Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2416-TA TANZANIA STAFF APPRAISAL REPORT OF A FIRST IBRD LOAN TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD (TDFL) June 8, 1979 East Africa Projects Department Industrial Development and Finance Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
FILE COPYReport No. 2416-TA
TANZANIA
STAFF APPRAISAL REPORT
OF A FIRST IBRD LOAN
TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD (TDFL)
June 8, 1979
East Africa Projects DepartmentIndustrial Development and Finance Division
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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CURRENCY EQUIVALENTS
US$ 1.0 = TShs 8.30TShs 1.0 = US$ 0.120
GLOSSARY OF ABBREVIATIONS
ABADEA Arab Bank for Economic Development of AfricaCDC : Commonwealth Development CorporationDEG Deutsche Gesellschaft Fuer Wirtschaftliche
Zusammenarbeit (Entwicklungsgesellschaft) mbhEIB European Investment BankEADB East African Development BankFMO Nederlandse Financierings - Maatschappij Voor
Ontwikkelingslanden N.V.KfW Kreditanstalt fur WiederaufbauNBC Natinoal Bank of CommerceNDC National Development CorporationNOFC : Nederlandse Overzeese Financierrings Maatschappij N.V.SIDA : Swedish International Development AgencyTIB : Tanzania Investment Bank
FOR OFFICIAL USE ONLYTANZANIA
TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD (TDFL)
STAFF APPRAISAL REPORT
Table of.Contents
Page No.
BASIC DATA i-ii
I. THE INDUSTRIAL SECTOR ................ .................. 1
Industrial Strategy ............................... 1Institutional and Policy Framework ............... . 2Role of Small-Scale Industries (SSIs) ............ . 3Role of the Private Sector ..* ..................... 4Performance and Structure of Output ............. 4Development Issues ...... ............... 5Prospects ..... o ............. ....................... 6
Bank Group Experience in the Sector .............. . 7
II. THE FINANCIAL SECTOR ......... . . . . . . ............................. . 8
Resource Mobilization and Allocation .............. 9Interest Rates ...... ............. ................. 10Issues ........ ............... ..................... 10Bank Experience in the Sector ..................... 11
III. THE INSTITUTION ....... ............................ 11
A. Institutional Aspects ............................. 11Objectives and Role ...... ..... .................. . 11
Capital and Ownership ..... ................... 11Board and Management ........... .. ............ 12Organization and Staff ....................... 12Operating Policies . ........................... 13
B. Operations and Finance ............................ 16Operations ................................... 16Resources ...... ............. ................. 17Portfolio .... ................................. 18
Financial Performance and Situation ..... ...... 19
This report is based on the findings of a mission consisting of Messrs. TeiMante and Peter Edmonds which visited Tanzania in November 1978.
This document has a restricted distribution and may be used by recipients only in the performanceof their omcial duties. Its contents may not otherwise be disclsed without World Bank authorization.
Table of Contents (Continued) Page No.
C. Prospects ......................................... 20TDFL's Strategy ........... .............. 20Forecast Operations .... o .................... 21Forecast Financial Prospects .............. .. 21
IV. THE PROJECT ................................... 22
A. Description, Objectives and Justification ....... 22B. Costs and Financing ................................ 22C. Terms and Conditions of the Proposed Loan ......... 23D. Project Implementation ............. .. ............. 24E. Benefits and Risks ............................... 25
V. RECOMMENDATIONS AND AGREEMENTS REACHED ........... ..... 25
LIST OF ANNEXES
ANNEX
1 Structure of Output and Employment in Large-ScaleManufacturing in Tanzania
2 Interest Rate Structure in Tanzania3 TDFL: Summarized Income Statements (1974-78)4 TDFL: Summarized Balance Sheets (1974-78)5 TDFL: Past and Projected Operations (1962-83)6 TDFL: Projected Income Statements (1979-83)7 TDFL: Projected Balance Sheets (1979-83)8 TDFL: Projected Sources and Uses of Funds (1979-83)9 TDFL: Financial Ratios (1974-83)10 TDFL: Projected Schedule of Disbursements of Proposed Bank Loan11 Selected Documents and Data Available in the Project File
TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD (TDFL)
BASIC DATA (March 31, 1979)
1. Date of Establishment: December 19622. Capital Structure:
Authorized: Shs 145 million consisting of(a) 6 million ordinary shares of Shs2O.0O each(b) 1.25 million ordinary "A" shares of Shs2O.OO
Interest rate: 11er p.a on straight loans, and 12g p.a. on incomenotes and preference shares.
Commitment Charge: 1% p.a. on undrawn loan balances.
Appraisal/investigation fee: 1% of total investment.
Repayment period: Range from 5 years to 15 years.
Exchange Risks: Passed on to subborrowers on existing EIB Loan, andCDC Loan.
THE INDUSTRIAL SECTOR 1/
Industrial Strategy
1.01 After gaining independence in 1961, Tanzania adopted an industrialstrategy which aimed at increasing domestic production through import substi-tution, relying mainly on private foreign investment. The Arusha Declarationof 1967 charted a completely new course for Tanzania based on socialism andself-reliance. It involved the transfer of ownership and control of a numberof large enterprises from the private to the public sector and sought to in-crease the rate of employment growth and improve the income distributionbetween urban and rural areas. Henceforth, most major industries would bepublicly owned and most new investments would be in the public sector.
1.02 The Government's present strategy towards the development of theindustrial sector is the Basic Industrial Strategy (BIS) which was adoptedin 1974. The two main goals of this strategy are structural transformationand self-reliance. The strategy in its pure form emphasizes the use ofdomestic resources for domestic needs. Priority will be given to industrieswhich cater for the basic needs of the majority of Tanzanians, such as food,shelter, health, etc. Emphasis is also given to the development of heavyindustries, such as iron and steel and engineering. By using local resourcesand producing for the local market, the BIS envisages a structural transfor-mation of the economy through a system of backward and forward linkages.Although basically oriented towards the domestic market, the BIS also mentionsthe need to expand export-oriented, agricultural processing industries toincrease the foreign exchange earning capacity of the country. Large-scalenational enterprises (in the public sector) will operate heavy industriesand produce export goods, whereas consumer goods and other day-to-day itemswill be produced by medium and small-scale industries.
1.03 The potential problems with the BIS are that attempts to restructurethe economy too quickly during a period of resource stringency may ultimatelyfrustrate both growth and structural change. A too rapid expansion of themetals sector (especially steel production) may lead to more reliance onexternal finance, know-how and markets, and the massive investment coordi-nation required by the strategy may overburden the country's already weakplanning capacity. Moreover, effective implementation of the strategy willrequire specific changes in the macro policy framework towards a protectionand tariff structure which does not discriminate against backward linkageimport substitution, discourage domestic production of capital goods, norconfer high and widely varying effective rates of protection to the produc-tion of consumer goods.
1/ A detailed analysis of the sector is given in "Tanzania Basic EconomicReport: Annex V" (No. 1616 TA), December 1977.
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Institutional and Policy Framework
1.04 The institutional structure of Tanzanian industry derives from thesystem of economic management that has been adopted since 1967. This system,with its emphasis on central planning and direct economic controls to guidethe direction and level of investment and the distribution of income betweenthe various segments of the community, has necessitated direct public sectorownership and control of large units in important economic sectors such asmanufacturing, banking, insurance, and wholesale trading. Almost all largescale industrial production in Tanzania, therefore takes place in wholly ormajority Government-owned companies, operating under the aegis of holdingparastatals, which, in turn, are organizationally responsible to parentministries. 1/ The holding companies are organized along product or processlines (e.g., National Textile Corporation), and serve as planners for, advi-sors to, and supervisors of the operating companies under them. They receivecommissions and fees from the operating companies to cover their costs ofproviding these services. In addition to this parastatal system all DistrictDevelopment Corporations (DDCs), are charged with promoting productive invest-ments in their districts, and may therefore, sponsor and own industrialenterprises.
1.05 As noted, this institutional framework has been designed to enableGovernment control over sectoral investment and production activities whichare considered of national importance. In the investment area, attempts aremade to exercise this control through centralized approval of projects andallocation of finance. Thus, although new project ideas in the public sectormay originate from the parent ministry, holding company, operating companyor any other national agencies concerned with industrial development, approvalof all investments is required at some stage by the Economic Committee of theCabinet. In cases where funds for a project would require budgetary alloca-tion, as is the case for all Government equity contribution to projects,parliamentary approval is also required as part of the annual budget approvalexercise. Project preparation and appraisal is mostly done by the holdingparastatals with the aid of external consultants in most cases.
