Document of The World Bank FOR OFFICIAL USEONLY Report No: 34082-TZ PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHE AMOUNT OF SDR65.5 MILLION (US$95 MILLIONEQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR A PRIVATE SECTORCOMPETITIVENESSPROJECT November22,2005 PrivateSector Unit Africa Region 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. CURRENCY EQUIVALENTS (Exchange Rate Effective November 16,2005 Currency Unit = Tanzanian Shilling Tsh 1,166.50 = US$1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loans ATP Accountability, Transparency, and Integrity Project BDG Business Development Gateway BDS Business Development Services BEST Business Environment Strengthening for Tanzania BEST-AC BEST Advocacy Component BFIA Banking and Financial Institutions Act BOT Bank of Tanzania BRELA Business Registrations and Licensing Agency BRU Better Regulation Unit BSC BEST Steering Committee BSD Business Development Scheme CAS Country Assistance Strategy CDR Commercial DisputeResolution C E M Country Economic Memorandum CFAA Country Financial Accountability Assessment CGAP Consultative Group to Assist the Poorest CGPS Continuing Global Positioning System CGS Credit Guarantee Scheme C D A Canadian InternationalDevelopment Agency CLE Continuing Legal Education CQ Consultants' Qualifications CTI Confederation o f Tanzania Industry Danida Danish International Development Agency DFID United Kingdom's Department for International Development DSM Dar Es Salaam DTIS Diagnostic and Trade Integration Study EAC East African Community EC European Communities ESMAI East and South African Management Institute ERR Economic Rate o f Return ERV Exchequer Receipts Voucher ESRF Economic and Social Research Foundation EU European Union FDI Foreign Direct Investment FIAS ForeignInvestment Advisory Service FIDP I1 Financial Institutional Development Project I1 FMR Financial Management Report FMS Financial Management Specialist FPSI Finance, Private Sector, and Infrastructure FSAP Financial Sector Assessment Program FSDT Financial Services Deepening Trust GBSN Global Business School Network GDP Gross Domestic Product GIS Geographic Information System GNI Gross National Income GOT Government o f Tanzania GTZ German Technical Cooperation HIV/AIDS Human Immunodeficiency Virus/Acquired ImmuneDeficiency Syndrome IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IFC International Finance Corporation ICT Information and Communication Technology ILO International Labor Organization IMF International Monetary Fund IRT Investors Round Table LA Legal Agreement LCS Least Cost Selection LIS Land Information System LSRP Legal Sector Reform Program MDA Ministries Departments and Agencies MFI Micro Finance Institution MIGA Multilateral Investment Guarantee Agency MJCA MinistryofJustice and Constitutional Affairs MLHSD Ministry o f Lands, Human Settlements Development MOU Memorandumo f Understanding M S M E Micro, Small, and Medium Enterprise MTEF Medium-Term Expenditure Framework MKUKUTA National Strategy for Growth andReduction o fPoverty MTR Mid-Term Review NACTE National Council for Technical Education NAO National Audit Office NBAA National Board o f Auditors and Accountants N B S National Bureau of Statistics N C B National Competitive Bidding NGO Nongovernmental Organization NMP National Microfinance Policy NPV Net Present Value NSGRP National Strategy for Growth and Reduction o f Poverty (MKUKUTAstrategy) QCBS Quality- and Cost-Based Selection PEFAR Public Expenditure and Financial Accountability Review PFMRP Public FinancialManagement Reform Program PEP Private Enterprise Partnership PIC Program Investment Committee PIM Project Implementation Manual PIP Project Implementation Plan PKF Panel Ken- and Forster POPP President's Office o f Planning and Privatization PRBS Poverty ReductionBudget Support PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Strategy Paper PS Permanent Secretary PSA Private Sector Advocacy PSD Private Sector Development SACCO Savings and Credit Cooperative Small and Medium Enterprise SBD Standard BiddingDocument SIDA Swedish InternationalDevelopment Agency SIDO Small Industries Development Organization SIL Specific Investment Loan SME Small and Medium Enterprise SOE Statement o f Expenses SPILL Strategic Plan to Implement Land Laws SWAP Sector Wide Approach TA Technica1Assistance Tanesco Tanzania Electricity Supply Company TBDS Tanzania Business Development Scheme TCCIA Tanzania Chambers of Commerce Industryand Agriculture TFP Total Factor Productivity TIAS Technical Innovation, Applied Research Scheme TIC Tanzania Investment Center TNBC Tanzania National Business Council TOR Terms o f Reference TPSF Tanzania Private Sector Foundation TRC Tripartite Commission TTL Task Team Leader UNDP United Nations Development Program UNIDO UnitedNations Industrial Development Organization USAID United States Agency for InternationalDevelopment WB World Bank Vice President: Gobin T. Nankani Country Director: Judy M.O'Connor Sector Manager: DembaB a Task Team Leader: Michael D. Wong TANZANIA TANZANIA - PRIVATE SECTOWMSME COMPETITIVENESS PROJECT APPRAISAL DOCUMENT AFRICA AFTPS Date: November 22, 2005 Team Leader: Michael D.Wong Country Director: Judy M.O'Connor Sectors: Micro- and SME finance (100%) Sector ManagerDirector: Demba Ba Themes: Small and mediumenterprise support (PI Project ID: PO85009 Environmental screening category: ( C ) Lending Instrument: Specific Investment Loan Safeguard screeningcategory: ( C ) [ 7 Loan ProjectFinancingData [XI Credit [ 3 Grant [ ] Guarantee [ ] Other: Source Local Foreign Total BORROWERRECIPIENT 26.2 35.7 62 INTERNATIONAL DEVELOPMENT 51.9 43.1 95 ASSOCIATION Total: 78.1 78.8 157 ~~ Borrower: The UnitedRepublicof Tanzania ResponsibleAgency: President'sOfficefor Planningand Privatization,TanzaniaPrivate Sector Foundation, FinancialSector DeepeningTrust Does the project depart from the CAS incontent or other significant respects? Re$ PAD A.3 [ ]Yes[X]No Does the project require any exceptions fiom Bank policies? [ ]Yes[X]No Re$ PAD D.7 Have these beenapprovedby Bank management? []Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [IN0 Does the project include any critical risks rated "substantial" or "high"? Ref: PAD C.5 [XIYes [ XI N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D,7 [XIYes [ ] N o Project development objective Re$ PAD B.2, TechnicalAnnex 3 The project objective i s to create sustainable conditions for enterprise creation and growth. The project's progress in achieving this objective will be measured by the increase in the number of formal enterprises, the increase inthe value o f titled land relative to untitled, and growth in sales and assets o f firms participating inthe project Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 Component 1:BusinessEnvironmentStrengthening This component supports the Business Environment Strengthening for Tanzania (BEST) Program that aims to lower the costs o f investing in, establishing, and operating a business in Tanzania by eliminating policy, legal, regulatory, and institutional constraints that inhibit a growing and competitive private sector. Component2: EnhancingEnterpriseCompetitiveness The objective o f this component is to improve the capacity o f the private sector to respond to viable opportunities in regional and international markets. The project would also help strengthenthe Tanzania Private Sector Foundation. Component3: ImprovingAccess to FinancialServices The objective o f the component is to increase access to financial services. The project would support this objective by contributing to the Financial Sector Deepening Trust. The project would also provide technical assistance and financing for studies associated with the program Which safeguard policies are triggered, if any? Re$ PAD 0.6, TechnicalAnnex 10 None Significant, non-standard conditions, if any, for: N/A Re$ PAD C.7 Boardpresentation: December 15,2005 Loadcredit effectiveness: July 1,2006 Covenants applicable to project implementation: The following shows the credit effectiveness conditions andthe responsible parties to meet the conditions. (1) POPP/BRU, FSDT, and TPSF have put inplace a satisfactory management and procurement system for the project; (2) POPP/BRU and TPSF have adopted a satisfactory PIM; (3) TPSF and the Government have signed the Subsidiary Grant Agreement and (4) Appointment o f Project Coordinator at POPP. Legal Covenants: DisbursementConditions: (1) For the matching grants and BDGgrants, appointment o f grant managers and approval o f the grants inaccordance with the PIM. (2) For the business environment strengthening component through the BEST Program, signature o f the MOU and approval o f the respective annual work plan. (3) For the improving access to financial services component through FSDT, signature of the FSDT grant letter (satisfactory to IDA) by the Government, approval o f the annual business plan and approval o f the FSDT grant in accordance with the PIM. TANZANIA Tanzania .PrivateSector CompetitivenessProject CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ........................................................... 1 1. Country and Sector Issues................................................................................................. 1 2. Rationale for Bank Involvement....................................................................................... 9 3.Higher Level Objectives to which the Project Contributes ............................................ 10 B PROJECT DESCRIPTION . ............................................................................................ 12 1. Lending Instrument ......................................................................................................... 12 2 Project Development Objective and Key Indicators . ....................................................... 12 3. Project Components ........................................................................................................ 12 4 Lessons Learnedand Reflectedinthe Project Design . .................................................... 16 5. Alternatives Considered and Reasons for Rejection ....................................................... 19 c IMPLEMENTATION . ...................................................................................................... 20 1. Partnership Arrangements ............................................................................................... 20 2. Institutional and Implementation Arrangements ............................................................ 20 3. Monitoringand Evaluation o f Outcomes/Results ........................................................... 23 4. Sustainablllty................................................................................................................... . . . 24 5. Critical Risks and Possible Controversial Aspects ......................................................... 25 6 Loadcredit Conditions and Covenants . .......................................................................... 26 D APPRAISAL SUMMARY . .............................................................................................. 27 1 Economic and FinancialAnalyses .................................................................................. . 27 2 Technical......................................................................................................................... . 28 3. Fiduciary ......................................................................................................................... 28 4. Social............................................................................................................................... 28 5 Environment., . .................................................................................................................. 28 6. Safeguard Policies ........................................................................................................... 29 7 Policy Exceptions and Readiness.. . .................................................................................. 29 Annex 1: Country and Sector or ProgramBackground ................................................... 30 Annex 2: Major RelatedProjects Financedby the Bank andlor other Agencies ...........52 Annex 3: ResultsFramework and Monitoring .................................................................. 56 Annex 4: Detailed Project Description ................................................................................ 60 Annex 5: Project Costs ......................................................................................................... 82 Annex 6 ImplementationArrangements . ......................................................................... 83 Annex 7: Financial Management and DisbursementArrangements ............................. 88 Annex 8: Procurement Arrangements ................................................................................ 92 Annex 9: Economic and Financial Analysis ..................................................................... 101 Annex 10: Safeguard Policy Issues .................................................................................... 108 Annex 11: Project Preparation and Supervision ............................................................. 111 Annex 12: Conflict of InterestManagement Framework ............................................... 113 Annex 13: Documents inthe Project File ......................................................................... 115 Annex 14: Statement of Credits and Grants .................................................................... 118 Annex 15: Country at a Glance ......................................................................................... 120 Annex 16: Maps ................................................................................................................... 122 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues Over the past five years, Tanzania has grown rapidly, albeit from a low base. Its current growth rate o f 6.7 percent i s higher than that o f South Asia (5.4 percent) and Southeast Asia (5.6 percent).' Growth over this period has contributed to reductions inpoverty.2Despite this progress, Tanzania remains among the poorest countries inthe world with an estimated per capita income o f US$330 (Atlas method) in2004. Tanzania i s still intransition from an economy dominated by the public sector and public enterprises to a dynamic private sector-led economy. This increase has beenprimarily drivenby exports, which have grown at an average o f 11percent per year since 2000. Non-traditional exports (such as fish, gold, tourism, and horticulture) are responsible for this growth. Although some traditional exports continue to contribute significantly to growth-for example, revenues from cashew nuts increased from US$l5.5 million in 1990 to about US$48.6 million in 2004-the share o f traditional exports has more than halved to just 22 percent o f Tanzania's total exports. Gold, tourism, and fisheries are the primary sources o f non- traditional export growth. Gold exports have experienced a massive surge since 1997, growing from 1percent of exports to 47 percent in 2004. Fishexports also grew strongly from 7.5 percent o f total exports in 1997 to 10.1 percent in 2004, more than both coffee (3.4 percent) and cotton (8.0 percent). Since the mid-l990s, tourism has grown an average o f 6 percent per year, with the number of arrivals increasing more than fourfold since 1990 and recently generating receipts of $497 milli~n.~ Figure 1.) (See Growth was made possible by sound macroeconomic policies, trade liberalization reforms, and banking and financial sector reforms that the Government o f Tanzania (GOT) successfully implemented over the last 10 years. Although there i s evidence that these reforms have resulted in some gains in export growth as well as foreign direct investment, analysis o f sector and firm-level data suggests that there is unrealized export growth potential inthe above three sectors, as well as in agribusiness and services. Much deeper microeconomic and sector reforms are still needed to reduce the cost o f doing business (regulatory/factor cost) and to increase firm-level productivity and competitiveness. 1 Robert Utz, Country Economic Memorandum (CEM) Background Paper (Washington, DC: World Bank, *2005). Accurate numbers ofpovertydecline are inthe processofbeingdevelopedby the National Bureauof Statistics. World Bank, Diagnostic TradeIntegrations Study (Washington, DC: 2005). Most recent data availablefrom 2003. World Bankand IMFData Base. 1 Figure 1: Comparisonof ExportBaskets, 1990and 2004 Share of TradRonal and hbn-Tradtional Exports 1990 Share of Traditional and hbn-Traditional &ports 2004 Rh I 0% SisalbbaccoTea\Cashew Mineral 1% 3% 6% 2% 56% Source:World Bank and InternationalMonetaryFundData Base To achieve its objective o f becoming a middle income country by 2025, Tanzania needs to implement a strong export push strategy for its manufacturing, agribusiness, and services sectors. Under certain circumstances, by 2025 the manufacturing share o f GDP could increase from 18.4 to 33 percent, services could increase from 34.8 to 42 percent in 2003, and agriculture's share could fall from 47 to 25 percent o f GDP.' This strategy implies an average annual growth rate for agriculture o f 5 percent, for industry o f 10.9 percent, for services o f 8.9 percent, compared with a baseline o f 3.3 percent, 4.8 percent, and 4.4 percent, respectively Tanzania's excellent track record o f successful macroeconomic and sectoral reforms suggests that these bold targets are attainable. This i s reinforced by the expressed commitment o f the Government o f Tanzania, under the National Strategy for Growth and Reduction o f Poverty (NSGRP, or MKUKUTA strategy in Swahili) to aggressively pursue the required structural transformation of the economy as well as microeconomic reforms consistent with international experience observed in emerging economies. Specific sector issues include the following: Micro, small, and medium enterprises (MSMEs) dominate Tanzania's economy. There are approximately 2.7 million MSMEs in the country with 60 percent o f them located in urban areas. Microenterprises (those employing less than five people) constitute 98 percent o f this total. Most MSMEs (66 percent) have annual sales o f less than Tsh 2 million annually and are primarily operating survival types ofbusiness. Over 60 percent o f MSMEs exit business during the first five years o f operation. MSMEs are represented inall sectors o f the Tanzanian economy, but dominate intrade (54 percent) and in services (34 percent).6 Large firms account for only 12 percent of all registered firms but contribute 38 percent o f gross domestic product (GDP) and generate employment for 20 percent o f the workforce. Informality: The Tanzanian economy has a large informal sector that accounts for 70 percent o f employment and 58 percent o f gross national income (GNI). A diagnostic o f the country's Utz, CEM2005. IFC, "Tanzania MSMEAccess to Finance Assessment" (Washington, DC: World Bank, 2005). 2 informal sector inmid-October 2002, covering 11 regions o f Tanzania (including Dar Es Salaam, Dodoma, Mwanza, and the Zanzibar) found that the informal sector in Tanzania has assets worth 29.3 billion, dollars, equivalent to 10 times all foreign direct investment (FDI) accumulated since independence and four times net financial flows from multilateral institutions in the same peri~d.~ The findings o f this study underline the fact that economic activity by the majority o f Tanzanians takes place outside the legal framework and i s limited by the law. In fact, the current laws and regulations governing business and real estate transactions do not provide businesses with the necessary mechanisms to generate capital, which in turn makes it very difficult for firms to enter the system. High Cost of Doing Business: One o f the most significant constraints that MSMEs face in Tanzania i s the heavy burden o f regulation. In the World Bank's 2006 Doing Business report, Tanzania ranked 140 out o f 155 countries in terms o f the ease o f doing business. Incomparison, Kenya ranked 68 and Uganda ranked72, which highlights the urgent need for the Government o f Tanzania to fast track the implementation o f essential reforms aimed at reducing the cost of doing business. Table 1: Economy Rankings 2006 Difficulty of Hiring Index* Rigidity of Hours Index* Credit Information L ~ * lndices range from 0 to 100 with I00 being the max rigid Source: World Bank, Doing Business in 2006 (Washington, DC: 2005). Tanzania currently lacks the efficient institutional framework necessary for implementing its market based reform approach. In many areas o f regulation, including business entry and exit, property rights, and contract enforcement, Tanzania performs poorly- not withstanding the fact that in some areas Tanzania performs better than some countries Sub-Saharan Africa (see Table 1). For example, registering a business costs US$532 in Tanzania, compared with US$222 in 'HemandoDeSoto, Empowering the Disadvantaged towards Expanded Market Economy September 2005. 3 Kenya. Closing a business takes longer and costs more in Tanzania than in many countries in the region. Tanzania also performs poorly in the areas o f property rights and contract enforcement. Although better than the average o f other Sub-Saharan African countries in other areas, costs are much higher than in the best performing countries in the region and than in OECD countries. In particular, regulations and institutions providing services related to land registration and titling need to be reformed and the administration ofjustice incommercial areas needs to be improved so that business disputes can be resolvedmore rapidly. Regulatory Barriers for Doing Business: Ninety percent o f businesses in Tanzania are sole traders and partnerships, but the law makes no provision for separating their business and personal assets or for the business to continue after the owner's death. Incorporating a company can only be done in Dar Es Salaam. Permits for officially declared "special" businesses (such as pharmacies, tour agencies, restaurants, and cell phone providers) are only available in Dar Es Salaam and may cost between US$3,916 and US$5,506, which makes it very difficult for the 87 percent o f the nation's businesses located outside the capital. Furthermore, some authorities may be excessive when applying laws and regulation, and private operators find it difficult to defend themselves against arbitrary decisions. Objecting to an administrative decision in the mainland sometimes can take up to 570 days. Incorporating a private company in the mainland costs US$2,669; to close a company voluntarily costs US$2,750, almost four times the average annual wage for an ordinary Tanzanian. It i s impossible for Tanzanian companies to raisejkancing by selling shares on the stock exchange, unless they have been profitable for the past three years and have a minimum o f US$50,000 equivalent incapital-a group comprising less than one percent of the country's companies. Property Rights: Most property rights in land are not documented or mapped to facilitate land transactions because only about 150,000 land parcels are registered. Registration o f land in rural areas (customary land) only commenced recently with a pilot program in the Mbozi district, Consequently, about 90 percent o f Tanzanians cannot be located through the property registry system, which would allow them to gain access to collateral-based credit and exercise their rights as contracting parties and citizens. Registration procedures are unnecessarily burdensome for property owners (firms, private individuals, and the poor). These property owners have access to only six registry offices nationwide and are obliged to comply with irrelevant red tape. Because of the prior authorization requirementsfor land from Government and tax authorities, registrars, and valuers, property i s not very liquid. It i s also difficult to mobilize, transfer, combine, divide, or leverage it into credit and capital. Finally, complying with the law takes too much time: The de Soto diagnostic study reported that valuation, planning, surveying, and title procedures take 8 years, and land allocation for urban purposes in the mainland takes 7 years and in Zanzibar 9 years.8 Firm-level Productivity and Competitiveness: The 2004 Investment Climate Assessment was based on firm-level survey data covering about 480 firms, 276 o f which were from the manufacturing sector. The data were collected in 10 regions o f mainland Tanzania, in Zanzibar, and in about 8 different industrial sectors. The regions covered inthe survey were selected based on the relatively high concentration o f manufacturing firms inthese areas. The subsectors chosen 8 See De Soto, Empowering the Disadvantaged. 4 were wood working and furniture, textile and garments, leather, construction materials, paper printingandpublishing, chemicals and paint, plastics, and agribusiness. (See Figure2.) Figure2: Regionaland SectoralDistributionof Firms I Regional Distribution Sector Distribution paper. [Plastics 3% priclrg Cares Salaam 40% Furniture and wood 27% Construclio llyo nmariiis 4Yo I Source: RPED, Investment Climate Survey 2003 Analysis o f the data indicates that labor productivity in the manufacturing sector in Tanzania i s significantly higher than in Uganda but far lower than in China, India, and even Kenya. Value added per employee i s about US$2,028 per employee in manufacturing enterprises in Tanzania, 54 percent lower than in China, 43 percent lower than in Kenya, and 37 percent lower in India. These averages, however, hide substantial differences across sectors. For example, labor productivity in some manufacturing sectors (construction material, chemical products) in Tanzania i s higher than inKenya, giving Tanzania a comparative advantage inregional exports. Furthermore, every dollar of capital inTanzania generates approximately 30 cents o f value added. However, cross-country comparisons indicate that capital i s much more productive in Uganda where each dollar generates approximately 60 cents invalue added. (See Table 2.) Table 2: Cross-countryComparisonof Capitalper Worker inManufacturingFirms Tanzania Uganda Kenya Capital-Labor Ratio 6853 1421 973 1 Value-added- Capital Ratio 0.32 0.66 0.3 Capital Utilization 57.3 58.4 60.3 The low productivity of Tanzanianfirms reflects the low level of education, lack of training, and limited utilization capability o f production technology. Workers in manufacturing enterprises in Tanzania have less formal education than workers in Kenya or Uganda. Moreover, firms in Tanzania also provide less formal training. About 44 percent o f firms in Tanzania provided formal job training to their employees, lower than in Kenya (48 percent) or China (71 percent). Even when firms do have formal training programs, they are often less rigorous than those in other countries; enterprises with formal programs in Tanzania reported average annual durations of 3 weeks, compared with 7 inKenya and 17 inChina. Tanzanian enterprises also do not tend to 5 make full use o f technology. About 68 percent o f enterprises in Tanzania reported that at least some o f their employees useda computer intheir jobs, compared with 85 percent inKenya and 96 percent in China. Enterprises that used technology more intensively were more productive and grew faster in terms o f sales and employment than enterprises that did not. This may partially explain why totalfactor productivity i s low inTanzania, about 5.6 percent lower than inKenya. Trade Facilitation and Supply Chain: Availability o f reliable infrastructure i s one o f the most important components o f a country's investment climate and greatly affects firm competitiveness and profitability. Moreover, variation in infrastructure facilities across regions within a country, therefore, will result in differing costs o f doing business and differing business performance. In Tanzania, infrastructure affects the industrial base and firm performance at least two ways. First, infrastructure inadequacies deter entry o f new businesses, and second, existing firms underperform and are often driven to exit or relocate. Firms in the Investment Climate Survey identified two areas o f infrastructure-power and transportation logistics-as particularly problematic. In contrast, relatively few firms-only 21 percent-rated telecommunications as a serious obstacle, slightly higher than in China (17 percent), but less than in many o f Tanzania's neighbors (for example, 44 percent o f Kenyan firms saw telecommunications as a serious obstacle). Over 59 percent o f all enterprises across the manufacturing, construction, and tourism sectors rated unreliable electricity supply (generation) as a serious problem. This i s almost twice as many as in China (28 percent) and i s higher than in many neighboring countries (49 percent in Kenya; 44 percent in Uganda). The median manufacturing firm reported outages o f 48 days (67.2 days across all sectors). By contrast, in Uganda, the median manufacturing firm reported only 20 outages (38.6 percent for all sector). Unreliable power imposes large costs on firms. About 55 percent o f firms in Tanzania owned their own generator, compared with 27 percent inChina and 5 percent inUganda. In addition to forcing firms to buy generators, unreliability imposes other real costs on doing business inTanzania. The integration o f farms and firms to market chains and the development o f forward and backward linkages between and among farmers, small and medium enterprises (SMEs), and export-oriented larger firms i s stifled in Tanzania. Analysis o f maize, fish, and sugar supply chains concludes that this poor performance i s caused by very poor integration, high transaction costs imposed by the low quality of the infrastructure backbone, and inefficiencies in the way these infrastructures are managed and integrated. Only 50 percent o f trunk and regional roads are in good or fair condition, and 72 percent o f all roads are classified as in poor condition. The railway takes longer and i s less reliable than other methods o f transportation, and although it i s less costly than road travel, it is only used to transport 10 percent o f exports and 18 percent o f imports across the country. The hightransport costs resulting from customs, road blocks, and the inability to manage and externalize also constrain the ability o f farmers and firms, who often opt out o f the opportunities to export both regionally and internationally. (See Table 3 for more detailed data on cross-border trading.) 6 Table 3: Logistics Indicatorsof Cross-Border Trading % Paved Rail load-to-locomotive Cost of air cargo $/kg(a) Cost of interic Cost of rail roads (Million rail ton- roadtransport transport kdlocomotive) (USJ/km) (US$/ton-km) Kenya 2.3 1 13.9 I 10.81 4.65 1 7.91 I Madagascar 3.6 11.6 17.7d 15.711 15.66 IMali I 1.5 I1 12.1 1I 11.2 1 9.4 I 5.67 I 10.391I 0.06 I 0.05 I 8.3 13.34 7.47 I 12.62 1 Source: Investors Council (V) Access to Finance: Access to finance i s a serious problem for enterprises in Tanzania. The provision o f credit to the private sector, while having doubled since the late 199Os, is still low at 8 percent o f GDP compared with countries such as Kenya (23 percent). Also, according to the 2004 Investment Climate Survey, only 20 percent o f enterprises surveyed reported having loans from any financial institution (compared with 40 percent for Kenya). The problems are even more significant for MSMEs.A 2003 study estimated that 85 percent o f MSMEs do not access any formal sources o f credit.' Constraints to increasing access to finance for MSMEs need to be addressedintwo areas: SME finance and micro and rural finance. First, SME finance issues are complex, with constraints on boththe demand and the supply sides. On the demand side, the group o fpotentially bankable SMEs i s very small, and on the supply side, formal financial institutions believe that SMEs are highly risky and that processing and managing small loans entail high transaction costs, which makes SME lending an unattractive proposition for most financial institutions. Furthermore, the financial service providers that do recognize the business potential o f SME lending typically lack the delivery network and credit underwriting skills required for successful SME financing operations. More generally, a challenging legal and regulatory framework, particularly relating to security and enforcement o f contracts, makes it more difficult to lend to SMEs. Therefore, there i s a need to provide assistance to both entrepreneurs and financial institutions-as this project i s planning to do. Second, in addressing micro and rural finance, the 2001 Household Survey showed that only about 6.4 percent o f all households had a member with a savings or current account, down from 9Taken from the 2005 Tanzania MSMEAccess to Finance Assessment report, which refers to studies conducted inthe Uhurucorridor in2003. 7 18 percent a decade before. Furthermore, the figure inurban areas was four times than that inrural areas. A 2004 survey showed that only 6 percent o f microenterprises have loans from either microfinance institutions (MFIs) or banks (while an older 1997 survey showedthat only 9 percent o f microenterprise requests to banks were granted). These figures indicate that there is a large unmet demand for financial services for households and microentrepreneurs and that the main challenge i s on the supply side. The existing microfinance nongovernmental organizations (NGOs) are limited interms o f their volume o f activity, range o fproducts, and outreach, and most o f the financial cooperatives (Savings and Credit Cooperative Small and Medium Enterprise, or SACCOs) are operationally weak. There i s a need to strengthen the capacity and outreach o f the microfinance providers (NGOS and SACCOs) and also to support "wholesale" lending by commercial banks to MFIs. Country Context. The Government and the development partners have declared their commitment to a development partnership, established under a single framework called a Joint Assistance Strategy to address some o f the key issues above. The Government and its development partners have developed sectonvide programs that aim to address the key issues that constrain private investment. The Business Environment Strengthening for Tanzania (BEST) Program aims to lower the costs of investing in, establishing, and operating a business inTanzania by eliminating policy, legal, regulatory, and institutional constraints that inhibit a growing and competitive private sector. It was initially developed in 2002 to be implementedin five years by the Government with the support of four bilateral donors-UK Department for International Development (DFID), the Danish International Development Agency (Danida), the Swedish International Development Agency (SIDA), and the Government o f the Netherlands-and has beenreoriented to address key issues in the areas o f land reform, business registration andjudicial reform. Inaddition, the Government and the same donors plus the Canadian International Development Agency (CIDA), led by DFID, have developed the Financial Sector Deepening Trust (FSDT), which aims to expand financial services to low income groups in Tanzania. Both sector wide programs form an integral part o f the Bank's assistance program. It i s also envisaged to develop a sector wide program for infrastructure. 8 2. Rationale for BankInvolvement The Government has formulated a long-term strategy, the National Vision 2025, which aims to transform the country's agriculture-based economy into an export-led, competitive, and dynamic semi-industrial economy. The first phase (2005-2010) for realizing this vision i s articulated inthe MKUKUTA,which, among other activities, emphasizes the need for (i) broad-based and equitable growth and (ii)most important an export-driven economic transformation, particularly in the manufacturing, agricultural, and services sectors. To implement the MKUKUTA strategy, the Government o f Tanzania has prepared a series o f sector policies and programs that outlines and prioritize policy, regulatory, and institutional reforms.loThe implementation o f these will address the above mentioned constraints that impede the acceleration o f export-led growth. The SME program calls for (i) removing constraints in the legal and regulatory and institutional framework that affect the cost o f doing business; (ii) improving functioning o f the infrastructure network; and (iii)strengthening the entrepreneurship culture, boosting firm-level productivity through access to technology, business development, and improving access to markets and finance. The Tanzania National Business Council (TNBC) and the Investors Round Table (IRT), chaired by the president o f Tanzania, have been set up to provide a forum for stakeholders that (i) acts as a watch dog for effectiveness o f Government policy and institutions; (ii) provides a voice for private sector actors in prioritizing Government policy and actions; and (iii) provides private sector access to high-level policy makers. These objectives are addressed inthe Private Sector Competitiveness Project. The World Bank's Country Assistance Strategy (CAS), approved in 2000, i s still relevant. It is fully aligned with the country's key development goals and outcomes as detailed in the MKUKUTA strategy. Preparation of a new CAS has been delayed to allow full alignment and consistency with the MKUKUTA; and to allow it to be developed in harmony with other developmentpartners. MKUKUTA goals are organized around three clusters: (i)growth and reduction of income poverty; (ii)improvement o f quality o f life and social well-being; and (iii)governance and accountability. The Bank i s providing support to all MKUKUTA clusters through a Poverty Reduction Support Credit (PRSC), currently in its third phase, in addition to various investment lendingoperations inall major sectors. Under cluster 1 o f the MKUKUTA (growth and reduction of income poverty), the Bank supports rural development, environmental management, infrastructure development (power and roads), tax administration, and regional trade facilitation. Ongoing investment lending operations in the area o f private sector development include the second Financial Institutional Development Project (FIDP 11) and the Privatization and Private Sector Development Project. These operations support developing a sound and competitive financial sector, improving access by micro entrepreneurs to the formal financial system, restructuring public enterprises, and regulating infrastructure and utilities. loMinistry of Industryand Trade, MSME Strategy (Dar es Salaam: April 2003); Construction Sector (Dar es Salaam: 2003); Ministry o f Industryand Trade, National TradePolicy (Dar es Salaam: February 2003). 