Document of The World Bank FOR OFFICIAL USE ONLY Report No. 84029-TZ INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT ON A PROPOSED DEVELOPMENT POLICY CREDIT IN THE AMOUNT SDR 55.5 MILLION (US$85 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR AN ELEVENTH POVERTY REDUCTION SUPPORT CREDIT February 26, 2014 Poverty Reduction and Economic Management 5, AFTP5 Country Department AFCE1 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. TANZANIA - GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 31, 2014) Currency Unit Tanzania Shilling (T Sh) US$1.00 TSh 1,623.01 Currency Unit Special Drawing Right (SDR) US$1.00 SDR 0.65 Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS AEOs Authorized Economic Operators BEST Business Environment Strengthening in Tanzania BoT Bank of Tanzania BRELA Business Registrations and Licensing Agency CAG Controller and Auditor General CAS Country Assistance Strategy CCRO Certificates of Customary Right of Occupancy CEM Country Economic Memorandum CEOs Chief Executive Officers CPI Consumer Price Index CSOs Civil Society Organizations CWG(s) Cluster Working Group(s) D by D Decentralization by Devolution DfID Department for International Development DPs Development Partners DPO(s) Development Policy Operation(s) DRC Democratic Republic of Congo DSA Debt Sustainability Analysis EAC East African Community EIA Environment Impact Assessment EITI Extractive Industries Transparency Initiative EMA Environmental Management Act EPA External Payment Arrears EPP Emergency Power Plan EPZ(s) Export Processing Zone(s) EPZA Export Processing Zones Authority ESRF Economic and Social Research Foundation ESW Economic and Sector Work EU European Union FDI Foreign Direct Investment FIAS Facility for Investment Climate Advisory Service FY Fiscal Year (Financial Year) FYDP Five Year Development Plan GBS General Budget Support i GDP Gross Domestic Product GNI Gross National Income GoT Government of Tanzania HBS Household Budget Survey HIPC Heavily Indebted Poor Countries HIV/AIDS Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome ICRR Implementation Completion and Results Report ICT Information and Communication Technologies IDA International Development Association IFC International Finance Corporation IFMIS Integrated Financial Management Information System ILMIS Integrated Land Management Information System IMF International Monetary Fund IT Information Technology JBCs Joint Border Committees JSAN Joint Staff Assessment Note, IDA-IMF KRA Key Results Area LGAs Local Government Authorities LGRP Local Government Reform Program M&E Monitoring and Evaluation MAIR MKUKUTA Annual Implementation Report MDAs Ministries, Departments and Agencies MDGs Millennium Development Goals MDRI Multilateral Debt Relief Initiative MEM Ministry of Energy and Minerals MKUKUTA Mkakati wa Kukuza Uchumi na Kupunguza Umasikini Tanzania MKUZA Mkakati wa Kukuza Uchumi na Kupunguza Umasikini Zanzibar MLHHSD Ministry of Lands, Housing and Human Settlements Development MoF Ministry of Finance MoHA Ministry of Home Affairs NAO National Audit Office NBS National Bureau of Statistics NEPAD New Partnership for Africa’s Development NKRAs National Key Result Areas NLUFP National Land Use Framework Plan NPS National Panel Survey OECD Organization of Economic Cooperation and Development OSBPs One-Stop Border Posts PAF Performance Assessment Framework PBGs Planning and Budget Guidelines PDB Presidential Delivery Bureau PDO(s) Program Development Objective(s) PEFA Public Expenditure and Financial Accountability PEFAR Public Expenditure and Financial Accountability Review PER Public Expenditure Review PFM Public Financial Management PFMRP Public Financial Management Reform Program PHDR Poverty and Human Development Report PIM Public Investment Management PIP Public Investment Program PMO Prime Minister’s Office POPC President’s Office Planning Commission PMO-RALG Prime Minister’s Office—Regional Administration and Local Government ii PPIAF Public-Private Infrastructure Advisory Facility PPP(s) Public Private Partnership(s) PPPFU Public Private Partnership Finance Unit PPRA Public Procurement Regulatory Authority PRBS Poverty Reduction Budget Support PRS Poverty Reduction Strategy PRSCs Poverty Reduction Support Credit(s) PS Permanent Secretary PSI Policy Support Instrument PSCP Private Sector Competitiveness Project PSIA Poverty and Social Impact Analysis PSM Public Service Management PSRP Public Sector Reform Program PV Present Value Q Quarter REPOA Research on Poverty Alleviation SADC Southern African Development Community SAGCOT Southern Agricultural Growth Corridor of Tanzania SEZ(s) Special Economic Zone(s) SPILL Strategic Plan for Implementation of Land Laws TASAF Tanzania Social Action Fund TDV Tanzania Development Vision TIC Tanzania Investment Centre TPA Tanzania Ports Authority TR Treasury Registrar TRA Tanzania Revenue Authority UNDP United Nations Development Programme US$ United States Dollars VAT Value Added Tax Vice President: Makhtar Diop Country Director Philippe Dongier Sector Director: Marcelo Giugale Sector Manager: Albert Zeufack Sector Leader: Jacques Morisset Task Team Leader: Emmanuel Mungunasi The Credit is being prepared by an IDA team consisting of Emmanuel Mugunasi, Yutaka Yoshino, Josaphat Kweka, Jacques Morisset, Goodluck Mosha, Isis Gadis, Victoria Cunningham, Chiara Bronchi, Denis Biseko and Lydie Ahodehou (AFTP5), Mary-Anne Mwakangale, Justina Kajange and Agnes Mganga (AFCE1), Jeffrey Delmon (AFTFE), Mamadou Barry (SEGOM), Gert van der Linde and Mercy Sabai (AFTME), Donald Mneney (AFTPC), Zoe Kolovou (LEGAM), and Luis Schwarz (CTRLA). Ndiame Diop (EASPI), Erika Jorgensen (ECSP2), and Dorsati Madani (ECSP1) are the peer reviewers. iii TABLE OF CONTENTS I. INTRODUCTION AND COUNTRY CONTEXT ..................................................... 1 II. MACROECONOMIC POLICY FRAMEWORK ..................................................... 3 A. RECENT ECONOMIC DEVELOPMENTS .................................................. 3 B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ......... 8 C. IMF RELATIONS ........................................................................................ 11 III. THE GOVERNMENT’S PROGRAM ...................................................................... 11 IV. THE PROPOSED OPERATION .............................................................................. 12 A. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ............................................................................................ 12 B. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 13 C. LINK TO CAS AND OTHER BANK OPERATIONS................................ 24 D. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS.................................................................................................. 25 V. OTHER DESIGN AND APPRAISAL ISSUES ....................................................... 26 A. POVERTY AND SOCIAL IMPACT ........................................................... 26 B. ENVIRONMENTAL ASPECTS .................................................................. 27 C. PFM, DISBURSEMENT AND AUDITING ASPECTS ............................. 29 D. MONITORING, AND EVALUATION ....................................................... 30 VI. SUMMARY OF RISKS AND MITIGATION ......................................................... 30 ANNEXES Annex 1: LETTER OF DEVELOPMENT POLICY ................................................................ 32 Annex 2: POLICY AND RESULT MATRIX .......................................................................... 43 Annex 3: FUND RELATIONS ANNEX .................................................................................. 47 Annex 4: MAP .......................................................................................................................... 