1.06 At the same time that this institutional structure was being set up,policies were introduced to facilitate and reinforce central planning andcontrol. In the macro area, a system of comprehensive import licensing isoperated by which Government, through parastatals, determines what industrialgoods are to be imported. A system of annual foreign exchange allocationsaims at ensuring that foreign exchange is only available for such approvedimports. In addition, a system of protective import duties exists to protectlocal producers. Wage scales are set by the Standing Committee on Parastatals(SCOP) and conditions of service in all parastatals have been standardized;salary levels being similar to those obtained in the civil service. Govern-ment policy also aims at worker participation in management decisions. Prices
1/ As of June 1977, there were 97 operating companies under 17 holdingparastatals, reporting to 4 operating ministries involved in industrialdevelopment.
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of industrial output are controlled, along with all other prices, by a NationalPrice Commission, which has been using a cost plus price system for settingthe ex-factory prices of locally produced goods. This central planning andcontrol system has therefore reduced the role of macro incentive tools typicalin free market economies in investment and production decisions in Tanzanianindustry. In practice the system is faced with a series of problems whichare detailed below (para. 1.14).
1.07 Two other institutions are involved with the industrial sector. TheNational Institute of Productivity, set up in 1967 with ILO's assistance, hasbeen providing consulting and management training services to middle-levelmanagers of parastatal enterprises. In order to provide facilities for indus-trial studies and consultancy, the Government established the Tanzanian Indus-trial Studies and Consultancy Organization (TISCO) in 1976, with financial andtechnical assistance from SIDA. Although TISCO has the primary responsibilityfor carrying out consultancy services in Tanzania, foreign consultants havebeen engaged in areas where TISCO lacks the necessary expertise. 1/
Role of Small-Scale Industries
1.08 On the basis of information available, small-scale industries (SSIs)appear concentrated in those areas normally associated with early industrial-ization, for example grain milling and bakeries, clothing, wood products in-cluding furniture, printing and soap products. Due to the lack of sufficientdata, it is difficult to accurately isolate the performance of SSIs; howeverestimates show that value added by SSIs 2/ in manufacturing declined from 44%in 1966 to 23% in 1974. This appears to be due to the emphasis placed by theGovernment on large-scale projects in the public sector and lack of clearpolicies on the role of private investors.
1.09 The Government has in recent years acknowledged the need to developSSIs (paragraph 1.02) and established the Small Industries DevelopmentOrganization (SIDO) in 1973 to have primary responsibility for planning,promoting and providing all kinds of assistance to small-scale industries.SIDO has set up three industrial estates for SSIs and has also set up 11training-cum-production centers for imparting skill and craft training. Itsother activities include preparation of feasibility studies, provision ofhire-purchase finance, marketing and other technical assistance. The Govern-ment envisages a larger role for SIDO in the development of the SSI sector andhas requested the Bank Group to assist SIDO in the matter. A project to meetthis request is under preparation.
1/ For example, TIB's Feasibility Studies Unit which was created to channelfunds under IDA's Technical Assistance Project has engaged foreignconsultants for feasibility and other studies.
2/ Defined as enterprises with less than 10 employees.
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Role of the Private Sector
110 In spite of the clear preference for public ownership or controlof large scale industry, and the institutional changes which have been imple-mented since 1967 to effectuate this, the role of the private sector inindustry remains surprisingly large. In 1974, private production is esti-mated to have accounted for over half of large scale production and nearlytwo thirds of total manufacturing and handicrafts production, including smallscale. This proportion is not expected to have declined significantly sincethen.
1.11 The level of new private industrial investment did decline afterthe Arusha declaration of 1967, and many factors were responsible for this.First, although the declaration made it clear that private investment waswelcome in unrestricted subsectors, the takeover measures which followedthe declaration inevitably created uncertainties among both foreign and localprivate investors; thus some of those whose enterprises were not taken overvoluntarily decided to sell out to Government. Those who continued shelvedmost of their investment plans. Second, a party 1/ leadership code precludesall party members from holding shares or a directorship in any privately ownedcompany. This effectively arrested the development of indigenous Tanzanianentrepreneurs, since all citizens are encouraged to become members of theparty. Third, the bulk of Government institutional support for industrialdevelopment was geared towards assisting parastatals. More recently, Govern-ment has clarified, at the highest level, that private sector involvement inindustrial development has always been welcome, and has backed it up withissuing licenses etc., to private entrepreneurs. The effect has been an in-crease in the number of investment proposals coming from the private sector.It is expected therefore that the level of private investment in the sector,and the contribution of private enterprises to output will increase.
Performance and Structure of Output
1.12 Industry in Tanzania grew fairly rapidly compared to the overalleconomy since independence in 1961. The share of the manufacturing andhandicraft sector which accounted for just under 4% of GDP in 1961, increasedto 8% in 1965 and has remained around 10% since 1970. Total manufacturingemployment increased from about 28,000 in 1965 to about 85,000 in 1977. Valueadded in manufacturing grew rapidly at an average rate of 10.8% between 1965and 1969, but averaged 7.4% between 1970 and 1973. While limitations ofsector data prevent any firm conclusions about the causes of this declininggrowth rate, indications are that there was an increase in the incrementalcapital-output ratio, implying a lower rate of growth in relation to invest-ment in the latter years. The evidence further suggests that this decline wasdue to both a shift toward more capital intensive investment, and a declinein the productivity of capital. After virtual stagnation in 1974 and 1975
1/ The Tanganyika African National Union (TANU), which merged in 1977 withthe Afro-Sharazi Party of Zanzibar to form Chama Cha Mapinduze (CCM).
because of the economic crisis in those years and its attendant supply prob-lems for industrial inputs and parts, industrial output appears to haverecovered, showing a growth rate averaging about 6.4% in 1976 and 5.4% in19 77.
1.13 Tanzania's industrial struc:ture has undergone a fairly rapidchange from the rudimentary structure inherited at independence in 1961producing a very limited range of goods, to a more diversified structure,producing a larger variety of basic food and non-food consumer goods, inter-mediate goods such as saw-milling and plywood, leather, aluminum re-rolling,chemicals and plastics and some capital goods such as vehicle assembly.Tanzanian manufacturing is still dominated by production of consumer goodsfor the domestic market. Consumer goods accounted for 71% of output and68% of employment for manufacturing enterprises with 10 or more employeesin 1965. In 1976, the share of consumer goods to total output and employ-ment was 50% and 69% respectively.
Development Issues
1.14 As may be expected, the institutional and structural changes thathave been taking place in Tanzanian industry over the past decade, havebrought in their wake a number of problems which have affected sectoralperformance. First is an apparent decline in labour productivity, particu-larly in the parastatal sector. This can be traced mainly to a lack of aclear-cut micro-incentive framework for parastatal companies. Clear andunambiguous criteria for judging performance are yet to emerge, and managers,even if they are competent, have lacked a system of rewards and penalties forstimulating required performance from workers. The cost-plus price system hasalso tended to work against cost reduction, and has not therefore discouragedovermanning. Second, there have been excess capacity problems in certainindustries because of a tendency to overbuild capacity in relation to supply.This gets exacerbated when shortages of raw materials and spare parts becomeacute (as is frequent if the foreign exchange situation deteriorates). Third,the real rate of return on capital invested in parastatals has been falling,with the result that parastatal surpluses have lagged in relation to thegrowth of output. This is largely attributed to the decline in parastatallabour productivity. Fourth, the central investment planning system has beenineffective. Originally designed to ensure coordination in the choice ofinvestments to meet overall sector strategy, the system, in practice, hastended to place great focus on the annual budget as a major instrument ofcontrol. The planning office has not got the staff to coordinate investmentplans of parastatals, and as such most parastatals have been able to plan andundertake investments without much central control. Fifth, because of theuncertainty and fear of takeovers, the resources of the private sector havenot been effectively harnessed for sectoral needs. Finally, as discussed inparagraph 1.08, the potential contribution of SSIs, especially to employmentcreation in the sector, is yet to be realized.