9 The Government o f Tanzania and the development partners declared their commitment to a development partnership, established under a single framework called a Joint Assistance Strategy, in which the World Bank's CAS is fully integrated. This was created in the process of rationalization and harmonization between the Government o f Tanzania and all its development partners, aimed at reducing transaction costs and improving aid effectiveness. Inkeepingwith this approach, the goal is to combine the Bank's private sector operations in a Sector Wide Approach (SWAP), together with other development partners. To this end, both FIDP I1 and the Privatization Project will be integrated into the SWAP combined with the Private Sector Competitiveness Project. It also complements other programs supported by the World Bank on infrastructure, accountability, transparency and integrity, and agriculture. The proposed project i s part o f an integrated set o f instruments, knowledge products, and services that the World Bank Group i s contributing, in coordination with other donors, to support the Government in implementing its program. This operation in particular combines International Development Association, International Finance Corporation, and Multilateral Investment Guarantee Agency (IDA/IFC/MIGA) products and services bundled for increased effectiveness in delivering results and outcomes for the private sector as envisioned under the IFC/IDA MSME initiative." The IFC participated in the overall design o f the project and led the design work for the access to finance component and business schools network subcomponent. MIGA has provided analytical work on benchmarking and provides support to the Tanzania Investment Center (TIC) inits promotional activities. 3. Higher LevelObjectivesto which the ProjectContributes The higher level objective to which the project contributes is the achievement of significant and sustainable economic growth in Tanzania (8-10 percent per year), which in turn will lead to sustained poverty reduction. Under the proposed project, the World Bank is supporting the Government in implementing a set o f priorities in the area o f private sector development with a particular focus on key "behind-the-border" reform challenges, weak business environment and poor governance, underdeveloped trade and transport facilitation systems and institutions, closed and overregulated domestic service sectors, low level o f FDI, rigid factor markets, and barriers to regional integration. The objective i s aligned with the Government's national strategy as outlined inthe National Vision 2025 and the MKUKUTA. It is also consistent with the goals outlined in the Africa Action Plan and sector work conducted in preparation for the forthcoming CAS. The project will contribute to increasing Non-Government sector GDP, along with manufacturing and trade as a percentage o f GDP, non-traditional exports as a percentage o f total exports, employment in industry as percentage of total employment, the gross capital formation, direct credit to the private sector, and regulatory quality and rule o f law. Figure 3 illuminates this vision and benchmarks a selective set o f indicators with a relatively well- known middle income country Malaysia. The spider diagram shows the level o f employment in industry and services, capital formation, trade as a share o f GDP, and the soundness of banks. Aside from these, the diagram reflects some important social benchmarks, such as the level o f "TheProgramFrameworkfortheJointInitiativeforAfricawasdiscussedwiththeBoardinDecember2003 anda pilot programwas approvedinJuly 2005. 10 secondary and tertiary education, Internet access in schools, extent o f staff training, and availability of management education and technology readiness. Figure 3: Development Objective Indicators: Tanzania Benchmarks and Targets (Malaysia) Comparison Between Tanzania and Malaysia GDPgrow th (Oh) GDPper capita Mbile phone per 1,000 2 /-Human/\Errploymnt DevelopmentIndex in industry (Ohof total enployment) loyment in services (Ohof total enploymnt) Availability of managementeducation Gross CapRal Formation I Went of Staff Training Trade as % of GDP -Tanzania Internet access in schools Soundness of banks 4 Tertiary Enrollment L\\Y\ A Exports of goods and servcies as Oh of GDP Secondary Enrollmen Domestic credit to private sector (% of GDP) Average years of schooling Adutt literacy rate (% age 15 and abo High-Tech exports as Oh of manuf. ex Foreign Direct lnvestmnt as % of GDP State of cluster Patentapplications granted by the USPTO/ m1pop. Source:E-toolsWorld Bank database 11 B. PROJECT DESCRIPTION 1.LendingInstrument The specific investment loan (SIL) i s chosen as the most adaptable instrument to support the implementation o f the Government's private sector development program. The project will provide direct financing for activities that have beenidentifiedby the private sector to respond to market developments and also to provide the necessary financing for change management in key public institutions that already have an established source of recurrent funding. The SIL also provides the funding flexibility to enable the public and private sector to carry out the analytical work requiredto underpin policy changes. 2. ProjectDevelopmentObjective and Key Indicators The project objective i s to create sustainable conditions for enterprise creation and growth, The project's progress in achieving this objective will be measured by the increase in the number o f formal enterprises, the increase in the value o f titled land relative to untitled, and growth in sales and assets o f firms participating in the project. The project will achieve this objective by reducing the cost o f doing business and increasing the capacity of the local private sector to participate in domestic and international markets and to access appropriate financial services. 3. ProjectComponents The project supports the government program through three mutually reinforcing components: (i) strengthening business environment; (ii)developing enterprise competitiveness; and (iii) improving access to financial services. A detailed project description i s given inAnnex 4. Component1:BusinessEnvironmentStrengthening This component supports the Business Environment Strengthening for Tanzania (BEST) Program that aims to lower the costs o f investingin, establishing, and operating a business in Tanzania by eliminating policy, legal, regulatory, and institutional constraints that inhibit a growing and competitive private sector. The purpose o f the program i s to (i) reduce the burden on businesses by eradicating as many procedural and administrative barriers as possible; and (ii) improve the quality o f services provided by Government to the private sector. The program includes five components: (i)achieving better regulation; (ii)improving commercial dispute resolution; (iii) strengthening the Tanzania Investment Center; (iv) changing the culture o f Government; and (v) empowering private sector advocacy. The first four components are funded by a joint basket to which the four bilateral donors contribute. The fifth component-empowering private sector advocacy-is financed separately from the basket and outsourced to a consulting company. This fifthcomponent will not be financedbyIDA. Currently, the BEST Program i s being refocused to use a programmatic approach that entails the development o f a multi-year package o f reforms inkey areas to meet the planned objectives. This approach would require the financial resources that the Bank will contribute through the proposed project. Each reform program i s to be implementedby the respective ministry or agency primarily 12 responsible for the area of reform. Based on the above approach, the BEST Program has been streamlinedinto five program areas that will bethe focus o fthe program during the project period: improvements inthe areas of business registration, landreform, commerciallaw andjustice, labor law reform, and the TIC. The Government has proposed that the establishment o f a national identification database and support to the MSME Policy Unit in the Ministry o f Trade be part of the BEST Program, and these activities would also be funded by the program during the project period. The mainactivities are summarized as follows: Business Registration Reform. The program will support the establishment o f a single business interface for business registration. This change would enable businesses of all sizes to complete the legal procedures of business set-up, receiving all registration and tax identification numbers andincorporationcertificates. Land Reform. The main activities in the land component are: (i) developing an efficient, re- engineered registration process supported by strengthened land information systems; (ii) improving survey and mapping infrastructure; (iii) decentralizingland administration services in 15 districts by, among other things, establishing district registries; (iv) mapping and registering house plots inunplannedsettlements inDar Es Salaam and other priority areas; (v) facilitating the resolution o f land disputes by strengthening the district land and housing tribunals; and (vi) building capacity, involving a short-term training programs and providing support for the project management and monitoring and evaluation in the Ministry of Lands, Human Settlements Development(MLHSD). Commercial Law and Justice. This program will support a review o f the legislative framework for the business sector, disseminationo f legislation, support to thejudiciary (including a review o f the laws of civil procedure and management of the court system) and continuing legal education for members o f the legalprofession.Inaddition, the programwill provide for training incorporate governancebehavior and standards. Labor Law Reform. The program focuses on the updatingthe existing laws and regulationsusing the overarching principle that the rights of employees should be adequately and appropriately balanced by the rights o f employers. The program includes reviewing and revising existing legislationregulating employment. Strengthening the Tanzania Investment Center (TIC). The program would support the business plan for strengtheningof the TIC. National Individual Identification Database. The program would support the establishment of an individual identification database, which will enable Tanzania, among other things, to establish a credit reporting system. The inability to clearly identify clients i s a major constraint to financing small enterprisesthat are not known by the financial system. MSME Policy Unit in the Ministry of Trade and Industry. The program would support in strengthening the capacity o f the Ministry of Industry and Trade to maintain a reliable database. The program would support an initial baseline survey that will act as a benchmark for periodic review andreporting. This component will therefore monitor the impact of the project itself. 13 Growth Unit in President's Office Planning and Privatization (POPP). Support to POPP to strengthenits capacity to be able to provide overall guidance and coordination. Component2: EnhancingEnterpriseCompetitiveness The objective o f this component i s to improve the capacity of the private sector to respond to viable opportunities in domestic, regional and international markets. The project would also help strengthen the Tanzania Private Sector Foundation. The component includes four subcomponents: SubcomponentA: Cluster Competitivenessand Business School Linkages This subcomponent focuses on three main activities: 1. Technical assistance to support studies and facilitate the identification and strengthening links between clusters o f enterprises with high potential to enable them to compete more effectively. The analysis will inform other activities financed under the project. 2. Support for strengthening TPSF technical competencies to monitor sector developments and to promote the dialogue between the Government and the private sector, in particular with international investors through the Tanzania Round Table Mechanism, through, among other activities, the provision of technical assistance and training. 3. Assistance to enable TPSF, in collaboration with the IFC's Global Business School Network (GBSN) Unit, to assist Tanzanian management and financial schools to strengthen their capacity to deliver entrepreneurial training and develop centers o f Excellence. Subcomponent B: Tanzania BusinessDevelopment Scheme (TBDS) TBDS will help improve productivity growth by providing assistance to modernize management systems, improve production techniques, improve marketing skills, and increase investment in skills and technology. Improved productivity growth will enable private enterprises to either export or sell in an increasingly open domestic market. The support will be provided in the form o f matching grants to Tanzanian enterprises for technical assistance and injection o f know-how and expertise into their businesses. The matching grant concept i s different from most traditional approaches to helping firms in that it i s deliberately temporary and the support only partial, because the beneficiary firm i s expected to make a meaningful contribution to demonstrate commitment and ownership. The TBDS will provide 50 percent cost-sharing, or matching, grants to private firms, either individually, or as groups undertakingjointly organized activities. The grants will cover the costs o f external services and travel undertaken as part of a formal plan to build competitiveness at the individual firm level. Grants will be paid on a reimbursement basis, conditionedon proof o f expenditure and proofthat the activities agreed were actually carried out. The standard TBDS grants will not be effective inreaching micro enterprises because these firms do not buy consulting or other tailored services. Micro enterprises are most effectively helped through courses in business skills (such as how to keep simple books o f account) and industry- specific technical skills (such as how to select machines). To support such short open courses, the TBDS will pay for grants to training providers. These grants will be set so as to provide a level of 14 subsidy equivalent to around 50 percent o f commercial fees currently being charged with the balance beingpaid by the beneficiaries. Subcomponent C: Business Development Gateway (BDG) The Business Development Gateway will provide grants on the basis o f a business plan competition. Entrepreneurs in the informal sector, employees in existing firms, university graduates, and existingbusinesses will be encouraged to develop new business ideas that lead to highervalue addition, development o fnewmarkets, and innovations. Proposals will bejudged on criteria such as commercial returns, increasing value in existing value chains, and increasing export value. Selected project promoters will match the grants in kind by providing labor and pledging available assets to the proposed venture. Project promoters can also select to sell their developed business ideas to existing enterprises in a marketplace for business ideas to be organized after the competition. The top 1,000 ideashnovations (based on criteria such as feasibility and uniqueness)will have access to this seed capital grant over a period o f two years in the amount o f US$5,OOO-US$lO,OOO. Mentorship will be provided by established entrepreneurs inthe regionor inthe existingcluster. The credit will finance the value ofgrants fundedunderthe project. Subcomponent D : TechnicalInnovation Applied Research Scheme (TIAS) This program is aimed at improving the capacity o f technical institutions to provide training and other services that help boost the productivity and competitiveness o f the private sector. The TIAS scheme will be managed by the same program unit that manages the TBDS. The scheme will provide grants to public and private institutions to cover: (i)the costs o f pre-investmentfeasibility studies, related to the supply o f specific paid-for services, and (ii)the long-term investment costs o f particular training or similar services. Inthe first two years o f the program (the pilot phase), a maximum o f five institutions will be supported for a period o f two years. The second phase will be implementedbased on the experience acquired inthe first phase. Component3: ImprovingAccess to Financial Services The objective o f the component is to increase access to financial services. The project would support this objective by contributing to the Financial Sector DeepeningTrust. The project would also provide technical assistance and financing for studies associated with the program. Specifically, the component provides financing for the following activities: FSDT; Through matching grants, the find finances initiatives aimed at: (i)providing training, education, and related activities aimed at developing the human resources and organizational capacity to enable institutions to serve low income groups; (ii) developing new financial products that address the needs of poor households and micro and small enterprises; (iii)improving the policy, legislative, and regulatory framework affecting delivery o f financial services; (iv) improving financial market integration and access to wholesale forms o f finance by financial service providers addressing poor households and micro and small enterprises; (v) enhancing the supply o f appropriate business services to financial service providers in Tanzania; and (vi) providing research and information dissemination to increase the understanding, across the 15 financial sector, in the Government o f Tanzania, and among donors, o f best practice in the Tanzanian context. TechnicalAssistance and Studies. The component will strengthen technical capacity o f the FSDT by funding: (i) long-term technical experts-one two specialized in SME finance and the other in new product development, including agrifinance-to be part o f the FSDT management structure and who will report to the FSDT's Technical Manager and be based in the FSDT's office; and (ii) industry assessments and case studies (including in-depth quantitative and qualitative assessments o f the design, application and appropriateness o f the new financial instruments. This technical assistance and analytical work will assist the fund in focusing on the following priority activities: 0 Expanding SMEfinance, including (a) expanding SME lending including strengtheningo f banks' SME finance institutional structures and operating systems; and (b) developing new products to expand the range o f financial products offered by formal financial institutions (commercial banks, and finance and insurance companies). Envisioned products include agriculture finance, poor and low-income housing and mortgage finance, leasing, suppliers' credithtock financing, and factoring. 0 Strengthening micro and rural finance, including (a) facilitating private investment in commercial MFIs by helpingNGO MFIs to transform into formal MFIs under the recently passed microfinance legislation and assisting these transformed NGOs to secure private investment, including equity; (b) supporting the development o f new MFIs, given the significant unmet demand for microfinance; and (c) supporting the linkages between formal financial institutions and the formal or semi-formal microfinance providers that thenon-lend the funds to microenterprises. 4. LessonsLearned and Reflectedin the Project Design The project has been designed drawing on the World Bank Group's experience in Sub-Saharan Africa and other regions and has benefited from the inputs o f various World Bank Group networks and global products groups, including the Finance, Private Sector, and Infrastructure (FPSI) network, IFC Global Financial Markets and IFC Africa Region, the SME Department, Africa Project Development Facility, Africa Region Rural Development units, Foreign Investment Advisory Service (FIAS), and Investment Climate Unit. Specifically, the project draws on studies carried out by the World Bank Group and the Government during preparation (including a Country Economic Memorandum on Growth, Diagnostic and Trade Integration Study (DTIS), the Investment Climate Assessment, the Cost of Doing Business Survey, and value chain analysis o f four subsectors). Lessons learned were also drawn from the public-private consultation process and the Investor Round Table. This project falls under the joint IDMIFC MSME Program, which i s intended to expand on successful approaches already under way in the Bank Group's work in Africa.'2 The project designreflects the followingkey lessons learned: l2Referenceto World Bank Group, "Program Framework Document for Joint IDAIIFC MSMEProgramfor Africa," for the discussionof the Bank's history of lending to MSMEs and of associated chronic difficulties. 16 Alternative to budget support:Experience over the last four years has demonstrated that financing requirements for health, education, and recurrent expenditure are better able to compete for resources within the budget, thus leaving funding requirements for improving the public-private interface under budgeted or postponed. Project financing and external pressures for reform inthe public-private interface have proven more successful. Public-private partnership: The importance o f building an effective public-private dialogue i s a key area in the Africa Region's private sector strategy, because experience has demonstrated the difficulties in implementing change without ownership by the public and private sector. The project design draws on this lesson and makes the private-public interface a central feature o f the project. Furthermore, experience in Tanzania, Uganda, and Ghana, where the World Bank and International Monetary Fund (IMF) have successfully launched IRTs chaired by the president o f the country, shows that the quality o f and commitment to the dialogue also depends on the analytical work and the quality o f information. The project recognizes the need for continued analytical work involving the private sector and has also made this a key element o f the project. Building strong public-private sector dialogue: An important element to successful private-public dialogue i s the ability o f the private sector to debate, research, and present issues to the public sector. The private sector's ability to articulate clear positions supports Government in developing a focused growth strategy. The project has included capacity building for the TPSF to enable the apex body to develop clear policy positions and solutions. Integrated approach: A principal conclusion of reviews o f past MSME projects, highlightsthe need for an integratedpackage o f interventions-such as access to financial services, business development services, and improvements in the business environment for MSMEs-that address interrelated constraints. A minimumset o f priorities, addressed simultaneously over these areas, will enable MSME growth and creation. This project i s built on these three complementary pillars. Matching grant program: Based on lessons o f matching grant schemes in Africa and elsewhere, the demand-driven approach will be designed with attention to achieving a suitable balance between incentives for potential demand to come forward and sufficient co-payment to ensure adequate willingness to pay when assistance i s removed. Although these matching grants will go to private entities (for-profit as well as non-profit organizations), the products developed and the demonstration effects o f success constitute public goods that are expected to facilitate subsequent further adoption, expansion, and innovation by other institutions. The design o f the matching grant component specifically takes into account lessons learned from first-generation matching grant schemes, including (i)lack of institution and financial sustainability; (ii)insufficient ownership and involvement o f stakeholders; (iii) insufficient independence o f the grant management and risk o f capture by special interests; and (iv) inadequacies in monitoring and evaluation capacity. Private sector service delivery and sustainability:The project places heavy reliance on private sector delivery channels to promote responsiveness to enterprise demand and 17 commercial sustainability. Experience elsewhere has shown evidence o f good prospects for sustainability o f the private Business Development Services (BDS) market for MSMEs on both the demand and supply sides. However, sustainability could have been improved through better targeting and cost-sharing by users who were likely to continue purchasing the services on their own. The project will thus place emphasis on growth-oriented value chains with effective coordinating mechanisms, where continued demand and willingness to pay are likely. 0 Specializedfinancial products:There is a growing body of experience inproviding small business loans profitably-either through microfinance institutions entering the market or through commercial bank downscaling. These experiences are drawn predominantly from experience in Latin America and Eastern Europe. The critical factors underlying these success stories often have less to do with the injection o f new liquidity and more to do with the application o f new technology, the introduction o f new corporate incentives, the development o f new staff skill sets, and the provision o f institutional support to staff responsible for M S M E lending portfolios. This proposed project will pay particular attention to these capacity-building considerations. 0 Managementeducation: The 2003 survey o f management education inAfrica highlights the need for case studies that relate to the local economic environment, resources to support faculty development, development o f stronger linkages between business schools and local business communities, and partnerships between local and regional institutions to enhance information flow and sharing o f best practices. Consultations were held with Tanzanian business schools and Global Business School faculty and administrators to design the project to yield maximumbenefits in a cost-effective manner. The project also takes into account lessons learned from previous bilateral programs and partnerships in businesseducation. 0 Land Reform: The World Bank has assisted many land reform and administration projects since the formulation o f its Land Reform Policy Paper in 1975. At least four significant lessons can be drawn from the Bank's experience with these projects. First, land interventions should be conceived within a comprehensive land policy framework that should precede legal and institutional reforms and investments. Second, there i s a rediscovery o f traditional land rights arrangements. In some areas, compared with freehold titles, traditional tenure arrangements and leasehold rights may be more cost effective in increasing tenure security and even inproviding a basis for land transactions. Third, land titling and registration should be area based (systematic titling) with community and private sector participation so as to enjoy economies o f scale, transparency, and legitimacy. And, fourth, as much if not more attention should be paid to developing sustainable systems to enable transactions intitles as inbuildingland titling systems. The proposed support for land administration activities takes into account the four lessons by (i)buildingon acomprehensive multi-tenure approach to landpolicyand institutional development; (ii)applying community and participatory approaches to land titling; and (iii)emphasizingsustainablesystemsforlandtransactions asmuchasthebuildingofland registration systems. 18 0 Performance contracts: Drawing from best practice inAfrica and elsewhere, the project will use, where feasible, Performance criteria incontracts with service providers. Including performance criteria will allow performance monitoring and reinforces a commercial and results focus on project-funded activities. 5. AlternativesConsideredand Reasons for Rejection The project team considered several approaches to addressing project objectives. First, consideration was given to focusing the project on specific sectors such as agribusiness, tourism, or manufacturing, but the team rejected this approach because o f the limited success o f narrowly defined projects in Tanzania and elsewhere (that is, agro-export project cashew nuts) and because a broader focus gives greater flexibility in responding to market opportunities. The team also considered focusing on one specific area o f intervention and making interventions more sequential. However, it was decided that a combined set o f interventions would generate greater impact. Although combined interventions can increase project complexity and risk, the distinct and complementary nature o f the interventions included inthe project generate important benefits that are mutually reinforcing. The team also considered providing only technical assistance or working through the budget support program. However, given Tanzania's history o f state-run enterprises, there is a need to build private sector capacity and enhance learning experiences, which demands a flexible program focused on opportunities, independent o f the budget cycle and public sector management. In addition, the limited success of programs that are funded and managed by the public sector led the team to adopt an approach in which the private sector manages the program, thus ensuring greater private sector participation and ownership. The implementation mechanisms focus on public-private collaboration and support by all key donors and have been designed with a view o f moving toward a sector wide budget support approach to private sector activities inthe future. 19 C. IMPLEMENTATION 1. PartnershipArrangements The proposed project will extend the collaboration that already exists between the Government and key donors involved inreforms insupport of private sector growth. Key donors participated in the design o f the program, and supervision of individual programs will be coordinated. The BEST Program, to be supported under the proposed credit, i s already funded by DFID, SIDA, Danida, and the Government o f the Netherlands. The access to financial services component will complement activities of the Financial Sector Deepening Trust funded by CIDA, SIDA, DFID, Danida, and the Government o f the Netherlands. The private sector capacity building component will be cofinanced with DFID under a parallel financing arrangement. All activities under the project will be closely coordinated with the Financial Sector Reform Program funded by the Bank and other donors. As with other MSME projects, the project was prepared inpartnership with the IFC. The project will be jointly supervisedby all the funding partners. The World Bank Group supervision team will include Bank and IFC staff. Under the Legal Sector Reform Plan (LSRP) developed by legal sector institutions and to be implemented under the leadership o f the Ministry o f Justice and Constitutional Affairs (MJCA), simplification and modernization o f commercial laws are key activities. The LSRP will be supported by a number o f development partners including the World Bank through the proposed Accountability, Transparency, and Integrity Project (ATIP) under a pooled funding modality. However, because o f the close link o f commercial law reform to private sector growth, the Government decided that this aspect o f the legal reforms would be included inthe BEST Program fundedunderthe MSMECompetitiveness Project. 2. Institutionaland ImplementationArrangements The project will be implemented over six years. The President's Office for Planning and Privatization (POPP) will be responsible for overall project coordination. The project organization i s shown inAnnex 4. A project coordinator inthe department responsible for growth, reporting to the Permanent Secretary o f POPP (PS-POPP), will support the PS-POPP in administering the program, assembling quarterly and annual reports, compiling the annual work plans and procurement plans prepared by the implementing agencies, keeping all institutions involved in the program informed, and informing stakeholders and decision makers o f project progress and constraints. The project coordinator will also ensure that project activities are aligned with those o f other Government programs. Implementation arrangements are detailed in Annex 6. The PS-POPP will assume overall responsibility for project accounting. The project accounts will be fully integrated into the existing accounting and financial management system o f POPP under the Directorate o f Finance. The PS-POPP will ensure that the disbursements and financial management o f the project are carried out efficiently, in accordance with the laws o f the Government o f Tanzania that are in line with international accounting standards and World Bank financial and disbursementprocedures and guidelines. 20 Project oversight will be incorporated into existing structures. Overall guidance to the project will be provided by a subcommittee, chaired by the PS-POPP, will consist o f public and private sector representatives with proven knowledge infinance, technology, law, or management, including one representative each from the Ministry o f Industry and Trade, the MLHSD, the Ministry o f Agriculture and Food Security, the Ministry o f Justice and Constitutional Affairs, the chairperson o f the TPSF, the Bank o f Tanzania, and other Ministries' Departments and Agencies overseeing the project. The subcommittee will monitor the annual work plan, assess project impact, and ensure the project's alignment with public-private dialogue established under the R T and the TNBC. The components will be administered by three separate agencies: (i)the business environment component will be administered by the BRU in the POPP, (ii)the enterprise development component will be administered by the Tanzania Private Sector Foundation (TPSF), and c) the access to financial services component will be administered by the FSDT. The BRU in the POPP has been charged by the Government with coordinating the BEST Program. BRUwill compile the annual work plans and procurement plans for the BEST Program on the basis o fprograms prepared by the implementing agencies. IDA will sign a Memorandum o f Understanding (MOU) between the Government and the BEST Program donors, setting out the common implementation disbursement, procurement, financial management, and monitoring and evaluation arrangements for the basket fund. Following the laws o f the Government o f Tanzania, implementation o f specific reforms will be the responsibility o f the implementingministries and agencies. The details o f the implementation arrangements including requirements relating to work plans and procurement plans, will be incorporated inan MOUbetween the POPP and the responsible implementing ministryor agency. The M O U will specify that POPP will be responsible for all procurement under this component and that the technical evaluation committees will be chaired by technical implementing MDAs. BRUwill facilitate implementation by providing or making available requiredtechnical services. In particular, BRU will recruit experienced procurement advisors who will assist in the development o f procurement plans, provide hands-on training in procurement matters, and participate in the procurement process according to the procurement plan. BRU will compile all financial reports and ensure the flow of funds. The TPSF will have overall responsibility for the component relating to enterprise competitiveness. The Government and TPSF will sign a subsidiary grant agreement for the implementation o f this component, and the TPSF will sign a project implementation agreement with IDA. The TPSF is headed by an executive director, who is responsible for daily operations. A management team consisting of the chairperson, the deputy chairperson, and a board member form a management committee to provide guidance for the executive director. The TPSF will establish a finance and procurement unit with a qualified accountant and procurement specialist prior to credit effectiveness. The executive director will be the accounting officer for this project component assuming overall responsibility for accounting for the project funds. The proposedproject will be fully integrated into the finance unitto be established. 