49 iv CREDIT AND PROGRAM SUMMARY UNITED REPUBLIC OF TANZANIA ELEVENTH POVERTY REDUCTION SUPPORT CREDIT (PRSC-11) Borrower United Republic of Tanzania Implementing Ministry of Finance Agency Financing Data The credit will be financed from new IDA amounting to SDR 45.4 million envisaged in the CAS and recommitted IDA of SDR 10.1 million. Total of SDR 55.5 million (US$85 million equivalent); standard IDA terms: 40-year maturity with a 10-year grace period. Operation Type Programmatic (3rd of 3). Single Tranche. Pillars of the The proposed operation is the last operation in the current PRSC series, and Operation and is organized around two pillars: public finance and investment climate. The Program main program development objectives (PDO) are to: (i) ensure Development macroeconomic stability and safeguard shared growth through sound Objectives management of public finance; and (ii) improve the investment climate in select strategic areas for competitiveness and shared growth in the country by leveraging its geographical advantage and facilitating agglomeration effects. Results The results indicators of the series are: (i) domestic revenue as a percentage Indicators of gross domestic product (GDP); (ii) time taken before publishing an annual Extractive Industries Transparency Initiative (EITI) payments reconciliation report after the end of the relevant fiscal year; (iii) number of new public investment projects appraised in a year based on economic and financial analysis as outlined in the operational manuals prepared by the President’s Office Planning Commission as a percentage of total new public investment projects started by ministries, departments and agencies (MDAs) in the same year; (iv) number of public-private partnership (PPP) projects signed after ex-ante value for money and affordability reviews by the Ministry of Finance; (v) approved budget broadly in line with policy objectives (MKUKUTA, Five Year Development Plan, sectors’ policy priorities); (vi) proportions of MDAs, regions, and local government authorities that are electronically connected to the financial management information system; (vii) Open Budget Index (OBI); (viii) average compliance rate of MDAs and local government authorities with internal audit guidelines; (ix) number of operating investors in the existing SEZs; (x) average time taken for operators to get the license within the zone; (xi) average container dwell time and ship turnaround time at the Port of Dar es Salaam; and (xii) average time taken for trucks to cross the main border posts. Overall risk Moderate rating Operation ID P120536 v IDA PROGRAM DOCUMENT FOR A PROPOSED ELEVENTH POVERTY REDUCTION SUPPORT CREDIT TO THE UNITED REPUBLIC OF TANZANIA I. INTRODUCTION AND COUNTRY CONTEXT 1. The proposed Eleventh Poverty Reduction Support Credit (PRSC-11) to the United Republic of Tanzania is the third and final in the series of three annual programmatic development policy operations in support of the implementation of Tanzania’s second National Strategy for Growth and Reduction of Poverty, MKUKUTA II, and complemented by Five Year Development Plan (FYDP). The current PRSC series (PRSC-9 to PRSC-11) has identified the following two pillars with program development objectives (PDOs): (i) Public Finance Pillar with PDO “Ensure macroeconomic stability and safeguard shared growth through sound management of public finance”; and (ii) Investment Climate Pillar with PDO “Improve the investment climate in select strategic areas for competitiveness and shared growth in the country by leveraging its geographical advantage and facilitating agglomeration effects”. These two pillars map onto five policy areas. Pillar 1 includes (1.1) enhanced efficiency and transparency in domestic revenue mobilization; (1.2) sound public investment management (PIM), including public private partnerships (PPPs); and (1.3) improved quality of budgets and a stronger public financial management (PFM) system. Pillar 2 includes (2.1) effective institutions for promoting and regulating special economic zones (SEZs); and (2.2) improved investment climate as a regional transit hub. The series has a cross-cutting emphasis on improved transparency and access to information. 2. Tanzania has also continued to take steps to ensure macroeconomic and fiscal stability. Private consumption and public investment as well as rapid expansion in a few selected economic sectors (communication, construction, financial services, and mining) have continued to propel Tanzania on a rapid growth trajectory, which has averaged around seven percent in the past 10 years. However, over the past three years, fiscal space has been reduced due to the combination of lower than expected improvements in tax collection, stagnating aid disbursements, and higher investment towards infrastructure projects. The Government has relied on external non-concessional borrowing to finance the country’s huge infrastructure and social needs, which has to be accompanied by close monitoring and efficient financial and debt management. 3. Despite the strong and stable economic growth, poverty has reduced marginally from 34 percent in 2007 to 28 percent in 2012. 1 The low elasticity of growth on poverty reduction is explained by the lagging impact of improvements in the human capital stock on income generation opportunities and insufficient growth in labor intensive sectors, including in agriculture and in rural areas, where 80 percent of poor households are located based on the 2007 Household Budget Survey (HBS). It is also the result of the small productivity gains in the manufacturing and agriculture sectors. The ongoing Poverty Assessment carried out by the World Bank, using the new 2012 HBS database, will provide further light on the causes behind the persistent relatively high poverty rates in Tanzania. 1 The poverty figures between the two years are not directly comparable due to changes in methodology. The ongoing Poverty Assessment includes recalculation of the 2007 poverty data to allow direct comparability. 1 4. The two pillars supported by this operation are at the heart of the Government’s strategy to strengthen public finance management and improve the investment climate. The two pillars of the operation also mutually reinforce each other. A better investment climate will stimulate private investment and help mobilize larger domestic revenue, which in turn will be distributed through a sound public expenditure policy so as to ensure that benefits from growth are adequately shared. Prioritized and well-managed public investments and public private partnership (PPP) projects will close existing infrastructure gaps and encourage broader based growth-generating quality jobs through private sector development in the country. Fiscal policies have a critical role to play in facilitating the broad sharing of prosperity when the country’s growth is driven by a few capital-intensive sectors. Improved fiscal management as well as transparency will also become critical for the prospects of future gas revenues in the coming years. At the same time, there are potential trade-offs across the two pillars. For example, more stringent tax policies, while contributing to domestic revenue mobilization, may become a burden for private investors unless policies are well designed and implemented in a consistent and transparent manner. 5. Looking forward, and considering this operation being the final of the PRSC series, future development policy operations need to ensure the effectiveness of service delivery in Tanzania. Over the past few years, the quality of service delivery has declined, despite major investments in infrastructure, especially in key social sectors, such as education, health and water. This decline is visible in the deterioration of key service delivery indicators and the citizens’ perception of satisfaction with public services. 2 . The decline in quality and outcomes is compounded by growing inequities in service provision across districts that are evidenced by wide disparities in public spending per capita and service delivery outcomes. Generally, financial resources are allocated on the basis of existing infrastructure and staff. As a result, unequal resource allocation is strongly correlated to unequal service delivery outcomes. 6. Adequate reliable information on performance of public service delivery is critical for demanding accountability and effectiveness from those involved in the service delivery chain. Equally important is the efficient and effective use of public resources to achieve service delivery outcomes. To reduce the information deficit, the Government of Tanzania (GoT) has recently adopted the Open Government Partnership (OGP) initiative and the Public Financial Management Reform Program phase IV. Under the OGP, the Government is implementing an action plan that is in line with the international OGP initiative. The OGP action plan seeks to (i) promote public transparency, enhance proper management of public resources and fight corruption; and (ii) strengthen mechanisms for citizens’ engagement and participation in improving service delivery with a focus on education, water and health sectors. This is expected to create a stronger partnership between citizens and the government in implementing service delivery improvement programs. The Government also launched the fourth phase of the Public Financial Management Reform Program in 2012/13, to address amongst others the smooth flow of funds, including to local governments, linked to improved service delivery and accountability. Under the PFMRP IV, Government seeks to implement a more inclusive program 2 In the education sector for example, at the primary level, results from the latest round of UWEZO Tanzania student assessments (May 2011, covering over 128,000 children) showed that for grade 3 students - only 3 in 10 could read a basic Kiswahili language story, only 1 in 10 could read a basic English language story and only 3 in 10 could add, subtract and multiply 2 that will achieve improvements in the efficient use of public resources, set a more appropriate fiscal policy framework and achieve greater development results. 