1.15 Government is aware of these problems, and is making efforts toresolve them. It has acknowledged the problems of low labor productivity
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and low capacity utilization, and is stressing the need to increase pro-ductivity through a review of the cost-plus pricing system. While decisionson major policy changes relating to incentives, price and import controlsystems and the control of parastatals will take time because of the import-ance and breadth of the issues, there! are already indications that at the firmlevel a number of improvements have been made. Some of these improvements arenot due to any overall policy directives but are the result of individualinitiatives by firms' managers in a more favourable industrial environment.The improvements include some cases of retrenchment in over-manned parastatals,better discipline among workers mainly due to improved relations of themanagers with the Labour Union, JUWATA, better worker participation in certainaspects of decision-making, introduction of incentive (in kind) system in afew firms and relaxation of limitations on recruitment of expatriate experts.Regarding capacity utilization, the National Development Corporation (NDC),the largest parastatal holding company, recently implemented the recommenda-tions of a firm of management consultants and has been able to achieveimprovement in the operating efficiency of some of its subsidiaries.
1.16 The Bank Group has raised these issues in its discussions withthe authorities both within the context of its general economic work inTanzania and of specific projects in the industrial sector. It has alsoprovided funs under the IDA Technical Assistance Credit for carrying outstudies to improve efficiency in the industrial sector. Among the studiescurrently in progress are (i) capacity utilization studies initiated by theTextiles Corporation in respect of its subsidiaries and (ii) measurement andimprovement of productivity studies carried out by TIB with assistance fromtwo experts from the International Executive Service Corps; TIB is alsocontemplating to engage experts to study inventory control practices inTanzania and to suggest improvements.
1.17 On the issue of the role of the private sector, the Government hasclarified, at the highest level, that the Arusha Declaration did not precludeprivate investment in industry, and that the private sector would be encour-aged in all areas not specifically reserved for full Government control. Thishas been followed in practice by greater liberalism in processing of applica-tions for industrial licenses and importation of spare parts and raw materialsto encourage the growth of private industries. It may however be necessaryin future, to issue a new Guide to Investors clearly specifying policieson price control, import licensing, dividend transfer restrictions, incometaxation, etc. Regarding small-scale industries, Government is aware ofthe unintended restrictions which its policies have placed on their develop-ment, and appears responsive to a specific effort by the Bank Group toassist in reviewing such policies.
Prospects
1.18 The Third Five Year Plan (1976-1981), currently under implementa-tion, is the first phase of implementation on the Basic Strategy. Under thisplan, the specific objectives are to improve the efficiency and capacity
utilization in the existing industries so as to increase output, to expand andestablish new industrial capacity for production for basic needs, and to laythe foundations for the implementation of the Basic Strategy. The targetedgrowth rate for the sector is 9.3% per annum compared to an overall targetedgrowth rate of the economy of 6.0%. In line with the important role whichindustry plays in the plan, a total of Shs 5,147 million, (24% of the totalinvestment allocation in the plan), has been earmarked for public investmentin the sector.
1.19 The Ministry of Industries will be directly responsible for imple-menting projects involving T Shs 2,747 million or 53% of the total Governmentdevelopment budget for the industrial sector projects; the remaining 47% willbe implemented by other ministries and agencies. TIB is expected to invest18.5% of the total in the sector. The sub-sectoral allocation of the proj-ected investment is as follows: construction and building materials T Shs 929million; metalworking, engineering and chemicals T Shs 820 million; textileand garments T Shs 600 million; leather and leather goods T Shs 224 million;and Small-Scale Industries T Shs 178 million.
1.20 The Government's emphasis on productivity, work and discipline(para 1.15) has had the effect of increasing investor confidence in thesector and improving the overall investment climate. Following the Presi-dent's statement late in 1977 encouraging private investors to establishmedium- and small-scale industries, there has been an upsurge in investmentactivity by the private sector. In addition to the public outlays in theThird Five Year Plan, Government expects considerable private investment,especially in the small- and medium-scale industries, to supplement theresources it will provide in meeting the investment needs of the sector.
1.21 During the first two years of the plan, the average growth ratesachieved were 5.9% for industry and 5.3% for the overall economy. The dropin coffee prices, Tanzania's major export, has resulted in a marked deterio-ration in the country's balance of payments. Due to the lack of foreignexchange, the Government has been forced to impose restrictions on importsand devalued the Tanzanian shilling by 10% in January 1979. Given the lowinitial growth rates and the constraints presently facing the sector, itwill be difficult for industry to achieve the growth envisaged in the plan.
Bank Group Experience in the Industrial Sector
1.22 Apart from financing industrial projects through credit lines toTIB and EADB, the Bank Group presently is financing four projects for a totalamount of $143 million. Two investments of $60 million have been made in thetextile sector through the National Textile Corporation, first a loan of $15million to expand an existing operation and second, a loan of $25 million andan IDA credit of $20 million to set up a new integrated polyester textilemill. The Bank also approved two loans totalling $23 million for an indus-trial complex at Morogoro in 1977, wherein a canvas mill and a shoe factorywill be set up with the primary objective of exporting their output. Early
this year the Bank Group has approved a loan of $30 million and an IDA creditof $30 million for the Mulfindi Pulp and Paper Project.. The project consistsof the establishment of an integrated pulp and paper mill with an initialcapacity of 60,000 tons per annum of paper and board as well as 1,400 tons ofpulp for sale outside the mill. IDA has also approved a Small-Scale Indus-tries component in its Second National Sites and Services Project ($1.4 mil-lion) to provide assistance to small-scale industries in Tabora and Tanga.The program, which is being administered by SIDO, would provide infrastructurefor industrial clusters, credit for equipment and management and technicalassistance to selected small enterprises. IFC has recently approved aninvestment of $1. 8 million in a privately owned soap manufacturing operationand is also looking at other project possibilities. The Bank Group's experi-ence with these projects, which are under various stages of implementation,is generally satisfactory. Only the SSI component in the urban project isexperiencing delays in implementation.
II. THE FINANCIAL SECTOR
Institutional Structure
2.01 In terms of appropriate institutions, Tanzania's financial systemis relatively well developed. In addition to the Central Bank, the Bank ofTanzania, there are nine other financial institutions: a commercial bank,four development banks, a savings bank, a housing bank, an insurance companyand a national provident fund. 1/ All the institutions are state-owned exceptfor the East African Development Bank (EADB), the majority of whose sharesare held jointly by the Governments of Kenya, Tanzania and Uganda, and theTanganyika Development Finance Corporation (TFDL) which is jointly owned byTIB and bilateral aid agencies of the U. K. , West Germany and the Netherlands.Tanzania has no private capital market and the bulk of equity investments isprovided by the Government directly through the budgetary process.
2.02 Six institutions carry out lending operations. TIB, TDFL, EADB,the Tanzania Rural Development Bank (TRDB) and the National Bank of Commerce(NBC) lend to the directly productive sectors whereas the Tanzania HousingBank (THB) provides funds for commercial and residential buildings, includinglow-cost housing. TRDB mainly operates in the rural sector and makes short-term loans for seasonal inputs and medium- and long-term loans for machinery,transport, storage and livestock. Other short-term funds for working capitalare provided by NBC. Most of NBC's loans are extended to industry andmining, and to the marketing of agricultural products.
1/ A Summary of the activities of these institutions is available in theProject file.
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2.03 Medium- and long-term financing for the modern sectors of manufac-turing, agro-business, tourism, transport, etc. is provided by EADB, TDFLand TIB. Although there is a limited overlapping of functions among thesethree institutions, their respective roles are well defined and there is nocostly duplication of effort. EADB's charter does not authorize it to makemore than 3& 75% of its investment in Tanzania. Moreover, EADB's role hasdiminished considerably because of the uncertainty surrounding its futureafter the dissolution of the East African Community. TDFL provides fundsmainly to medium-size, private enterprises. Although TIB has increased itslending to the private sector, it has concentrated on large-scale enterprises.In FY 1978 the average size of a TIB loan was T Shs 13 million (for privatesector loans, T Shs 10 million) compared to T Shs 2 million (T Shs 2.9 mil-lion for both loans and equity and investments) for TDFL. Moreover, TIB owns30% of TDFL's shares and has two directors on its board and thus helps tocoordinate the operations of the two organizations.