21 Specialized organizations and private firms, selected following a competitive process, will be responsible for the implementation o f (i)the Tanzania Business Development Program, (ii) the TIAS, and (iii)the Business Development Gateway Program, respectively. The contracts with the f i r m s will include clear performance criteria. The teams from the selected firms will work from the TPSF, which will lead the process o f selection o f the firms and supervise the contract with them. Terms o f reference for the two contracts are being prepared and will be approved by the Board o f the TPSF shortly. The access to financial services component will be implemented through the FSDT, which was founded by DFID and legally established by way o f a Trust Deed, dated June 8, 2004. Other development partners now participate in the trust: CIDA, SIDA, DANIDA, and the Government of the Netherlands. The FSDT's activities are guidedby the Trust Deed, a Strategy Paper (October 2003), and an annual business plan. A technical manager is responsible for management o f the trust's operations. To ensure clear segregation o f duties, the trust's finance manager, Ernst and Young Advisory Services, i s accountable directly to the PIC. The trust's auditor i s Panel Kerr and Forster (PKF). The Government o f Tanzania will be represented by the POPP and BOT in the PIC. IDA willjoin the government team. For the access to financial services component, the Government will enter into agreement with FSDT (satisfactory to IDA), stipulating the obligations of the trust in managing the additional funding provided under the project. The Government will commit funds from the IDA credit to the FSDT annually, based on the business plan approved by the FSDT donors, the Government, and IDA. OverallProjectSupervision:A Mid-TermReview (MTR) is planned for 24 months after project effectiveness. The project impact will be assessed on an annual basis, three months after the end calendar year. Quarterly reports will be prepared on outputs and key milestones, and will be assessed during supervision. A Project Implementation Manual (PIM) that includes a description o f implementation and monitoring arrangements and spells out the sequence o f project activities is being prepared. The PIM includes financial management arrangements and a procurement manual. The final version o f the manual i s a condition o f credit effectiveness. 22 Figure4: ImplementationProcess Land RegislreAon [ /------\ r--- President's O f f r ] Planningand Pi Mlninrrvof 'i Business Regtslratio_lj - ~ - - [ SsctDr Foundation G J Flnanclal Sector Deepening TrunI 3. Monitoringand Evaluationof OutcomesDtesults The data collected during the project will serve three main purposes: project monitoring, private- public dialogue, and policy development. The project coordination unit in the POPP will be responsible for compiling data and reporting on impact indicators as agreed under the project. It will also use the data collected, along with other sector data, to monitor the achievements as projected in National Vision 2025. This will enable the POPP to engage more effectively with other relevant sector ministriesand the private sector. MSME sector-related information will be collected by the Ministry of Industry and Trade. The project will assist the ministry to develop a census o f SMEs and a database on the basis o f the census results. This will enable the Ministry o f Industry and Trade to develop sound policy analysis. This work will be conducted in close collaboration with the National Bureau o f Statistics (NBS), which will be responsible for maintenance o f the database. The BRUwithin POPP will focus on monitoring the effectiveness o f the public-private interface. The focus will be on service delivery o f the public sector institutions that interface with the Government, regulatory efficiency, costs due to unnecessary procedures, and the competitiveness o f Tanzania as an investment location. The indicators will assist the Government in identifying actions necessary inachieving a low-cost business environment. The TPSF will also prepare impact assessments in collaboration with research institutions and business associations as agreed in the results framework. It will also work closely with sector associations to collect subsector data in order to map supply and value chains. The data will be 23 used to prepare subsector notes as a basis for discussion among a cluster o f firms, the IRT, or the TNBC. The FSDT will collect the necessary data to monitor the access to finance services component. The focus will be on the key indicators related to the SME loans, microloans, and savings. The indicators will assist the Government inrealigning the component activities ifnecessary. Data will be collected from the NBS, the Bank o f Tanzania, the Tax Revenue Authority, sector associations, commercial banks, and microfinance institutions. It will be closely coordinated with the statistical master plan. In collecting data on formal enterprises (increases in employment, increases in value o f semi-processed exports), the TPSF will liaise with the Ministry o f Industry and Trade and the SME unit. The project coordination unit will prepare a report every three months on project outputs, actions, and milestones as outlined inthe PIM. The PLM includes all reporting, monitoring, and evaluation arrangements throughout the project implementation period. Apart from periodic reports and standard monitoring arrangements, the P I M intendsto have annual independent operational audits. These audits will provide impact assessments, including that o f the matching grant programs, and will identify ways to improve project implementation. A key challenge faced in the context of the operational audits will be to separate results that are clearly attributable to the project from those that are caused by external factors. Finally, a mid-term review i s planned by December 2008. As part o f this review, a firm survey will be undertaken to assess the impact o f the measures implemented. The objective o f the mid-term review will be to assess progress to date and, if necessary, reorient the project, integrating additional lessons learned and the realities on the ground. 4. Sustainability The Government has developed major strategic frameworks, the National Vision 2025, the MKUKUTA, the Tanzania Mini-Tiger Plan, the SME policy, and the Trade Policy, all o f which document Government commitment to policy change to a private sector-driven economy. The Government has involved all key institutions relevant to the success o f investment climate reforms, together with the private sector, in the process o f developing each component o f the program, and this will help ensure ownership o f the program and sustainability o f the reforms introduced. As mentioned earlier, the Government has installed a BRUto work with the TPSF in ensuring implementation o f policy changes and institutional reform to reduce the cost o f doing business and enable stronger private sector participation. In addition, the Government plans to benchmark all institutions against international standards to be better able to identify actions for change and improvements on an ongoing basis. Critical to the sustainability o f the project i s further investmentin infrastructure (power, transport, and water supply), which is not covered under this project. The ongoing privatization program is developing the framework for private sector participation in infrastructure; this has been partially completed for the telecommunications sector, there i s private sector participation in energy, but further work must be carried out in the water and transport sectors. Although the existing infrastructure will be able to support growth envisaged under the project, it will be insufficient to sustain growth inthe mediumto long term. 24 Another critical factor to sustainability i s achieving a change in attitude o f key public service agencies and their staff, which are now required to perform a new role, moving from gatekeeper to service provider or facilitator. This change will be particularly critical in rural areas, where the local authority perceptions o f the business community are less positive than in urban centers. To address this issue, the project will enhance regional consultation between the public and the private sector on investment climate issues. The TPSF also plans to work with members o f parliament to ensure that the role of the private sector as the engine o f growth is understood and widely accepted. 5. Critical Risks and Possible Controversial Aspects Risk Risk Mitigation Measures Risk Rating with Mitigation Government does not remain committed to private The Government has developed a strong relationship L sector-.led growth and to open discussion o fpolicy with the private sector and i s committed to deepening issues and project with the private sector the collaboration. The Government does not pursue increasedefficiency Government commitment to improvements in L o f utilities. infrastructure confirmed inrecent statements. Parliament blocks necessary reforms. Members o f Parliament have participated inthe public- L private discussions which have set the private sector development agenda and are expected to continue to be involved duringproiect implementation. The private sector does not activelyparticipate inthe Private sector indicated commitment throughout L consultative process and MSME's are not responsive to project preparation, and will receive substantial incentives provided. training and technical support under the project. Government agencies involved inprogram unable to Project to provide capacity building for implementing M fully explain program or to upgrade their technical agencies so that policy changes are understood and skills, including those on management o f IDA capacity is strengthened. K e y agencies will increase programs. their staff. TPSF financial staffto be recruitedbefore effectiveness, and training on WB financial and disbursement procedures will be carried out. Funds may not be used inan efficient and economical The process of follow-up o f management reports o f way and exclusively for purposes intended. auditors and linkages between physical output and M financial outcomes will be strengthened under the oroiect. Weak internal audit function Internal auditor will develop an audit strategy and plan.M Effectiveness o f the internal audit will be complemented by periodic audit issues follow-up by the POPP Audit Committee. Project Entities unfamiliar with procurement procedures Procurement plan includes staff recruitment and H training. Overall risk M 25 6. Loan/CreditConditionsand Covenants Effectiveness Conditions. The following shows the credit effectiveness conditions and the responsible parties to meet the conditions. 0 POPPBRU, FSDT, and TPSF have put inplace a satisfactory management and procurement system for the project; 0 POPPBRU and TPSF have adopted a satisfactory PIM; 0 TPSF and the Government have signedthe Subsidiary Grant Agreement and 0 Appointment o f Project Coordinator at POPP. Legal Covenants. Conditions o f disbursementinclude: 0 For the matching grants and BDG grants, appointment o f grant managers and approval o f the grants inaccordance with the PIM. 0 For the business environment strengthening component through the BEST Program, signature o f the M O U and approval o f the respective annual work plan. 0 For the improving access to financial services component through FSDT, signature of the FSDT grant letter (satisfactory to IDA) by the Government, approval of the annual business plan and approval o f the FSDT grant in accordance with the PIM. 26 D. APPRAISAL SUMMARY 1. Economicand FinancialAnalyses The economic analysis o f private sector development projects presents difficulties because of the indirect relationship between actions taken under the project and the stream o f benefits that result from them. The main beneficiaries o f the project will be: (i) providers; (ii) existing TBDS 2,000 and 1,000 new MSMEs directely supported by the project, with better access to business development services, finance; and improved investment climate (iii)10 public institutions for skills and innovation; and (iv) the Government, with a wider tax base and healthier fiscal position. More generally, both public and private institutions and private business associations and consulting services will benefit as they improve their efficiency for business services. Notwithstanding limitations, a conventional methodology i s used for carrying out the economic analysis of the project by estimating future stream costs and benefits and deriving net benefits to calculate the net present value (NPV) and the economic rate of return (ERR) based on a 12-year forecast timeframe. Cost-benefit analysis was carried out for the following components: (i) business environment and land; (ii) capacity building, skills development, and access to finance; and (iii) matching grants, the seed capital fund, and technical institution support. The project impact i s expected to start materializing during project implementation. The maximum impact o f the project will be reached once the relevant capacity, institutions, and investment climate are strengthened. The NPV o f the overall project i s estimated at US$56 million for a 12 percent discount rate while its ERR i s estimated at 27 percent. The project i s expected to have positive impact on direct employment creation by increased production. Supported MSMEs are expected to create a minimum of 4,115 direct jobs by the end of the project implementation period in the TBDS, Gateway, and Technical Institution grants, where there i s a straightforward and direct relationship between investment and job creation relative to other project components. This figure does not account for the jobs generated through improvements in the business environment and increased access to financial services, which are expected to be considerable. Because the estimate incorporates all the identifiable costs o f the project but excludes any value for intangible benefits, the results couldbe considered a lower bound estimate o fthe actual economic return.Key features of the project are that the private sector has been heavily involved in its design, and private entrepreneurswill be committing their resources to the project. These features will contribute to ensuringthat the programs financed generate sound economic returns. The project i s expected to generate fiscal revenues for the Government. Indeed, for the year forecast timeframe (including the year project implementation period), the project would generate US$22 million as the result o f incremental personal and corporate income taxes. This amount, however, does not capture the potential fiscal impact from the increased number of registered enterprises and reduced tax evasion, both o f which are difficult to reasonably estimate ex-ante. (Detailed results are presentedinAnnex 9,) 27 2. Technical The project will seek to ensure that appropriate technical standards are achieved inthree ways: (i) partnering with practitioners and technical experts with proven track records; (ii)focusing on commercial, market-driven provision o f services that will limit grant dependency among beneficiaries and promote a demand responsiveness among service providers; (iii)developing specialized financial services for the MSME market and targeting BDS to address specific industry needs that will increase quality, market relevance, and uptake of services. The public sector role would be to: (i) revise public policies and regulations that produce high transaction costs and thus create a competitive disadvantage for MSMEs; and (ii)review government- sponsored programs to ensure efficiency and avoid crowding out o f private initiatives. This approach, which i s technically sound and reflects the negative experience with government programs, represents the continued shift in the role o f the Government o f Tanzania away from direct provision o f services and toward facilitating the development o f private markets and networks. 3. Fiduciary The financial management assessment was carried out only for POPP. There was no assessment carried out for TPSF because the finance unit i s not in place. Preparations are under way to establish the unit. The project financial management risk i s assessed as being medium in case o f POPP and high in case o f TPSF. The major action that must be done by the borrower and TPSF before the effectiveness o f the credit i s the establishment o f a satisfactory financial management system acceptable to the World Bank. To ensure that the project is effectively implemented,POPP and TPSF will ensure that appropriate staffing arrangements are maintained throughout the life o f the project. The conclusion o f the assessment is that the financial management arrangements for the project need to be improved before project effectiveness to satisfy the Bank's minimum requirements under OP/BP10.02 and will then be adequate to provide, with reasonable assurance, accurate and timely information on the status o f the project required by IDA. With the implementation o f the action plan, the financial management arrangements will be strengthened. 4. Social There are no social issues triggered by this project. A number o f project components are expected to lead to favorable social outcomes, including employment generation and poverty reduction. Key stakeholders from both the public and private sectors have been involved in the project design, and several workshops and other consultative mechanisms have helpeddefine the project. Project implementation arrangements builds on a public-private partnership that has already begunto be developed. 5. Environment Category C. Not required. 28 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmeiital Assessment (OP/BP/GP 4.01) [I [XI NaturalHabitats (OP/BP 4.04) 11 [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, beingrevised as OP 4.11) [ ] [XI InvoluntaryResettlement (OP/BP 4.12) 11 [XI Indigenous Peoples(OD 4.20, beingrevisedas OP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety o fDams (OP/BP 4.37) [I [XI Projects inDisputed Areas (OP/BP/GP 7.60)13 11 [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI 7. Policy Exceptions and Readiness The project does not require any exception from Bank policies. l3 By supporting the proposed project, the World Bank does not intendto prejudice the final determination of the parties' claims on the disputed areas. 29 Annex 1: Country and Sector or ProgramBackground TANZANIA: Private Sector Competitiveness Project Tanzania achieved significant growth during the last five years, reaching an average growth rate o f 5.2 percent, a performance that i s almost as good as that o f countries in South Asia (5.4 percent) and Southeast Asia (5.6 per~ent).'~However, as Figure A.1.1 shows, Tanzania's growth appears only moderate when compared with its neighbor Uganda, which averaged 6.7 percent over the last decade, and according to official figures reached 5.9 percent in2004. FigureA.l.l: Comparison across EastAfrican Community(EAC) of GDP Growth Trends 1 Real GDP Growth (log) _-_- -- ______I---- __I_ O T - 3 4 - Uganaa 3 2 +Kenya C __-_ --cTanzana -0 2 I I Source:World Bank, SIMA (August 2005) Tanzania's stable positive growth performance i s based on exports and increased investment. Foreign aid i s also a significant contributor. Exports have encouraged growth by averaging 19 percent growth rates throughout the last decade, as shown inFigureA.1.2. FigureA.1.2: Growth Trend in Tanzanian Exports, 1990-2003 I 1997 1998 1999 2000 2001 2002 2003 I -4--Agrlsulturd Raw Melala -Food - C F u s l MBnUfrnWBS ."IOr- &Meids -+-Total MachacdlseExports Source:World Bank, WDI (September2005) Tanzania's major export markets are Western Europe and Asia, which receive just over 80 percent o f Tanzania's total exports between them. Table A.1.1 details the export baskets for each o f the four major export markets (excluding data for gold): Africa, Western Europe, North America, and Asia. The table shows that the most prominent exports directed to the l 4Utz, CEM BackgroundPaper. 30 two major export markets are fish and cashew nuts, both non-traditional exports from progressive sectors o f Tanzania agribusiness industry. Exports to China and the Middle East have not increased as these markets have grown rapidly, reflecting the sluggishness o f Tanzania's private sector. Table A.l.l: Top Five Products in the Four Major Export Markets Africa Western Europe I Share Exoorts 1 Rank Product (Africa) Product Share Ex.W. Europe Portland cementsement 1 fonduslaa cement etc. 5.74% Fish fillets, fresh or chilled 26.81% Containe;s,glass,for Coffee,whether or not roasted or 2 conveyance or packing 4.70% freed of caffeine 10.85% 3 Maize (corn),unmilled 4.55% Tobacco,whoily or partly stripped 9.73% 4 Tobacco,not stripped 4.17% Diamonds,not mountedlset 6.92% Meal and flour of wheat and 5 flour of meslin 3.22% Fishfillets,frozen 5.96% I North America Asia Share in Exports Share in Exports to Rank Product to N. America Product Asia 0th.precious/semi-precious Edible nuts(exc1.nut.s used 1 stones 35 38% for the extractof oil) 76.55% Cotton (other than kters),not Fish fillets,frozen 19.35% carded or combed 12.84% Copper ores & Other materials of vegetable concentrates;copper origin, n.e.s. 11.80% mattelcement 12.44% Coffee,whether or not roasted Ores etc of precious or freed of caffeine 9.49% metals;waste,scrap 6.54% I Edible nuts(excl.nuts used for 0th.precious/semi-precious 5 I the extractof oil) 7.59% Istones 5.80% Source: UNCOMTRADE / World Bank WITS (August 2005) Exports have contributed nearly 60 percent o f overall GDP growth since 1990. Close examination reveals that Tanzania's economy remains routed in factor conditions, specifically in low cost labor and unprocessed natural resources. For example, export performance in 2003 demonstrates this with the dependence on gold, which accounted for 40 percent o f total exports. As a result o f this factor-based economy, Tanzania still competes on price; the private sector lacks direct access to consumers, produces undifferentiated commodities, and plays a limitedrole inthe value chain. A private sector economy based on factor competitiveness i s highly vulnerable to world economic cycles, commodity prices, and exchange rate fluctuations. Tanzania needs to continue to diversify its export base and to develop the capability to compete on value added and quality. r. Growth has also been facilitated by an increase in investment. The private sector i s responsible for the bulk o f domestic investment in Tanzania, and despite recent stagnation in 31 the construction industry, investment has grown by 9.6 percent, and there has beena modest resurgence in the manufacturing sector with an average growth rate o f 6 percent. Foreign direct investment has followed a much more volatile and intrepid path. As Figure A.1.3 shows, in 2004, investment reached US$260 million, remaining at levels akin to that during 1990. FigureA.1.3: Trends in ForeignDirect Investment, 1990-2003 6% 500 5% 400 4% 3% 300 2% 200 1% 100 0% 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 US$ million I Net FDI Inflows (currentUS$ million) +Net FDIinflows (%GDP) Source: World Bank, WDI (September2005) However, recent growth i s also based on increasing aid inflows that have allowed aid- financed public sector investments and Government consumption to rise. Currently, donor funding remains high and is growing; and 16 percent of Tanzania's GNI is financed by aid, well above the 6 percent Sub-Saharan Africa average. Sound macroeconomic management, as well as financial, public enterprise, and trade policy reforms by the Government, are the underlyingfactors for this private andpublic confidence. Tanzania's Vision: In 2004, the Government outlined a program embodied in the National Vision 2025 document to transform the country's agriculture-based economy into a competitive and dynamic semi-industrial economy. Such an ambitious objective demands that the economy become investment-driven, whereby efficiency in producing standard products and services becomes the source o f a competitive advantage. Such transformation requires an efficient infrastructure, a business friendly government, strong investment incentives, and access to capital to allow major improvements in productivity. The products and services produced will become more sophisticated and differentiated in the market, and the private sector will increase its role inmajor value chains. To achieve the National Vision 2025 and the targets o f the MKUKUTA, Tanzania's private sector must shift from its traditional approach o f competing on price and relying on public subsidies. The private sector will have to adopt a more competitive approach, focusing on higher value products and services, where value i s added because o f better market linkages, as the main outputs. Productivity, the value per unit o f input, the better use o f human, capital, and natural resources will all be increasingly the determining factors for Tanzania's success. The objectives of the strategy must therefore go beyond selling commodities, to increasing the value added in production and exports, increasing unit values in exports, and gradually moving away from cost-based competition thus enabling higher wages. This will result in an increase in the value o f exports, increased investment, increased jobs, in particular higher 32 valuejobs, and a reduction inthe exposure to fluctuating commodity prices and external aid. This strategy will rely on three main pillars: (I) open public-private dialogue among the an Government, the private sector, and academia, driven by (ii)sound analytical work well grounded in the business community and discussed by all participants in a value chain, and (iii) Government implementation o f a selected high priority policy and institutional reforms. The overall goal i s a shared national vision to reposition Tanzania's competitiveness that is rooted in a realistic analysis o f Tanzania's competitive opportunities and the actions required to develop the capability to compete inthese niches. The World Bank Country Assistance Strategy (CAS) for private sector-led growth focuses on four areas that require improvement in order for the Government to achieve its ambitious growth targets. These include the regulatory and legal framework, the financial sector, the capacity o f the private sector, and infrastructure. Only with appropriate reform in all o f these areas will growth be achieved. These broad areas have been identified as a result o f extensive consultation with the business community and analytical work carried out by the Government and the World Bank. Inimplementing the reform program, the Bank will adapt a demand-driven approach that i s based on the dialogue between the private sector and Government, sound market analysis, and implementation through a multi-sector approach. Rigorous benchmarking o f the cost o f doing business and competitiveness will be adapted to monitor progress. The Bank will deepen its current engagement inthese four areas o f reform by providing analytical work, developing a coordinated sector approach (including with development partners), and providing growth-focused interventions. Key Economic Sectors: Figure A.1.4 shows the sectoral composition o f GDP and the annual growth rates duringthe last four years for each sectoral group (agriculture, industryincluding manufacturing, manufacturing alone, and services). At the disaggregate level, agriculture remains the main component o f GDP at 52 percent, but secondary and tertiary sectors have growing more rapidly since 2001. Agriculture has experienced the least impressive growth rates, averaging aroundjust 4 percent over the last five years. In contrast, the service sector has maintained an average annual growth rate o f 6 percent since 2000 and currently contributed around 30 percent o f Tanzania's GNP. Likewise, industryexperienced a surge in its growth rate in 2003 and has averaged around 8.2 percent over the five-year period between2000 and 2004 and contributed around 18 percent to GDP in2003. 33 FigureA.1.4: Sectoral Compositionof GDP and SectoralGrowth Rate, 2003 Sectoral Composition of GDP 2003 \ 4" Gar. M l m ~ ElcIric~ly, CoN1rml'on 10% - Quaryiw 2% Trade f !4% 8% - F 6% 4% 2% 0% \ 0% Agricllltre GDP Agriculture industry Manufacturing Services 52% Source: World Bank, LDB (September 2005) Tourism: Tourism i s a central economic sector in Tanzania, with estimated foreign exchange earnings totaling US$746 million and generating direct employment for 200,000 people in 2004. With international arrivals o f 580,000 in 2004, tourism directly accounts for about 16 percent of GDP and nearly 25 percent o f total export earnings. Through backward linkages, tourism also generates demand for outputs in sectors such as retail, manufacturing, food processing, construction, and agriculture. Recognizing the potential strengths o f this sector, the Tanzanian Government has set a target of 1 million tourists by 2010 bringingearnings o f US$1.5 billion. FigureA.1.5: ForeignExchangeEarningsfrom Tourism &ooO 6000 4000 2030 0.0 1991 1% 1993 1994 1995 1996 1997 1998 1999 2000 2CO1 2o(n 2033 1 I I ~ +TcUrismM p b@IF Bop)4-TcUrismReoeipts(MofTcUrim) Source: IMF Balance of Payments data base However, over the past four years, tourism growth has slowed in Tanzania and tourist arrivals have not grown appreciably. There are several structural constraints that impede the industry from realizing its potential growth. Tourism production and consumption are concentrated in a handful o f operators controlling demand and volume to relatively limited products (for example, Ngorongoro, Serengeti, Lake Manyara, Zanzibar, and others). Current slow growth i s symptomatic o f saturation inthis package holiday segment and while this i s a positive platform for the image o f Tanzania, data suggest that significant growth i s limited. Recognizing this, Tanzania restructured a Tourism Master Plan o f 1996 in 2002 hoping it 34 would serve as a roadmap and strategic framework for the ~ e c t o r .The plan identified a ' ~ range o f investments focused on improving infrastructure constraints, enhancing products, improving the efficiency and competitiveness o f suppliers, and improving the enablingpolicy and business environment. However, the plan offers several dozen growth strategy options without attempting to define a specific focus. The potential growth o f tourism lies with diversifying market segments, focusing on the domestic market, and improving the backward linkages into local economies. A recent study into sectoral backward linkages in Tanzania concluded that agriculture and fisheries linkages with tourism are currently the strongest, being 100percent locally sourced. Considering that tourism already represents a significant share o f GDP, the expectation o f doubling visitors over the next five years would enhance tourism's importance in the economy by an additional 8-10 percent. However, notwithstandingpotential to address these inherent difficulties, for tourism to grow within the external context of a rejuvenatingKenya, emerging Mozambique and Zambia, and a strengthening South Africa, and given an internal context o f limited resources, clear and focused growth strategies are needed to turn Tanzania's comparative advantages into competitive advantages. One such aspect may be the use o f information and communication technologies (ICT) to access markets and increase consumption o f tourism products. Another option is spatial, focusing on existing distribution hubs likeKilimanjaro International Airport or new products around the coastal regions. Another option may be a strategy for employment creation through tourism by increasing demand for locally sourced goods and services. Under these circumstances, defining specific cost benefit scenarios i s critical to narrowing the options and assessing the biggest "bang for the buck," particularly from the perspective o f the Government's development priorities. Agriculture: On a disaggregated level, agriculture remains the main component of GDP at 52 percent. Secondary and tertiary sectors have growing more rapidly since 2001, but agriculture has experienced a less impressive growth rate, averaging around 4 percent over the last five years. FigureA.1.6: SectoralAnnual Growth Rate, 2000-2004 00% GDP Agriculture lndustry Manufecturing Services l5 UnitedRepublic o fTanzania, Ministry ofNaturalResources andTourism, TourismMaster Plan: Strategies and Actions, Final Summary Update (Dar es Salaam: April 2002). 