7. A more focused approach should help to achieve more significant results in the areas of governance, PFM and the private sector development. The Bank, in close partnership with the Government, has initiated the preparation of a DPO with a possible emphasis on: (i) strengthening budget credibility and execution, including public investment management, cash management, procurement, and financial reporting; and; (ii) supporting the Government’s Open Government Initiative (OGI) by enhancing policy and legal changes, supporting the dissemination of public information (including inputs, outputs, and outcomes/results), and strengthening accountability mechanisms. A possible next budget support operation on private sector development will be built on the recommendations of the ongoing Country Economic Memorandum, which should be ready by mid-2014. II. MACROECONOMIC POLICY FRAMEWORK A. RECENT ECONOMIC DEVELOPMENTS 8. Tanzania’s recent developments have on balance been overall favorable with stable economic growth, rapid export growth, and lower inflation. However there has been deterioration in fiscal accounts. Tables 1, 2, and 3 present key macroeconomic, fiscal, and balance indicators. Gross Domestic Product (GDP) growth remains robust, reaching 7 percent in fiscal year (FY) 2012/13 and is projected to improve to 7.1 percent in FY2013/14. Inflation has gradually declined over the past 18 months due to tight monetary policy and falling energy and food prices. The inflation rate was 6.1 percent in September 2013, down from over 20 percent at end-2011. 9. Tanzania has continued to experience high and steady economic growth driven by several fast-growing sectors, such as mining, communications, financial services, construction, manufacturing, and retail trade, as well as sustained domestic demand. Over the past few years, the industrial and construction activities witnessed the biggest expansion, growing at around 9 percent on average while the mining sector has boomed, especially gold that accounts for 40 percent of the total merchandise exports today. Simultaneously, the services sector has grown at around 8 percent, driven by the expansion in communications, financial services, and retail trade. By contrast, labor-intensive sectors such as agriculture—the sector on which about 80 percent of households depend as their primary economic activity—posted slower growth and weaker productivity gains. 10. Sustained public and private consumption and investment have been the main drivers of economic growth from the demand side. Household consumption has remained high between 2007 and 2013, accounting for 57 percent of GDP growth. The contribution of private investment in GDP growth has also remained high at 34 percent between 2007 and 2013. Comparing two periods of 2001-2006 and 2007-2013, the share of public consumption and investments in GDP growth also increased from 29 percent to 40 percent and from 11 percent to 15 percent respectively, reflecting the Government’s effort to sustain social service provision while scaling up economic and social infrastructure investments in the country. 3 11. However, the relatively high economic growth has created a limited number of productive jobs for a rapidly growing labor force in the country. Not only from the high population growth rate (over 2.5 percent) but also from the age structure of the population (with almost half of the population being under 15 years old), over 700,000 young workers now enter the domestic labor market every year. So far Tanzania has not been able to stimulate job creation at a sufficiently rapid pace because productivity growth has been limited in key economic sectors and the shift in labor towards more productive sectors has not been fast enough. 3 Productivity growth and increased diversification of the economy will be central to enhance the expansion of private firms and their capacity to create productive jobs. These issues are at the center of the forthcoming Country Economic Memorandum (CEM), which is being prepared in close collaboration with the Tanzanian authorities. 4 12. Tanzania’s economy has become more open, with increasing diversification toward new products and markets during the past five years. The trade-to-GDP ratio has risen from 64 percent in 2008 to 77 percent in 2012, the highest among the countries of the East African Community (EAC), with merchandise exports multiplying by five over this period. Although the export structure remains largely dependent on primary commodities such as minerals (gold), coffee, tea, cashew, and cotton, the recent surge in manufactured exports to the EAC and the Southern African Development Community (SADC) has been a notable and welcome development. During the same period, imports grew faster than exports, leading to a growing trade deficit over time. 5 The current account deficit was, however, financed by official aid and growing FDI inflows into the natural resources sector. 13. The balance of payments, which had improved significantly during the first half of FY2012/13 due to lower import growth and the relatively good performance in exports, started to deteriorate during the second half of FY2012/13. Decline in commodity prices in 2013 adversely affected Tanzania’s export basket, which is still driven by only a few commodities. The overall fall in unit prices of both traditional and non-traditional exports, especially gold (as reflected in the decline in the terms of trade), together with a decline in manufactured exports resulted in a decline in total export value by around one percent. The value of imports of goods and services increased by 2 percent in the year ending October 2013, compared to the amount recorded in the year ending October 2012. Much of the increase was observed in imports of intermediate goods particularly oil and fertilizers, with oil import value increasing by 20.1 percent to US$4,217 million. Gross official reserves, however, amounted to US$4,652 million as of the end of October 2013, sufficient to cover 4.6 months of projected imports of goods and services excluding those financed by foreign direct investment. 14. The Central Bank has continued to follow a tight monetary policy, which resulted in falling inflation during the last two years. Annual growth of average reserve money declined to 16.3 percent in the year ending June 2013, down from 22.4 percent a year ago. Growth in broad money (M3) declined as well—from more than 22 percent to 15 percent during the same 3 Overall labor productivity has grown by only 0.7 percent between 1991 and 2006 and there has been no sign of acceleration in recent years. Output and employment growth rates (annual average) between 1991 and 2006 were 4.2 percent and 5 percent respectively for manufacturing, 6.7 percent and 4.7 percent respectively for service, but 3.4 percent and 3.8 percent respectively for agriculture. 4 The overall theme of the forthcoming CEM is on fostering productive jobs. 5 Drivers for the faster growth of imports include higher energy import bills and capital imports for mining and natural gas sectors. 4 period. As a result, together with falling domestic food prices, inflation reached only 5.6 percent in December 2013—a significant achievement compared to the 19 percent of December 2011. Table 1: Key Macroeconomic Indicators 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 Real Economy Annual percentage change, unless otherwise indicated GDP (nominal, TSh million) 34,913 41,125 48,264 55,549 62,769 70,684 79,625 Real GDP 6.7 6.7 6.9 7.1 7.1 7.3 7.3 Nominal GDP per Capita (US$) 512 547 630 682 724 762 -- Contributions: Consumption 9.3 9.0 6.6 6.2 5.8 5.4 5.5 Contributions: Investment 5.5 5.8 2.7 1.5 1.4 1.9 2.4 Contributions: Net exports -8.1 -8.1 -2.4 -0.7 -0.1 -0.2 -0.6 Imports (goods & services) 21.5 32.5 4.6 7.4 6 7.2 8.9 Exports (goods & services) 28.3 13.7 6.1 14.1 13.2 12 11.5 Unemployment Rate -- -- -- -- -- -- -- GDP deflator 8.1 10.3 8.7 6.1 5.0 5.0 5.0 CPI (e.o.p.) 10.9 17.4 7.6 6.0 5.0 5.0 5.0 Fiscal Accounts Percent of GDP, unless otherwise indicated Expenditures 27 26.2 26.8 29.8 27.5 27.1 26.5 Revenues 16.4 18.1 17.8 18.9 18.6 18.6 18.6 Overall Balance (Including Grants) -6.6 -5.0 -6.2 -5.0 -4.6 -4.0 -4.0 Public debt 39.4 39.8 43.0 43.7 45.0 45.3 45.5 Public debt (Alt)* 39.4 39.8 43.0 43.7 45.5 46.3 46.7 Selected Monetary Accounts Annual percentage change, unless otherwise indicated Reserve Money 19.3 14.2 14.5 11.4 12.2 -- -- Credit to Private Sector 24.3 18.6 17.1 17.2 16.8 -- -- Interest Rate (Treasury Bill 91 days; e.o.p.) 3.7 13.4 11.9 n.d. n.d. n.d. n.d Balance of Payments Percent of GDP, unless otherwise indicated Current Account Balance -9.4 -16.5 -13.5 -14.9 -13.4 -12.1 -11.1 Imports (goods, f.o.b.) -33.8 -41.1 -34.4 -33.7 -32.4 -31.5 -30.7 Exports (goods, f.o.b.) 20.7 21.6 17.7 15.6 15.2 15.5 15.4 Foreign Direct Investment 4.3 6.3 5.9 5.6 5.9 6.1 6.6 Gross Reserves (in US$ million, e.o.p.) 3,610 3,797 4,360 n.d. n.d. n.d. n.d. In months of next year's imports (g & s) 3.3 3.5 3.7 n.d. n.d. n.d. n.d. As % of short-term external debt n.a. n.a. n.a. n.d. n.d. n.d. n.d. External Debt 33.1 34.4 35.9 37.5 39.6 40 40.1 Terms of Trade (annual change) 1.2 1.4 -1.6 -9.4 -4.3 -0.6 -0.8 Exchange Rate (Tsh/US$; p.a.) 1,47 1,594 1,589 n.d. n.d. n.d. n.d. Source: Bank of Tanzania, IMF, World Bank staff Note: public debt (alt) is the case in which GoT fails to pay future liabilities from PSPF pre-1999 accrued benefits from 2014/15 onwards. “n.a.” is not applicable. “n.d.” is not disclosable. “n.r.” not required 5 Table 2: Key Fiscal Indicators 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 (percent of GDP) Overall Balance -6.4 -6.6 -5.0 -6.2 -5.0 -4.6 Primary balance -5.5 -5.1 -3.4 -4.7 -3.4 -2.9 Total Revenues (excluding grants) 15.9 16.4 17.6 17.8 18.9 18.6 Tax revenues 14.6 15.2 15.8 16.2 16.9 16.8 Taxes on goods and services (VAT, Exercise) 7.4 7.4 7.3 7 7.1 7.1 Import duties 1.2 1.3 1.2 1.2 1.5 1.4 Income tax 4.4 4.8 5.5 6.3 6.1 6.1 Non-tax revenues 1.2 1.3 1.8 1.7 2.2 2.2 Grants 4.7 5.2 5 3.2 3.6 3.6 Expenditures 27.5 27 26.2 26.8 29.8 27.5 Recurrent expenditures 18.8 19.2 17 19.6 20 19.1 Wages and compensation 5.7 6.7 6.6 6.9 7.6 7.8 Goods, services, and transfers 12.3 11.4 9.3 11.2 10.8 9.6 o/w Transfers to TANESCO .. .. .. 