Resource Mobilization and Allocation
2. 04 Mobilization of savings from the public is carried out by fiveinstitutions, namely, NBC, THB, Tanganyika Post Office Savings Bank (TPOSB),the National Insurance Corporation (NIC), and the National Provident Fund(NPF). NBC, THB and TPOSB, with branch networks, mobilize savings throughdeposit accounts. NBC is the most important mobilizer of savings in Tanzania.As of December 31, 1977 its total deposits exceeded T Shs 6.2 billion. THBhad deposits of T Shs 226 million at the end of 1977 and TPOSB had mobilizeddeposits of T Shs 118 million as of March 31, 1978.
2.05 Tanzania has a high level of savings compared to its income level.The share of domestic savings to GDP has fluctuated around 17% since the mid-1960's, except during the economic crisis of 1974/75, when it fell to around8%. The Government has been able to mobilize domestic resources through acombination of highly progressive direct taxes and proportional or moderatelyprogressive indirect taxes. The share of Government recurrent revenue to GDPaveraged about 20% in 1977. With the emergence of public enterprises as aresult of the Arusha Declaration, the parastatal sector was looked uponas the major saving entity in the country. The performance of this sector,with the exception of the financial parastatals, has however, not been up toexpectations. The Bank's Basic Economic Report concluded that, while interestrates will remain less important in resource allocation in Tanzania's commandeconomy than in less controlled economies, they could still play a role onthe mobilization side. It therefore recommended a more active interest ratepolicy to stimulate savings particularly from the private sector. Theinterest rate on deposits which varied between 4% and 6. 5% depending on term,was considered low in the light of the inflation rates which, measured by theGDP deflator, ranged between 14.5% and 16.2% during 1975 - 1977. Similarlya case was made for increasing the lending rates of the financial parastatals,which had a proven record of being better savers than other parastatals, toenable the former to generate more surpluses.
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2.06 The Government's role in allocation of resources is more importantthan in resource mobilization due to the centralized investment decision-making. Allocations from the development budget are made to parastatalsannually in accordance with the Third Five-Year Plan targets. However, theGovernment is able to influence resource mobilization from the parastatalfinancial institutions by directing them to invest their surpluses in Govern-ment stocks, bonds and Treasury bills. These institutions play an importantrole in financing public investment in Tanzania. Medium and long-termGovernment security sales to the financial institutions accounted for 27%of the development budget in FY 1978. 1/ Furthermore, as of March 31, 1978,Government borrowings from the banking system stood at over T Shs 3.1 billion.
Interest Rates
2.07 In an effort to revise the overall interest rate structure inthe country with a view to influencing resource mobilization and allocationand reflecting Government priorities, the Bank of Tanzania (BOT) directedNBC, THB, TIB and TRDB in May 1978 to adopt a new interest rate structure(see Annex 2) effective July 1, 1978. The new schedule authorizes NBC andTHB to increase their deposit rates slightly. It also permits the NBC toincrease its rates on loans across the board by 1%. On the other hand, BOThas directed TIB and TRDB to reduce their rates on loans, with the exceptionof sub-loans made out of foreign credit lines for which the terms and condi-tions of the credit lines would be applicable. While the increase in thedeposit rates and the lending rates for NBC are in line with the recommenda-tion of the Basic Economic Report, the reduction in the lending rates of TIBand TRDB is contrary to the Bank's view (see para. 2.08).
Issues
2.08 There are two important issues in the Tanzanian financial sector.The first relates to the recent BOT directive to TIB and TRDB to reducetheir lending rates to the levels desired by BOT. The Bank's view is thatthe appropriate lending rate should be determined after taking into consider-ation the existing and projected inflation rates, the rates charged by otherfinancial institutions for similar loans in Tanzania, the need for an ade-quate spread and the opportunity cost of capital. This issue of the lendingrates of the financial institutions receiving Bank Group's lines of creditis being discussed with Government and BOT.
2.09 Secondly, because of the unusual risks involved in financing small-scale industries, the high cost of administering such loans and the uncertaintyregarding the Government's policies in the sector, the financial institutionshave been reluctant in the past to provide short and medium-term financingto the sector. In view of the recent Government interest in accelerating thedevelopment of the Small-Scale Industries sector, there is need for the
1/ Loans and grants from external sources accounted for 55% of the devel-opment budget.
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financial institutions to evolve pragmatic policies and delivery mechanismsdesigned to assist the sector and to coordinate their activities more closelythan in the past.
Bank Experience in the Sector
2.10 The Bank has been extensively involved with TIB since 1974. To datethe Bank has made one IDA credit and two loans to TIB for a total amount of$36 million. Progress on these projects has been satisfactory and TIB hasgrown into a well-organized institution and an efficient allocator of medium-and long-term funds to the productive sector. Furthermore, the Bank has madetwo loans of $23 million to EADB, of which the equivalent of $9 million hasbeen invested in projects located in Tanzania. The Bank is presently expand-ing its role in the sector; in addition to TDFL, TRDB has been appraised for afirst line of credit.
III. THE INSTITUTION
A. Institutional Aspects
Objectives and Role
3.01 The Tanganyika Development Finance Company Ltd (TDFL) was estab-lished in 1962 as a private limited liability company under the Tanzaniacompanies ordinance. Its Memorandum of Association lists as its objectiveswide ranging activities in the field of promoting and financing development.In practice this has been narrowed down in its policy statement to assistingin the development of Tanzania through "establishment and expansion of com-mercially viable industrial, agricultural, extractive and commercial enter-prises as well as of housing, industrial estates, tourist, commercial hotels,and lodges, provided it can be shown that they are of value to the economy".
3.02 TDFL's main role in Tanzania's economic system is that of develop-ment financier of medium scale privately owned manufacturing enterprises.It is active in promotion of such enterprises through its identification ofsuitable investment opportunities and through taking the leadership in bring-ing together interested investors, technical partners, and other financiers,both local and foreign. It provides equity financing to supplement invest-ments of project sponsors, or where it is the lead promoter, to serve as anecessary catalyst for attracting others. It is the main institution inTanzania which provides such equity funds for non-parastatal projects. Inaddition to this basic role, it has provided on some occasions, co-financingfor some larger projects whose financing requirements are too large for eitherTIB or EADB to finance alone.
Capital and Ownership
3.03 TDFL was established with an authorized capital of Shs 35 millionunder the joint sponsorship of the Tanganyika Government (before union withZanzibar), Britain's Commonwealth Development Corporation, and the Federal
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Republic of Germany (through KfW), each of whom subscribed Shs 10 million ofthe initial share issues. The authorized capital was increased to Shs 60.0million in 1965 to permit the Netherlands Government, through NOFC, to sub-scribe to Shs 10 million at par, making it a fourth owner. The TanganyikaGovernment's shareholding was transferred to NDC, and then to TIB; the KfWshareholding was transferred to DEG; and NOFC'c shareholding was transferredto FMO. These together with CDC remain the current shareholders of TDFL.
3.04 The authorized capital of TDFL was increased to Shs 145 million, 1/consisting of 6 million ordinary shares of Shs 20.00 each and 1.25 millionordinary "A" shares of Shs 20.00 each, in December 1978. The ordinary "A"shares have no voting rights in General Meetings of the Company. Five millionof the ordinary shares have been issued at par for Shs 100 million. Of thisTIB, FMO and DEG have each subscribed 1.5 million shares for Shs 30 million,and CDC has subscribed 0.5 million shares for Shs 10 million. Foreigngovernmental development agencies thus hold the majority ownership in TDFL.
Board and Management
3.05 Each of the existing four shareholders is represented by twodirectors on TDFL's Board. The Chairman, a TIB representative, was originallyappointed by the Tanzanian Government and has been Chairman since the com-pany's inception. CDC and FMO each have one of their directors residentlocally, while the second directors visit Tanzania to attend Board Meetings.DEG's two directors are both resident outside Tanzania. All the directorsare experienced development bankers or businessmen who take a keen interestin TDFL's operations. The combination of local and foreign expertise on theBoard has also proven to be invaluable to TDFL's operations. The Board meetsabout four times a year, but TDFL's management is in constant touch with mostof the members.
3.06 Under the Memorandum of Association, the Board is responsible forthe management of the company, and may appoint one of its members as a ChiefExecutive. In practice, a General Manager, who is not a Board member, hasbeen delegated the responsibility for the day to day operation of the company.The incumbent, a Tanzanian, has been General Manager since 1974. He has beenwith TDFL since 1966, and was made a Deputy General Manager in 1970. He pro-vides TDFL with experienced, dynamic and competent leadership.