35 The liberalization o f Tanzanian agricultural sector since the mid-1 9 8 0 ~with food crop ~ marketing liberalization starting in 1985 and export crop marketing liberalization starting in 1993, together with rising international prices, resulted in increases in agricultural crop exports during the first half of the 1990s. Since then, however, these exports have fallen, in part due to the decline in international commodity prices, but there were also specific problems for individual crops. Despite the traditionally vulnerable nature o f these crops, agriculture has improved since 2003 and there i s movement for increased forward integration and value added that will lead to an increase in export earnings and in the incomes o f chain actors, For example, cashew nuts have a huge potential for forward integration, migrating from low value-added raw product exports to increased domestic processing. One study shows that a viable domestic processing industry could create on average 30,000 jobs per year. Within agriculture, commodity crops traditionally comprise agribusiness, with steadily increasing output representing a 1.6 percent contribution to Tanzania's overall growth since 1999. Coffee, cashews, cotton, and tea make up the main export crops, contributing over 29 percent o f total exports in 2003. Coffee i s currently Tanzania's number one crop, accounting for 5 percent o f total export earnings. This product i s certainly among the most vulnerable to price volatility. However, the coffee sector was proactive inresponding to recent price dives with product differentiation and domestic processing. By improving the product quality and thus accessing less elastic higher value consumers, the coffee producers experienced less volatile earnings. Cashew producers also have the potential to do this. Cashews are Tanzania's second largest crop, and Tanzania enjoys a 6 percent share o f the cashew market as the fourth largest global producer, This crop's production volume increased by a factor o f twenty during the 1990s and in 2003, and raw cashew exports from Tanzania amounted to as much as US$59.8 million during this period. Few crops therefore offer better demand growth prospects, and despite increased competition and a slight decline in market share, Tanzania's resilient performance indicates its comparative advantage in this area. Tanzania i s the number one exporter to the global frontrunner in cashew production, India. However, competition from Vietnam risks destabilizing India, where over 80 percent o f Tanzania's cashews are sent. There i s therefore a window o f opportunity for Tanzania to strengthen the domestic processing capacity, which processes just 17 percent o f all production at the moment. Increased processing means additional value added domestically and thus would help Tanzania retain more o f the product's value. As recently as 1997, non-traditional agroproducts amassed just one-third o f the share of traditional products in Tanzania's export basket. Today, they exceed traditional exports by more than US$lOO million and correspond to 80 percent o f the export basket. These products represent new market growth in Tanzania that has vast potential. Steady growth o f the fish product industry, for example, means that these products have been able to take over half o f the non-traditional export market, increasinginvalue from US$1million in 1984 to US$150 just two decades later. Similarly, a recent diagnostic identified several products within the small spice industry as having the potential to increase substantially in export value over the coming years, notably vanilla, cardamom, paprika, pepper, and ginger. Currently, the market 36 brings injust US$5 million per year, but market predictions place this figure at a possible US$20 million inthe future, emphasizing the potential o fregional market trade. Tanzania's agricultural sector i s central to sustained growth o f the economy, as has been the experience o f some strong East Asian economies. InTanzania, this sector i s well established to make an impact on future growth, contributing over 50 percent o f GDP and generating employment for over 70 percent o f the workforce. Moreover, recent studies indicated that o f all sectors in Tanzania, agriculture has the largest employment multiplier and greatest employment linkages. Mining: Tanzania i s endowed with a wealth o f minerals. Combined with market liberalization and incentive-induced investment, this natural endowment has enabled the mining sector to grow at well above 5 percent per year (2004). Some reports suggest that given this rate, the current GDP contribution (3 percent) may grow to as much as 10 percent o f GDP. Although currently making only a small contribution to national income, mining has become Tanzania's dominant export portfolio product. Mineral exports as a whole grew at an average annual rate o f 49.2 percent between 1999 and 2003, and gold alone grew on average 10 percent each year during the last decade, raising Tanzania to fourth largest producer status and bringinginreceipts o fUS$499 million in2003. Although a positive model sector, the benefits have not filtered down to the ordinary Tanzanian, because, like other industries in Tanzania, the mining industry i s based on comparative advantage, channeled to low-value extractive products, exported with little value added. However, currently low value mining has the potential to migrate into higher value added production. For example, the second largest subsector, the gemstones industry, i s based on smaller-scale operations than gold mining and i s predominantly domestically owned. Adding value to the uncut stones in Tanzania in terms o fjewelry production would inject huge value into the export product and thus increase earnings for Tanzanian firms. SMEs: The core of Tanzania's recent growth lies inits smaller enterprises, which number 2.7 million, 98 percent of which are microenterprises. Of these smaller enterprises, most operate in the industry (54 percent), services (34 percent), and trade sectors of the economy, both informally and formally. Recent data suggest that o f the whole formal sector, over 80 percent i s comprised o f MSMEs, generating jobs for 20 percent o f the Tanzanian workforce. Given the substantial presence o f smaller enterprises in the informal economy, which also plays a 37 significant role in income and employment generation, an understanding o f Tanzania's informal sector is crucial to comprehendingTanzania's growth and development. The Tanzanian informal sector employs over 70 percent o f the workforce and generates 58 percent o f the country's GNI. The most recent Integrated Labor Survey identified that the majority o f firms were survivalists, defined as having chosen the sector either as a last resort for employment, using it as a necessary supplementary to increase their household income. There are, however, many who are classed as entrepreneurswho are unable to afford the transaction costs associated with formalization. A recent joint International Labor Organization, United Nations Industrial Development Organization, and United Nations Development Program study found that it takes 75 percent o f a monthly sales value to formalize a firm in Tanzania. The main constraint for urban firms to formalize in Tanzania was identified as a hefty tax burden o f 51 percent o f gross profits, which acts as a disincentive. Despite efforts to trim this through a nil bond, dissemination down to the local level has been poor. The main constraint in rural areas was identified as access to finance. This presents a cyclical dilemma o f sorts because the very nature o f informality means that resources are usedinefficiently, and access to formal systems, such as access to finance, are denied. A firm's untitled assets cannot be used as collateral for loans to start or expand a firm, and so the business stays small and underproductive. Moreover, a low income means that there i s no capital to formalize. Therefore, much entrepreneurial spirit i s wasted in Tanzania. Furthermore, informality simultaneously has serious macro effects because it de facto erodes the tax base and distorts competition and resource allocation, which could cost Tanzania 1-2 percent inannual GDP growth.I6 Although informality i s a positive aspect o f an economy in some cases, for pilot firms and as an alternative to forced formality that risks suppressing entrepreneurship just as much, transitioning from informal to formal status must be made a viable option for Tanzania's economy to achieve efficiency and sustainable growth. l6Based on calculated cost to the average developing country. 38 Summary of Private Sector Issues: Tanzania's Investment Climate Assessment i s based on an analysis o f data collected in the Investment Climate Survey o f manufacturing firms in Tanzania.l7The assessment compares measures o f firm performance and the investment climate inTanzania with similar measures inKenya, Uganda, India, and China. The regional comparators, Kenya and Uganda, are chosen because o f their geographic proximity to Tanzania, their joint membership o f the East African Community, and the fact that similar InvestmentClimate Surveys were completed for these countries at the same time. India and China are chosen for their rapid growth development that provides a useful benchmark for the long-term progress that Tanzania aims to achieve. Second, because o f the large size o f these countries and their growing importance in international markets, Tanzanian manufacturing firms will be forced to compete with enterprises from China and India as they expand into regional and international markets. Analysis of firm-level subjective data, coupled with more objective indicators as described in Table A.1.3 at the end o f this annex, gives an overall picture o f the investment climate in Tanzania at the firm level and seems to reflect accurately the issues discussed inthe private- public dialogue and raised at the Investors Round Table in Tanzania (see Table A.1.2). Although recent efforts to improve the climate have resulted in an improved score on the previous assessment, Tanzanian firms remain subject to low productivity levels that are based in part on constraints in electricity supply, cost o f financing, tax administration, corruption, access to finance, and macroeconomic instability constraints. l7 surveywas conductedbetweenApril andJuly 2003 bythe WorldBankandthe Economic andSocial The Research Foundation (ESRF) in Dar Es Salaam, together with the National Bureau o f Statistics (NBS). In addition to data from this survey, the assessment draws o n similar surveys o f firms in the tourism and construction sectors, also conducted between April and July 2003; a survey o f informal and microenterprises conducted for World Development Report 2005; the Doing Business database; the World Bank's World Development Indicators; Investment Climate Surveys o f firms in China, India, Kenya, and Uganda; and governance indicators from Kaufmann Aart Kraay and Massimo Mastruzzi, Governance Matters 111. (2003). 39 Table A.1.2: Selective Firm Perception Indicators of Major or Severe Constraints to Business Telecom (%) 11.8 24.97 44.1 5.2 23.5 5.3 Electricity ('YO) 58.9 51.I1 48.1 44.5 29.7 28.9 Transportation (%) 22.9 24.7 37.4 22.9 19.1 12.4 Anti-competitive practices (%) 24.3 38.26 65.3 31.I 23.7 17.5 Access to land (%) 24.6 30.3 24.6 17.4 14.7 9.1 Access to financing (%) 48.3 47.81 44.1 45 22.8 18.3 Cost of financing (YO) 57.8 62.9 73.3 60.3 21.8 20.2 Skills and education of workers (YO) 25 26.4 27.6 30.8 30.7 12.5 Tax rates (O/O) 73.4 61.02 68.2 48.3 36.8 27.9 Tax administration (YO) 55.7 46.93 50.9 36.1 26.7 26.4 Customs and trade regulations (%) 31.5 35.21 39.9 27.4 19.3 14 Labor regulations (YO) 12.1 15.04 22.5 10.8 20.7 16.7 Business licensing and permits ('YO) 27.4 13.91 15.2 10.1 21.3 13.4 Economic and regulatory policy uncertainty (%) 31.5 40.59 51.5 27.6 32.9 20.9 Macroeconomicinstability (%) 43 47.35 51.3 45.4 30.2 16.1 Corruption (%) 51. I 47.14 73.8 38.2 27.3 37.4 Crime, theft and disorder (%) 25.5 31.77 69.8 26.8 20 15.6 Legal system (%) 20 22.92 Sourc World Bank, InvestmentClimatesurveys, various Productivity Labor Productivity Tanzania's value added per worker (US$2,028) i s considerably lower than that in India (US$3,214 in 1999), Kenya (US$3,551), or China (US$4,397 in 2002). Value added tends to differ across sectors and size categories in Tanzania, and as expected, in larger firms it tended to be higher ($US5,598) and was particularly low for microenterprises (US$474). Notably, the chemicals and paints, construction materials, and plastic products industries tended to show higher value added per worker in Tanzania than in other regional competitors such as Kenya. Capital Intensity Labor productivity can vary across firms because o f differences in the amount o f capital per worker. The capital intensity o f the median firm was lower in Tanzania (US$6,853 per worker) than in Kenya (US$9,731 per worker), but considerably higher than in Uganda (US$1,421 per worker). Capacity utilization was similarly low in the three countries- ranging between 57 and 61 percent. In Tanzania, larger enterprises were more capital- intensive (US$12,944) than the median small enterprise (US$4,655). 40 TotalFactor Productivity Differences in Total Factor Productivity (TFP) are differences in productivity that cannot be explained by differences inthe use o f labor, capital, or intermediate goods. By this measure, Tanzanian firms are less efficient than firms inthe comparator countries. The average TFP i s about 5.6 percent higher in Kenya than in Tanzania and i s also higher in Uganda, even though value added and sales per employee i s almost twice as highin Tanzania as inUganda. This discrepancy can be explained by differences in capital intensity rather than efficiency o f workers. TFP, like labor productivity, i s higher for large firms. Thus, the differences inlabor productivity between large and small firms are not simply due to the fact that large firms employ more capital per worker. Firms that export also tend to have a higher TFP than non- exporting firms-something that is true inmany countries. Human Capital Education of the Workforce The quality o f the workforce i s a serious constraint on productivity in many developing countries. It appears to be an especially serious problem in Tanzania, even by regional standards. Workers in Tanzania tend to have considerably less formal education than workers in either Kenya or Uganda. Some 43 percent o f workers in Tanzania have only a primary education, compared to 20 percent inKenya and Uganda. The main cause o f this gap appears to be Tanzania's low levels o f secondary and vocational education. The education o f the top manager also has an important influence on firm performance. On average, total factor productivity i s 24 percent higher in enterprises where the manager has a university degree. Inthis respect, Tanzanian enterprises do well by regional standards. More managers have a university degree in Tanzania (68 percent) than inUganda (40 percent) or Kenya (60 percent). However, top managers in China were far more likely to have a university degree (84 percent). Training Enterprises in Tanzania were less likely to have formal training programs than enterprises in either Kenya or China (but not Uganda). Tanzanian firms with formal training programs also provided less training than their counterparts in the comparator countries. Enterprises without formal training programs generally reported that they were unable to afford a formal program or that informal training was sufficient. But contrary to the latter belief, formal training appears to pay off. Total factor productivity was 11 percent higher in Tanzanian enterprises with formal training programs. Technology Tanzanian enterprises tend to use technology less intensively than enterprises in Kenya and China, but more intensively than enterprises in Uganda. About 68 percent o f enterprises in Tanzania reported that at least some o f their employees used a computer on the job, compared with 85 percent in Kenya and 96 percent in China. Similarly, about 58 percent o f enterprises in Tanzania used e-mail to communicate with clients and suppliers, compared with 71 percent in China and 79 percent in Kenya. Tanzanian enterprises that used 41 technology more intensively were more productive and had faster sales and employment growth. Impact of HIVAIDS Notwithstanding its impact on human suffering, the human Immunodeficiency VindAcquired Immune Deficiency Syndrome (HIV/AIDS) also undermines economic development. Firms in Tanzania generally appear less aggressive in their response to HIV/AIDS than enterprises in Kenya. About 31 percent of Tanzanian enterprises had some type o f prevention program by mid-2003, compared with 32 percent o f Ugandan enterprises and 44 percent o f Kenyan enterprises. The most common program involved displaying HIV prevention messages-most enterprises with a program provided this service. Close to half o f enterprises with a program also reported that they provided counseling. Programs involving condom distribution, anonymous HIV testing, and financial support for dependents were far less common. Barriersto EnterpriseOperations and Growth Manufacturing enterprises inTanzania are less likely to export and export less o f their output than manufacturing enterprises in Kenya and China. The difference between Tanzania and Kenya i s not entirely explained by differences in firm characteristics, such as enterprise size and sector o f operations. When we controlled for these differences, enterprises in Tanzania were 18 percent less likely to export and exported 4.7 percent less o f their output than similar Kenyan firms. Taxes Over 73 percent o f Tanzanian firms rated tax rates as a major problem, more so than in any other surveyed country except Ethiopia and Brazil. Despite unfavorable perceptions, the gross tax burden at 51.3 percent o f firm profit i s slightly less than the regional average and not far off the OECD figure (46.1 percent). However, this may not reflect the true burden o f several additional fees and local taxes that enterprises must also face. Indeed, bribes are estimated to amount to more than 5 percent o f total sales and make up a substantial share o f the cost o f doing business in Tanzania. In addition to tax rate burdens, 58 percent firms perceive tax administration as a major constraint to operations in Tanzania's formal sector. Despite the low level o f compliance in Tanzania, enterprises reported spending an average o f 7 days dealing with tax officials, compared with between 2 and 3 days in Kenya, Uganda, and China. Despite recent tax reforms in tax administration, enterprise managers did not report any improvement in 2003 relative to 2002. Corruption i s also a problem, with 21 percent o f enterprises reporting that tax inspectors requested gifts o f informal payments duringtheir meetings. 42 Power Despite recent reforms, about 59 percent o f enterprises rated the power sector as a serious problem, more than in Kenya, Uganda, or China. Concern about power was particularly widespread among larger enterprises. Whereas over 60 percent o f medium, large, and very large enterprises said that power was a serious problem, only 39 percent o f informal microenterprises, 52 percent o f formal microenterprises, and 44 percent o f small enterprises said the same. The cost o f power does not seem to be excessively high in Tanzania. The average price per kilowatt hour was no higher (US$0.08) than in most o f the comparator countries. However, reliability does appear to be a serious problem. The median enterprise in Tanzania reported losing 5 percent of production due to outages and surges. This was considerably higher than the median estimates for China (0 percent), Uganda (0 percent), and Kenya (3 percent). Problems with maintenance and the poor commercial performance o f the Tanzania Electricity Supply Company (Tanesco) partially explain the sector's problems, but they are not the whole story. Per capita generating capacity is also lower inTanzania than in the comparator countries. A severe drought, which has limited hydroelectric power generation, might exacerbate these problems inthe near term. Finance Although Tanzania has made considerable progress in the development o f its banking sector inrecent years, privatizing several state-owned banks and allowing foreign banks to enter the Tanzanian market, enterprises continue to report that access to finance and highinterest rates are serious problems.'* About 58 percent o f enterprises reported that cost of financing was a major or very severe constraint on enterprise operations and growth and 48 percent reported the same for access to finance. Overall, enterprises rated these constraints as the third and sixth most likely to be a major or very severe problem. Financial markets in Tanzania are less developed than markets in most o f the comparator countries. For example, claims on the private sector are equal to only 5 percent o f GDP in Tanzania-far lower than in any o f the other comparator countries except Uganda (6 percent '* La Porta et a1 (2002) show that government ownership o fbanks reduce financial sector development. 43 o f GDP).I9 Claims on the private sector were 23 percent o f GDP in Kenya, 28 percent in Pakistan, 29 percent in India, and 127 percent in China. Similarly, money and quasi-money, another common measure o f financial sector development, i s equal to only 20 percent o f GDP in Tanzania, also lower than in any o f the comparator countries except Uganda (18 percent o f GDP).20 Money and quasi-money are equal to over 39 percent o f GDP in Kenya, 48 percent inPakistan, 58 percent inIndia, and 168 percent o f GDP in China. In addition to having an underdeveloped banking sector, other aspects of the financial sector are also underdeveloped. For example, Tanzania's stock market i s embryonic. In 2002, there were only five companies listed on the exchange, total market capitalization was equal to about 0.2 percent o f GDP, and turnover was equal to only about 7.6 percent o f GDP. This was lower than in the other comparator countries for which data were available. For example, market capitalization and turnover were 0.6 percent and 18 percent, respectively, in Kenya, 35 percent and 12 percent in Pakistan, and 66 percent and 105 percent in India. Under these circumstances, it is not surprising that very few companies in the Tanzania Investment Climate Survey financed any investment through equity financing. O f the 255 enterprises inTanzania that reported how they financed investmentand working capital, only 12 reportedhaving any equity financing. As shown in Figure A.1.7, only 20 percent o f the enterprises included in the Investment Climate Survey in Tanzania reported having loans from a financial institution. This was similar to Uganda and Pakistan-despite the fact that claims on the private sector are considerably higher in Pakistan-but i s significantly lower than in Kenya (40 percent o f enterprises) and China (57 percent). About 31 percent o f enterprises in Tanzania reported having overdraft facilities-slightly higher than in Uganda (23 percent) and China (27 percent) but lower than in Kenya (73 percent). It i s important to note that there was considerable overlap between the enterprises with overdraft facilities and enterprises with loans. For example, 75 percent o f enterprises with loans also had overdraft facilities, compared with only 20 percent o f enterprises without loans. Consequently, about 63 percent o f enterprises hadneither overdraft facilities nor loans. l9 Claims on private sector include gross credit from the financial systemto individuals, enterprises, non- financial public entities not includedunder net domestic credit, and financial institutions not included elsewhere. 2o Money and quasi-money comprise the sum of currency outside banks, demand deposits other than those o f the central government, and the time, savings, and foreign currency deposits o f resident sectors other than the central government. 44 Figure A.1.7: Share of Firms that Report Having Overdraft Facilities and Bank Loans 80% 73% 60% 57% 40% 20% 0% I Tanzania Uganda Kenya China Pakistan I Source: Investment Climate Surveys. Consistent with the previous evidence, enterprises in Tanzania finance very little investment through the formal financial sector. Only 16 percent o f investment i s financed through bank lending in Tanzania, compared with 14 percent in Uganda and 32 percent in Kenya. In addition, very little investment, only about 8 percent, i s financed through non-bank financial institutions. Moreover, these averages tend to obscure the fact that very few enterprises appear to have access to non-bank financial institutions; some enterprises reported financing very large amounts o f investment through non-bank financial institutions. For example, although this category, which includes financing from investment funds, special development financing, government financing, NGO financing, and donor financing, accounted for close to 1percent o f financing on average, only two enterprises actually received any money from these sources. Because both financed over 70 percent o f lending from these sources, the average was close to 1 percent. Similar patterns can be observed for equity financing and other sources of non-bank financing-a very small number o f enterprises financed a lot o f investment through these financing mechanisms, while most received no financing from them at all. Under these circumstances, it is not surprising that most enterprises financed investment primarily through retained earnings (68 percent o f new investment) in Tanzania. This was slightly lower than in Uganda (71 percent), but considerably higher than in Kenya (54 percent). Many enterprises relied almost exclusively on internal funds for financing new investment. In fact, over half o f all enterprises (56 percent) that had any new investment financed all investment through internal funds. Because another 11 percent o f enterprises financed all investment through either informal sources or internal funds, this means that close to two-thirds of enterprises that invested did not finance any investment through the formal financial sector. Constraints to M S M E access to finance can be grouped into three general categories: (i) financial intermediaries aversion or inadequate capacity to target MSMEs; (ii)inadequate business and financial skills at the enterprise level, resulting in a less than optimal level o f effective demand or bankable deals; and (iii) legal, regulatory, and policy frameworks that impede the development o f a robust private sector and expansion o f financial services. 45 Formal financial institutions, particularly private commercial banks, are averse to lendingto MSMEs, for several reasons, including: (i) perceived highrisk o f MSMEbusinesses, most of which have inadequate business and technical skills to be considered bankable; (ii) cost fixed elements in traditional loan appraisal, supervision, and collection renders small loans more costly per amount lent; (iii)limited know-how in SME credit methodologies (cash-flow- based analysis and intensive portfolio supervision); (iv) high costs and uncertainty o f enforcing contracts through the judicial system; (v) information asymmetries (leading to moral hazard and adverse selection), are a market distortion that i s particularly acute for SMEs; and (vi) risks associated with asymmetric information and adverse selection leads banks to make lending decisions largely based on the value o f assets pledged by a borrower (rather than the borrower's expected revenues and cash flows). Most SMEs lack adequate collateral that i s legally establishable or realizable if necessary in a cost-effective manner to reduce net losses from defaults. The statutory requirement for fully secured lending i s 125 percent collateral, with no difference in requirements for short- and long-term loans. Banks often demand more-as much as 400 percent collateral. These prohibitively high collateral requirements preclude potentially creditworthy borrowers from debt financing. Many potentially creditworthy SMEs lack the necessary business and financial management skills to present attractive proposals that demonstrate that their enterprises are indeed bankable and will remain so in the long run. Effective BDS services are limited and costly for most SMEs. Finally, a facilitating regulatory framework and complementary public policies are crucial to the expansion o f access to finance for MSMEs. Commercial banks in Tanzania cite shortcomings in the recently revised Land Act as an impediment to the expansion o f their loan portfolios. For example, the unclear definitions o f "spouse" (and other claimants to the land) make it difficult for lenders to determine the extent o f their own claim on the land in the event o f a recovery. Potential collateral substitutes-credit history and moveable collateral-depend on the development o f the necessary infrastructure (including nationalhnique identity cards, property registries, efficient security pledge agencies, and credit information systems). Leasing, a financial instrument that could effectively address SMEs' need for long-term financing with little collateral, cannot be effectively introduced untilsuitable laws and regulations are inplace. For instance, banks offering leasingproducts must book these assets on their balance sheets. Given that the Banking and Financial Institutions Act (BFIA) maximum allowable asset concentration i s 20 percent, there i s a disincentive (to banks) to entering the leasing market. In addition to the above constraints, banks have little incentive to target the M S M E market when the government treasury offers more lucrative, almost risk-free investment options, thus crowding out credit to the private sector. Corruption Compared with other low-income countries, Tanzania performs well on most measures o f governance (political stability, rule o f law, and regulatory quality). But despite some recent progress, it trails many countries when it comes to controlling corruption. On one common corruption measure, only Kenya, among the comparator countries, performed worse. Corruption ranked as the fifth greatest problem facing enterprises in Tanzania. About 33 46 percent o f enterprises that did business with the Government said that unofficial payments were typically needed to secure a Government contract. The median reported payment was about 10 percent o f the value o f the contract. Furthermore, 35 percent o f managers said that informal payments were typically needed to "get things done" in such areas as customs, taxes, licenses, and other Government services. The median reported payment in this case was about 0.3 percent o f sales. Bribes were also common when obtaining utility connections, applying for import licenses, undergoing inspections (particularly tax inspections), and participating in mandatory meetings with Government officials. Microenterprises appeared to avoid some o f the burden o f corruption by avoiding contact with bribe-taking institutions. Macroeconornic I nstability Despite Tanzania's improved macroeconomic performance, enterprise managers continue to see macroeconomic instability as a major problem. About 43 percent rated macroeconomic instability as a major or very severe obstacle to enterprise operations and growth. Consequently, continued efforts to control inflation and maintain economic growth are important from an investment climate perspective. As part o f these efforts, the government must continue to pursue fiscal stability. Cutting taxes on enterprises without steps that improve compliance, boost tax collection inother ways, or reduce spending would be risky. Customsand TradeRegulations Although most enterprises did not rate customs and trade regulations as a serious obstacle, they were rated a serious constraint by more than 52 percent o f very large enterprises (that is, the enterprises most likely to engage in foreign trade). Customs delays illustrate the scale o f the problem. The median delay for imports was 14 days in Tanzania, and the median delay for exports was 7 days-longer in both cases than in any o f the comparator countries. In China, for example, the median delay for imports was 5 days, and the median delay for exports was 3 days. Business Entry Recent estimates suggest that the informal sector in Tanzania i s equivalent to about 58 percent o f GNI-more than in any o f the comparator countries. By reducing the level o f informality, the Government could reduce the tax burden on formal enterprises without compromising macroeconomic stability. Reforms should focus on reducing the costs and increasing the benefits associated with operating in the formal sector. Reducing the regulatory burden on formal enterprises i s one way to achieve this goal. Recent work has shown that informality i s higher in countries where it i s costly to register a business. Although most enterprises in Tanzania did not see business registration as a serious obstacle to enterprise operations and growth, this result i s likely to underestimate the impact o f entry-deterring regulations. Businesses that are already operating-especially those that have been operating for a long time-may not see entry restrictions as an important bamer to their future operations and growth. For this reason, evidence from the 47 Investment Climate Survey is supplemented with evidence from the World Bank's Doing Business database. According to the Doing Business data, it takes about 35 days to fulfill all legal requirements for starting a business in Tanzania. Registeringa business takes even longer in most o f the comparator countries: 71 days in India, 54 days in Kenya, 48 days in China, and 36 days in Uganda. The monetary cost o f this process, however, i s considerably higher in Tanzania- 161.3 percent o f per capita GNI-more than in any o f the comparator countries but less than Sub-Saharan Africa as a whole (see Figure A.1.8). The most expensive procedures are obtaining the certificate o f incorporation, a business license, and a company seal. FigureA.1.8: Cost of Starting a Business(YOof GNI), 2005 South China Kenya India Uganda Tanzania Sub- Africa Saharan Africa Source: World Bank, Cost of Doing Business 2005 (Washington,DC: joint publication o f World Bank,IFC, and Oxford University Press, 2004). Labor Regulations: Labor laws can also act as an entry barrier. According to the Doing Business database, labor laws are considerably more restrictive in Tanzania than in most o f the comparator countries. The Doing Businessdatabaseuses a Rigidity o f Employment Index as a composite indicator to measure inflexibility of labor law in hiringand firing workers. It consists o f three sub indices: a difficulty o f hiring index, a rigidity o f hours index, and a difficulty o f firing index. The higher the index, the more rigid labor law environment a country has. The 2005 index for Tanzania i s 69, while it is 28 for Kenya and only 13 for Uganda. The I C A for Tanzania reveals an existing phenomenon-very few enterprises rated labor regulation as a significant obstacle-possibly because labor laws are poorly and unevenly enforced by the respective public authorities. And, as result, the compliance level o f entrepreneurs i s low. Other evidence supports this explanation. Very large enterprises, which are more likely to face close scrutiny, were far more likely than smaller firms to rate labor regulations as a serious problem. Consequently, in addition to making labor laws more flexible, the government should consider making enforcement more even and effective. Business Inspections: The high cost o f complying with regulations may also encourage enterprises to remain in the informal sector. The median enterprise in Tanzania reported having 15 inspections or meetings with government agencies per year-significantly more than inUganda (5) and India (6). Microenterprises appear to avoid a significant part o f this burdenby remaining informal. 48 Other Constraints on Enterprise Operations and Growth One concern about perceptions data, such as that collected by the Investment Climate Surveys, i s that enterprises that have adapted to certain constraints might not see them as problematic. For example, microenterprises without power did not consider electricity to be a serious problem even though access would probably improve their performance. Potential problems that enterprises by and large did not identify as major constraints in the surveys include legal, certain types o f infrastructure, and land issues. Only 20 percent o f enterprises reported that the legal system was a major obstacle to their operations and growth. However, there i s still room for improvement. Enterprises in Tanzania were less likely to report that they could rely on the courts to enforce contracts and uphold property rights (45 percent o f enterprises) than in Kenya (49 percent) or China (92 percent). The introduction o f the commercial and land divisions o f the high court, though commendable, are insufficient to address the challenges o f judicial dispute resolution faced inthe country. The appeal process from the decisions of the commercial court is subject to a lengthy process at the Court of Appeal that usually involves waiting a couple of years for a hearing. Dispute resolution in the ordinary division o f the high court as well as the lower courts is still fraught with severe constraints. The judicial system faces the following challenges that impact on the commercial sector: 1. Delays indispensation o fjustice and (commercial) disputeresolution due to backlogs and an antiquated legal system, including civil and criminal procedure laws that are unsuited to a market economy and for delivery o f expedited dispute resolution. 2. Technical incapacity (human resources) to address challenges brought by a market economy including technological, economic, and political changes. 3. Corruption. 4. Poor case reporting-most cases are not reported in the law reports making it very difficult for lawyers to access authoritativejudgments passedby the courts. 