0.8 0.3 0.2 Interest payments 0.8 1 1.1 1.5 1.6 1.7 Development expenditures 8.6 7.9 9.2 7.1 9.8 8.4 General Government Financing 6.4 6.6 5 6.2 5 4.6 External (net) 4.6 3.1 4.2 4.8 6.5 4.6 Domestic (net) 1.9 3.6 0.8 1.5 -1.6 0 Source: IMF and World Bank staff Table 3: Balance of Payment Financing Requirements and Sources 2012/13 2013/14 2014/15 2015/16 2016/17 Financing requirements (US$ million) Current account deficit -4,106 -5,068 -4,927 -4,867 -4,884 Debt amortizations 141 248 274 438 555 Financing Sources (US$ million) FDI and portfolio investments (net) 1,794 1,920 2,169 2,457 2,913 Capital grants 545 824 770 806 639 Debt disbursements (general government) 2,165 1,792 1,426 1,458 1,593 Change in reserves (net) 455 240 409 484 551 IMF credit (net) 114 0 0 0 0 Source: IMF and World Bank staff 15. In contrast to the contractionary monetary policy, fiscal policy has been used by the authorities to finance infrastructure projects and social services in addition to TANESCO’s operational gap. This shift is partly embedded in the Big Results Now (BRN) initiative, which has identified a series of priority investments for the short to medium term so that the country can address existing deficiencies, broadly share prosperity and put the economy on an even faster growth trajectory. This drive to fund investments has led to an increase in public spending by 0.6 percent of GDP between FY2011/12 and 2012/13. Concurrently, the level of public revenues was lower than the target by 0.3 percent of GDP in FY2012/13. As a result, the overall deficit increased from 5.0 percent of GDP in FY2011/12 to 6.2 percent of GDP in FY2012/13. This deterioration of the fiscal accounts, while manageable, contrasts sharply with the overall objective of further fiscal consolidation. 6 16. During FY2012/13, fiscal management was greatly affected by the financial difficulties of TANESCO, although the utility is now on a more sound footing. The Government transferred US$252 million (TSh 403 billion) to TANESCO to finance the deficit and payments of arrears, in addition to extending guarantees for TANESCO’s commercial borrowing of US$65 million. As a result, the total value of TANESCO’s arrears to EPPs and IPPs, which was US$276 million at the end of December 2012, was reduced to around US$243 million as of December 2013. In recent months, the Government has taken further measures to close the financial gap in TANESCO: it has guaranteed a commercial loan to TANESCO for the amount of US$150 million, it supported TANESCO’s application for a tariff increase, which resulted in the Energy and Water Utilities Regulatory Authority (EWURA) decision to raise the electricity tariff by an average of 39 percent starting from January 2014. 17. The Government budget for FY2013/14, approved by the Parliament in June 2013, aims at reducing the overall fiscal deficit to five percent of GDP. This target is consistent with the Government’s objective of maintaining fiscal sustainability, lowering the risk of debt distress, and avoiding inflation pressure. This projected fiscal deficit is based on a relatively ambitious increase in domestic revenue that will help finance priority programs and projects in infrastructure and social services. The level of total expenditure is projected to increase significantly to over 30 percent of GDP in 2013/14—its highest level in recent history and about three percent of GDP higher than in 2012/13 (Table 2). Development expenditure has increased largely due to the BRN initiative. The Government has prioritized key development projects in six priority sectors as part of the BRN initiative to foster shared growth in the country. Other development partners (DPs) and the World Bank Group, have been working very closely with the authorities on the prioritization of the investments in selected sectors. The year-to-year increase of development expenditure from 2012/13 to 2013/14 is also pronounced because of the under-execution of the development budget of 2012/13 (with actual expenditure of 7 percent of GDP compared to 9.2 percent in the approved budget).6 The 2013/14 budget also reflects a relatively sharp projected increase in the public wage bill as a result of the adjustment in minimum wage to keep up with the rising cost of living. The increase in wage bill is also caused by new hires in the education, health and agriculture with the goal of improving the quality of service delivery. 18. Based on the preliminary results of the first semester, significant fiscal adjustments are planned during the second half of the FY2013/14 in order to achieve the targeted fiscal deficit of 5 percent. Domestic revenue collections during the first half of the financial year fell short of initial targets by almost 10 percent. Recognizing this, the Government is set to implement significant fiscal adjustments during the mid-year budget review. On the revenue side, collections are expected to recover during the second half of the financial year thanks to the agreement reached with telephone companies to replace the proposed subscriber identity module (SIM) card tax by a higher excise tax rate of 17 percent up from 14.5 percent. On the expenditure side, the Government plans significant expenditure cuts on non-priority current spending while slowing down domestically funded development projects that are not part of the BRN initiative. 6 Foreign-funded development expenditure was significantly under-executed in 2012/13 due to lower-than- anticipated disbursement of projects and delays in recording foreign direct spending to project funds. 7 B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 19. Tanzania’s economic growth is projected to remain stable at around 7 percent in the medium term, largely driven by the same set of rapidly expanding sectors which drove growth in recent years and by an increase in public investment (as part of the “Big Results Now” initiative) (see Tables 1 and 2). In particular, the communication, financial, retail trade and construction sectors should continue to benefit from sustained increases in domestic demand as a result of technological changes and urbanization. In the medium term, the expected large FDI inflows toward the mining and natural gas sector should also drive the economy, notably through a boom in construction. The rate of inflation is expected to stabilize around 5 percent assuming there are no shocks on food and energy prices, and no major changes in monetary or exchange rate policy. 20. On the external front, the current account deficit should remain relatively high. However, it is expected to improve significantly in the medium term after domestic natural gas replaces liquid fuel as the main source of thermal power generation, thereby reducing presently costly energy imports. Over the next few years, the official reserves are projected to remain at around four months of imports of goods and services. 21. Tanzania has good prospects of becoming a major producer of natural gas in the medium term but the magnitude and timing of related investments remains uncertain. Tanzania has seen favorable natural gas exploration results. There appear to be good prospects that commercial quantities of natural gas will be confirmed, resulting in multibillion dollar FDI in Tanzania’s natural gas sector over the next five years, and subsequent large export and budget revenue flows around the end of the 2020s. The challenge is to prepare the country for the gas economy and establish strong foundations to best take advantage of this potential resource wealth. 