Organization and Staff
3.07 TDFL has an organization structure which is well suited to its sizeand operations. There are five departments directly under the GeneralManager. A Finance and Planning and Department, headed by the Financial
1/ In March 1977, a second class of shares, called ordinary "A" shares withno voting right at annual General Meetings was created in the amount of1.25 million shares of Shs 20.00 each. This was a condition of EIBsubscribing to a convertible European unit of Account Bond of Shs 24.00million equivalent in TDFL.
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Controller, is responsible for accounting and financial management, disburse-ments and procurement. A manpower Development and Administration Departmenthandles staff recruitment, training and general administration whilst legaland company secretarial services are the responsibility of a Secretarial andLegal Department. An Investments Department is responsible for the supervisionof TDFL's portfolio, and an Investments Promotion Department for projectidentification, preparation and appraisal.
3.08 TDFL is adequately staffed by a small, dedicated, and able groupof Tanzanian professionals assisted in key areas by expatriates provided by,or with the help of, the foreign shareholders. As of March 1979, the totalprofessional staff was 21, of which 2 were expatriates. (The financial con-troller, provided by CDC, and a consultant economist to the InvestmentsDepartment provided by German Aid). In line with projected expansion in itsoperations, TDFL plans to recruit 29 more professionals by 1983 and a suitablerecruitment and training program has been drawn up.
Operating Policies
3.09 TDFL's operating policies are contained in a policy statementwhich has been issued by the Board as a guideline to the management. A copyof this statement is in the project file and agreement was reached with TDFLduring negotiations that it will not be materially changed without priorconsultation with the Bank. The statement clearly defines the objectives ofthe company, the powers and limitations of the General Manager, the principlesthat govern its investments and financial management, and provides a goodframework for its operations.
3.10 The statement precludes TDFL from financing projects which do notconform to Government policy, nor purely infrastructural projects like schoolsor hospitals. Investments would preferably be made in limited liability com-panies, and TDFL seeks to avoid taking a controlling interest, or any interestwhich would give it primary responsibility for management, in any project.Sponsors are normally required to put up at least 25% of a project's capitalcosts, and TDFL will not normally provide less than 10% of a projects totalcapital cost so as to avoid token investments.
3.11 At the suggestion of the Bank the following amendments and addi-tional clauses were introduced in January 1979 by TDFL's Board to permit moreflexibility in the size of projects assisted, and to introduce some necessaryfinancial principles.
(i) Because of the increasing cost of projects, TDFL's maximuminvestment limit per project has been revised from Sh 6million to Shs 12 million. Its minimum limit will stillremain at Shs 200,000, and this will permit it to promoteand finance, on a selective basis, indigenous Tanzanianentrepreneurs whose projects are at the lower scale of themedium sized enterprise category.
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(ii) to permit TDFL to increase its promotion role by providingmore financial assistance to new entrepreneurs withoutmuch capital, the proportion of TDFL's normal maximumcontribution to a project's capital cost has been raisedfrom 49% to 60%. This proportion, combined with thenormal maximum single investment limit of Shs 12 millionwill permit it to finance projects with costs up toShs 20 million (US$2.4 million). This is consistent withits role as a promoter and financier of primarily mediumscale projects, and will not expose it to excessive risks.
(iii) a final addition is a clause specifying that TDFL willalways protect itself against exchange risks.
3.12 In addition to these amendments and additions to the policy state-ment, the Bank has reached agreement with TDFL that its normal total invest-ments in equity will be limited to its own paid up capital plus unimpairedreserves to ensure that borrowed funds are not normally used for equityinvestments.
Procedures
3.13 Identification and Promotion: To identify suitable investmentopportunities, TDFL relies both on Government development plans and varioussector studies, and on its extensive contacts with the private local businesscommunity. This combination of a planning and an entrepreneurial approachhas proven successful in yielding projects which conform to Government require-ments and plans, and are at the same time attractive to businessmen. Promotionof these projects is done mainly by the General Manager and the InvestmentsPromotion Manager, with assistance from the staff of the Investment PromotionDepartment. TDFL also uses the external contacts of its foreign shareholdersin investment promotion.
3.14 Appraisal: TDFL's appraisal of the managerial and financial aspectsof projects is quite thorough, and its analysis of the demand, marketing andtechnical aspects are also quite good. An area of weakness is in economicanalysis, where it has been relying on a few partial indicators (e.g., employ-ment creation) to determine economic worth. To improve its performance inthis area TDFL has reached agreement with the Bank that in future, all non-service projects in which its proposed financial commitment will exceedUS$250,000 equivalent will be subjected to an economic rate of return cal-culation.
3.15 Follow-Up: Well established and adequate procedures exist forfollow up. Monthly operational and financial reports are required from allprojects, and are analyzed for review by an Investments Committee consistingof the professional staff in the Investments Department. Each operatingproject is visited by a TDFL supervision officer at least twice a year, inaddition to the regular involvement in the operations of these projects madepossible through its participation on their Boards. Management places thenecessary emphasis on project supervision, and the follow up department isprojected to receive the largest increase in professional staff through 1983.
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3.16 To provide a ready source of reference for appraisal and supervisionprocedures, and facilitate the training of the new professional staff tobe recruited, TDFL has agreed with the Bank that it will prepare an OperationsManual incorporating its existing documents on these subjects and submit acopy to the Bank by December 31, 1979.
3.17 Procurement and Disbursement: TDFL's procurement and disbursementprocedures are adequate, well established, and well documented in a FinancialOperating and Reporting Procedures Manual. Although sponsors of projects areresponsible for procurement of items financed by TDFL, TDFL ensures that suchprocurement is made on the basis of competitive quotations. Disbursements aremade on the basis of the predetermined investment program for each project,and after approval by both the Investments Promotion and Accounts Departmentsthat all preconditions for disbursements have been met, and that sponsorsequity have been paid in. Detailed documentation such as invoices are requiredfor these disbursements.
Auditors
3.18 The Dar es Salaam office of Coopers and Lybrand Ltd., a reputableinternational accounting and auditing firm, undertakes the audits of TDFL'sannual accounts. The scope of these audits has been adequate as far asthe basic financial statements are concerned. At the request of the Bank, theauditors have also started providing supplementary statements on the state ofTDFL's portfolio and on arrears of interest and principal on its loans. Thefirst of these statements have been provided for the year ending December1978.
Terms and Conditions of Lending
3.19 TDFL lends for maturities of between 5 to 15 years including anormal grace period of a year, and will not normally provide finance forless than 3 years. Adequate security is taken in the form of mortgagedebentures, and TDFL's position as a lender is not normally subordinatedto that of any other lender. In rare cases, lending may take the form ofincome notes or preference shares with or without cumulative dividend andconversion rights.
3.20 TDFL is willing, as a matter of policy, to vary its interest ratedepending on the standing of the borrower, the type and duration of the loan,the security offered and whether or not any special guarantees are obtainable.In practice this has rarely been done, and a uniform interest rate has beencharged on loans. Its current minimum lending rate is 11.0% per annum formortgage debenture loans, and 12% per annum for income notes and preferenceshares. Given domestic inflation rates of 14.5% each in 1975 and 1976, and16.2% and 12% respectively in 1977 and 1978, and considering that almost allits lending in those years were in domestic currency, this lending rate hasnot been positive in real terms. The Bank projects however that inflationrates in Tanzania will decline to 10% in 1979, and to 8% by 1980, and 1981and that international inflation rates would be 6.5% and 6% in 1979 and1980/81 respectively. TDFL's current lending rates would therefore yield
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positive real interest rates on both domestic and foreign currency lendingduring the commitment period of the proposed loan. They are also comparableto the lending rates of TIB and EADB and will provide TDFL with an adequatespread. The Bank has reached agreement with TDFL to maintain this minimumonlending rate of 11.0% per annum. In addition the Bank has reached agreementwith TDFL on the establishment of a system of periodic reviews between TDFLand the Bank of this onlending rate.
3.21 TDFL charges a commitment fee of 1% per annum on undrawn loanbalances, and an appraisal/investigation fee of 1% on the total financialcommitment requested from it. It passes on the full foreign exchange riskon subloans made out of foreign lines of credit to the subborrowers, and hasagreed to similar treatment of the foreign exchange risk on the proposedloan.