5, Ineffective alternative dispute resolution mechanisms have been introduced. Although larger enterprises were not very concerned about access to land, both formal and informal microenterprises reported that it was a serious concern. Only access to financing and the cost o f financing were greater problems for these groups. Apart from being reported inthe InvestmentClimate Surveys, consultations conducted as inputsfor the Strategic Planto Implement Land Laws (SPILL) indicated a serious shortage in the supply o f surveyed and serviced land; inefficiencies and ineffectiveness in land administration services have resulted inland deliverytrailing significantly behindeffective demand for landproperty development. Land supply constraints have been accentuated by conflicts between squatters and customary land rights owners in unplanned areas o f urban centers. According to SPILL, these now constitute about 70 percent o f all town areas. The Ministry o f Lands and Human Settlements Development (MLHSD) estimates that there are 500,000 housing units in Dar es Salaam alone and that at least 400,000 (80 percent) are in unplanned settlements. In rural areas, the conflicts are between crop producers expanding their farms and pastoralists operating 49 without regard for land boundaries, thus encroaching on fertile farming lands. Diagnostic work on the informal sector, being undertaken by the Institute for Liberty and Democracy, should provide more detailed information on the extent o f informality and the measures necessary to accelerate their regularization and the freeing up o f more resources (including land) for investment. Even when land is accessed by the authorities for allocating to investors, the time taken to have the land go through the delivery and registration systems i s longer and more costly in Tanzania than inneighboring Mozambique, Kenya, and Uganda, according to Cost of Doing Business. A major cause of the delays are operating problems within the General Registry that receives, records, and processes applications for land applications and transactions and the Title Registry that registers land and subsequent dealings in land rights. The General Registrysuffers from a range o f problems including inadequate record storage and archiving systems, limited record storage space, missing and damaged records, limited computer equipment, and a lack of trained staff. The Title Registry suffers fiom antiquated laws and regulations; a poor and outdated manual record keeping and land registration system; cumbersome and slow procedures leading to serious delays in registration; lack of efficiency and transparency increasing the risk o f corruption and fraudulent activity; registry system not being financially sustainable; traditional procedures for manual Exchequer Receipts Voucher (ERV), writing, and issuance leading to delays in registration and searching operations; the inability to search for records nationally; and limitedhuman and financial resources. Enterprises in Tanzania rated telecommunications as a less serious constraint than other infrastructure. Although the number o f fixed-line phones in Tanzania i s low even by regional standards (4 lines per 1,000 people), the sector appears to perform well on other dimensions. Only 51 o f 214 firms that used fixed-line phones to communicate with clients reported losing service at some point in 2002. By comparison, 211 of 257 firms in Kenya reported losing service for at least one day over the same period. About 23 percent o f manufacturing enterprises regarded transportation as a major obstacle to enterprise operations and growth. Transportation also appears to be a greater concern for enterprises in other sectors-38 percent o f enterprises in tourism reported it as a major obstacle. Access to paved roads and railways appears to be the greatest problem within this sector. Small Enterprise Logistic services 50 ' T o o y L " 0, u? : o '"'9 : ,4 b Y 0 Q u .I a Y El Y W Q .I GE Y a, e E P Y z El H c) 0 I a, m W .. c? h z a, c3 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies TANZANIA: Private Sector Competitiveness Project The World Bank i s providing support for the implementation of the Poverty Reduction Strategy Paper (PRSP)/MKUKUTA through a Poverty Reduction Support Credit (PRSC), currently in its third phase, working in close collaboration with eleven other donors that provide financial assistance through the Poverty Reduction Budget Support (PRBS) facility. The focus o f the PRSC/PRBS i s on improving the policy environment for scaling up pro-poor growth, especially through a focus on rural development and improvements in the business environment (with emphasis on reforms in business registration policy, implementation o f the land act and labor law, and SME policy). The PRSC/PRBS also supports the strengthening o f public expenditure management and public service delivery, especially in the priority sectors for poverty reduction, and the operationalization of an appropriate monitoring and evaluation system to enhance the accountability for results and outcomes of sectoral programs. In the areas of private sector and financial sector development, the Bank supports tax administration, specifically, Government efforts to increase revenue collection, strengthen the tax revenue authority, simplify tax laws, and help trade facilitation by improving the customs department. In addition, the Bank supports reforms in the utility regulatory environment and new and established regulatory agencies. Furthermore, the Bank supports improved financial sector supervision, financial sector restructuring, development o f a regulatory framework for microfinance, and development o f a credit reference bureau. In the area of public sector reforms, the Bank supports actions to improve accountability, transparency, and resource management for service delivery. In addition, the Bank supports local government development, especially the strengthening of fiscal decentralization and increasing the access for local governments to infrastructure and services. In human development, the Bank supports enhanced access, equity, and quality o f secondary education, building on the success o f the Government's Primary Education Development Program, which has also been supported by the Bank. The Bank contributes to the health sector multidonor "basket find," which supports reforms in the sector and provides funding for non-wage expenditures. An ongoing health Adaptable Program Loan (APL) i s providing support for the provision o f quality health services through reforms, capacity measures, improved management o f resources, and emphasis on quality in service delivery. A multisectoral HIV/AIDS project supports Tanzania's efforts to reduce HIV transmission and mitigate the adverse consequences o f AIDS. In the water sector, the Bank supports the technical, commercial, and financial rehabilitation o f the water supply and sanitation services in Dar es Salaam as well as the increase o f safe water supply to rural areas. Through a Social Action Fund, the Bank i s supporting the enabling o f individuals, poor communities, and their partners in development in the implementation o f initiatives to better manage risks associated with health, education, sanitation, water, transportation, energy, and food insecurity. 52 In the agriculturesector, the Bank supports policy reforms through analytical work and the policy dialogue under the PRSC. The Bank also provides project support to strengthen research and extension services. In the environment sector, the Bank supports initiatives for natural environmental resource management, including in lake, forest, marine, and coastal areas. The Bank supports efforts to improve Tanzania's infrastructure through upgrading roads and enhancing road management capacity. In addition, the Bank supports improving the operations o f Tanzanian Railways and urban rehabilitation. Inaddition, the Bank supports the building o f capacity o f local governments to allow them to better plan, finance, and manage for their infrastructure needs. In the power sector, the Bank supports the implementation o f a Power Sector Restructuring Program. The Bank has encouraged the Government to develop the domestic gas market to generate lower-cost power options. Partners: 1. Poverty ReductionBudget Support (Canada, Denmark, Finland, Germany, Ireland, Japan, the Netherlands, Norway, Sweden, Switzerland, UK, European Communities, African Development Bank, and the World Bank) 2. Joint Public Expenditure Reviews (Denmark, EC, Norway, Sweden, UK,UNDP, WB) 3 . Local Government Reform Program (Denmark, EC, Finland, Ireland, the Netherlands, Norway, Sweden, UK,UNDPAJNCapital Development Fund) 4. Evaluation o f Budget Support (DFID, Sweden) 5. Procurement, financial management and disbursement assessment (Denmark, Germany, Ireland, the Netherlands, Switzerland, WB) Growth: 1. Poverty ReductionBudget Support (Canada, Denmark, Finland, Germany, Ireland, Japan, the Netherlands, Norway, Sweden, Switzerland, UK, EC, AfDB, and the World Bank) 2. Emerging Swap inAgriculture (Denmark, EC, Japan, InternationalFundfor Agricultural Development, Ireland, WB) 3 , Biomass Energy Conservation (Germany, the Netherlands) 4. BEST Program (DFID, SIDA, the Netherlands, and Danida) HumanDevelopment: 1. Poverty Reduction Budget Support (Canada, Denmark, Finland, Germany, Ireland, Japan, the Netherlands, Norway, Sweden, Switzerland, UK,EC, AfDB, and the World Bank) 2. Primary Education Development Program (pooled funding: Canada, EC, Ireland, the Netherlands, and Norway; direct budget support: Sweden, WB) 3. Health Sector Development Program SWAP (Denmark, Germany, Ireland, the Netherlands, Switzerland, and WB) The project will complement the ongoing activities. Specifically, it will complement activities where other development partners and bank projects are taking and are expected to take the lead, including the policy instrument PRSC, infrastructure, education and health, finance, and tax administration. This project focuses on two major constraints in the private sector identified through the ongoing dialogue as bottlenecks to future growth. This project will take the lead in World Bank Group involvement concerning the high cost o f doing business and l o w labor skills, building an appropriate incentive structure to 53 lower the costs o f the operating environment, and enabling private sector participants to take advantage of future market opportunities. 54 'able A.2.1. Donor Activities I I Busin ss Climate Infrastructure cD = previouswork 4 = ongoingwork 2'EuropeanUnion 22GermanTechnical Cooperation 23UnitedStates Agency for InternationalDevelopment 55 N a d N Annex 4: DetailedProjectDescription TANZANIA: Private Sector Competitiveness Project The project objective i s to create sustainable conditions for enterprise creation and growth. The project's progress in achieving this objective will be measured by the increase in the number o f formal enterprises, the increase in the value o f titled land compared to untitled, and the growth in sales and assets o f firms participating in the project. The project will achieve this objective by reducing the cost o f doing business and increasing the capacity o f the local private sector to participate in domestic and international markets and to access appropriate financial services. Component 1: Business Environment Strengthening Component (IDA US$41.4 million; Other donors US$19 million) This component will support the Government Business Environment Strengthening for Tanzania (BEST) Program. The component supports the BEST Program objective to lower the costs o f investing in, establishing, and operating a business in Tanzania by eliminating policy, legal, regulatory, and institutional constraints that inhibit a growing and competitive private sector. The results o f the program supported by this component will be measured by the set o f indicators specified inAnnex 3. Improvements in business registration and licensing, property rights, and contract enforcement will be achieved by participating in the sectonvide BEST Program. The program was initially developed by the Government with the support of four bilateral donors (DFID, Danida, SIDA, and the Government o f the Netherlands) and has the objective o f delivering a more conducive environment for doing business. The program i s a comprehensive framework that aims to address key constraints in the legal and regulatory environment for business. The purpose o f the program i s twofold: (i) reducing the burden on businesses by eradicating as many procedural and administrative barriers as possible; and (ii) improving the quality o f services provided by Government to the private sector, including commercial dispute resolution. The BEST Program was designed in 2003 and planned to be implemented over a period o f five years. The 2003 program document includes five components: 1. Achieving better regulation 2. Improving commercial disputeresolution 3. Strengtheningthe Tanzania InvestmentCenter (TIC) 4. Changing the culture o f government 5 . Empoweringprivate sector advocacy The first four components are funded by a joint basket under a memorandum of understanding(MOU) signed by the Government of the United Republic o f Tanzania and all funding agencies. The Better Regulation Unit (BRU) in President's Office o f Planning and Privatization (POPP) i s responsible for the administration and coordination o f these four components. The fifth component-empowering private 60 sector advocacy-is financed separately from the basket and outsourced to a consulting company. This BEST component will not be financed by IDA. Currently, the BEST Program i s being refocused to use a holistic programmatic approach, which would require additional financial resources the Bank would contribute through the proposed project. This programmatic approach constitutes the holistic package o f reforms in the areas identified as major bottlenecks for the private sector growth. It requires the development o f multi-year work program setting out the sequence o f steps and the human and financial resources required to move from the status quo to the expected final results. Such results should be measured by clearly defined internationally comparable outcome indicators. Each reform program is to be implementedby the respective MDA primarily responsiblefor this area. This approach also includes using one team o f experts throughout the reform process to the extent possible. This would reduce administrative overhead for procuring and monitoring a multiplicity o f contracts and eliminate inconsistencies in policy recommendations developed by various teams. Based on the above approach, the BEST Program i s streamlined into the following program areas: (a) business registration, (b) land reform, (c) commercial law and justice, (d) labor law reform, (e) strengthening the TIC, and (f) program administration and monitoring. Two additional activities-national identification database and support to the MSME Policy Unit in the Ministry o f Trade-are proposed by the Government to be part o f the BEST Program and agreed with BEST donors. The following summarizes the targeted reforms inthese areas. Subcomponent A: Business Registration Reform This subcomponent will provide technical assistance, equipment, materials, and supplies to support the establishment o f a single business interface for business registration. This would enable businesses o f all sizes to complete the legal procedures o f business set up, receiving all registration and tax identification numbers and incorporation certificates. The proposed program will be based on the following key fundamentals: (1) one interface for all procedures to start up a business; (2) declaratory nature o f business registration; (3) clear time limits to complete the business registration (5-10 working days); (4) unlimited validity o f the registration certificate; (5) one business entity and one registration certificate; (6) validity o f registration certificate throughout the country; (7) inexpensive process for prospective entrepreneurs and fees to cover the administrative expenses not for the revenue generation purposes; and (8) single national database o fbusinesses. The subcomponent includes technical assistance to review related legislation and regulations with the objective o f simplifying the registration process and separating business registration from business licensing. Technical assistance and training will be provided to ensure that all stakeholders inthe public and private sector understand the merits o f an efficient institutional framework to enable businesses to register formally. 61 Subsequently, the required equipment,materials, supplies, and training o f officials will be provided to establish the institutional framework. Officials at the Ministry o f Industry, the Business Licensing and Registration Agency (BRELA), and other affected Government agencies will be trained. Investments will be provided to computerize national databases for effective name searches or other verification purposes and to provide linkages at the national level and to related institutions such as the Tax Revenue Authority. The proposed sequence o f business registration reforms will include the following main stages: (1) diagnostics; (2) reviewing and designing a policy/strategy approach; (3) buying-in from all stakeholders; (4) reviewing and ensuring that current and proposed legislation i s consistent with the agreed approach; (5) designing detailed business model, including development o f legal, institutional, procedural, and technological solutions; (6) enacting developed regulations; (7) training respective government officers on how to administer the procedures; (8) launching Business Registration Centers and Central Registry (one-stop shops); (9) launching public awareness campaign; and (10) evaluating and fine-tuning. Subcomponent B: Land Reform The immediate post-independence land policy and practice, including the conversion o f freehold to leasehold and the Villagization Program, created difficulties for local land holders and investors to access, secure, and invest in land. A major shift in land policy was adopted in 1995 and, subsequently, various land-related laws were enacted to: (i) provide local people with equitable and secure access to land; (ii)make it easier for investors to access and use land; (iii)reduce time needed to allocate and register land rights and subsequent dealings inthose rights; and (iv) reduce land disputes. A Strategic Plan to Implement Land Laws (SPILL) over the short term (3 years), medium term (5 years), and long term (10 years) was completed in May 2005. The objectives o f this subcomponent are to support implementation o f the key activities o f SPILL that will facilitate the development o f a competitive domestic private sector. Support will be given to the more urgent activities identified for implementation in the short (2 years) and medium (5 years) terms. Accordingly, the subcomponent will provide technical assistance and capacity buildingto develop efficient land registration and administration services by reengineering the processes supporting updated legislation; improving the infrastructure for surveying, mapping, and registration, and decentralizing land administration services to the district and village levels in about 15 districts. The activities, supported by the subcomponent, can be grouped under six categories: (i) land registry and land information; (ii)geodetic control and base mapping; (iii) decentralization o f land administration services; (iv) formalization o f property rights in unplanned areas; (v) strengthening the dispute resolution mechanisms; and (vi) capacity building. Land Registry and Land Information: A key element o f the support for the land registry and land information will be in re-engineering the existing registration and document handling/storage processes. Consultants will be hired to undertake an initial 62 review and produce a number o f outputs, including specifications for new streamlined procedures, the sharing o f information and data systems, the procurement o f new facilities and equipment, and the training o f staff inthe use o f these new systems. The consultants would then have input to assist MLHSD implement the new systems. The initial review would: (i) reviewing all processes in the Land Registry, General Registry, Survey and MappingRecords, and Town and Country Planning Register; (ii) formulating a strategy for computerizing the spatial/map records that support the registration system; (iii)developing strategies for document storage, record handling, and archiving; (iv) defininga long-term strategy for the development o f the registration system throughout mainland Tanzania; (v) preparing detailed specifications for a new computerized registration system, including data entry and the necessary training for registry staff; (vi) making recommendations on issues that need to be addressed in the laws that will replace the three registration laws; and (vii) developing a financial model for the registry. The project will implement the recommendations o f the initial review, providing infrastructure and implementing a new, streamlined registration system and improved records management systems in priority areas. The scope and detail for this activity will be defined inthe initial review. Improving Survey and Mapping Infrastructure: The project would establish a continuous global positioning system station (CGPS). This includes the construction o f the concrete pillar, a small building with air conditioning, in ground antenna cable installation in conduit, on-site equipment purchase (GPS receivedantenna, computer, modem, and so on), three stable reference marks, and utility connections (power and telephone). The ongoing costs include power, communications, equipment failures, and local support to visit remote site to assist with fault diagnosis and repeat reference marks (local tie) surveys to check pillar stability. There will be a need for hrther densification in the priority developed areas o f Dar es Salaam, Mwanza, Arusha, Mbeya, and Tanga. The project will scan and update with satellite imagery the scale topographic maps over the 15 project districts covered in subcomponents below. Fundingfor urban mapping inthese districts i s also included in the program. The project will produce mapping at a scale o f 1/10,000 using new aerial photography in two districts and will also include the renovation o f the existing SMD building and the procurement o f some equipment. Decentralizing Land Administration Services: The activities in this subcomponent are based on a strategy o f scaling up based on the experience from Mbozi. It i s proposed that 15 districts be covered, with the following activity in each district: (i) establishing a District Registry; (ii) surveying and issuing Certificates o f Village Land in 10 villages per district; (iii) establishing a prototype Village Registry and providing support and guidance to 9 other villages in establishing registries; and (iv) undertaking a comprehensive public awareness campaign. Table A.4.1 shows the 15 districts that have beenproposed for support underthis project. 63 Table A.4.1. Proposed Districts for Support from the Decentralizing Land Administration Services Component I Total I 212,024 I 4,425,623 I 285 j1,390 Register House Plots in Unplanned Settlements: This subcomponent continues the work MLHSD i s currently undertaking in Dar es Salaam. The project activities include undertaking field campaigns to map and register house plots in unplanned settlements, establishing registries in the local authorities, and encouraging and supporting residents inapplying for residential licenses. MLHSD may have completed a substantial amount o f the work in Dar es Salaam by the time the project i s effective, in which case the project would be extended to other priority areas where unplanned settlements are a major issue (for example, inthe Mbeya, Arusha, Mwanza, and Morogoro regions). The project is not proposing any support for regularization, which could be picked up under other projects such as the Community Infrastructure Upgrading Program under the Local Government Support Project (World Bank 2004)24. Facilitating the Resolution of Land Disputes: The project proposes to facilitate the resolution of land disputes by strengthening the District Land and Housing Tribunals, increasing the number o f sittings from 1 to 3 times a week, by improving infrastructure (rehrbishing and procuring furniture and equipment for 12 offices), and by providing vehicles, and supporting a public awareness campaign. The cost o f this subcomponent i s estimated at $5.54 million. Capacity Building: Project activities include training trainers, District Land Office Staff, Village Land Committees, and other staff in GPS and Geographic Information Systems and land Information System (GIS)/LIS technology. Inaddition to the training, 24Tanzania, Local Government Support Project, November 30" 2004. 64 the MLHSD will require assistance in coordinating and managing the land component. A full-time national component coordinator will be hired as well as an international senior technical advisor. Provision i s also made for other specialist inputs as needed during project implementation. Funding is also provided for office renovation, operational expenses, and procurement o f vehicles, office equipment, and furniture. The cost o f this subcomponent i s estimated at US$2.95 million. Subcomponent C: Commercial Law and Justice The legal andjudicial systeminTanzania is an impedimentto growth and operation o f the business sector. Therefore, this component will provide technical and financial assistanceto remove some o f the impedimentsinthe legal system, as follows: Review of Legislative Framework for the Business Sector: The activity will involve two levels o f technical assistance: (i) reviewing legislation applicable to the business and manufacturing sector, and (ii) appropriate legislatiodlegislative provisions. drafting Laws envisaged for revision are those identified by the private, manufacturing, and business sectors through studies on the legal and judicial framework for business in Tanzania and include the Bankruptcy Ordinance Cap 12, Stamp Duty Act, 1972, Arbitration Ordinance Cap 15, Sale o f Goods Ordinance, Cap 214, and the Business Names (Registration) Ordinance, Cap 213. Although these laws have beennamed by the private sector as needing review, further consultation with the private sector will continue so that those laws that create the highest impact on private sector are reviewed. The revision o f laws that will result from the review is expected to improve the overall environment for business and to bring legislation in accordance with international best practices. The subcomponent includes needs assessment for enactment o f new legislation, such as for regulation o f property values. Dissemination of Legislation: The activity will provide assistance for dissemination o f new laws that support growth and facilitate the functioning o f the business sector, including laws that deal with competition, companies, and employment. Laws will be disseminated to the private sector, judiciary, government regulatory authorities, the legal profession and other professional groups including the National Board o f Auditors and Accountants (NBAA), Confederation o f Tanzania Industry (CTI), Business Registrations and Licensing Agency (BRELA), Chambers o f Commerce, and the Tanganyika Law Society. The expected outcome o f this component is to increase the level o f awareness o f new laws and the changing legal and business environment (to encourage efficiency inthe legal andjudicial process affecting business) and to increase compliance with legislation (to minimize risks associated with doing business). Continuirzg Legal Education: The activity will address the training needs o f legal professionals in private, public, and judicial practice and will provide technical assistance for the transfer o f specialized commercial skills and legal knowledge to equip lawyers with technical skills in the changing business environment. The component will be implemented through a program o f tailor-made modules for lawyers across the country. The number o f lawyers to be trained under this program i s estimated at 3,000. 65 The Continuing Legal Education (CLE) subcomponent will also train the staff o f the legal sector institutions such as the Ministry o f Justice, the Tanganyika Law Society, the Tanzania Institute o f Arbitrators, and the Institute o f Judicial Administration. The expected outcome o f this subcomponent i s to increase the capacity o f legal personnel to offer specialized commercial law services, to handle and expedite commercial disputes, to offer alternative dispute resolution such as arbitration, and to deal with a rapidly changing businessenvironment. Supportfor the Judiciary: This sub component will support the needs o fthe courts by undertaking a review o f civil procedure laws (including the Civil Procedure Code, Evidence Act, Advocates Ordinance, Court Broker's and Process Server's Rules and the law o f civil procedure in the Magistrate's courts). The review will not only result in changes to law and procedure of the court system as a whole, but will also examine the management o f the courts and the resource needs o f the courts providing among other things online libraries, IT development, upgrading skills o f legal librarians, case law reporting, training for judges and magistrates, case backlog disposal programmes, and resulting in court registry reform and development. The component will also seek to build on and develop the existing ADR programme in Tanzania. The component will involve technical assistance to assess existing needs o f the court system. Over time, the component activities will result in a timely, efficient and reliable commercial justice delivery. This component will include support for dialogue between the judiciary and the private sector. Corporate Governance: This activity will provide technical assistance for training in corporate governance behavior and standards. This component i s expected to facilitate voluntary compliance o f the corporate sector in Tanzania with good corporate governance standards and best practices. Subcomponent D: Labor Law Reform The Government recognized the need to improve the existing legislative framework covering the labor market, which needs to be updated to ensure it responds to the challenges Tanzania faces vis-a-vis other countries in the region, in Southern Africa, and inthe world. Specifically, the current laws are considered outdated and inadequate for regulating a modem, market-oriented economy. As mentioned in the Tanzania Investment Roadmap, the country's labor laws remain inadequate to support a modem private sector economy, and some provisions related to terminating employment are a serious concern for the private sector. This program focuses on updating the existing laws and regulations using the overarching principle that the rights o f employees should be adequately and appropriately balanced by the rights o f employers. 66 Inparticular, the work program includes: 1. Review o f the existing legislation regulating employment 2. Discussion o f proposed changes with stakeholders involved including the private sector 3. Incorporation o f agreed changes into current laws 4. Development and introduction o f by-laws and regulation needed to enact the adopted laws 5. Capacity buildingto MDAs involved inadministering the labor law 6. Public awareness campaign 7. Monitoring and evaluation Subcomponent E: Strengtheningthe TanzaniaInvestment Center (TIC) The TIC was set up in 1997 under the Tanzania Investment Act to be the primary agency o f Government to coordinate, encourage, promote, and facilitate investment in Tanzania and to advise the Government on investment policy and related matters. The TIC i s to provide a one-stop center for investors. The TIC'S mission i s to promote and facilitate investment for national economic growth by enhancing an environment conducive for business and entrepreneurship stimulation. To accomplish its mission, TIC states in its corporate plan that it will carry out the following activities supported by the BEST Program: 1. Aggressivelymarketing Tanzania's priority investmentareas 2. Creating and maintaining a positive climate for private sector investment 3, Continually advising the government on investment-related matters 4. Stimulating local and foreign investments 5. Facilitating and servicing foreign and local investors 6. Stimulating and supporting the growth o f entrepreneurshipand SMEs inTanzania 7. Providing and disseminating up-to-date information on investment opportunities and incentives available to investors 8. Monitoring the Tanzania business environment and growth o f foreign direct investmentinto the country Subcomponent F: Nationa1Individual Identification Database Interviews with commercial financial institutions revealed that the absence o f a single national identification number i s a significant barrier to improving access o f MSMEs to credit. A credit bureau would greatly improve the willingness o f commercial b L to extend credit to MSMEs by limiting the risk of lending to entrepreneurs who are over indebted or have previously defaulted and by facilitating the use o f credit scoring to lower the costs o f screening applicants. An identification system would also lower 67 the cost o f verifying identity, which currently i s unduly high relative to the size o f small loans and may lead to rejection o f applications when verification i s difficult. Other agencies, such as pension providers, court, land, and business registries, are also interested in an identification system that will reduce the time and cost in providing their services. A feasibility study has been completed for a system that involves the establishment o f a major data bank as a public-private partnership. The system i s designed to allow private management and private participation in maintenance and operation, providing services on a fee basis to major service providers that provide services to enhance private investment. Under this subcomponent, the data bank and operating system will be linked to the credit reference bureau, the registries, pension funds, and so on. However, the data bank will be in position to provide links to agencies that perform public functions, such as issuing voter cards or passports. Such functions will be funded from the public sector reform program under the e- governance component. The subcomponent will therefore provide for the establishment o f a functioning database with linkage o f various registries, training o f Government officials, and issuingo f identification cards. Subcomponent G: MSME Policy Unit in the Ministry of Trade and Industry Accurate, reliable, and current data tracking o f MSMEs i s required to enable analysis and appropriate policy intervention to further development. Although the importance o f the MSMEs in development and poverty reduction i s recognized in Tanzania, there remains an acute lack o f reliable and correct information on the sector. Moreover, efforts to develop an MSME database have thus far beenad hoc and patchy, relying on outdated survey instruments for their foundation. This component aims to build the capacity o f the Ministry o f Industry and Trade to establish such a reliable database through implementation of an initial baseline survey that will act as a benchmark for periodic review and reporting. This component will therefore monitor the impact o f this MSMEcompetitiveness project itself. Subcomponent H: Growth Department in the President's OfJice Planning and Privatization The project would also finance the project coordinator in POPP who will be a consultant, as well as training and technical assistance for the growth department. The department will be strengthened to play a coordinating function between the private sector, sector ministries relating to infrastructure, public agencies interfacing with the private sector and academia. This will enable the department to play a much more effective role incoordinating Tanzania's Growth Strategy MKUKUTA. Component 2: Enterprise Development (IDA US$36.4 million; Other donors US$12.1million) The objective o f this component i s to improve the capacity o f the private sector to respondto viable opportunities inregional and international markets. Based on cluster- 68 based and subsector analyses, the component will seek to improve the capability o f export-ready firms and strengthen linkages betweensuch firms and smaller enterprises, thereby increasing local supply and value addition. The project would also support the Tanzania Private Sector Foundation (TPSF) to carry out its mandate. The credit will finance consulting services, training, and operating costs o f TPSF to carry out activities under the component. The component includes four subcomponents. DFlD is expected to co-fund subcomponent A as regards cluster competitiveness. Subcomponent A: Cluster Competitiveness and Business School Linkage The project would support strengthening the TPSF to enable it to carry out its mandate. Support will be focused on cluster-based and subsector analysis, ensuring that the private-public dialogue i s pursued. Under this subcomponent, a program will be implemented to encourage linkages between local business schools and the global business school network. Cluster Competitiveness Program: The credit will support the development o f cluster and subsector analysis. A cluster competitiveness program will facilitate clusters of f i r m s with high growth potential to coordinate and thus compete more effectively. The program will be facilitated with support contracted from a specialized firm in competitiveness strategies. Although the focus o f the intervention will be high-growth firms, the institutional entry point will the TPSF in collaboration with other subsector associations. In addition to the development o f cluster strategies, the firm will build the long-term capacity o f Tanzanian public and private stakeholders to use cluster development to further firm and national competitiveness. Although the clusters to be targeted will be determined by the private sector and market opportunities, discussions with the private sector point to opportunities in tourism, the construction industry, mining-related industry, agribusiness in fish, meat, and supplies to local supermarkets. Government has a partial but significant role increating the platform from which firms compete through improving the business environment. Ultimately, firms not nations compete. However, in a globalizing world SMEs struggle to compete alone. Whereas large corporations can exploit economies o f scale and internalize most the operations in their value chain, SMEs must outsource many functions. Thus, the quality o f cooperation among networks of SMEs i s as least as important as the firms' own capacity, particularly as in environments such as that of Tanzania where the opportunities for SME organic growth are constrained. Inturn, clusters o f related and supporting firms become the buildingblocks o f a competitive economy. Clustering has three principal functions: aggregation o f individual production capacities to fill big orders, linking o f complementary skills to increase product variety, and collective action to enter new markets. The competitiveness program in Tanzania will be implemented infive distinct phases: Phase 1: Conduct Initial Competitiveness Diagnostics. This phase will include (i)assessing (in broad terms) the country's economic foundations; (ii) 69 benchmarking the country against comparative and competitive peers; (iii) conducting an intensive series o f workshops to improve understanding o f competitiveness and its relevance in the local context; and (iv) initiating outreach to local media, universities, and other public communications channels. Phase 2: IdentzJjling Clusters. The interest and commitment demonstrated by various clusters will determine which will initially be involved at the end o f this phase. By Phase 2, potential cluster participants should understand that competitiveness initiatives revolve mainly around their own efforts-with project-funded long-term advisors and strategic short-term assistance providing support rather than leadership. Through the process o f testing cluster interest and commitment, the project will avoid "picking winners" and will allow enthusiastic "self-selected" groups to gain valuable technical assistance with which they can improve their growth prospects. 