22. The medium-term fiscal policy framework aims at further reducing the overall fiscal deficit to below 5 percent of GDP and stabilizing the total public debt at around 45 percent of GDP in FY2014/15. These targets are consistent with the Government’s objective of maintaining fiscal sustainability, low debt distress, and avoiding the risk of renewed inflation pressure. Towards this end, the Government is taking some measures. The review of VAT, enactment of the Tax Administration Act and EITI together with the rationalization of existing tax exemption regimes should help the Government to increase revenue collection from both tax and non-tax sources. The control of recurrent spending, notably the wage bill, will be required as well as considerable improvements in the selection and management of investment projects. Moreover, reforms being implemented in parastatal organizations such as TANESCO (especially recent tariff increases) and the pension funds should help reduce expenditure pressures on the Government budget. Close monitoring and improvement in both fiscal and debt management remain critically important. Nevertheless, this medium term fiscal framework is associated with some of risks which are described at the end of this section. 23. Tanzania's current risk of debt distress remains low provided fiscal consolidation is maintained. The last IDA-IMF Debt Sustainability Analysis 7 (DSA) (April 2012) shows that Tanzania’s risk of debt distress was low. The IMF’s Policy Support Instrument (PSI) staff report 7 DSA covers only the debt by central government and does not include parastatals and local government authorities. 8 discussed by the IMF’s Board in June 2013 also provided a similar assessment. However, while the debt distress is expected to remain low, the preliminary assessment from the ongoing preparation of the new DSA (to be ready in April 2014) indicates that public debt sustainability continues to be sensitive to fiscal consolidation (Figure 1), including measures to resolve pension-related liabilities (Table 1). This increased sensitivity, while manageable, is explained by the recent rapid increase in non-concessional borrowing (including in domestic debt) by the public sector. This risk highlights the importance of a sound debt management strategy, a conservative approach to non-concessional borrowing, and improving capacity to plan and execute public investments in order to ensure future debt and fiscal sustainability. Figure 1: Debt Sustainability PV Public Debt to GDP PV External Debt to GDP External Debt Position FY 2012/13 45 35 % of Total 40 30 US$ milli External % of on Debt GDP 35 25 Total External Debt 10,912 100% 36% 30 20 by Central Government 8,897 82% 29% by Parastatals 504 5% 2% 25 15 by Private Sector 1,511 14% 5% 20 10 Medium/Long Term 10,912 100% 36% 2013 2014 2015 2016 2017 2018 20 2013 2014 2015 2016 2017 2018 20 Short Term 0 0% 0% Baseline Historical Average Baseline Historical Average Lower growth Primary Balance Fixed Since 2 Low Growth, High Debt Export Decline (2015-16) Source: IMF and World Bank staff 24. The positive economic prospects are subject to a number of macro-fiscal challenges described below, which are presented in order of relative significance. 25. The first challenge is related to the fiscal stance. Tanzania’s infrastructure needs are so pressing that the Government might borrow more to finance those projects, especially if the authorities fail to meet their ambitious revenue target in FY2013/14 and FY2014/15. Experiences around the world show that maintaining prudence in fiscal policy is difficult in the context of a political cycle. The trade-off between prudent debt management and sustained public investment will have to be closely monitored by the Government. The IMF and the World Bank will need to continue providing technical assistance in management of the public debt. In addition, the joint Public Expenditure Review (PER) process provides an opportunity for the World Bank and other development partners to support the Government in monitoring the public debt and investments. Ensuring fiscal transparency and consolidation will also be critical. The Government should move towards a consolidated presentation of the State’s financial accounts, including those of the main parastatal agencies operating in the energy and mining sectors. 26. The second challenge is linked to the Government’s level of debt, the value of which stood at around 43 percent of GDP as of June 2013. As discussed above, this level appears manageable as long as the authorities maintain a relatively prudent fiscal policy. In that context, the Government is forecasting external borrowing on a non-concessional basis of around US$1.3 billion during the next two fiscal years. This expected borrowing should be sufficient to finance a number of new investment projects, while at the same time keeping debt to a sustainable level of 46.8 percent of GDP at end FY2014/15. Any significant deviation from this plan may endanger the Government’s creditworthiness as it will increase its debt service (which is already close to 9 nine percent of total expenditures) and its capacity to refinance at affordable costs on both the international and domestic markets. 27. The third challenge could arise from financial distress within the energy sector, especially TANESCO’s large deficit. While considerable progress was achieved in recent months, the size of the TANESCO deficit is itself sensitive to a number of factors outside of the Government’s control. For example, an increase in world oil prices will automatically lead to higher generation costs and therefore, to a higher TANESCO deficit. A combination of drought, increase in oil prices and time required to improve TANESCO’s financial and operational situation would add significant pressure to the Government’s fiscal accounts. 28. The fourth challenge relates to the accumulation of arrears by the Government, including with pensions. The value of the Government’s arrears grew substantially during FY 2012/13, reaching almost Tsh 376 billion at the end of June 2013. The high and growing level of Government arrears fails to incorporate important categories of delayed payment by the State, in particular to pension funds, which was estimated to reach Tanzania Shilling 1,200 billion as of December 2012. 8 This already significant figure, equivalent to about 3 percent of GDP, will increase rapidly if the Government fails to act, underscoring the need for urgent reforms in the pension system. The Government has recognized this problem and is taking some measures. For instance, through the joint PER process supported by the DPs, a study has been initiated which will establish the level, sources, solutions and ways of curtailing reoccurrence of payment arrears in the future. 29. The fifth and final challenge is associated with external factors. While the Tanzanian economy is not overexposed to global market volatility, it is not completely immune. Major fluctuations in commodity prices, notably gold and oil, will affect trade balance. The magnitude and timing of anticipated FDI inflows to the natural gas sectors will also impact the local economy, especially in the geographical areas where those investments will take place. The new investments are expected to be in the range of US$4-5 billion per year. Even if the majority of these funds are used to purchase imported goods, as is likely, their magnitude will modify the current equilibrium in the domestic financial markets and possibly have an impact on exchange rates. 9 These potential impacts will have to be carefully managed by the authorities. 30. Recent macroeconomic and fiscal developments have been adversely affected by the reduction in fiscal space, financial distress in the energy sector, higher debt levels and debt services, and the remaining volatility in the external environment. Nevertheless, the positive medium- and long-term economic outlook, as well as the relatively prudent overall macroeconomic policy stance in Tanzania, provides an adequate basis for a development policy operation. 8 The Public Service Pension Fund (PSPF) is in serious financial distress. Prior to 1999, the pension scheme in the public sector was non-contributory. As the PSPF was established in 1999 based on the contributory scheme, the Government has inherited the existing and future liabilities of pension benefits accrued under the pre-1999 non- contributory scheme, which is estimated to be about US$2,500 million (Tsh 4 trillion) based on the actuarial report prepared in 2010. As of December 2012, the Government had accumulated about US$750 million (Tsh 1.2 trillion) in arrears with PSPF, which has continued to pay pensioners on behalf of the Government 9 To illustrate if only 20 percent of the annual expected FDI inflows are spent in Tanzania, this might still represent around USD 1 billion, which is equivalent to one-fifth of total banking credit today. 