B. Operations and Finance
Operations
3.22 Since its inception in 1962 through 1978, TDFL approved a totalof Shs 267.4 million in financial assistance to some 87 projects (Annex 5).Initially, being the primary development finance institution in Tanzania, itexperienced a steady growth of operations. Its rate of growth was slowed downafter the Arusha declaration of 1967 because of the adverse impact the policypronouncements in the declaration had on private industrial investments.Since 1975, however, TDFL has experienced a fairly substantial increase inoperations, reflecting the changed climate for the type of investments itfinances. Its approvals in 1975 and 1976 averaged Shs 30 million per year,compared to an annual average of only Shs 8.1 million between 1962 and 1974,and reached Shs 45.6 million in 1977. In 1978, it approved Shs 57.4 million,an increase of over 91% over the 1975 and 1976 average. 1/ This recentsignificant increase in level of operations has resulted from both an increasein the number of projects assisted (15 in 1976 compared to 21 in 1978) as wellas in the average size of its financial assistance per project (Shs 1.9 mil-lion in 1976 compared to Shs 2.7 million in 1978).
3.23 The proportion of equity investments in TDFL's total approvalsthrough December 1978 was 20.8%. While this proportion is rather high fora development bank in Tanzania, it is justified in TDFL's context becauseof its active role as a lead promoter of projects. In fact, in 1978, equityapprovals amounted to 28.6% of approvals, reflecting the fact that TDFL wasthe lead promoter of three of the nine new projects it approved.
3.24 Although the overall level of TDFL's disbursements has been ade-quate, there is a recent trend of an increasing lag between approvals anddisbursements. As of December 1978, 70% of approvals had been disbursed
1/ All these figures are in current terms, but the rates of growth aresignificantly higher than Tanzania's experiences with inflation, indi-cating substantial growth in real terms too.
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compared to 87% at the end of 1974. This decline, attributed to a slowdownin preparation of legal documentation by TDFL's external lawyers, is expectedto be reversed since TDFL is now using additional firms of lawyers to draftloan and share subscription documents.
3.25 In keeping with its role, TDFL's operations have concentrated onmedium scale privately owned manufacturing enterprises. The average projectcost of the 66 projects to which TDFL had provided financial assistance asof December 1977, was Shs 16 million, which is medium scale in the Tanzaniancontext. It has financed some large projects, but these are very few. Forexample, only 6 out of 43 operating projects on which information on totalassets were available as of June 1978 had total assets in excess of Shs 20.0million (US$2.4 million). Of 87 projects assisted as of December 1978, 86%were privately owned, the remainder were parastatals or cooperatives. Themajority of these private companies are owned by local groups, althoughthere are a few majority foreign holdings. An estimated 25% of the capitalinvested in 66 projects assisted, on which information was available asof December 1977, originated from outside Tanzania. In terms of sectoraldistribution, manufacturing activities have received the bulk of assistance,accounting for 75.3% of the cumulative approvals as of December 1978 comparedto 13.7% in hotels and tourist projects, 9.6% in agriculture and fishing,0.9% in property development, and 0.5% in mining and quarrying. In themanufacturing group TDFL is well diversified with general industries, tex-tiles and garments, food and beverages and rubber and plastics productspredominating.
3.26 As may be expected from the size and subsectoral distribution ofthese projects, a majority of them are import substitution in orientationand rely in part on imported inputs. Because TDFL has not been using theeconomic rate of return criterion in project selection, it is not possible todetermine how efficiently the projects assisted have been substituting forimports. Their employment impact has however been significant. Of 66 proj-ects assisted as of December 1977 on which data is available, total investmentof Shs 1,043.9 million is estimated to have created employment opportunitiesfor some 25,000 people. This gives an investment cost per job created ofUS$3,480 at the shadow exchange rate, which is quite low.
Resources
3.27 Until March 1977, when TDFL was able to borrow foreign resourcesfrom EIB, all its resources were in local currency and were provided in fullby the four shareholders. The resource position as of March 31, 1979 is shownin the basic data. Local resources consisted mainly of the Shs 100 million ofissued capital and Shs 80 million of unsecured non-cumulative income notesprovided in equal amounts each by the shareholders. These income notes area peculiar form of long term debt with quasi equity features. They bear amaximum interest rate of 8% per annum, but the actual rate payable in anygiven year is dependent upon the profits available before income note interest.The notes are redeemable in full on December 31, 2000, but can be fullyor partly converted to TDFL ordinary shares by the holders if they wish. In
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addition the subscription agreement specifies certain conditions under which
the noteholders can call for an early redemption. These include dissolution
of TDFL, default on any covenants under the agreement by TDFL, or national-
ization of TDFL by the Government of Tanzania. For purposes of the Loan
Agreement with TDFL, the Bank has defined these income notes as long term
debt.
3.28 Foreign currency resources consisted of an EIB convertible bond
of European Unit of Account (EUA) 2.5 million (about Shs 28.10 million) and a
CBC line of credit of Shs 23.7 million equivalent. The Bond is unsecured and
bears a non-cumulative maximum interest rate of 5-7/8%; it is redeemable on
October 3, 1988. As with the income notes, the actual interest rate payable
in any given year will depend on TDFL's profitability. EIB has the option to
convert it fully or partly into non-voting shares. The CDC line of credit is
at an 8% interest rate and is repayable in equal installments over the last 16
years of a 20 year maturity period. The loan is unsecured.
Portfolio
3.29 A summary of TDFL's portfolio as of December 31, 1978 indicating
the status of the projects assisted is provided below.
Summary Analysis of Portfolio (Amount in Shs Million)
3.30 Considering that only 5 out of 65 projects, accounting in amounts
for 12% of the portfolio, face uncertain prospects because of major problems,
the quality of the portfolio can be said to be fairly good. The problems
faced by 4 of these projects stem from fundamental mistakes in project design,
while the fifth, a tourist project, is faced with severe management problems.
Among the 4, 2 are operating at levels well below their breakeven points
because of persistent shortages of raw materials, which were planned to be
produced locally. Both are agro-processing projects and rehabilitation
efforts on them are in progress. There is a likelihood of TDFL receiving a
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Government guarantee on its investments in one of them. Of the remaining 2,one is TDFL's only investment in a mining project. There are doubts about thefeasibility of this project, and a study is in progress to determine whetherit should continue operating or whether it should be liquidated. The second,a tourist hotel, has consistently faced poor demand, and was almost completelyburnt down recently. A rehabilitation program is under implementation.Significantly, all 5 projects are non-manufacturing enterprises, and 4 areparastatal projects. It appears therefore that TDFL has been quite successfulin its main area of private manufacturing projects. TDFL has taken dueaccount of the status of these projects in making its provisions against theportfolio. Overall, it has written down its investments in these 5 projectsby Shs 11.5 million (60% of total investment in them), whilst provisions onother projects amount to Shs 5.6 million. It has however also taken accountof increases in the value of its profitable equity investments in determininghow much of these provisions to charge against income. Thus Shs 8.4 million,representing portions of TDFL's share of retained earnings and bonus issuesreflecting retained earnings, in such equity investments has been offsetagainst the Shs 14.3 million, bringing total provisions against the portfolioto Shs 8.7 million.
3.31 TDFL has succeeded in keeping the arrears on the loan portfolio ata reasonably low level. The total amount of interest and principal in arrearsover three months, as of December 31, 1978, was Shs 8.8 million. The principaloutstanding in the affected projects was Shs 22.0 million, amounting to25% of the loan portfolio. Because the projects involved are some of thosewith uncertain prospects, some rescheduling of repayments may be necessary.
Financial Performance and Situation
3.32 TDFL has been a reasonably profitable development bank. Its grossprofit averaged 4.2% of its average total assets for the years 1975 through1978, but mainly because of a high level of provisions, its net profit averagedonly 1.4% over the same period. 1/ Partly because of this high level of pro-visions (54% of the profits before provisions for the years 1975 through 1978were set aside for provisions) and partly because of underutilization of debt
financing (long term debt/equity ratios averaged 1.5/1 for the years 1975through 1978), the return on TDFL's net worth has been modest, with net profitaveraging only 3.2% of average net worth between 1975 and 1978. Details ofTDFL's income and expenses over the past five years, and relevant financialand operating ratios, are shown in Annexes 3 and 8. An important source ofincome, in addition to interest and dividends,has been management fees fromTDFL's 4 subsidiaries. TDFL has preferred to take its return on investmentsin these subsidiaries in this form rather than as dividends, because suchmanagement fees are tax deductible for the subsidiaries. Even with thisapproach, the dividend yield on the equity portfolio has been improving. Itaveraged 9.4% in 1977 and 1978, compared to an average income on the loan
1/ This compares with a gross profit to average total assets of 3.3% forTIB and 2.1% for INDEBANK (Malawi) and a net profit to average totalasset ratios respectively of 1.7% and 1.2% over the same period.