0 Phase 3: Crafting Cluster Strategies. The objective o f Phase 3 will be to facilitate a strategic planning process to enable the cluster to define its common interests, strategic vision, and action plan. The cluster will develop a targeted set o f achievable initiatives and assign tasks (that is, identifies individual and institutional champions that agree to carry out each initiative). Throughout the process, the contractor serves as a facilitator, lending expertise and objective data during points o f substantive contention, defusing nonproductive disagreements, questioning overoptimistic or grandiose ideas, and continually focusing the dialogue on the major issues identified from the cluster analysis. The "task-volunteering" end o f this step is a pivotal point in the cluster's development, as it represents the juncture at which cluster members must demonstrate concretely their willingness to do more than "talk." Phase 4: Implementing the Cluster Strategies. This phase i s the time when discussion and planning are turned into action. Each cluster will take different steps to achieve its goals; regardless o f the specific actions, the overall objective i s to implement the strategy and action plan developed in Phase 3. Actions vary widely depending on the sector, the local context, and cluster members' interests. Sample initiatives might include joint purchasing agreements, coordinated market research or joint actions to enter new markets. In all cases, the actions should be led by the responsible individual and institutional champions or civic entrepreneurs who committed in Phase 3 to take charge o f the activity. The contractor lends a key supporting role to these activities. Types o f support that contractors often provide during this phase are targeted technical assistance; specialized training; international market research; policy, legal, and regulatory analysis; facilitation o f dialogue and engagement with the public sector; and media outreach and assistance with public communications. 70 Phase 5: Sustaining the Cluster Initiative. The TPSF and sectoral associations will be the initial institutional entry points and will provided with technical assistance and capacity building to undertake a cluster-based analysis. The analysis i s expected to encourage better coordination between firms and enable spin-offs to develop. The cluster approach will be linked to the ongoing private public dialogue, the private sector strategy, and the country's growth strategy. It will provide clear benchmarks in terms o f market value, revenues, and investments in specific growth sectors as identified by the private sector. It will also form the basis for identifying the public investment required to assist the private sector inincreasing its marketposition. Over the medium term, three general paths to institutional sustainability will be considered: (i)agreement to house and continue cluster activities within an existing organization; (ii)formation o f a new (nonprofit, nongovernmental) apex organization to continue cluster activities; or (iii) commitment to continue activities and meetings in an informal manner rather than through a specific entity. Monitoring and Private-Public Dialogue: This project would support strengtheningthe TPSF's technical competencies to monitor subsector developments with member associations. The capacity will be established to implement private sector dialogue and public-private dialogue at the national and subnational level, using the Investor Round Table approach. International Business School Linkage Program: The TPSF, in collaboration with the IFC's Global Business School Network (GBSN) Unit and the Chief Executive Office Group (CEO Group), will assist Tanzanian management and financial schools to strengthen their capacity to deliver world-class entrepreneurial training in Tanzania. GBSN will assist in bringing together the top global business schools with business schools in Tanzania, helping to address the chronic shortfall o f well-trained local managers. This subcomponent will significantly enhance the capacity o f training institutions inTanzania to ensure a permanently increased supply o f quality managers in Tanzania. The linkage program focuses on a program syllabus upgrade that will facilitate a comprehensive curriculum upgrade program for the selected institutions, taking into account the relevance o f program course materials in the local context and within a dynamic business environment. Curriculum content would conform to global best practices in the field, enabling the recipient institution to compete better globally. The upgrade will take place intwo phases: (i) will work with the local institution to GBSN host a regional workshop inconjunction with the private sector to first understand what should be central to the reconfiguration o f curriculum; and (ii)based on recommendations from the regional workshop, GBSN will assist local institutions in appointing an independent consultant who will work closely with the local institution to upgrade its curriculum. The program will also finance the training o f faculty. 71 Sustainability o f this work will be achieved through facilitation o f an active dialogue with the private sector. To this end, the GBSN will coordinate an initial quarterly workshop with the selected institution and private sector to evaluate whether the program satisfies employer expectations regarding skills and training o f employees, which it i s hoped will stimulate a regular practice. The program will also support the dissemination o f best practices through workshops and publications. SubcomponentB: Tanzania BusinessDevelopmentScheme(TBDS) The Tanzanian private sector i s characterized by firms that are vertically integrated, with limited subcontracting, little or no innovation, and are mostly family-owned with few private companies listed on the stock exchange. The investment climate survey confirms firm size and productivity growth are lower when compared with Asian countries in all sizes o f enterprises. The TBDS will help improve productivity growth by providing assistance to modernize management systems, improve production techniques, improve marketing skills, and increase investment inskills and technology. This will enable the private enterprises to either export or sell in an increasingly open domestic market. The proposed TBDS will provide direct support, in the form o f matching grants, to Tanzanian enterprises for technical assistance and injection o f know-how and expertise into their businesses. The matching grant concept is different from most traditional approaches to helping firms in that it i s deliberately temporary. "Institution-building" i s aimed within the individual firm. The help given i s deliberately partial because the firm is expected to make a meaningful contribution and to demonstrate commitment and ownership. In return, there i s no selection o f firms by any central agency. Firms select .themselves on a first-come, first-served basis and decide for' themselves what activities make most sense for them. Firms also decide for themselves which suppliers o f services to use. Fullcommercial confidentiality i s maintained. The TBDS will provide no more than 50 percent cost-sharing, or matching, grants to private firms, either individually or as groups undertaking jointly organized activities. The grants will cover the costs o f external services and travel undertaken as part o f a formal plan to build competitiveness at the individual firm level. Grants will be paid on a reimbursement basis, conditioned on proof o f expenditure and proof that the activities agreed were actually carried out. Experience has shown that this i s the only effective way o f ensuringthat money paid to private entities i s properly spent. These standard TBDS grants will not, however, be effective in reaching the very smallest Tanzanian firms-microenterprises. Microenterprises do not buy consulting or other tailored services. What does most to build their competitiveness i s attendance at open short courses. The short courses build general business skills (for example, how to keep simple books o f account), and industry-specific technical skills (for example, how to select machines for small-scale furniture making). To support such short open courses, the TBDS will provide a second type o f grant, the training provider grant, which will pay standard grants to training providers, based on the number o f participants trained and the duration o f the course. These standard grants will be set so 72 as to provide a level o f subsidy equivalent to around 50 percent o f commercial fees currently beingcharged with the balance beingpaid by the beneficiaries. The major output o f this component will be a higher level o f output growth in firms assisted by the TBDS. Following experiences in other countries, it i s expected that firms receiving matching grants should generate at least US$15 o f extra output over a five-year period for every US$1o f grant received. It i s expected that the TBDS will reach around 2,000 firms over the three years o f its operation. The TBDS will be runby a private contractor, selected internationally, who will bring to the task best international practice in running such schemes. This experience i s not available within Tanzania. The TBDS will be very actively promoted, particularly outside the Dar es Salaam area, and particularly to organizations targeting microenterprises. Promotion activities will make full use o f the networks already established by the Tanzania Chambers o f Commerce Industry and Agriculture (TCCIA) and its local chambers, by Small Industries Development Organization (SIDO), andby localbusiness associations. The contractor's local team will staff a program unit that will provide free "technical assistance" to firms on the process o f building competitiveness; on how to develop a plan in support o f this; on how to use outside services within such a plan; and on how to select the right service supplier. This free "hand-holding" has proven invaluable in other similar schemes. The unit will not provide help on solving particular capacity or technical problems within each firm. For that, the firm has to pay its 50 percent share o fthe real commercial cost. Subcomponent C: Business Development Gateway (BDG) Given the Tanzania's political legacy, the private sector has a comparatively short history o f identifying markets. With increasing improvements in the investment climate, the basis for spin-offs, enterprise opportunities in existing supply chains, or increasing value added in existing production clusters will be available for entrepreneurs. The Business Development Gateway i s designed to strengthen entrepreneurial culture by providing entrepreneurs with business ideas and start-up firms with a small risk grant (virtual incubator), which will enable them to start or upgrade their business. The program will aim particularly to support women in business. Specifically, the purpose o f the scheme i s to: (i) ideas and innovations attract from young graduates from university and technical schools; (ii)encourage spin-offs and specialization; (iii)encourage formalization and business expansion o f small business; (iv) enable small or young entrepreneurs access to a mentoring and professional network; (v) improve their track record and visibility; and (vi) create local successful role models for young Tanzanians. The BDG will provide grants on the basis o f a business plan competition. Entrepreneurs in the informal sector, employees in existing firms with a high level o f technical skills, university graduates, and existing businesses will be encouraged to 73 develop new business ideas that lead to higher value addition, the development o f new markets, and innovations in the Tanzanian economy. Proposals will be judged on the basis o f commercial returns, increasing value in existing value chains, enabling higher value retention in the Tanzania economy, increasing export value, and innovative and new economic activities to the Tanzania economy. Selected project promoters will match the grants in kind by providing labor and pledging available assets to the proposed venture. Project promoters can also select to sell their business ideas once developed to existing enterprises on a market place for business ideas. The top 1,000 ideas and innovations based on feasibility, practicality, capacity to ameliorate, and uniqueness will have access to this seed capital matching grant over a period o f two years in the amount (US$5,00O-US$10,000). The grant will be provided in installments and based on the implementation progress demonstrated, inputs into the project by the entrepreneur, and verified by the responsible mentor. Mentorship will by provided by established entrepreneurs in the region or in the existing cluster. Specialized consultants will manage the program. Subcomponent D: TechnicalInnovation Applied Research Scheme (TIAS) TIAS i s aimed at improving the capacity o f technical institutions to provide training and other services that help boost the productivity and competitiveness o f the private sector. The scheme recognizes that, for some years to come, the supply in this marketplace will continue to be dominated by publicly owned institutions and schools. It supports current efforts by the Government to make such institutions more independent, with greater private participation in management and with an increased commercial orientation. Given a history o f underinvestment, it supports these efforts primarily by providing investment funding for new equipment. However, it does so according to strict conditions, aimed at ensuring that only truly viable investments are funded, which will lead to real economic benefits, primarily higher productivity in private firms. The TIAS will be managed by the same private contractor that manages the TBDS. The scheme will provide two types of grant. First, there will be up to 75 percent grants to public-sector technical institutions and vocational schools, toward the direct external costs of producing pre-investment feasibility studies related to the supply o f specific paid-for services. Second, there will be full 100percent grants to public sector technical institutions and vocational schools to cover the long-term investment costs required for particular training or similar services. These investment grants will cover the costs o f equipment, machinery, tools, and instrumentation only. These 100 percent investment grants will be subject to two strict conditions. First, the recipient institution must have carried out a full pre-investment feasibility study, which confirms the market, economic, and financial justification for the investment. Second, there must be acceptable private sector representation on the supervisory or management board o f the institution, to ensure adequate consideration o f their interests inthe management and direction ofthe institution. 74 The TIAS will be organized into two phases. The first, or pilot, phase, will limit itself to supporting investment in a maximum o f five institutions. It will run for two years. Only institutions with hll registration status at the National Council for technical Education (NACTE) will be eligible during the pilot phase. The second phase will extend eligibility more broadly, the details being based on experience during the pilot phase. The intention i s to include vocational schools inthis second phase. Component 3: Improving Access to Financial Services (IDA US$12 million; Other donors: US$30 million) The MSME sector plays a crucial role in the Tanzanian economy. The Government estimates that the MSME sector contributes about a third o f the country's GDP.25Lack o f access to financial services remains a formidable obstacle to improving their productivity and income and employment creation potential. The Government's SME Development Policy and the National Microfinance Policy emphasize the importance o f improving access to financial services (credit, savings, and other financial products) for MSMEs and low income populations. Inresponse to these needs, the Government, donor partners, the World Bank Group, and other development agencies have initiated several programs aimed at increasing the volume, range, and outreach o f access to finance, particularly for MSMEs, as well as low-income and rural populations. This component seeks to contribute to the achievement o f these objectives by leveraging synergies with existing and forthcoming initiatives. The component seeks to stimulate new investment, rather than subsidizing existing sources o f capital or technical assistance funding. Particular emphasis will be placed on adding value to on- going initiatives led by the Government's Second Generation Financial Sector Reform Program, the Financial Sector Deepening Trust (FSDT), the Netherlands Financial Exchange (Dutch NFX) Program, other donor agencies, the World Bank FIDP I1 Project, and the IFC Private EnterprisePartnership (PEP) Africa program in Tanzania. A fuller description of these initiatives is provided in the Component Design and Guiding Principles section of this annex. The component will support a "three-pillar" approach to improving access to financial services: (i)financial instruments for financial intermediaries to expand their MSME lending portfolios, which entails the Government's SME-Credit Guarantee Scheme (SME-CGS) and potential investments by IFC and other international financial institutions; (ii)technical assistance grants for financial intermediaries to strengthen the intermediaries' capacity to'expand existing operations and develop new products for the underserved markets profitably; (iii) technical assistance for SMEs, which will be implemented under the TBDS activity described in Component 2. This access to financial services component will focus on the second pillar and seek to enhance the impact o f the larger and broader initiatives by providing additional technical assistance grants, to the extent necessav, to support capacity buildinginfinancial intermediaries. 25Government of Tanzania, SME Development Policy (Dar es Salaam: 2002). 75 The key results indicators for this component are increase in SME loans, increase in number of microloans, and increase in volume o f savings. The SME and savings indicators will be tracked using information from the Bank o f Tanzania (BOT),which obtains data on total banking sector loan portfolios (categorized in number and distribution o f loans inTsh 50 million ranges (that is, 1-50 million, 50-100million, and so on). The microloans indicator will be tracked at the financial intermediaries' level. Indicators will be tracked at both the overall level and for the specific institutions that receive technical assistance (TA) grants. In addition, the component includes several assessments throughout the lifetime o f the project. These quantitative and qualitative assessments will document progress toward the achievement o f the objectives and capture "lessons learned" for dissemination and application in this project and future initiatives. The component will be implemented through the FSDT, a sectoral initiative involving an approximately US$30-million fund set up by five development partners with the overall aim o f providing greater access for more people to engage with the financial system in Tanzania. The FSDT was founded by DFID and i s legally established by way o f a Trust Deed, dated June 8, 2004, between DFID (the "Founder") and Epitome Advocates (the "Trustee"). The Trust Deed encapsulates the purpose of the program and establishes the legal powers and responsibilities o f the Trustees. The other development partners have agreed to participate inthe Trust under a Letter o f Intent or Grant Letter. The current donors, DFID, CIDA, SIDA, Danida, and the Government o f the Netherlands, share the common aim o f harmonizing their development efforts in the financial sector. The FSDT program supports the Government's Second Generation Financial Sector Reform program and closely co-coordinates with the World Bank's FIDP I1project. As o f October 2005, the FSDT had a project pipeline o f 22 funding proposals with potential total funding requirements o f around US$8 million. The FSDT's activities are guided by the Trust Deed, a Strategy Paper (October 2003), and an annual business plan. The activities of the FSDT are reviewed, endorsed, and supervised by a Program Investment Committee (PIC), which comprises representatives from the donors, together with the BOT(representing the Government). The PIC provides strategic direction to the overall program to ensure that it achieves its developmental goals. A technical manager is responsible for management of the Trust's operations. To ensure clear segregation o f duties, the Trust's finance manager, Emst & Young Advisory Services, is accountable directly to the PIC. The Trust's auditor i s Panel Kerr and Forster (PJSF). Inaccordance with the Trust Deed, the FSDTundertakes to: 0 Finance training, education, consulting and other related support activities aimed at developing the human resources and organizational capacity in Tanzania to deliver financial services to low income groups inTanzania; 0 Provide funding to support the development o f new financial products that address the needs o fpoor households and micro and small enterprises; 76 Provide fbnding to support improvements in the policy, legislative, and regulatory framework affecting delivery o f financial services; Support initiatives aimed at improving financial market integration and access to wholesale forms o f finance by financial service providers addressing poor households and micro and small enterprises; Support initiatives aimed at enhancing the supply o f appropriate business services to financial service providers inTanzania; and Finance research and information dissemination activities aimed at increasing the understanding across the financial sector, in the Government o f Tanzania and among donors o f best practice inthe Tanzanian context. The component is aligned with FSDT's mandate described above, will support the FSDT's above mentioned activities by providing funding for: 0 Technical Assistance Grants to eligible financial service providers; 0 Two long-term technical experts-ane specialized in SME finance and the other in new financial product development, including agrifinance; and 0 Industry assessments and case studies (including in-depth quantitative and qualitative assessments o f the design, application, and appropriateness o f the new financial products). In particular, the access to financial services component will assist in leveraging the FSDT's capacities to support the following priority initiatives: Expanding SME Finance: 0 Expanding SME Lending: Strengthening o f banks' SME finance institutional structures and operating systems. Capacity-building activities will include developing effective SME financial risk assessment (particularly cash-flow-based lendingmethods), intensiveportfolio supervision, extensive training of loan officers, and expanding rural outreach. New Financial Products: Development o f new products, thus contributing to expanding the range o f financial products offered by formal financial institutions (commercial banks and finance and insurance companies). Envisioned products include agriculture finance (such as warehouse receipts, weather insurance), poor and low-income housing and mortgage finance, leasing, suppliers' credithtock financing, and factoring. Strengthening Micro and Rural Finance: Facilitating Private Investment in Commercial Microfinance Institutions (MFIs): Expanding the FSDT's efforts aimed at helping MFIs to transform into licensed 77 institutions under the recently passed microfinance legislation. Additional T A grants would be focused on assisting these transformed NGOs to secure private investment, including equity. Greenfzeld Microfznance Institutions: Support the development o f new MFIs, such as a proposed greenfield microfinance bank, which LFS Financial Systems-a leading commercial microfinance specialist-intends to establish inTanzania by the end o f 2006. Potential investors in the proposed bank include the IFC, which i s a founding shareholder o f the LFS microfinance bank inAzerbaijan. Linkage Banking: Supporting the linkages between formal financial institutions and the formal or semi-formal microfinance providers. Facilitate the expansion o f "wholesale microfinance" (commercial bank lending to microfinance providers). Support the proposed wholesale finance guarantee facility through T A grants to commercial banks and client MFIs and SACCOs. Proposed Implementation Arrangements: The FSDT represents an existing organization for implementing this component effectively. For the access to financial services component, the following additional implementation arrangements will be established: Governance and Results Monitoring: 0 The borrower will enter into an agreement with FSDT (satisfactory to IDA), stipulating the obligations o f the trust in managing the additional funding provided underthe project. 0 The GoT/FSDT agreement will specify that both the GOT and IDA will be reporesented on the PIC as voting members. 0 The FSDT will provide POPP with quarterly and annual progress reports to enable POPP to monitor the overall project. 0 The FSDT's annual business plan will be approved by the PIC (including the GOT and IDA requirements). Procurement: 0 The Trust Deedprovides for procurement to be done inaccordance with the policies, procedures, and investment guidelines o f the FSDT (which conform to the EEC Treaty and EC procurement directives as implemented in UK legislation). Before disbursement, these guidelines will be reviewed to ensure that they conform to the Tanzania national procurement guidelines and World Bank guidelines, and the applicable guidelines will be reflected ina procurement manual for the FSDT. 78 Component Design and Guiding Principles: The component design draws heavily from detailed analytical work on MSME finance issues including: the Government`s SME Development Policy; National Microfinance Policy (NMP) 26;Guidelines for GOT and Donor Support to Microfinance Institutions; the Poverty Reduction Strategy Paper (PRSP 2000); IFC's Tanzania M S M E Access to Finance (Demand and Supply) Assessment completed in August 200527; the Financial Sector Assessment Program (FSAP) review conductedby the World Bank, IMF, and Bank o f Tanzania in2003; the matrix for the Roadmap o f the Second Generation Financial Sector Reform Program; the World Bank's Financial Institutions Development Program I1(FIDP 11); and MSME finance international best practices published by the Consultative Group to Assist the Poorest (CGAP) and other industry experts. The component's design has also benefited from an extended dialogue with key partners and stakeholders in Tanzania, including: Government agencies, the FSDT, the Netherlands Financial Sector Development Exchange (Dutch NFX), commercial banks, microfinance providers, and SME business development service providers. The component is designed to reflect Government priorities and strategic directions. For instance, the NMP underscores key challenges to the expansion o f microfinance notingthat "most o f the microfinance institutions currently operating inthe country are small and/or new. A great deal of capacity building i s required to bring them to the level at which they can operate with large outreach, quality services and profitable operations. Much o f the capacity building will take place within institutions, through their development of systems, training o f staff, and building o f management and governance capabilities." The component i s designed to address these constraints directly. Key complementary initiatives being taking into consideration in the design o f the component are as follows: e GOTSmall and Medium Enterprise Credit Guarantee Scheme (SME-CGS), a risk- sharing facility aimed at expanding SME lendinginparticipating banks and assisting small- and medium-scale investors. The GOThas so far allocated Tsh 2.0 billion for this program. e Netherlands Financial Sector Exchange Program (Dutch NFX), a public-private partnership o f the Dutch banking sector and the Dutch government supporting a multi-phase program aimed at stimulating access to finance for SMEs. The program will assist selected commercial banks (chosen based on their level o f commitment and their ability to deliver SME financing services, given their financing and operational structure) in strengthening their expertise and tools to service the SME sector. So far, two banks have been selected to participate in the program, following a diagnostic phase that i s now to be followed by workshops, trainings, and technical 26Ministry of Finance, National Microfinance Policy (Dar es Salaam: United Republic of Tanzania, May 2000). 27This assessment was funded by IFCNetherlands Technical Assistance Trust Fundand conducted by Strategic Business Advisors of Nairobi. 79 assistance expected to begin in November 2005 and to end in the second half o f 2006. World Bank Second Financial Institutions Development Project (FIDP II),a program working to strengthenthe regulatory framework and financial infrastructure to facilitate microfinance and SME finance. Areas covered include property registration, microfinance regulation and supervision, credit information legislation, and unique national identity systems. IFC PEP-Africa Leasing Program, a program funded by a grant o f more than US$900,000 from Switzerland aimed at helping IFC adapt its successful efforts in other regions to expand Tanzania's leasing market, thus providing an effective alternative financing option for small businesses. The component designis founded on the following guidingprinciples: Additionality: To support the FSDT's sectoral approach, the component will provide additional resources to enhance the FSDT program, specifically in the areas o f SME finance, new product development (including agrifinance), and housing finance. As such, the component seeks to address market imperfections through cost-effective, incentive-based interventions; achieve additionality; and catalyze commercially sustainable M S M E lending to currently underserved markets. Emphasis i s placed on enhancing, not distorting, the competitive environment in the financial sector or subsidizing otherwise sustainable business activity. Capacity-building grant funding will be provided on a time-bound, cost-sharing, and performance-based approach, thus focusing the intervention on catalyzing expanded operations rather than subsidizing existing operations. Innovation: The component's intensive technical assistance activities aim to help formal financial institutions to establish the internal systems, procedures, and develop a cadre o f specialized staff critical to the development o f commercially viable SME lendingoperations. Inparticular, the component seeks to shift traditional bankers from collateral lending to cash-flow lending (moving from zero risk underwriting to risk- based pricing); to increase medium-termlending; and to expand into new geographical regions and reaching lower-income households. Sustainability: Activities would be designed in such a way that they can be easily scaled up when necessary and participants can continue targeted objectives (such as increased SME lending) on a commercially sustainable basis after the project has ended. Building on local capacity is the core factor in the project's plan, with an emphasis on developing sustainable local delivery mechanisms. Experience shows that programs with built-in "dissemination and learning" activities maximize the spillover effects and enhance the localization o fprograms. Performance Focus: Grants intended to support institutions' expansion into new markets by reducing the "all-in costs'' will be extended on a cost-sharing performance- 80 related basis. In particular, performance-based grants can encourage financial institutions to maintain covenants and ensure funds are used for targeted development outcomes that may include (but are not limited to) lending volumes, tenor, portfolio performance, rural diversification, and degree o f cash-flow-based lending. Each beneficiary would obtain grants up to a pre-specified cumulative value. Leveraging Synergies: The component i s designed to stimulate new investment, rather than subsidize existing sources o f capital and/or technical assistance funding or duplicate other initiatives. Particular emphasis will be placed on joining the existing FSDT sectoral approach and leveraging forthcoming MSME development initiatives. The eligibility criteria o f any funding under FSDT will include successful completion o f existing donor funded activities, and exclude the "double funding" o f the same projects. 81 Annex 5: ProjectCosts TANZANIA: Private Sector Competitiveness Project ProjectCost by Component Local Foreign Total US$ millio BusinessEnvironmentStrengthening I Support to BEST Program 59.0 Project Coordination 27.7 1.4 I 3do3 1.4 Subtotal 60.4 EnterpriseCompetitiveness Cluster/Business School/Support to TPSF 10.6 TBDS Matching Grants 18.0 Business Development Gateway 9.4 Technical Innovation Applied Research Scheme 10.5 Subtotal 33.2 15.3 48.5 Access to FinancialServices FSDT Contribution 11.8 26.2 38.0 Support to FSDT 1.o 3.O Subtotal 12.8 29.2 Total Baseline cost 75.1 75.8 Contingencies Total ProjectCost Note: Figures include IDA, other donors, and matching grant beneficiary contributions. Identifiable taxes and duties are US$15 million, and the total project cost, net o f taxes, is US$141.1 million. Therefore, the share of project cost net of taxes i s 13 percent. 