10 C. IMF RELATIONS 31. Currently the IMF has a Standby Credit Facility (SCF) program with Tanzania; however the Government has requested IMF support for a new PSI program. The current precautionary 18-month arrangement under SCF for SDR 149.175 million (about US$224.9 million), which was approved by the IMF’s Board in July 2012, is designed to provide Tanzania a financial cushion to withstand deterioration in external demand and access to global financing. The SCF arrangement has been extended to April 30, 2014 from its original expiry date of January 5, 2014 to allow time for conclusion of the third and final review. The Government requested an extension of the SCF arrangement in order to have enough time to complete remaining policy and structural measures under the IMF-supported program. The IMF is also considering a new PSI arrangement following expiry of the previous PSI (2nd PSI) in June 2013 based on a request from the Government. The periodic IMF assessments of Tanzania’s macroeconomic performance serve as a key input to the dialogue and assessments on policies related to macroeconomic stability. III. THE GOVERNMENT’S PROGRAM 32. Tanzania has a medium-term national growth and poverty reduction strategy, MKUKUTA II, covering the period from 2010/11 to 2014/15. 10 It is a medium-term strategy to achieve the goals of Tanzania’s Development Vision 2025 (TDV 2025) and the MDGs. TDV 2025 sets forth Tanzania’s aspiration to become a middle income country by year 2025, characterized by high quality livelihoods; peace, stability, and unity; good governance; a well- educated and learning society; and a strong and competitive economy. MKUKUTA II is organized into the following three clusters: (i) growth and reduction of income poverty; (ii) improvement of quality of life and social wellbeing; and (iii) good governance and accountability. 11 33. The First Five Year Development Plan (FYDP I) (2011/12–2015/16) present the Government’s high-level policy priorities in operationalizing TDV 2025 and MKUKUTA II. The FYDP I complement MKUKUTA II by prioritizing key interventions in an orderly sequence so that they complement each other to enable more efficient and effective resource utilization. The overarching goal of FYDP I is unleashing the country's growth potential by fast- tracking the provision of the basic conditions for a broad-based and pro-poor growth. FYDP I is the first in the series of three five-year plans under the recently launched Long-Term Perspective Plan (LTPP) 2011/12-2025/26 “The Roadmap to a Middle Income Country.” Under the umbrella of LTPP, three strategic FYDPs are expected to be developed and implemented: the First FYDP (2011/12-2015/16) “Unleashing the Growth Potential,” which is currently being implemented, to be followed by the Second FYDP (2016/17-2020/21) “Nurturing an Industrial Economy” and the Third FYDP (2021/22-2025/26) “Realizing Competitiveness-Led Export Growth.” 34. Through the FYDP I the Government has identified five areas of emphasis, including infrastructure investments, such as: (i) hard infrastructure (energy, port, railways, roads, airports, and air-transport) and soft infrastructure (mainly information and communication 10 Concurrently, the Revolutionary Government of Zanzibar finalized the Zanzibar Strategy for Growth and Reduction of Poverty (Kiswahili acronym MKUZA II), covering the same period. 11 More details can be found in the PRSC-9 Program Document. 11 technologies, ICT); (ii) agriculture; (iii) industries (manufacturing, mining); (iv) water and sanitation; and (v) human capital development. The plan emphasizes the need to expand the cargo-volume handling capacities of the Port of Dar es Salaam and other ports to position the country as a regional transportation hub and international trade gateway. For manufacturing, it envisages setting up special economic zones (SEZs) in urban and rural areas. Moreover, FYDP I lays out the following three key areas that should help the implementation of the set of interventions planned under FYDP I: (i) sustained macroeconomic stability; (ii) governance and rule of law; and (iii) productive use of land to support growth. FYDP I also emphasizes the need for stronger revenue mobilization, including both conventional and innovative ways of resource mobilization. 35. Meanwhile, the Government has launched the BRN initiative with the objective of speeding up the implementation of FYDP I. The BRN initiative has helped the Government to establish a strong and effective system to oversee, monitor, and evaluate the implementation of its development plans and programs based on the Malaysian Big Fast Results approach. The Government has established a Presidential Delivery Bureau (PDB) and conducted the first wave of LABs. Detailed action plans have been developed through the LABs in six National Key Result Areas (NKRAs), namely Agriculture, Education, Energy, Transportation, Water, and Resource Mobilization. The action plans include concrete and ambitious indicators for measuring progress. Implementation of some of the action plans has started with financing from the 2013/14 budget with full implementation of all action plans expected in the 2014/15 budget. IV. THE PROPOSED OPERATION A. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 36. The proposed PRSC-11 is the third and final operation in a series of three annual development policy operations (PRSC-9 to PRSC-11) that support implementation of Tanzania’s growth and poverty reduction efforts. This final operation is based on the same two pillars and policy areas of the full series, which have been summarized in the introductory section of this document. The series has a cross-cutting emphasis on improved transparency and information access as an accountability tool. This focus is addressed through enhanced budget transparency, including timely publication of budget documentation, and revenue transparency, such as support to EITI in Tanzania, as well as wider transparency in the budget preparation and implementation, including through the public expenditure review (PER) process. While transparency is one entry point for the broader governance and anti-corruption agenda in the country, the specific focus on PFM and the investment climate under the series ensures alignment with the CAS and builds direct linkages with the two pillars of the series, particularly the public finance pillar. 37. This operation, in line with the full PRSC series, is built on the successes and lessons learned from previous series and remains well aligned with the Government’s priorities.12 The first pillar of public finance management continues to represent the core of fiscal policy and budget support. Significant and sustainable gains in allocative and operational fiscal efficiency will be crucial for infrastructure and social service delivery that will contribute to the medium- 12 The lessons from previous series are described in details in PRSC-9 and 10 program documents. 12 term objective to transform Tanzania to a middle-income country. The need to promote private sector development (the second pillar) is at the forefront of the recent FYDP I, in which private enterprises are viewed as the future engine of growth. The focus on selected areas such as SEZs and Tanzania’s role as a regional transit hub are high on the list of the Government’s interventions included in FYDP I. 38. Following the Implementation Completion and Results Report (ICRR) for the previous PRSC series, this series has taken a more selective approach in designing the operation while incorporating some flexibility. The series focus on a limited set of areas with high prospects for better reform traction contrary to the previous series which encompassed a wide range of reform areas. For example, a blanket approach to the business environment reforms which was not significantly successful. This PRSC series focus on specific areas within the business environment reforms or specific contexts to which such reforms are applied where there is potential to rebuild momentum of reforms by delivering solid results on the ground. 39. Moreover, the Independent Evaluation Group (IEG) review of the ICRR also noted the importance of realistic monitoring frameworks for effective reforms, drawbacks to long-term commitments to budget support, and the need for a tailored approach to far- reaching reform programs due to capacity constraints on the side of the client. The design of the current PRSC series have therefore incorporated a more focused and tractable set of outcome indicators, which are more directly linked with the policy actions supported by the operations. A shorter series of PRSC—three operations rather than five in the previous series, coupled with a more flexible approach to GBS PAFs, has allowed the Bank to introduce adjustments during the course of the series. To address the issue of capacity constraints for the client in carrying out reform programs, this PRSC series is designed to have better synergy with joint analytical programs with the Government and technical assistance activities by the Bank and other DPs. Examples include the PER process, PIAFF support on PPPs, a Multi-Donor Trust Fund (MDTF) to support the EITI initiative, the PFMRP IV, TA work on SEZs funded by the MDTF for Trade and Development. 