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portfolio of 7.9% for the same period. While administative expenses as apercentage of average total assets have fluctuated between 4% and 2.6% overthe past five years, financial expenses have climbed steadily from 3.0% to4.9%.
3.33 In spite of the modest net profit it has been earning, TDFL hasbeen paying regular dividends since 1975. These payments have yielded anaverage return of 2.3% on paid up common shares. To enable it to declarethese dividends, TDFL has had to obtain a special waiver from the TanzanianGovernment on the dividend provisions of the companies act of 1972. Underthese provisions a company is prevented from declaring any dividends until itsreserves reach a minimum of 25% of its paid up capital. The waivers so fargranted to TDFL have restricted it to declare dividends up to 50% of posttaxation profits after write offs of bad debts. TDFL has agreed with the Bankto stick to this maximum 50% payout ratio in the future, to permit it toplough back more internal resources for operations.
3.34 Annexes 4 and 8 show TDFL's past balance sheets and relevant ratioson financial situation. The financial situation has been characterized bylow current ratios, low long term debt to equity ratios, and a relativelyhigh ratio of provisions to the portfolio. TDFL has been able to draw downon committed resources to finance operational needs at short notice, andhence has adopted a policy of keeping liquid assets at a low level. Onleverage, although its articles of association stipulate a maximum long termdebt to equity ratio of 3.1, it is yet to approach this limit because it hashad to draw down on its equity to finance the relatively large proportion ofits operations in the form of equity investments. TDFL has agreed to maintainthis debt equity limit at 3.1. For the purposes of this covenant, TDFL'sincome notes will be considered as long term debt. In addition, the con-solidated debt and equity of TDFL, for purposes of this covenant, will bedefined to include the debt and equity of its four subsidiaries. While thelevel of provisions may appear rather high in relation to the quality of theportfolio, this conservatism is quite prudent given the economic environmentin which TDFL operates. Overall, TDFL has managed its finances creditably,and its financial situation remains quite sound.
C. Prospects
TDFL's Strategy
3.35 TDFL's operations over the coming 3 to 5 year period will be guidedby a strategy designed to increase its impact on development. This strategyis incorporated in a strategy paper, a copy of which is in the project file.In keeping with the increasing role that the Government expects the privatesector to play in the industrial development of Tanzania, TDFL's strategy willbe to expand its promotion and financing activities to meet a greater propor-tion of the needs of the sector. Because the medium size of projects itassists will preclude it from playing a major role in assisting large exportoriented projects, it will concentrate its promotion activities in those
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import substituting industries where medium scale enterprises could be effi-cient producers. Specifically, and in line with Tanzanian's Basic IndustrialStrategy, it will actively promote projects which meet basic needs (clothing,construction materials and food), and some basic industries (chemicals, andprojects in the metalworking and engineering area). In undertaking theseactivities, it will seek to diversify the source of its clientela and contri-bute to the development of indigenous private industrialists by assisting, ona selective basis, smaller projects sponsored by such entrepreneurs. It willalso consider joint venture projects with the more effective District Develop-ment Corporations. To finance the planned increase in operations, it willseek to diversify its sources of funds. Finally, it will build up the staffand organizational capacity to perform these tasks. This strategy is suitablefor TDFL and within its capability to implement.
Forecast Operations
3.36 In continuation of the growth process which started in 1975, TDFLexpects to attain a level of approvals of Shs 90 million in 1979, and to reacha new annual level of Shs 100 million by 1980. It plans to stabilize andconsolidate operations at that annual level through 1983. The proportion ofapprovals in the form of equity is projected to increase from the average of21% of total approvals experienced in recent years, to an average of 33% overthe next five years because TDFL expects to play an increasing role in pro-moting the projects it will finance.
3.37 To attain this level of operations, TDFL has a long list of projectproposals and ideas under study. The majority of these projects are in themanufacturing sector, and involve the types of basic products and processeswhich can be efficiently undertaken on a medium scale basis. With Tanzania'sBasic Industrial Strategy in mind the proposals and ideas include projectsthat use iron and steel such as bolts and nuts manufacturing, steel rolling,and wiregauze manufacturing; chemical projects such as production of indus-trial alcohol and of carbon dioxide; and construction material projects suchas stone quarrying, sawmilling, and manufacture of PVC tiles. In addition tothese projects, TDFL expects to receive a constant flow of financing applica-tions from local private investors.
Forecast Financial Prospects
3.38 Projected income statements, balance sheets and ratios for TDFLfor 1979-1983 are shown in Annexes 6 through 9. The assumptions underlyingthese projections are in the project file. No significant increases areexpected in the rate of return on the total portfolio, but with new incomefrom rental of portions of TDFL's new office building, with continued tightcontrol of expenses, and with a lower level of provisions than in the past,TDFL's profitability is projected to increase slightly. Net profits as apercentage of average total assets are expected to increase gradually fromthe 1.1% experienced in 1978 to 2.1% by 1983. The return on equity (networth) is expected to increase, partly because of this increased profit-ability, and partly because of greater use of debt financing, from the 3.6%
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experienced in 1978 to 5.9% by 1983. Because of the proposed restrictionon the payment of dividends however, the dividend yield for shareholders isnot expected to top 3.5%. TDFL's financial situation is expected to remaingood. The projected debt/equity ratios show that the limit of 3:1 will notbe reached in spite of increasing use of debt finance. This is becauseTDFL will continue to raise large amounts of new equity to finance itsexpected investments in equity. The liquidity situation is expected tobe in line with past experience, and enough cash is expected to be generatedinternally to service the increased debt.
IV. THE PROJECT
A. Description, Objectives and Justification
4.01 The project involves provision of a line of credit to TDFL tofinance medium scale industrial and related service projects, agro-processingand tourism development projects through 1981. It is designed with two majorobjectives in mind:
(a) to increase the effectiveness of TDFL in resource allocationin Tanzania, by providing it with policy, institutional andoperational advice; and
(b) to contribute to the foreign exchange resource availablefor medium sized investment in the sectors involved.
4.02 The main justification for this project is the desire of the BankGroup to enhance the role of financial intermediaries in Tanzania in resourceallocation because of their proven relative effectiveness in that area. Inaddition, TDFL has proven itself an effective institutional source of finan-cial and technical assistance to medium scale private projects. Such projectshave contributed, and will continue to contribute significantly to industrialoutput, value added, and employment. By becoming associated with TDFL at thistime through a lending operation, the Bank Group will have an opportunity toassist such projects.
B. Costs and Financing
4.03 Between January 1979 and December 1981, TDFL is projected to commitShs 280 million to projects, broken down as follows:
Projected Commitment (Shs million)Foreign Local Total
Loans 132 56 188Equity 64 28 92
Total 196 84 280
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The estimated 70% foreign component of these commitments represents an aver-aging of the expected direct and indirect import component of subprojectexpenditures to be financed with TDFL's loans and equity investments. Theindirect component will involve such items as locally procured vehiclesand construction materials for civil works.
4.04 To finance these commitments the following financing plan isproposed.
Financing Plan (Shs Million)Foreign Local Total
Total Commitments 196 84 280Resources Available as of 1/1/79 - 25 25
Resource Gap 196 59 255
New Resources
EIB II 50 - 50IBRD I 91 - 91Internal Cash Generation - 59 59
141 59 200
Unidentified Finance 55 _ 55
TOTAL 196 59 255
4.05 EIB's second loan is still under negotiations, but is expected tobe available in 1979. The proposed Bank Loan will meet about 35% of TDFL'stotal resource requirements between 1979 and 1981, and about 45% of theforeign resource requirements. In addition to EIB and the Bank, TDFL willneed to raise Shs 55.0 million in new foreign resources. In this connection,it has contacted IFC for a possible share subscription, which, if provided,will prove invaluable for financing portions of TDFL's planned investmentsin equity. Other financiers TDFL plans to contact include the AfricanDevelopment Bank, BADEA and Norwegian, Swedish and Canadian financial and aidinstitutions.