82 Annex 6. ImplementationArrangements TANZANIA: Private Sector Competitiveness Project The project will be implemented over six years. The President's Office for Planning and Privatization (POPP) will be responsible for overall project coordination. The project organization i s shown in Figure A.6.1 below. A project coordinator, in the department responsible for growth, reporting to the Permanent Secretary o f POPP (PS-POPP), will support the PS-POPP in administering the program, assembling quarterly and annual reports, compiling the annual work plans and procurement plans prepared by the implementing agencies, keeping all institutions involved in the program informed, and informing stakeholders and decision makers o f the project progress and constraints. The project coordinator will also ensure that project activities are aligned with those other Government programs such as the Second Generation Financial Sector Program, the Tax Modernization Program, the Mini Tiger Plan, the Legal Sector Reform program, the SPILL, and the Infrastructure Program. The PS-POPP will assume overall responsibility for project accounting. The project accounts will be fully integrated into the existing accounting and financial management system o f POPP under the Directorate o f Finance. The PS-POPP will ensure that the disbursements and financial management o f the project are carried out efficiently and in accordance with the laws o f the Government o f Tanzania, which in turn comply with international accounting standards and World Bank financial and disbursement procedures and guidelines Project oversight will be incorporated into existing structures. Overall guidance to the project will be provided by an oversight subcommittee that will consist o f a majority o f four private sector representatives with proven knowledge in finance, technology, law, or management, and one representative each from the Ministry o f Industry and Trade, the Ministry of Lands and Human Settlements Development (MLHSD), and the Bank of Tanzania. The subcommittee will monitor the annual work plan, assess the project's impact, and ensure the project's alignment with public-private dialogue established under the Investor Round Table (IRT) and the TNBC. The project consists o f three components that will be administered by three separate agencies: (i)the business environment component will be administered by the Better Regulation Unit (BRU) in the POPP, (ii)the private sector capacity-building component will be administered by the Tanzania Private Sector Foundation (TPSF), and (iii)the access to financial services component will be administered by the Financial Sector DeepeningTrust (FSDT). Business Environment Strengthening Component. The BRU in the POPP has been charged by the Government with coordinating the Business Environment Strengthening Tanzania (BEST) Program that i s currently funded by DFID, SIDA, and the Governments o f Denmark and the Netherlands. It is envisaged that the activities of the unit will be mainstreamed into the normal operations o f POPP. BRU i s headed by a chief executive 83 officer and staffed with two economists and a legal officer, an accountant, and support staff. BRUwill compile the annual work plans and procurement plans for the BEST Program on the basis o f programs prepared by the implementing agencies. The work plans will be developed along a programmatic approach, setting out the sequence o f steps and human and financial resources required to reach the expected measurable impact as indicated in the results framework. The BEST Steering Committee (BSC), consisting o f directors o f public agencies involved in the program and chaired by the PS-POPP, provides guidance and hands-on management support to the BRU. In addition, a Tripartite Commission (TRC), also chaired by the PS- POPP and consisting o fpemanent secretaries o f the cooperating public agencies and the lead donor representative, has the responsibility o f making strategic decisions and approving work plans and budgets for all BESTcomponents. Following the laws o f the Government o f Tanzania, implementation o f specific reforms will be the responsibility o f the relevant functional ministries and agencies. The details o f the implementation arrangements, including requirements relating to work plans and procurement plans, will be incorporated in a Memorandum o f Understanding (MOU) between the POPP and the responsible implementingministryor agency. BRUwill facilitate implementation by providing or making available the technical services required. In particular, BRU will recruit experienced procurement advisors who will assist in the development o f procurement plans, provide hands-on training in procurement matters, and participate in the procurement process according to the procurement plan. BRUwill compile all financial reports and ensure the flow o f funds. Wherever possible, the actual work will be contracted out in large segments or lots to reduce the administrative costs and increase the speed of implementation. Inthe case of the land subcomponent, the MLHSD will appoint a full-time coordinator to oversee the implementation o f the land reforms, with the assistance o f a full-time senior technical advisor who will be recruited internationally. An internal technical committee, consisting o f division heads and chaired by the Permanent Secretary o f the MLHSD, will be responsible for providing policy guidance and overseeing the technical work o f the lands subcomponent. The following arrangements will be established for the IDA contribution to the Government participation in the BEST Program. The Bank will join the BEST Program partners by signing an M O U between the Government o f the United Republic o f Tanzania and development partners. Funds allocated for the business environment component will be transferred to the BEST Exchequer Basket Fund Holding Account opened for financing the program. These disbursementswill be made inaccordance with agreed annual work plans for the BEST Program. EnterpriseCompetitivenessComponent: The TPSF will have overall responsibility for the component relating to enterprise development. The TPSF will sign a project implementation agreement with POPP for this subcomponent. The foundation was established in 1999 as an apex association, with corporate and sector associations as its members (for example, the 84 Chambers o f Tanzanian Industry and the Tanzania Chambers o f Commerce Industry and Agriculture). The TPSF i s headed by an executive director, who i s responsible for daily operations. A management team consisting o f the chairperson, the deputy chairperson, and a board member form a management committee to provide guidance and supervise the executive director. The TPSF i s currently being supported by the BEST Advocacy Fund, a separate fund, provided by the BEST donors and managed by private sector contractor, with resources to develop it core services, dialogue, analysis, and so on. The Advocacy Fund will finance an economist and an accountant in the TPSF. The TPSF will establish a finance and procurement unit with a qualified accountant and procurement specialist prior to credit effectiveness. The executive director will be the accounting officer for this project component assuming overall responsibility for accounting for the project funds. The proposed project will be fully integrated into the finance unit to be established. Specialized private firms, selected following a competitive process, will be responsible for the implementation o f (i) Tanzania Business Development Scheme (TBDS); (ii)the the Technical Innovation, Applied research Scheme [TIAS]; and (ii) Business Development the Gateway (BDG) and (iii)cluster competitiness, respectively program, respectively. The contracts with the firms will include clear performance criteria. The teams from the selected firms will work from the TPSF, which will lead the process o f selection o f the firms and supervise the contract with them. Terms o f reference for the two contracts are being prepared and will be approvedby the board o f the TPSF shortly. Access to Financial Services Component: This component will be implementedthrough the FSDT, a sectoral initiative involving approximately US$30 million fund set up by five development partners with the overall aim o f providing greater access for more people to engage with the financial system in Tanzania. The FSDT was founded by DFID and i s legally established by way of a Trust Deed dated June 8, 2004, between DFID (the "Founder"), and Epitome Advocates (the "Trustee"). The Trust Deed encapsulates the purpose o f the program and establishes the legal powers and responsibilities o f the Trustees. The other development partners have agreed to participate in the trust under a Letter o f Intent or Grant Letter. The donors, currently DFID, CIDA, SIDA, Danida, and the Government o f the Netherlands, share the common aim of harmonizing their development efforts in the financial sector. The government o f Tanzania will be represented by the Po -PP and BOT in the PIC. IDA willjoin the government onbehalf o fthe government. The FSDT's activities are guidedby the Trust Deed, a Strategy Paper (October 2003), and an annual businessplan. The activities o f the FSDT are reviewed, endorsed, and supervisedby a Program Investment Committee (PIC), which i s made up o f representatives from the donors, together with the Bank o f Tanzania (representing the Ministry o f Finance). The PIC provides strategic direction to the overall program to ensure that it achieves its developmental goals. A technical manager is responsible for management of the trust's operations. To ensure clear segregation o f duties, the trust's finance manager, Ernst & Young Advisory Services, i s accountable directly to the PIC. The trust's auditor i s PanelKerr and Forster (PKF). 85 The FSDT represents an existing organizationfor implementing this component effectively. For the access to financial services component, the following additional implementation arrangements will be established: Governance and Results Monitoring: The borrower will enter into an agreement with FSDT (satisfactory to IDA), stipulatingthe obligations of the trust in managingthe additional funding provided under the project. 0 The GOT/ FSDT agreement will specify that both the GOT and IDA will be representedon the PIC as voting members. 0 The FSDT will provide POPP with quarterly and annual progress reports to enable POPP to monitor the overallproject. The FSDT's annual business plan will be approved by the PIC (including the GOT andIDA representatives). Financial Management: The GOTwill commit funds from the IDA credit to the FSDT annually, basedon the businessplan. Funds from the IDA credit will be used to finance both the grants to the financial intermediariesand the FSDT's operatingcosts. Fundingfrom the IDA Credit will be for future expenses (on a proportionatebasis) after the projectbecomes effective.It i s expected that this beginwith the 2006/2007 fiscal year businessplan.IDA funds will not be used for retroactivefinancing. Funds will flow from IDA to a special account managedby the BOTor the FSDT (dependingon the GOT'Spreference). Disbursementwill be done on the basis o f quarterly FMRs to be submitted by the GOTto IDA. Procurement. 0 The Trust Deedprovides for procurementto be done inaccordance with the policies and procedures and investment guidelines of the FSDT (which conform to the EEC Treaty and EC procurement directives as implemented in UK legislation). Before disbursement, these guidelines will be reviewed to ensure that they conform to the Tanzania national procurement guidelines and World Bank guidelines, and the applicable guidelines will be reflectedina procurementmanualfor the FSDT. A Mid-Term Review (MTR) i s planned for 24 months after project effectiveness. The project impact will be assessedon an annual basis, three months after the end of the calendar year. Quarterly reportswill be preparedon outputs and key milestones and will be assessed during supervision, A Project Implementation Manual (PIM), including a description of implementation and monitoring arrangements and spelling out the sequence of project 86 activities, is being prepared. The PIM includes a financial management plan and a procurement plan. The final version of the manual is a condition of credit effectiveness. FigureA.6.1: ImplementationProcess - (=dT L...--i [----eI Land Registration i Miniary of Justice __. . ..- Contiact Enforcement__....__. ____ President's Offlm, -.- Planningand Privatisation. (POPP) Project CoordinationI institutions 87 Annex 7: FinancialManagementand DisbursementArrangements TANZANIA: Private Sector Competitiveness Project Country Public FinancialManagementIssues and Risks The Government o f Tanzania has clearly made great steps in improving financial management through implementation o f Public Financial Management Reform Program (PFMRP). The 2005 Public Expenditure and Financial Accountability Review (PEFAR) concludes that generally Tanzania now has a sound system o f formal rules for financial management, and extensive training has taken place on the application o f the financial rules and regulations. Most o f the recommendations contained in the 2001 Country Financial Accountability Assessment (CFAA) report have been implemented or are already included in the PFMRP under implementation. In terms o f appropriate legislation and regulatory frameworks, significant progress has been made to ensure that the risk associated with lack o f clear rules and regulations has been reduced. Also more useful information i s now provided in the annual accounts. As a result, the general level o f fiduciary risk has been reduced from highto medium. FinancialManagementsystem The features o f a strong financial management systeminclude the following: The borrower/project implementing agency should have an adequate number and mix of skilled and experienced finance staff. The internal control system should ensure the conduct o f an orderly and efficient payment and procurement process, as well as proper recording and safeguarding of assets and resources. The accounting system should support the project's requests for funding and meet its reporting obligations to fund providers including Government o f Tanzania, IDA, and other donors. The system should be capable o f providing financial data to measure performance when linked to the output o f the project. An independent, qualified auditor should be appointed to review the project's financial statements and internal controls. FinanciaILAccounting Policies and Procedures IDA funds to support businessenvironment will be channeled through the existing BEST basket fundingmodality which follow government financial management arrangements. The BESTprogram's accounts are prepared inaccordance with the Public Finance Act 2001 and regulations. The program i s also guidedby the Memorandum o fUnderstanding (MOU) and agreed audit Terms o f Reference (TOR). The POPP accounting system i s based on an integrated government computerized accounting system called IFMS.The systems was 88 reviewed and found acceptable to account and report on project funds. Project financial statements are required to be prepared in accordance with acceptable accounting standards acceptable to the Bank issued b y the lnternatioiial Accounting Standard Board 01' Public Sector Accounting Standards. The internal control systemindicated satisfactory levels o f segregation o f duties. A Chart o f Account will be developed to allow for project costs to be directly related to specific work activities and outputs o f the project and formats o f the various periodic financial reports. Reporting and Monitoring Project quarterly and annual Financial Monitoring Reports (FMRs) will be prepared by the Directorate o f Finance. There will be clear linkages betweenthe information inthese reports and the Chart o f Accounts. These reports will be designed to provide quality and timely information to project management and various stakeholders on project performance. The current BEST Program FMRswere reviewedand found satisfactory. At the end o f each quarter, the following reports should be prepared and submitted to IDA for consolidation no later than 45 days after the end o f each calendar quarter. The contents o f these reports should at minimumconsist o f the following: Financial reports consisting o f sources of funds, uses o f hnds by project activity/component, Statement o f Expenses (SOE) withdrawal schedule, Project Account Activity Statement (and reconciliation thereto), statement of actual and budgetexpenditures, six months cash flow projects, and others; 0 Physical progress or output monitoring reports; and e Procurement Report. Financial Statements The project financial statement shall be in accordance with GENERALLY ACCEPTED ACCOUNTING PRACTICE (which inter alia includes the application o f the accrual basis o f recognition o f transactions). These financial statements28will be composed o f 0 A Balance Sheet reflccting the asscts, liabilitics, and funding of the projcct bascd on the cash bases; A Statement of Sources and Uses of FunddCash Receipts and Payments, which recognizes all cash, receipts, cash payments, and cash balances controlled by the 28 It should be noted that the project financial statements should be all inclusive and cover all sources and uses oexpenditures,not only those provided through IDA funding. It thus reflects all project activities, financing, and f funds and including funds from other donorsiparties and contributions inkindsuch as labor and accommodation, irrespective o f whether the project implementing agency controls the knds for a particular aspect o f the project. However, the IDA components would have to be identified separately. 89 entity for this project; and separately identifies payments by third parties on behalf o f the entity. 0 The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Balance Sheet and Statement of Cash Receipts and Payments being cross-referenced to any related information inthe notes. 0 A Management Assertion that Bank funds havebeen expended inaccordance with the intendedpurposes as specified inthe relevant World Bank legal agreement. Staffing and Training Finance staff within the directorate o f finance will carry out the day-to-day activities o f the project. Training on World Bank financial and disbursement procedures will be carried duringthe project implementation. Annual Planning and Budgeting A project budget and a disbursement schedule will be drawn up and included in the Project Implementation Manual. It i s from this disbursement schedule (as may be subsequently revised) that annual budgets will be drawn. The annual budgetwill be prepared based on the policy guidelines issued by Ministry o f Finance on the fiscal policy o f the government under the Medium-Term Expenditure Framework (MTEF). The annual estimates will be finalized three months before the beginning o f the financial year and submitted to IDA for approval process. Audit Arrangements Internal Control and Internal Auditing The POPP internal control system indicated satisfactory levels o f segregation o f duties. The ministryhas an internal auditor who will be the internal auditor for the project and will have to develop an audit strategy and plan for the project based on the risk assessment of the project. It i s important to note that the internal auditor's work will be monitored during the supervision missions to ensure that the internal control systems o f the project are being reviewed and that the issues raised in the internal auditor's report are addressed by management. The effectiveness o f internal audit will be complemented by the institution o f periodic audit issues follow-up by the POPP Audit Committee. External Audit The project external audit will be carried out annually by the National Audit Office (NAO) or a qualified auditor acceptable to the World Bank. The auditor will be required to express an opinion on the audited project financial statements only, in compliance with International 90 Standards on Auditing (IFAC/INTOSAI pronouncements), and submit the audit report within six months o f the end o f the financial year. In addition, detailed management letters containing the auditor's assessment of the internal controls, accounting system and compliance with financial covenants in the IDA Credit Agreement and suggestions for improvement will be prepared and submittedto management for follow-up. It is recommended that arrangements for the external audit o f the financial statements o f the project should be communicated to IDA through agreed TOR. Appropriate TOR for the external auditor were developed and agreed at negotiations. Fund Flow and Accountability 0 Fundswill flow from the IDA credit account to TPSF special account to be held ina commercial bank acceptable to the World Bank and denominated inU.S.dollars. Funds to support the BEST Programwill flow from the credit account to the existing BEST holding account maintained at Bank o f Tanzania. 0 Actual expenditure will be reimbursed through submission o f quarterly withdrawal applications and against quarterly FMRs that will be approved in accordance with internal control measures applied inPOPP and TPSF, respectively. e The bank accounts should be opened by credit effectiveness. Financial Management Supervision The Country Financial Management Specialist (FMS) will carry out financial management supervision regularly at least once a year. The FMS will also: 0 Review the financial component o f the quarterly FMRs as soon as they are submitted to the World Bank; and 0 Reviewthe annual Audit Reports and Management Letters from the external auditors and follow-up on material accountability issues by engaging with the Task Team Leader (TTL), client, and/or auditors. 91 Annex 8: ProcurementArrangements TANZANIA: PrivateSector CompetitivenessProject General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurementunder IBRD Loans and IDA Credits" datedMay 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement (LA). The various items under different expenditure categories are described in general below, For each contract to be financed by the loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification,estimatedcosts, prior review requirements, and time frame are agreed between the borrower and the Bank in the Procurement Plan. The ProcurementPlanwill be updatedat least annually or as requiredto reflect the actual project implementationneeds andimprovementsininstitutional capacity. Procurementof Works Works procured under this project would include: (i)rehabilitating land registry and land information building; (ii) rehabilitating mapping building; (iii) constructinglrehabilitating district and village registries and district land and housingtribunal; (iv) renovatingregistry; and (v) extending and partitioning Tanzania Private Sector Foundation(TPSF) offices. The procurementwill be doneusingthe Bank's StandardBiddingDocuments(SBD) and standard bid evaluationforms for all International CompetitiveBidding (ICB). The Government has already prepared the standard bidding documents for national competitive bidding (NCB) procedures. Therefore, these documentswould beusedbythe Governmentwhen conducting procuremento f works through NCB. Bank's standardbid evaluation forms would be used also for NCB contracts with necessarymodifications. Procurementof Goods Goods procured under this project would include: (i) land survey equipment including security systems; (ii)survey/mapping equipment; (iii)updating geodetic control and base mapping; (iv) completion of 1/10,000 mapping in two districts; (v) office furniture; (vi) vehicles; (vii) computers; and (viii) geo-referencedsatellite imagery and consumables. The procurement will be done using the Bank's SBD and standard bid evaluation forms for all ICB. The Government has already prepared the standard bidding documents for national competitive bidding (NCB) procedures. Therefore, these documents would be used by the Government when conducting procurement of works through NCB. Bank's standard bid evaluationforms would be used also for NCB contracts with necessary modifications. 92 Procurementof Non-consultingServices Services required under the project will include: (i)selecting venues for workshops and training; (ii)contracting out service providers for cleaning and ground maintenance, maintenance o f office equipment, and maintenance o f vehicles; and (iii)contracting out security providers. Selection of Consultants The project will finance various consultancy services including: Procurement Specialists to BRUand TPSF Consultant to carry out review on re-engineeringo f land registration procedures Consultant to carry out study for the improvement of land record management Consultant to designand supervise survey and mapping division building Consultants to design and supervise constructionhehabilitation district and village registries and district land and housing tribunal Consultant to establish project monitoring and evaluation system Geodetic Specialist Executive Director for TPSF Project Manager for TPSF Accountant for TPSF Legal Advisor for TPSF Database Specialist for TPSF Consultant to develop an accounting, financial management and management information system, and training Consultant to review the business plan for TPSF Consultant to design and supervise office extension o f TPSF Management Consultants o fmatching grants for TBDS and GTI Consultants for facilitation o f workshops Senior Technical Advisor to the ministryo f lands. Consulting firms for services estimated to cost more than US$lOO,OOO would be selected through Quality- and Cost-Based Selection (QCBS) method. Consulting firms for services estimated to cost less than US$lOO,OOO may be selected using Consultants' Qualifications (CQ) method. Individual consultants will be selected on the basis o f their qualifications. Single source selection may be used where it can be justified. Consulting firms for assignments of standard or routine nature such as audit may be selected using least cost selection methods (LCS), Single source may be used where it can bejustified. Short lists o f consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 o f the consultant guidelines. 93 OperatingCosts Operating costs for this project shall consist o f office supplies, operation, and maintenance costs for vehicles and equipment, communication charges, utility expenses, per diem and travel costs for staff from National Auditor's Office when travel on duty during carrying out annual financial audit, among others. Others The project will also provide financial support to the component o f access to financial services that will be implemented through the Financial Sector Deepening Trust (FSDT). The Trustee o f this fund is M/s Epitome Advocates. A technical manager is responsible for management o f the trust's operations. The FSDT's finance manager i s Ernst & Younger Advisory Services. During appraisal, the Bank was informed by development partners that these consultants were selected competitively. The partners have promised to share with Bank the relevant documents used during selection process. Therefore, the credit funds should be used to pay future expenditure related to contracts o f these consultants. Money from the trust funds will be used as grants to finance-qualified financial institutions and service providers. Therefore, items o f goods estimated to cost less than US$150,000 equivalent per contract and services estimated to cost less than US$lOO,OOO equivalent per contract may beprocured in accordance with commercial practices acceptable to the Bank. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Implementation Plan (PIP). The Procurement Manual i s part o f the PIP. Assessment of the Agency's Capacity to ImplementProcurement Procurement activities will be carried out by three entities: (i) RegulationUnit (BRU); Better (ii) Tanzania Private Sector Foundation (TPSF); and (iii) Financial Sector Deepening Trust (FSDT). BRU i s located in the President's Office for Planning and Privatization (POPP). Because BRU i s mainstreamed in the POPP, procurement o f this project will be carried out by a procurement management unit to be established in accordance with the new public procurement act o f 2004. This will be done by transforming the current procurement supplies unit into the procurement management unit, which will continue to be responsible for carrying out procurement o f the seven departments o f POPP including BRU. Going by the number of staff currently doing procurement, the procurement management unit will be staffed with one senior supplies officer and three supplies officers. All staff seems to be qualified and has comparable experience inprocurement o f goods An assessmento f the capacity o fthe implementingagency to implement procurement actions for the project has been carried out jointly by (Pascal Tegwa, Senior Procurement Specialist, WB, and Aaron Komba, DFID) in August 2005 for BRU and in September 2005 for TPSF. The assessment reviewed the organizational structure for implementing the project, approval authorities, and the interaction between the project's staff responsible for procurement and 94 the ministry's relevant central unit for administration and finance. Procurement assessment o f the FSDT will be carried out before disbursement. The key issues and risks concerning procurement for implementation o f the project have been identified. On the part o f BRU, the assessment shows that the staff o f the procurement management unit has little experience inprocessing procurement through ICB procedures as well as selecting larger consultant contracts, especially international consultants. The assessment also shows that the quality o f procurement documentations is not satisfactory, in particular preparation o f the request for proposals. Furthermore, the procurement staff has inadequate experience in contract supervision and administration. On the part o f TPSF, the risk o f procurement is high because, first, it has no unit responsible for procurement. Second, it has no procurement specialist to undertake procurement function. And, third, there i s no tender board to adjudicate tender in accordance with the new act because the management positions are not filled in. The corrective measures, which have beenproposed include, on part o f BRU, hiring a short-term consultant to provide hands-on training on selection o f consultants; providing hands-on training on contract supervision and administration; assigning a qualified accountant to deal with payments o f contracts to improve on turnaround o f payment o f invoices; assigning a lawyer from the Attorney General Chambers to deal with review o f contracts from POPP to improve turnaround o f the procurement lead time; and training members o f the tender board on basic procurement to improve efficiency o f the tender board. On part o f TPSF, corrective measures would include hiring of the procurement specialist for the first two years to assist TPSF to establish the procurement system as well as expediting recruitment o f staff so that a tender board could be established inaccordance with the new procurement act. The overall project risk for procurement i s HIGH. To mitigate the risks posed by the above capacity issues, the following action plan i s beingproposed. Table A.8.1. RiskMitigation Plans RiskFactor Action to mitigate risk Action by I Deadline for Completing Action (a) Recruitprocurementspecialist BRU I Beforedisbursement ~~~~ Improveprocurement ~ ~ skills ofPOPPiBRUstaff (b) Trainmembersof tender boards inbasic BRUiTPSF Duringimplementationof andLack oftrainedstaff procurement the project TPSF (c) Prepareandfinalize terms ofreference TPSF for a short termconsultantfor the first two years (d) Hire a short termconsultantfor the first two years Duringimplementationof (e) Finalizerecruitmentof staffand the project establishthe tender board. 1 (0Hireaprocurementspecialist BRU 1Beforedisbursement Inadequateappropriate (a) Establisha tender boardinaccordance procurementprocedures withthe newAct after consultingPPRA TPSF Beforedisbursingthe credit (b) Revisea chapter ofprocurementinthe hnds financial & accountingmanualinlinewith the new Act BRU Beforedisbursement Absence of a procurement Preparea procurementplanfor the first 18 BRUandTPSF By negotiations plan months 95 ProcurementPlan The borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the borrower and the project team on November 2, 2005. It will be available in the project's database and in the Bank's external website. The procurement plan will be updated in agreement with the project team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. Frequencyof ProcurementSupervision Inaddition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the implementingagencies has recommended at least two supervisionmissions to visit the field to carry out post review o fprocurement actions. Detailsof the ProcurementArrangements InvolvingInternationalCompetition 1. Goods, Works, and NonConsultingServices (This mustbe insertedafter the borrowerhas completedthe procurementplan) (a) List o f contract packages to be procured following ICB and direct contracting: Ref. No. Contract Est. Proc. P-Q Domestic Review by Expected Expected Resp. Base Bid- Start Description Cost Method Preference Bank Opening Date Agency US% "000" (Yes/No) (Prior/Post) Date 1 COMPONENT 1 GOODS 96 IGeoreferenced satellite I I 2.1 2.2 - 2.3 2.4 NONCONSULTING SERVICES -Maintenance of office 2.1 equipment 60 NCB Yes Post 01-Jul-06 01-Sep-06 TPSF 2.8 Maintenance of vehicles 96 NCB Yes Post 01-Jul-06 01-Sep-06 TPSF -Cleaning and Ground 2.9 Maintenance 15 NS Yes Post 15-Jul-06 01-Sep-06 TPSF 2.10 Security and Reception 15 NS Yes Post 15-Jul-06 01-Sep-06 TPSF Sub-Total 186 97 (b) ICB contracts estimated to cost above US$200,000 equivalent for works and US$150,000 equivalent for goods per contract and all direct contracting will be subject to prior review by the Bank. 98 2. ConsultingServices (a) List o f consulting assignments with short-list of international firms. - Ref. No. Descriptionof Est. Selection Domestic Expected Assignment BaseCost Method Preference Proposal Commence- Submission ment Resp. US$"000" (Yes/No) Date Agency COMPONENT 1 Consultant to carry out review on re-engineering of land registration - 1.1 procedures 140 QCBS Yes Prior 01-Jul-06 01-NOV-06 PO-PP Consultant to carry out study for the improvement of land record - management system in HQ 1.2 and in priority areas 120 QCBS Yes Prior 01-JuI-06 0I-Nov-06 PO-PP Design and supervision of surveys and mapping 1.3 division (SMD) building 10 QCBS Yes Post 15-Jan-06 01-Apr-06 PO-PP Design and Supervision of P Constructionhehabilitation works for district and I village registries and 1.4 DLHIT 75IQCBS Yes Post 15-Jan-06 01-A r-06 PO-PP initial comprehensive public awareness campaignin 15 Project - 1.5 Districts 127 SBCQ Yes Prior 15-Jan-06 01-Apr-06 PO-PP Consultant for establishment of project M - 1.6 & E system 40 SBCQ Yes 15-Jan-06 - 1.7 Geodetic Specialist 100 IC Yes Prior 15-Jan-06 - 1.8 Technical Advisor 360 IC No Prior 15-Feb-06 Sub-Total 972 COMPONENT 2 - 2.1 Executive Director 360 IC No Prior 01-JuI-06 TPSF - 2.2 Project Manager 324 IC No 01-Jan-06 TPSF - 2.3 Administrative Officer 216 IC No Prior 15-JuI-06 TPSF - 2.4 ProcurementSpecialist (I) 216 IC No 01-Jan-06 TPSF - 2.5 Accountant (1) 216 IC No 01-Jan-06 TPSF 2.6 Yes I5-JuI-06 TPSF Office Management - 2.7 Yes Prior I 15-May-06 01-Jul-06 TPSF Public Relations Officer - 2.8 Yes Prior 15-Jun-06 15-Aug-06 TPSF - 2.9 Office ClerWAssistant(I) 36 IC Yes Prior 15-Jun-06 15-Aug-06 TPSF - 2.10 Legal Adviser (I) 216 IC No Prior 15-Jun-06 15-Aug-06 TPSF - 2.11 Economists (1) 216 IC No Prior 15-Jun-06 15-Aug-06 TPSF - 2.12 Database specialist (I) 216 IC No Prior 15 Jun-06 - 15-Aug-06 TPSF - 2.13 ITexpert (1) 216 IC No Prior 15-Jun-06 15-Aug-06 TPSF - 2.14 Driver (2) 72 IC Yes Prior 15-May-06 01-Jul-06 TPSF 2.15 Consultant to develop an Accounting, Financial Mgt 40 CQ Yes Post 15-June-06 01-Sep-06 ITPSF 99 Sub-Total 225 I I I I I (b) Consultancy services estimated to cost above US$lOO,OOO equivalent per contract and single source selection of consultants (firms) will be subject to prior review by the Bank. Consultancy services estimated to cost more than US$50,000 equivalent per contract for individual consultants will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the consultant guidelines. 100 Annex 9: Economic and FinancialAnalysis TANZANIA: Private Sector Competitiveness Project The Private Sector Competitiveness Project aims to promote the development o f a strong and competitive private sector in Tanzania. Through a combination o f financing instruments and technical assistance (TA) in different business institutions and MSMEs, the overall project objective will be achieved by reducing the cost o f doing business, increasing the capacity o f local private sector to participate in domestic and international markets, and improving financial services to MSMEs. The proposed project will contribute to the implementation o f the Government's growth and MSMEstrategies and will havethree areas of focus: (i) business environment improvements, (ii)private sector capacity building, including access to businessservices and business linkages, and (iii)access to financial services in particular for MSMEs. The project addresses both supply and demand issues constraining the MSME sector with an expected positive impact on the overall growth o f the private sector, employment, and reduction in poverty, Discussions with different stakeholders, financial institutions, and private sectors have indicated highlevels o f interest and demand for all the project components. Methodo1ogy The economic analysis o f this type o f private sector development project faces some difficulties particularly where there i s indirect relationship between the technical assistance provided under the project on its stream o f benefits. A conventional methodology is usedfor carrying out the economic analysis o f the project by estimating future stream costs and benefits and derivingnet benefits to calculate the net present value (NPV) and the economic rate of return (ERR) based on 12-year forecast timeframe. NPV i s positive when ERR i s greater than the assumed discount rate.29The NPV i s the decision criteria. Cost-benefit analysis was carried out for the following components: (i)businessenvironment strengthening, (ii)enterprise competitiveness, and (iii)access to financial services. The project impact i s expected to start materializing during project implementation. The maximum impact o f the project will be reached once the relevant capacity, institutions, and the investment climate are strengthened. Summary of Benefitsand Costs Table A.9.1.: EconomicAnalysis Present Value of Flows Fiscal Impact Economic Analysis FinancialAnalysis Taxes ($ mil) Subsidies Benefits (US$ mil) 116 22 NIA Cost (US$ mil) 61 Net Benefits (US$ mil) 56 22 NIA ERR (Yo) 27% 29 Opportunity cost of capital i s 10percent inmost o f the Bank's project. 101 Base CaseResults The NPV for the components o f the project where benefits can be quantified is estimated at USS56 million for a 12-percent discount rate, and its ERR i s estimated at 27 percent. The project i s expected to have positive impact on direct employment creation by increased production. Supported MSMEs are expected to create a minimumo f 4,115 direct jobs by the end o f the project implementation period. Through the matching grants components for TBDS, Seed Capital Fund, and technical institutions, there i s a straightforward and direct relationship between investment and job creation compared with other project components, where employment generation is easily quantified. This number does not account for the job generated through capacity building and institutional development (for example, investment climate, access to finance), but also it excludes indirectjobs to be created. However, positive externalities are expected to create additional jobs through capacity building through different institutions. Table A.9.2: Resultsby Components Investment Climate Capacity Matching Grants Bus Enviornmentl Land Building Tanzania Seed Technical Judiciary Business Development Capital Institution NPV (US $ million) 4 17 26 7 2.2 0.06 ERR 20% 34% 32% 39% 20% 12% From the above subcomponent results, we can see that ERRSare greater than the discount rate o f 12 percent, which shows that the project i s robust. The relatively high ERR for land component can be explained by the fact that cleaning up land titles and certification o f customary land occupation without surveying are low cost activities with highrates o f return. In the case of Philippines Land Administration Project and Uganda Private Sector Competitiveness Project 11, the ERR for the land components were 36 percent and 61 percent, respectively. The ERR for the TBDS matching grant i s higher because all 2,000 firms are self-selected on the basis o f willingness to pay 50 percent o f cost. As a result, the firms have an incentive to increase their output further. Assumptions Based on the information from field visits and experience from similar projects in other African countries, the following assumptions were made: 1. Measurement o f economic benefits in the institutional development support injudiciary system, and businessregistration reform is difficult because it provides services to firms indirectly. Therefore, we make an simple assumption that financial costs and benefits can be equated with the economic costs and benefits o f the operation o f the assisted firm. To be consistent, it was assumed that the support provided would increase efficiency o f the supported recipients and would yield an increase in economic outputs at a multipleo f two times the amount o f support. 