40. Looking forward, a more focused approach is envisioned on the Governance/PFM agenda, in order to respond to the decline in effectiveness in service delivery. Such an approach is expected to lead to more focused and concrete results, and better alignment with efforts of the Government as well as the General Budget Support (GBS) framework. While the next DPO operation is still at an early stage of preparation, indicative policy areas are: (i) strengthening budget credibility and execution, including public investment management, cash management, procurement, and financial reporting; and; (ii) support for the Government’s Open Government Initiative (OGI) by - (a) enhancing policy and legal changes to support the OGI, including the freedom of information bill and regulations; (b) supporting the dissemination of public information (inputs, outputs, and outcomes/results) for use by information intermediaries and citizens, and (c) strengthening accountability mechanisms emerging from the availability of information and data to a broader audience. B. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 41. The list of prior actions of this operation which have all been completed is summarized in Table 4. The complete policy and results matrix for the series, including outcome indicators, can be found in Annex 1. 13 Table 4: PRSC-11 Prior Actions No Prior Action Status 1. The Recipient has drafted legislation institutionalizing the Extractive Industries Transparency Completed Initiative (EITI) and providing a sound framework for EITI’s operation in its territory and has completed stakeholder consultations on the draft legislation. Same. 2. The Recipient’s Cabinet has approved a bill to enact the Tax Administration Act and said bill Completed has been finalized by the Attorney General’s Chamber. Modified to capture the latest developments. 3. The Recipient: (a) has drafted a bill to amend the Planning Commission Act; and (b) has Completed initiated development of a public investment operational manual to provide guidance for the ministries, departments, and agencies and the local government authorities to carry out economic and financial analysis of public investment projects. Modified to capture the latest developments. 4. The Recipient’s Cabinet has approved amendments to the PPP Act No. 18 of 2010 to: (i) Completed streamline the number of approvals required for PPP projects; (ii) create the PPP facilitation fund; and (iii) establish rules for unsolicited proposals. Modified to capture the latest developments. 5. The Recipient has: (a) through its Internal Auditor General issued public sector audit committee Completed guidelines to improve effectiveness of audit committees MDAs and LGAs; and (b) facilitated implementation of the Procedures Manual for the QAIP and of the Guidelines for Developing Institutional Risk Management Framework (IRMF) in Public Sector, issued by the Internal Auditor General. Same. 6. The Recipient has: (a) completed and published the MTDS, which recognizes as central Completed government debt off-budget liabilities, including from pension funds and other parastatals; and (b) submitted to its Cabinet proposed amendments to the Government Loans, Grants and Guarantees (GLGG) Act CAP 134 R.E. 2004. Modified to capture the latest developments. 7. The Recipient has published on the MoF website: (a) guidelines for the preparation of the Completed annual plan and budget for FY2013/14 by December 2012; (b) the executive budget proposal for 2013/14 as submitted to its Parliament by June 2013; (c) the approved budget for FY2013/14 by September 2013; (d) the citizens’ budget for FY2013/14 by November 2013; and (e) the year-end report on preliminary budget outturn by November 2013. Same. 8. The Recipient has established a single one-stop services center of MDAs for SEZs’ investors Completed and has developed operational guidelines for public private partnership (PPP) arrangements for SEZs. Same. 9. The Recipient has taken measures to improve port efficiency including: (a) strengthening Completed implementation of custom regulations which require manifest to be lodged electronically 24 hours before arrival of the vessel by effecting penalties for non-compliance; (b) starting to implement the Action Plan to move Tanzania Port Authority (TPA) to landlord status, including completion and adoption of feasibility study for berths one to seven with options for public private partnerships (PPPs); and (c) developing and implementing action plan to merge cargo management and clearance under the new automated custom system (TANCIS). Same. 14 10. The Recipient has issued an operational manual for border trade and has widely disseminated Completed the manual to traders to increase their awareness of required procedures for trading across the border. Same. 42. The proposed prior actions are the result of the discussions with the Government and informed by analytical underpinnings as summarized in Table 5. Table 5: PRSC 11 Prior Actions and Analytical Underpinnings Prior Actions Related Analytical Work Findings I: Public Finance Pillar 1 The Recipient has drafted legislation IMF TA reports, EITI payments Need for increasing revenue institutionalizing the Extractive Industries reconciliation reports (annually) collection from natural Transparency Initiative (EITI) and providing resources in a transparent and a sound framework for EITI’s operation in its accountable way is critically territory and has completed stakeholder important. consultations on the draft legislation 2 The Recipient’s Cabinet has approved a bill PER Tax Exemption study (2013); Low levels tax revenue to enact the Tax Administration Act and said WB Tax Modernization TA; WB collections due to weak tax bill has been finalized by the Attorney PSIA (2006); IFC EAC tax wok; policies and administration, General’s Chamber. FIAS study (2006); and TRA’s including increasing levels of informal studies tax exemptions. 3 The Recipient: (a) has drafted a bill to amend PEFA (2013); WB PER (2010); and Need to improve clarity the Planning Commission Act; and (b) has PIM-OM (2014) between POPC, MoF and other initiated development of a public investment MDAs/LGAs with regards to operational manual to provide guidance for PIM; and Lack of clear the ministries, departments, and agencies and guidance on structure of the the local government authorities to carry out project cycle that each public economic and financial analysis of public investment should go through. investment projects. 4 The Recipient’s Cabinet has approved PEFA (2013); WB PER (2012); PER Government is increasing to amendments to the PPP Act of 2010 to: (i) Joint Rapid Budget Analysis (2012); moving into new ways of streamline the number of approvals required WB PER report(2010) ); and PPP financing it infrastructure PER study (forthcoming) for PPP projects; (ii) create the PPP investments, including non- facilitation fund; and (iii) establish rules for concession borrowing and unsolicited proposals. private sector through PPP. 5 The Recipient has: (a) through its Internal PEFA (2013); WB PER (2012); PER There are still critical issues in Auditor General issued public sector audit Joint Rapid Budget Analysis (2012); PFM reforms in Tanzania, committee guidelines to improve Open Budget Partnership; WB PER including the effectiveness of (2011); WB PER (2010); WB the IFMS, oversight of public effectiveness of audit committees MDAs and PEFAR (2009) and PEFA (2009). enterprises, internal audit LGAs; and (b) facilitated implementation of functions, and fragmented debt the Procedures Manual for the QAIP and of management functions. Value- the Guidelines for Developing Institutional for-money in public Risk Management Framework (IRMF) in expenditure program is still Public Sector, issued by the Internal Auditor critical area which needs General. improvement, especially in procurement and cash management. 15 Prior Actions Related Analytical Work Findings 6 The Recipient has: (a) completed and PEFA (2013); WB PER (2012); PER There are still critical issues in published the MTDS, which recognizes as Joint Rapid Budget Analysis (2012); PFM reforms in Tanzania, central government debt off-budget IMF-WB TA reports (various); Open including the effectiveness of Budget Partnership; WB PER (2011); the IFMS, oversight of public liabilities, including from pension funds and WB PER (2010); WB PEFAR (2009) enterprises, internal audit other parastatals; and (b) submitted to its and PEFA (2009) . functions, and fragmented debt Cabinet proposed amendments to the management functions. Value- Government Loans, Grants and Guarantees for-money in public (GLGG) Act of 2004 expenditure program is still critical area which needs improvement, especially in procurement and cash management. 