C. Terms and Conditions of the Proposed Loan
4.06 The proposed Bank Loan to TDFL will carry the following terms andconditions:
(a) Eligibility: The Loan will be available for financingsubloans and equity investments in subprojects in theindustrial, transport, agro-processing and tourism sectors.
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(b) Free Limits: The individual free limit on subloans willbe US$250,000 and the aggregate free limit US$3.5 million.Equity investments to be made out of the proceeds of theloan will require prior Bank approval irrespective of theamount involved. This will permit the Bank to review atleast 70% of the subprojects to be financed.
(c) On-Lending Rate: The on-lending rate will be a minimumof 11% per annum. As mentioned in paragraph 3.20 this isexpected to be positive in real terms, give TDFL an ade-quate spread, and is comparable to on-lending rates ofsimilar institutions in Tanzania. The Bank and TDFL willreview this on-lending rate periodically to ensure thatTDFL continues to lend at a rate which is positive in realterms, yields an adequate spread, and is competitive.
(d) Foreign Exchange Risk: The foreign exchange risk on sub-loans will be fully passed on to the subborrowers. Forany portion of the loan that TDFL intends to use for equityinvestments, it will be required to submit at the time theproposed project is presented for Bank approval, a satis-factory plan for covering its exposure to the relatedforeign exchange risk.
(e) Amortization: The amortization will be the aggregate ofthe amortization schedules for subloans and investments.
(f) Debt/Equity Limit: During the life of the Loan TDFL'sdebt/equity ratio will not exceed the limit of 3:1.
D. Project Implementation
4.07 Reporting Requirements: TDFL will submit quarterly reports whichwill include a summary of operations, financial statements, resource position,statement of loan arrears, and notes on subprojects which are encounteringserious operational difficulties. It will also submit audited annual accountsprepared by qualified accountants in accordance with the Bank's requirementsfor DFCs, within four months of the end of each financial year.
4.08 Procurement: Procurement for the subprojects financed under theLoan will be in accordance with TDFL's existing procurement policy (para.3.17).
4.09 Disbursement: The proceeds of the Loan will be disbursed forauthorized TDFL subloans and investments as follows:
(a) 100% of the foreign cost of imported goods;
(b) 65% of the local cost of previously imported goods; and
(c) 40% of the total cost of civil works.
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4.10 The estimated disbursement schedule for the Loan is shown inAnnex 10. Disbursements are expected to be completed by December 31, 1983,two years after the completion of commitments.
E. Benefits and Risks
4.11 As noted in Chapter I of this report, privately owned medium scaleprojects have continued to play an important role in Tanzania's industrialsector despite the rapid growth of parastatals. By increasing the resourcesavailable for investment in such projects, and by improving the allocationof these resources through the strengthening of TDFL, the project will con-tribute to the growth of industrial output to meet basic needs in Tanzania,and generate significant employment benefits. While it is difficult toquantify these benefits in a rate of return calculation (ref. para. 3.14), theloan of Shs 91 million will, on the basis of the historical average proportionof total project costs that TDFL has financed, lead to a total investment ofabout Shs 455 million (US$55 million). TDFL's average investment cost perjob in the past was US$3,480. Allowing for inflation, and assuming that about20% of projects to be financed under the loan would be for modernization/rehabilitation, the Loan would lead to the creation of 6,500 to 7,000 jobs.
4.12 The subprojects to be financed under this project will be exposedto the normal risk that most industrial enterprises face in Tanzania, whenforeign exchange resources become scarce and there is a severe cutback onimports of raw materials and spare parts for industrial activities. Inaddition to this normal risk, the growth of TDFL may place strains on itsorganization, staffing and procedures and prevent it from being fully effec-tive during project implementation. In this connection, adequate plans havebeen made to adapt the institution to the expected higher level of investmentapprovals, and the larger portfolio to be supervised. The implementation ofthese plans will need to be closely monitored for unforeseen problems thatmay emerge.
V. RECOMMENDATIONS AND AGREEMENTS REACHED
5.01 A Bank Loan of US$11.0 million for TDFL to meet part of its foreignexchange resource requirements through December 1981 is recommended. Duringnegotiations between the Bank and TDFL, agreement was reached on the proposedterms (para 4.06), and the following subjects:
(a) that TDFL's policy statement, including the followingamendments and additions will not be materiallychanged without prior consultation with the Bank(paras 3.09 and 3.11);
(i) increase in the single maximum investment per projectto Shs 12.0 million;
(ii) increase of its normal maximum contribution to aprojects capital cost to 60%; and
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(iii) introduction of a clause specifying that it willalways protect itself against exchange risks arisingout of foreign borrowings.
(b) that TDFL's normal total investments in equity will belimited to its own paid up capital plus unimpaired reserves(para 3.12);
(c) that TDFL will use the economic rate of return criterion inappraising projects in which its financial contribution willexceed the equivalent of US$250,000 (para 3.14);
(d) that TDFL will prepare a satisfactory operations manual andsubmit a copy to the Bank by December 31, 1979 (para 3.16);
(e) that TDFL will restrict its dividend declaration to 50% ofafter tax profits and after bad debt write offs, until itaccumulates reserves up to 25% of paid up capital(para 3.33).
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ANNEX 1
TANZANIA
Structure of Output and Employment in Large Scale Manufacturing
Profit after tax 656 2,170 2 542 3,082 2,449Provision Against Investment Loss - (2,000) (500)(2,000)(1,000)Profit (Loss) on Sale ofInvestment - 469 - 14 37
Dividend Income as % of Average Equity Portfolio 6.9 5.6 9.7 10.0 8.7 8.5 8.5 8.5 8.5 8.5Income from Loans as Z of Average Loan Portfolio 8.2 8.7 8.7 8.2 7.5 9.9 10.7 10.8 11.0 il.1Gross Portfolio Income as % of Average Portfolio 8.8 11.5 12.6 13.1 12.1 11.8 12.0 11.7 il.7 11.5Cost of Debt as % of Average Long Term Debt 8.6 8.1 8.3 7.6 7.2 8.2 8.2 7.7 7.8 7.9
C. ProfitabilityNet Profit as % of Year-End Networth 1.6 1.6 4.9 2.6 3.5 3.7 3.4 4.9 4.9 5.4Net Profit as % of Average Networth 1.6 1.6 5.0 2.6 3,6 4.4 4.3 5.2 5.6 5.9Dividend Payments as % of Paid In Common Shares - 1.5 3.0 2.5 3.0 2.9 2.6 3.6 3.3 3.5Dividend Payment Ratio (%) - 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0
D. Financial Structure
Current Ratio 1.2/1 2.5/1 0.9/1 1.3/1 1.7/1 2.5/1 1.6/1 1.8/1 1.9/1 1.3/1Long Term Debt/Equity 0.7/1 0.9/1 0.9/1 1.5/1 2.6/1 2.3/1 1.5/1 1.9/1 1,6/1 1.5/1Provisions as of Portfolio 4.4 7.0 6.7 7.7 6.2 5.2 4.5 4.0 3.8 3.6
E. Debt Coverage
Debt Service Ratio - - - - - 3.4 3.8 2.7 4.0 3.9
4~
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ANNEX 10
TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)
Prolected Schedule of Disbursements of Proposed Bank Loan
IBRD FY Cumulative DisbursementsAmount in $ 000
1981October - December 700January - March 1,900April - June 4,600-
1982July - September 4,900October - December 5,600January - March 7,000April - June 8,000
1983July - September 9,000October - December 9,500January - March 10,000April - June
1984July - September 10,500October - December 11,000
EAPIDJune, 1979
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ANNEX 11
TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)
Selected Documents and Data Available in the Project File
A. General Reports on the Sectors
A.1 The United Republic of Tanzania: The Economic Surveys 1975-76and 1977-78
A.2 The United Republic of Tanzania: Speech by the Minister ofIndustries to the Budget Session of the National Assemblyfor the 1978-79 Session
A.3 The United Republic of Tanzania: Speech by the Minister ofFinance to the Budget Session of the National Assemblyintroducing estimates of Public Revenue and Expenditurefor 1978-79 and the Development Plan for 1978/79
A.4 Bank of Tanzania, Economic Bulletin, March 1978A. 5 Financial Institutions
B. General Reports Relating to the Project
B.1 TDFL: Annual Reports 1974-1977B.2 TDFL: Replies to the Questionnaire of the IBRD MissionB.3 TDFL: Selected Working Papers on ProjectionsB.4 TDFL: Various Shareholders Agreements