102 Land: As a reference, market surveys carried out in Manila, Philippines, found that the price o ftitled land was 40 percent higher than untitled land. Itis assumedthe relativeprice o ftitled and untitledlandwill remainthe same over time. It is assumed the land price with first-time land certification in the rural areawill increase about 30 percent in the first year and remain constant thereafter. The value o f mainly urban land whose titles will increase by 20 percent after the records and titles are cleaned and computerized. Some 400,000 residential plots inurban areas will be entered into a property register and issued with residential licenses. Some 150,000 titles will be cleaned inthe urban area. The average land price, average plot area, and total number o f titles to be issued are key parameters inthis calculation. Inthe rural areas, the project will focus on 15 districts (1,390 villages) to create district registries and certify village and individual lands. We are assuming that in the first 3 years 150 villages (10 villages per district and 50 villages per year) will be completed. We assume that the remaining o f the 1,390 villages in the 15 districts will be replicated over a 12-year period andbeyond. The transfer o f knowledge and skills will have a lasting effect on the activities o f the beneficiaries up to 12 years after the project completion. Matching grants: Matching grants o f US$25.4 million will support Tanzania Business Development Service (TBDS), seed capital fund (Business Development Gateway), and technical institutions. Even though these components are demand driven, we assume a minimum of 2,000 existing and 1,000 new MSMEs will participate in the matching grant scheme either for consulting services or training. For the skills and innovation matching grant, we assume that 10 public training institutions will participate. The average grant amount will be US$3,000 for TBDS and US$9,400 for the seeds capital fund. For the skills and innovation grant, we assume that each institution can receive a maximum o fUS$1 million up to three years. It is assumed that supported MSMEs would increase their efficiency and capacity utilization rate that would yield an increase o f output at a multiple o f two times the support. This i s based on experience in East Asia where output i s increased 15 times the grant amount. In Uganda, the Private Sector Competitiveness I1project used 5 times the grant amount. Considering innovation o f other components o f the project that involve initial testing o f activities, a conservative estimate of multiple o f 2 i s appropriate for Tanzania. For TBDS scheme, we assume that support provided would increase efficiency o f the firms receiving matching grants and would generate $15 o f extra output over a 5-year period for every US$1 consultancy input, which means that the capacity and utilization rate would be 3 times the support of the grant amount (US$6 million). The matching grant is also expected to inject know-how into companies to stay competitive apart from creation o f additional jobs. Job creation has been taken into 103 account as a secondary effect. For job-creating activities, the rate has been calculated taking into account a yearly average value added per worker o f US$1,138 for MSMEs. The average yearly salary inthe rivate sector is US$648, and the capacity utilization is low between57 and 61 percent.3 9 6. It i s assumed that there is no mismanagement o f the grant received by TBDS providers and financial institutions. 7. Without the project based on experience from other African countries, it i s assumed that only 50 percent o f MSMEswill undertake the activity supported with a delay o f 3 years. 8. A stable macroeconomic environment with price and exchange rate stability is also assumed. Sensitivity Analysis Four sensitivity analyses were carried out by switching values o f critical items. The results are presentedintable A.9.3 below. a) The first test assumed delayed in overall project disbursement over a period o f 9 years; The effect on the project was that the NPV was reduced from US$56 million to $44 million and the ERR from 27 percent to 26 percent. This suggested that a slower implementation o f disbursement will have little effect on the economic impact o f the project. b) The second test assumed an increase in discount rate from 12 percent to 20 percent, where NPV significantly decreases from US$56 million to US$35 million and an increase in ERR from 27 percent to 34 percent. The job creation rate i s not affected by the shadow discount rate. 30Tanzania Investment Climate Assessment 2004. 104 Table A.9.3. SensitivityAnalysis Summary Scenario Cases Variable NPV ERR Fiscal Job Amount (US$ mil npact (US$ mil) Created Delayedin overallproject df'sbursernent Base Regular disbursemet 56 27% 22 4,115 Alternate ;low disbursement 44 26% 15 1,658 Change indiscount rate Base 12% 56 27% 22 4,115 Alternate 20% 35 34% 15 4,115 Reduction in increasein output Base 50% reduction 56 27% 22 4,115 attributedto diversionfrom other sources. Alternate 65% reduction 10 14% 14 4,115 Increase in expectedchange in output Base 2 times 56 26% 22 4,115 foreachfirm. Alternate 8 times 227 57% 58 4,115 c) The third test assumed a reduction in increase in output from 50 percent to 65 percent, which attributed to diversion from other sources into the project where NPV and ERR significantly decreases to US$lO million and 14 percent, respectively. d) The fourth test assumed a higher increase in output from each firm from 2 to 8, the results of which showed a NPV o f US$227 million and a ERR o f 57 percent. Fiscal impact i s positive in all the scenarios. Finally, it should be noted that job creation remains the same at 4,115 except in the case o f slow disbursement where it decreases to 1,658 (a 60-percent reduction from the base case). Expected BeneJits Significant economic benefit i s expected to be derived from this project. Broadly, the project will create a business environment conducive to enterprise creation and growth and will improve MSME credit market efficiency, which will respond to market opportunities. . Inparticular, theproject will: Increase production and output o f the firms inthe MSME sector, which will increase the number of formal MSMEsand create morejob opportunities; Improve efficiency o f different institutions, such as the land registration and court . registry systems, as well as rationalize business registry in the areas that involve MSMEs; Land-related investment, both urban and rural, will increase due to strengthened investment incentives from improved access to finance and increased investors confidence; and 105 . Efficiency o f land resource utilization will be improved because of establishing land markets in the rural areas and upgradingthe existing market in the urban areas, which will leadto upgradingthe landvaluation system. Ultimately, through its economy wide demonstration effect, the project is likely to generate benefits for a much larger number of MSMEs, with wider implications for private sector growth,job creation, andpovertyreduction. FigureA.9.1. SensitivityAnalysis: Delayedin DisbursementScenario 1 I 120,000,000, 1 ~ E 100,000,000 2 $ 80,000,000 U .Y 60,000,000 e E Y0 40,000,000 .-C2m 20,000,000 -$ 0 11 Y R I YR2 YR3 YR4 YR5 YR6 YR7 YR8 YR9 YRIO Y R l l YR12 +Total Net Effect of the project +Total With Project -Total Wthout Project Net Effect Table A.9.4. Key Indicatorsto Monitor EconomicBenefits BenefitIndicator MonitoringTools Improvedinvestmentclimate; business Mid-termreviewof the project and environment(registration, dispute WED follow-up survey. resolution) Increasedproductivity and outputs inthe Mid-termreview and end ofthe project matchinggrants supportedMSMEs output level. Job creation inthe MSME sector and in Number of employees at the beginning privatizedcompanies and end o fproject. Improvedaccess to finance for MSMEs New financial services and products; survey ofrelevantMSMEs/surveyo f relevant financial institutions. ~~ Governmenttaxes Tax payment by supportedMSMEs. Main Beneficiaries The mainbeneficiariesof the projectwill be: (i) providers, (ii) 2,000 existingand TBDS the 1,000 new MSMEs that will be directly supported with better access to business development services, finance, and improvedinvestment climate, (iii)10public institutions 106 for skills and innovation, and (iv) a wider tax base and healthier fiscal position for the Government. M o r e generally, public and private institutions, private business associations, and consulting services will benefit as they improve their efficiency in providing business services. The fiscal impact is estimated at US$22 million, mainly from corporate and personal income taxes. 107 Annex 10: SafeguardPolicyIssues TANZANIA: Private Sector Competitiveness Project ProjectLocationand salient physicalcharacteristicsrelevantto the safeguardanalysis The project will be located primarily in urban and semi urban areas o f Tanzania, as most activities are geared to manufacturing, trade and services. However, due to the demand nature o f component 3, commercial agriculture may also be supported, which would take the project activities into the rural areas. E. Borrower's Institutional Capacity for Safeguard Policies [from PCN] The President's Office Planning and Privatization (POPP) will coordinate the overall project. The first component will be implemented through the Better Regulation Unit in the Presidents Office Planning and Privatization (POPP) that has been established to implement the BEST program. The second and third component will be implemented by the Tanzania Private Sector Foundation (TPSF). The units will need to be trained in safeguard policies, in order to be ina position to identify issues should they arise. Environmentaland Social Safeguards Specialists MrThomas E.Walton (AFTSD) I 6. Safeguard Policies Triggered 1 Yes I No EnvironmentalAssessment (OP/BP 4.01) X NaturalHabitats(OP/BP4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X CulturalProperty(OPN 11.03) X IndigenousPeoples (OD 4.20) X InvoluntaryResettlement(OP/BP4.12) X Safetv of Dams (OPIBP 4.37) X Projectson InternationalWaterways(OP/BP 7.50) X Projectsin DisputedAreas (OP/BP 7.60) X 11. Key SafeguardPolicyIssues and Their Management A. Summary of Key Safeguard Issues 1. Describe any safeguard issues and impacts associated with the proposed project. Identify and describe any potential large scale, significant and/or irreversible impacts: Environmental Category: C - Not Required Based on the design o f the project components, an environmental assessment may not be required. The environmental category assessed for this project i s C. Although the project is 108 not expected to present any specific environmental risk, IDA funds may be used to rehabilitate or refurbishexisting offices and storage facilities, no new structures or expansion o f exiting premises will be financed under the project. Under the investment climate component, the improvements targeted inthe land component will not fund any resettlement or trigger any resettlement issues. Recognizing the achievements and functional capacity within the Environmental Protection Agency, it will be suggested and discussed with the Government that environmental assessment and management plan will apply to all infrastructure components o f this Project. Appropriate reference to the environmental assessment, management plan, and implementation requirements will also be incorporated in the legal documents duringappraisal. 2. Describe any potential indirect and/or long term impacts due to anticipated future activities intheproject area: NIA 3. Describe any project alternatives (if relevant) considered to help avoid or minimize adverse impacts. NIA 4. Describe measures taken by the borrower to address safeguard policy issues. Provide an assessment o fborrower capacity to plan and implement the measures described. As the project unfolds, the capacity for safeguard policies, if necessary, will continue to be monitored. 5. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. The key stakeholders are micro, small, and medium enterprises as well as the meso level institutions (financial and non-financial) that serve these enterprises. These stakeholders were consulted widely through direct meetings as well as focus groups, but no particular safeguard policy discussions were necessary. 109 B. Disclosure Requirements Date * Ifthe projecttriggers the PestManagement, Cultural Property and/orthe Safety of Dams policies, the respectiveissues are to be addressed and disclosed as part of the EnvironmentalAssessment/Audit/orEMP. Ifin-countrydisclosure of any of the above documents is not expected, pleaseexplain why: C, ComplianceMonitoring Indicators at the CorporateLevel (to befilled in when the ISDS isfinalized by theproject decision meeting) NIA BP 17.50 Public Disclosure - Have relevant safeguard policies documents beensent to the World Bank's N/A Infoshop? Have relevant documents been disclosed in-country ina public place ina NIA form and language that are understandable and accessible to project-affected ~ O U D S and local NGOs? All SafeguardPolicies Have satisfactory calendar, budget and clear institutional responsibilities NIA beenprepared for the implementationo fmeasures relatedto safeguard policies? Have costs related to safeguard policy measures been included inthe project NIA cost? Does the Monitoring and Evaluation system o f the project includes the NIA monitoring o f safeguard impacts and measures related to safeguard policies? Have satisfactory implementation arrangements been agreed with the NIA borrower and the same been adequately reflected inthe project legal documents? 110 Annex 11:ProjectPreparationand Supervision TANZANIA: Private Sector Competitiveness Project Planned Actual PCNreview 1gthNovember 2004 8thApril 2005 Initial PID to PIC lothMarch 2005 Initial ISDS to PIC lothMarch 2005 Appraisal 17th October 2005 26thOctober 2005 Negotiations 26thOctober 2005 gthNovember 2005 BoardRVP approval 20thDecember 2005 Planned date o f effectiveness March 2006 Planneddate o fmid-termreview December 2009 Plannedclosing date March 2010 Key institutions responsible for preparationo f the project: Presidents Office Planning and Privatization (POPP) Tanzania Private Sector Foundation (TPSF) Ministryo fLands, HumanSettlements Development (MLHSD) Bank staff and consultants who worked on the project included: Name Title Unit Michael Wong Sr. Private Sector Development Specialist AFTPS KevinQuilan Growth Advisor DFID Hermina Martinez Consultant AFTPS Manush Hristov Counsel LEGAF Ravi Ruparel Sr. Financial Sector Specialist AFTFS William Steel Lead Specialist AFTPS Serigne Omar Fye Sr Environmental Specialist AFTS 1 Steve J. Gaginis Senior Finance Officer LOAG2 Klaus W. Deininger Lead Economist DECRG George Clarke Sr. Economist RPED/AFTPS Frank Byamugisha Operations Advisor AFTSD Moyo Ndonde Legal Advisor CAFAK - IFC Sylvia Zulu Project Officer CGFFS - IFC Makanda Kioko Project Officer CSMSE - IFC CGFFS - IFC AndreiMikhnev Sr. Private Sector Development Spec. Michael Graglia Project Officer CBNDR - IFC Kristine Schwebach Operations Analyst AFTS1 Mercy Mataro Sabai Sr. Financial Management Sp AFTFM Pascal S. A. Tegwa Sr. Procurement Specialist AFTPC Johannes Widmann Operations Analyst AFCTZ Yeshareg Dagne, Program Assistant AFTPS Justina Kajange Team Assistant AFC04 Tony Bums Consultant Alema Siddiky Economic Analyst PREM Denis Biseko Public Service Advisor AFTPR Solomon Waitaka Sr. Transport Advisor AFTTR 111 Justin Schwartz Intern Shireen El-Wahab STT/Junior Professional Associate AFTPS Bank funds expended to date on project preparation: 1, Bank resources: US$250.000 2. Trust funds:O 3. Total: US$250.000 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost: 112 Annex 12: Conflictof Interest ManagementFramework TANZANIA: Private Sector Competitiveness Project The Private Sector Competitiveness Project inTanzania falls under thejoint IDNIFC MSME ProgramY3lan initiative that responds to the demand from the Executive Directors o f IDA to expand IDA'S support for private sector development in Africa and to enhance the collaboration o f IFC and IDA inthis area. In line with the philosophy o f this program, the proposed project in Tanzania includes an access to financial services component that entails IDA-funded technical assistance grants (TA Grants) to MSME financial intermediaries. The project also includes the Tanzania Business Development Services (TBDS), a facility that will provide matching grants to MSMEs. Eligibility criteria, approval, disbursement, and administrative arrangements for these IDA-fundedgrants will be specified inthe Project ImplementationManual (PIM). Other key elements o f the program, endorsed by the Board o f Executive Directors o f IDA, are a focus on private sector project delivery, and collaboration with international and African development partners. IDA and IFC have already identified and, in some cases are already supporting, several such M S M E projects in other African countries. The project preparation team has determined that there i s a possibility that some existing or potential IFC clients could receive support from the project through the IDA-funded TA Grants and/or matching grants. Should such a situation arise, IFC will disclose its business interests in or relationship with these entities. IFC's current investments inTanzania are listed inthe Annex 14. A key objective of the access to financial services component is to facilitate private sector investment in MSME finance, in close collaboration with the Financial Sector Deepening Trust (FSDT), which is a multi-donor initiative. To this end, part o f the TA Grants are intended to support intensive capacity-building efforts aimed at helping non-governmental microfinance institutions to transform into licensed microfinance companies and to secure private investment, including equity. Part o f the T A Grants will also support the establishment o f a Greenfield microfinance bank or similar new commercial microfinance entities, TA Grants will also support the expansion o f commercial bank lending to microfinance institutions. It is envisioned that these institutional capacity-building efforts, facilitated by IDA-funded TA Grants and FSDT funds, will lead to the development o f commercially viable microfinance operations that will attract private investors, including the IFC. For instance, there i s an emerging opportunity to support the development o f a proposed Greenfield microfinance bank, which LFS Financial Systems-a leading commercial microfinance specialist-intends to establish in Tanzania by the end o f 2006. Potential investors in the proposed bank include IFC. There i s also a proposed guarantee facility that seeks to enable commercial banks to significantly increase their lending to microfinance institutions. The IFC is also a potential investor inthis facility. Therefore, beneficiaries o f the IDA-hndedTA Grants could potentially become IFC clients. ~ ~~ 3'The M S M E program is being piloted inten countries in Sub-Saharan Africa and i s intended to provide an array o f interventions aimed at fostering better access to finance for MSMEs. The interventions include technical assistance, capacity building,matching grants, and regulatory assistance. The ten pilot countries are Burkina Faso, Ghana, Kenya, Madagascar, Mali, Mozambique, Nigeria, Tanzania, Rwanda, and Uganda. 113 The IDA-IFC collaboration in the preparation o f this project will enable us to develop a significantly better overall program that accurately reflects the requirementsand expectations o f private parties inthe M S M E sector while also preserving the interests o f the Government. However, we also recognize that it also raises the risk o f potential conflicts o f interest, or the perception thereof, between IDA and IFC activities in Tanzania, if any existing or potential IFC clients benefit from support under the project as mentioned above. Accordingly, IDA and IFC have established a framework for identifying and managing conflicts o f interest in this project that i s consistent with the practice followed inall MSMEprojects under thejoint I D N I F C program. This framework will involve disclosure to concerned parties in communications (such as this letter) and a set o f measures to manage any potential or perceived conflicts o f interest arising from the multiple roles o f IDA and IFC. The Government o f Tanzania has confirmed its acceptance o f this framework. Accordingly, the framework will include the following elements: a) Separate teams, with no overlapping team members, will handle the joint I D N I F C project preparatiodsupervision assignments on the one hand, and IFC investment assignments, on the other hand. Accordingly, no IDA and IFC staff members who have been part o f the project preparatiodsupervision team (the "IDNIFC Advisory Team") are assigned to a team working on the IFC financing o f potential beneficiaries o f the IDA project (the "IFC Investment Team"). b) No confidential information would be shared among the various teams. Accordingly, the I D N I F C Advisory Team would not provide the IFC InvestmentTeam any confidential or privileged information obtained by the IDNIFC Advisory Team in the course o f the project; and the IFC Investment Team would not provide the I D N I F C Advisory team any confidential or privileged information obtained as a result o f their work with an IFC client. c) The advice o f the I D N I F C Advisory Team has been and will continue to be separate and independent from any IFC role or investment in a potential project beneficiary. The I D N I F C Advisory Team will continue to provide stand-alone, independent advice to the Government based on international best practice and experience, without regard to the possibility that IFC might eventually become a lender to or investor in a project beneficiary. d) The selection o f project beneficiaries will be based on best practice and transparent eligibility criteria that have been agreed upon by the IDA/IFC Advisory Team and the Government o f Tanzania. As mentioned above, eligibility criteria, approval, disbursement, and administrative arrangements for the IDA-funded grants will be specified inthe Project Implementation Manual. 114 Annex 13: Documents in the ProjectFile TANZANIA: PrivateSector CompetitivenessProject ComponentOne: Business Environment Strengthening A. Bank StaffAssessments World Bank Group, InternationalFinanceCorporation,Investment ClimateAssessment: Improving Enterpriseproductivity and growth in Tanzania, 2004 World Bank Group, Multilateral InvestmentGuaranteeAgency, InvestmentMarketing Services,Institutional Assessment of TanzaniaInvestment Centre, 2004 World Bank Group, World Bank,Analysis of Business Environment Strengtheningfor TanzaniaMission Report, 2005 World Bank Group, WorldBank, Doing Business 2005: TanzaniaEconomic Profile, 2005 World Bank Group, World Bank, Registering and Licensing Assessment in Tunzania, 2005 World Bank Group, World Bank, Small and Medium Enterprise Mapping of Tanzania, 2005 World Bank Group, World Bank, TanzaniaBusiness Environment Focus Group Report, 2004 B. GovernmentDocuments 0 The UnitedRepublic of Tanzania, Business Environment Strengtheningfor Tanzania Programme,Enhancing Growth and Reducing Poverty Final Report Volume 1,2003 0 The UnitedRepublic o f Tanzania, Ministry of Industryand Trade, National Trade Policy: Trude Policyfor a CompetitiveEconomic Export-led Growth, 2003 0 The UnitedRepublic o f Tanzania, Ministry of IndustryandTrade, Small and Medium Enterprise Development Policy, 2002 0 The UnitedRepublic of Tanzania, President's Office, PlanningandPrivatization programmefor Business EnvironmentStrengtheningfor TanzaniaMemorandum of Understanding between the Government of Tanzania, Tanzania Private Sector Foundation and Development Partners concerning support to theprogrammefor Business Environment Strengtheningfor Tanzania, 2003-2008, 2003 C. Other Documents 0 InternationalLabor Organization, UnitedNationsIndustrial DevelopmentOrganization, UnitedNations DevelopmentProgramme,Roadmap Study of theInformal Sector in mainland Tanzania, 2002 ComponentTwo: EnterpriseCompetitiveness A. Bank StaffAssessments 0 World Bank Group, Country Economic Memorandum: Tanzania, 2005 0 World Bank Group, Multilateral Investment Guarantee Agency, Investment Marketing Services,Institutional Assessment of Tanzania Investment Centre, 2004 115 8 World Bank Group, International Finance Corporation, Investment Climate Assessment: Improving Enterpriseproductivity and growth in Tanzania, 2004 0 World Bank Group, World Bank, Small and Medium Enterprise Mapping of Tanzania, 2005 B. GovernmentDocuments 0 The United Republic o f Tanzania, Ministry o f Industry and Trade, National Trade Policy: TradePolicyfor a Competitive Economic Export-led Growth, 2003 0 The UnitedRepublic o f Tanzania, Ministry of Industryand Trade, National TradePolicy Background Papers: Trade Policy for a competitive economy and export-led growth, 2003 8 The UnitedRepublic o f Tanzania, Ministry of Industry and Trade, Small and Medium Enterprise Development Policy, 2002 0 The United Republic o f Tanzania, The Ministry o f Labour and Youth Development and The Planning commission, with assistance from the International Labor Organization/ United Nations Development Programme and the Swedish International Development Agency, TheDar es Salaam Informal Sector, Volume 1,Analysis and Tabulations, 1995 C. Other Documents International Labor Organization, Interregional Project on Employment Promotion for Women in the context o f Economic Reform and Restructuring, and Women and the Informal sector, "State of the Art" Review of the Informal Sector in Tanzania, 1990- 1999,2000 Nchimbi, Mariam Idabaga, at Umea School o f Business and Economics, Department o f Business Administration, Gender and Entrepreneurship in Tanzania, A Comparative Analysis of Male-Female's Start-up Motivation, Individual Characteristics and Perceptions of Business Success,2003 Tanzania Bankers Association, TBA Conference gth March 2005, MicroJinance in Tanzania: TheExperience of Akiba Commercial Bank, 2005 Tanzania Bankers Association, TBA Conference sth March 2005, Private Sector Perspective on the Role of Banks in Tanzania, 2005 The University o f Dar es Salaam Entrepreneurship Centre (UDEC), Review of Experiences from Interaction among donor agencies in small enterprisepolicy reform in the UnitedRepublic of Tanzania, 2002 World Economic Forum, The Global Competitiveness Report 2003-2004,2004 ComponentThree: Access to FinancialServices A. BankStaffAssessments 8 World Bank Group, International Finance Corporation, Tanzania micro, small and medium enterpriseAccess to Finance Assessment, 2005 B. Government documents 0 The United Republic o f Tanzania, Ministryo f Finance, National Micro-Finance Policy, 2000 116 TheUnitedRepublicof Tanzania,Ministryof IndustryandTrade, Small and medium enterprise development Policy, 2002 C. Other Documents CanadianInternationalDevelopmentAgency, SwedishInternationalDevelopment Agency, Departmentfor InternationalDevelopmentandRoyalNetherlandsEmbassy, Tanzaniapro-poor Financial Sector Deepening Programme Strategy paper, 2003 Departmentfor InternationalDevelopmentandEpitomeAdvocates, Trust Deed, 2004 117 Annex 14: Statement of Credits and Grants TANZANIA: PrivateSector CompetitivenessProject Difference between expectedand actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO82492 2006 TZ-Marine & Coastal Env Mgmt SIL 0.00 5 1.OO 0.00 0.00 0.00 48.97 0.00 0.00 (FY06) PO70736 2005 TZ-LOCGovt Supt SIL (FY05) 0.00 52.00 0.00 0.00 0.00 50.88 8.90 0.00 PO85786 2005 TZ-Soc Action Fund 2 SIL (FY05) 0.00 150.00 0.00 0.00 0.00 137.39 -3.67 0.00 PO71014 2004 TZ-HIV/AIDS APL (FY04) 0.00 0.00 0.00 0.00 0.00 68.79 19.24 0.00 PO74624 2004 TZ-EmergencyPower Supply (FY04) 0.00 43.80 0.00 0.00 0.00 0.00 -32.57 0.00 PO57234 2004 TZ-GEF Eastem Arc Forests SIL (FY04) 0.00 0.00 0.00 7.00 0.00 7.00 3.17 0.00 PO78387 2004 TZ-Central Transp Corridor Prj (FY04) 0.00 122.00 0.00 0.00 0.00 109.02 50.28 0.00 PO82335 2004 TZ-Health Sec Dev 2 (FY04) 0.00 40.00 0.00 0.00 0.00 28.56 28 14 0.00 PO83080 2004 TZ-Sec Edu Dev Prj (FY04) 0.00 150.00 0.00 0.00 0.00 97.62 -0.13 0.00 PO67103 2003 TZ-Partic Agr Dev & Empwrmnt SIL 0.00 56.58 0.00 0.00 0.00 50.73 7.56 0.00 (FY03) PO59073 2003 TZ-Dar Water Suply & Sanitation(FY03) 0.00 61S O 0.00 0.00 0.00 42.55 10.46 0.00 PO58706 2002 TZ-Forest Conserv & Mgmt SIL (FY02) 0.00 31.10 0.00 0.00 0.00 30.88 16.80 0.00 PO73397 2002 TZ-Lower Kihansi Env Mgmt TAL (FY02) 0.00 6.30 0.00 0.00 0.00 3.28 1.53 0.00 PO02797 2002 TZ-Songo Gas Dev & PowerGen (FY02) 0.00 183.00 0.00 0.00 0.00 97.73 70.61 0.00 PO47762 2002 TZ-Rural Water Sply (FY02) 0.00 26.00 0.00 0.00 0.00 22.72 13.17 0.00 PO69982 2001 Regional Trade Fac.Proj. - Tanzania 0.00 15.00 0.00 0.00 0.00 8.84 7.35 0.00 PO49838 2000 TZ-Privitization & Priv Sec Dev (FYOO) 0.00 45.90 0.00 0.00 0.00 27.32 26.15 0.00 PO57187 2000 TZ-FIDP I1(FYOO) 0.00 27.50 0.00 0.00 0.00 9.65 8.47 0.68 PO60833 2000 TZ-Pub Sec ReformPrgm (FYOO) 0.00 41.20 0.00 0.00 0.00 15.20 -27.43 0.00 PO47761 1999 TZ-Tax Administration (FY99) 0.00 40.00 0.00 0.00 0.00 10.70 6.31 -1.54 PO02789 1998 TZ-Human Res Dev 1 (FY98) 0.00 20.90 0.00 0.00 0.00 0.46 0.50 0.00 PO46837 1997 TZ-Lake Victoria Env (FY97) 0.00 10.10 0.00 0.00 0.00 2.21 -6.11 1.26 PO02770 1994 TZ-Roads2 (FY94) 0.00 170.20 0.00 0.00 63.53 13.44 81.87 36.21 Total: 0.00 1,296.68 0.00 7.00 63.53 88394 29060 3661 118 TANZANIA STATEMENT OF IFC's Held andDisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC - FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1997 AEF AquVd Ginner 0.68 0.00 0.00 0.00 0.68 0.00 0.00 0.00 2001 AEF Boundary Hi1 0.20 0.00 0.00 0.00 0.20 0.00 0.00 0.00 1998 AEF Maji Masafi 0.04 0.00 0.00 0.00 0.04 0.00 0.00 0.00 2002 Exim Bank 1.67 0.00 I.oo 0.00 1.67 0.00 1.oo 0.00 1996 IHP 0.12 0.00 0.00 0.00 0.12 0.00 0.00 0.00 2000 IOH 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00 2000 NBC 0.00 10.00 0.00 0.00 0.00 3.63 0.00 0.00 1993 TPS (Tanzania) 3.06 0.00 0.00 0.00 3.06 0.00 0.00 0.00 1991 TPS Zanzibar 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 1994 Tanzania Brewery 0.00 3.43 0.00 0.00 0.00 3.43 0.00 0.00 Total portfolio: 8.45 13.43 1.oo 0.00 8.45 7.06 1.oo 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. - Total pendingcommitment: 0.00 0.00 0.00 0.00 119 Annex 15: Country at a Glance TANZANIA: Private Sector Competitiveness Project Tanzania at a glance 8/31/05 Sub- POVERTY and SOCIAL Saharan Low- Tanzania Africa Income 2evelopmentdiamond' 2004 Population, mid-year(millions) 35.1 703 2,310 Life expectancy GNI per capita (Atlas method, US$) 320 490 450 GNI (Atlas method, US$ billions) 11.1 347 1,038 T Average annual growth, 189894 Population (%) 2.4 2.3 1.9 Labor force (%) -0.8 2.4 2.3 3NI Gross 3er F--- +primary Most recent estimate (latest year available, 199895) :apita enrollment Poverty (% ofpopulation below national povertv line) 35 Urban population (% of total population) 36 36 30 Life expectancyat birth (years) 47 46 58 ... Infant mortality(per 1,000live births) 68 103 62 Child malnutrition (% ofchildren under 5) 22 44 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 56 58 75 Illiteracy(% ofpopulation age 15+) 21 35 39 - Gross primary enrollment I%of school-agepopulation) 105 87 92 Tanzania Male 109 94 99 Low-incomegroup Female 102 80 85 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 Economic ratios' GDP (US$ billions) 6.3 4.5 10.3 10.8 Gross domestic investmentlGDP 24.8 18.6 19.2 Exportsof goods and serviceslGDP 8.3 20.6 18.3 18.6 Trade Gross domestic savingdGDP 7.8 -0.3 9.5 8.5 Gross national savings/GDP 9.9 6.6 9.3 8.1 1 Currentaccount balance/GDP -5.0 -23.8 -9.9 -10.3 Domestic Interestpayments/GDP 0.5 1.4 0.3 0.8 savings investment Total debVGDP 114.7 160.4 73.1 69.3 Total debt service/exports 26.6 21.5 5.2 13.2 Presentvalue of debtlGDP 18.5 18.9 Present value of debtlexports 107.3 99.8 Indebtedness 1984-94 1994-04 2003 2004 200498 (averageannual growth) GDP 2.9 5.0 7.1 7.0 6.7 *".- ,,v Tanzania GDP per capita 1.2 2.1 5.0 3.8 4.3 Low-income group Exportsof noods and services 11.9 5.0 5.8 9.0 3.8 STRUCTURE of the ECONOMY 1984 1994 2003 2004 Growth of investment and GDP ( O h ) (% of GDP) *O Agriculture 526 450 450 448 Industw 109 151 164 167 l5 Manufacturing 7 7 7 4 7 2 7 4 '; Services 365 399 386 386 Private consumption 778 81 2 79 1 7 8 2 -5 00 01 02 03 04 General governmentconsumption 146 17 1 114 134 -'--*GDI ' S ' G D P Importsof goods and services 15 1 436 274 289 - 1984-94 Growth of exports and imports (Oh) (average annual growth) Agriculture 3.5 3.9 4.0 8.0 industry 1.0 7.3 10.2 10.1 'E Manufacturing 39.9 5.7 8.6 8.6 Services 4.1 4.9 5.6 8.0 :: Private consumption 3.1 4.3 3.7 1.3 0 Generalgovernment consumption 0.7 7.6 29.8 20.9 -20 Gross domestic investment 3.8 5.0 5.6 9.1 -Exports --cLlmports imports of noods and services 2.9 5.9 6.9 3.2 Note: 2004 data are preliminaryestimates. Group data are for 2003. * The diamonds show four key indicators in the country (inbold) comparedwith its income-groupaverage. If data are missing, the diamondwill be incomplete. 120 Tanzania PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Domestic prices (%change) Consumer prices 27.1 25.3 4.6 4.4 Implicit GDP deflator 24.5 6.5 5.7 Government Finance (%of GDP,includes current grants) Current revenue 18.4 9.5 110 11.4 Current budget balance -3.5 -4.4 -14 -2.5 Overall surplus/deficit -0.3 -8.2 -5.4 -8.0 TRADE 1983 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 377 411 903 999 T Coffee 0 0 96 35 40 k.500 I cotton 62 78 29 40 2 000 Manufactures 44 52 66 72 1500 Total imports (cif) 957 1,353 1661 2.07 Food 91 58 147 186 1,000 Fueland energy 241 01 8 5 375 500 I Capital goods 406 628 721 655 0 Export price index(1995-00) 82 73 95 0 4 97 98 99 00 01 02 03 Import price index (1995=00) 77 131 72 83 w Exports lworts Terms of trade (995=00) 0 7 72 0 2 2 5 BALANCE of P A Y M E N T S 1983 1993 2002 2003 (US$ millions) Current account balance t o GDP (%) Exports of goods and services 509 603 1,568 1,691 imports of goods and services 1,015 2,off 2226 2,682 Resource balance -507 -1414 -658 -991 Net income -73 -154 -52 -54 Net current transfers 353 463 24 67 Current account balance -393 -1,115 -724 -108 Financing items (net) 407 1068 1,095 1447 Changes in net reserves -14 46 -371 -431 1.20 1 M emo: Reserves includinggold (US$ millions) 295 1,528 1,976 Conversion rate (DEC, /oca//US$j 9.8 405.3 963.2 1,054.3 EXTERNAL DEBT and RESOURCE FLOWS I 1983 1993 2002 2003 (US$ millions) 1Composition of 2003 debt (US$ mill.) Total debt outstandingand disbursed 6,867 6,781 6,614 7,502 IBRD 223 140 6 3 IDA 475 1759 2,869 3.474 G:831 A:3 I Total debt service 155 211 118 93 IBRD 27 45 3 3 IDA 4 66 64 29 Composition of net resource flows Official grants 155 758 556 788 Official creditors 3 0 0 9 ?42 512 Private creditors 21 31 -22 15 Foreign direct investment 62 215 232 Portfolio equity 0 0 0 0 I World Bank program Commitments 47 341 402 386 A . IBRD E - Bilateral Disbursements 90 154 l70 397 B IDA . D Other mitilateral - F Private - Principalrepayments 14 75 46 a C-IMF G-Short-term 121 MAP SECTION IBRD 33494 TANZANIA SELECTED CITIES AND TOWNS MAIN ROADS PROVINCE CAPITALS RAILROADS NATIONAL CAPITAL PROVINCE BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES 30°E 32°E 34°E 36°E This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any To To 0° endorsement or acceptance of such boundaries. Tororo 0° To To UGANDAKampala To To Kampala Lake Kagera To To Victoria Nakuru K E N Y A Bukoba Musoma Mara To To Nakuru Buoen RWANDA KAGERA M A R A 2°S 2°S Lake Mwanza Natron ToKama M WA N Z A Simiyu A R U S H A Kilimanjaro (5895 m) BURUNDI Arusha Moshi To To Lake Malindi Kibondo Moyowosi Yalova S H I N YA N G A Eyasi Lake Shinyanga Manyara Kahama Pangani KILIMANJARO Nzega Steppe 4°S Babati Same CONGO K I G O M A Masai PEMBA NORTH Kasulu Steppe Kigoma Singida OF. Kaliua Kondoa Tabora Iwembere SINGIDA Wete PEMBA Tanga SOUTH TA B O R A TA N G A Mkoani ZANZIBAR REP Lake Ugalla Manyoni NORTH Tanganyika DODOMA Mts. Mkokotoni ZANZIBAR SOUTH & Zanzibar Koani CENTRAL Mpanda Wamimi D O D O M A Wa ZANZIBAR DEM. Nguru Morogoro Kibaha WEST R U K W A Dar Es Salaam Rungwa Great MOROGORO DAR ES SALAAM Ruaha P WA N I Lake Iringa 8°S Sumbawanga Rukwa M B E Y AangeR I R I N G A Utete 8°S Mpui Mbeya Rufiji INDIAN Kilwa Mbeya Kilombero Matandu Kivinje Tunduma To To Kasama Kipengere OCEAN Njombe L I NuD I 10°S To To Kasama Range Mbemkur Lindi 10°S Mtwara ZAMBIA To To Songea Masasi TANZANIAKasungu Lake R U V U M A MTWARA Tunduru Malawi Ruvuma To To Chiúre Chiúre To To 12°S To To Marrupa MOZAMBIQUE Lichinga 0 50 100 150 200 Kilometers 32°E 34°E 36°E 0 50 100 150 Miles 40°E JULY 2005