7 The Recipient has published on the MoF PEFA (2013); WB PER (2012); PER Limited transparency in budget website: (a) guidelines for the preparation of Joint Rapid Budget Analysis (2012); preparation, implementation the annual plan and budget for FY2013/14 by Open Budget Partnership; WB PER and reporting as reflect by low (2011); WB PER (2010); WB score of the OBI. December 2012; (b) the executive budget PEFAR (2009) and PEFA (2009) proposal for 2013/14 as submitted to its Parliament by June 2013; (c) the approved budget for FY2013/14 by September 2013; (d) the citizens’ budget for FY2013/14 by November 2013; and (e) the year-end report on preliminary budget outturn by November 2013. II: Investment Climate Pillar 8 The Recipient has taken measures to improve WB-DANIDA Port Study (2013); Need for improving of the port efficiency including: (a) strengthening recent WB SEZ Africa Study; WB investment climate in Tanzania, implementation of custom regulations which Micro-foundations for growth (2012); including institutional, require manifest to be lodged electronically WB ESW- Reshaping Economic regulatory, and infrastructure 24 hours before arrival of the vessel by Geography (2012); GoT Road Map reforms and coordination. effecting penalties for non-compliance; (b) (2010); WB CEM (2014); and WB starting to implement the Action Plan to TA work on SEZs and EPZs. move Tanzania Port Authority (TPA) to landlord status, including completion and adoption of feasibility study for berths one to seven with options for public private partnerships (PPPs); and (c) developing and implementing action plan to merge cargo management and clearance under the new automated custom system (TANCIS). 9 The Recipient has issued an operational WB-DANIDA Port Study (2013); Need for improving of the manual for border trade and has widely recent WB SEZ Africa Study; WB investment climate in Tanzania, disseminated the manual to traders to Micro-foundations for growth (2012); including institutional, increase their awareness of required WB ESW- Reshaping Economic regulatory, and infrastructure procedures for trading across the border. Geography (2012); GoT Road Map reforms and coordination. (2010); WB CEM (2014); and WB TA work on SEZs and EPZs. 10 The Recipient has drafted legislation WB-DANIDA Port Study (2013); Need for improving of the institutionalizing the Extractive Industries recent WB SEZ Africa Study; WB investment climate in Tanzania, Transparency Initiative (EITI) and providing Micro-foundations for growth (2012); including institutional, a sound framework for EITI’s operation in its WB ESW- Reshaping Economic regulatory, and infrastructure territory and stakeholder consultations have been completed. Geography (2012); GoT Road Map reforms and coordination. (2010); WB CEM (2014); and WB TA work on SEZs and EPZs. 16 Public Finance Pillar 43. The past and current PRSC series have focused on improving fiscal policy formulation and management which is critical for achieving PDO through better management of public finances while ensuring macroeconomic stability and safeguarding shared growth. The focus on the fiscal areas has been justified by: (i) the importance of public finance as an instrument for achieving economic growth and poverty alleviation and (ii) the cross-sectoral nature of most fiscal reforms. The current PRSC series aims at supporting the Government’s effort in the areas of revenue mobilization, public investment, and reforms in PFM and governance. This selection is aligned with Government’s priorities and the support provided by other DPs, including the IMF. Policy Area: “Enhanced efficiency and transparency in domestic revenue mobilization” 44. The Government recognizes the importance of stepping up its effort to mobilize further tax revenues to expand the country’s fiscal space for growth and sustainability in the long run. The IMF estimates that the tax gap (defined as the deviation of the actual collections from what Tanzania could potentially collect given international comparison of tax policy and quality of tax administration) as around 5.8 percent for FY2008/09, down from over 10.0 percent in FY2001/02. While smaller, this gap suggests scope for improvements in tax collection through better enforcement and tax policy measures, including controlling the growing level of tax exemptions. Despite the Government commitment to reduce them, exemptions from indirect taxes amounted to 3.1 of GDP in FY2012/13. Different Government strategic documents including the FYDP I set a target of reducing exemptions to one percent of GDP by 2015. The Government and development partners, through the joint PER process, have completed a study on management of tax exemptions that should provide the basis for dialogue. 45. The Government, through the Tanzania Revenue Authority (TRA), has actively continued to modernize its tax administration over the past few years to improve efficiency in tax revenue mobilization. The Government has prepared a bill for enacting the Tax Administration Act, which will further modernize tax administration by establishing a common tax procedure code that consolidates and harmonizes administrative procedures from different tax laws, such as income tax and VAT. The Act is expected to substantially simplify the revenue collection system both from collector and payers’ perspectives, thereby improving efficiency in revenue collection. The bill has been drafted by the AG Chamber and is ready for submission to the Parliament in May 2014 (PRSC-11 prior action). 46. Value Added Tax (VAT) reform is among further efforts being taken by the Government to improve tax revenue mobilization. The VAT reform is aimed at reducing the level of tax exemptions. TRA is reviewing the scope of the VAT exemptions with TA by the IMF, while the World Bank Group’s Investment Climate Advisory Services is also providing TA to review tax incentives to businesses at the EAC level. The VAT system in Tanzania is relatively inefficient due to the erosion of the effective base through zero-ratings and a series of exemptions. The authorities anticipate the bill to be submitted to the Parliament in May 2014. The Government through the 2013/14 budget speech has made some amendments to the VAT Act, CAP 148 with the aim of reducing tax exemptions in the tourism sector and the provision of Special relief to domestic textile manufacturers instead of zero rating. Further efforts to address 17 the scope and magnitude of tax exemptions are linked to a review of the overall investment promotion regime in Tanzania. 47. The Government recognizes the importance of increasing revenue collections from non-tax sources to expand the country’s fiscal space for growth and sustainability in the long run. The importance of strengthening domestic revenue collection, especially from natural resources, is well recognized in both the MKUKUTA and FYDP I. However, improving transparency in revenue flows from natural resources is particularly critical as the country anticipates growth in revenue flows from extractive industries, including mining and natural gas sectors. In order for the EITI to enforce transparency and accountability in collecting revenues from the extractives its legal framework needs to be well defined. 48. The Government has made solid progress in improving revenue transparency through EITI and succeeded in obtaining EITI compliance status in December 2012 and launching the third EITI reconciliation report. Given potentially significant revenue flows expected from off-shore natural gas in the future, as well as growing tax revenue from gold mines, obtaining an EITI compliant status was a major achievement for the country. The third EITI reconciliation report has been prepared and launched in June 2013. The third report was launched 24 months after the end of the relevant fiscal year, which is at the maximum time EITI International Board would allow for a country to maintain its EITI compliant status. The delay in publication of the past two reports is a concern since timely publication of annual audited EITI reconciliation reports is a requirement for Tanzania to maintain its EITI-compliant status. The Government is committed to prepare the fourth EITI reconciliation report for covering 2011/12 by June 2014. 49. Institutionalizing the EITI operations by establishing its governing legal framework is the next major step for the country after achieving EITI compliance status. While the current voluntary-based EITI exercise benefited from good participation among existing companies, it is important to ensure participation of new investors in the growing extractive industries in Tanzania through well-defined legal frameworks. In line with international best practice, the EITI legislation should also enshrine transparency and accountability principles along the value chain for all extractive industries. 13 Inclusiveness in the preparation process, by ensuring a broad-based local consultation process with citizens’ participation, is a key to successful preparation, as recently demonstrated in Liberia or Ghana. The Government has prepared a set of recommendations for the EITI legislation, including stakeholders’ consultations, and inputs from South-South exchange (SSE) learning experience in November 2013 (PRSC-11 prior action). 14 Policy Area: “Sound public investment management (PIM) including PPPs” 50. Public investments in Tanzania experience significant challenges including, limited capacity in planning, evaluation and controls. Further clarity is needed on the mandates among different ministries and institutions involved in planning and coordination of the public 13 Following international best practices, it is anticipated that such legislation in Tanzania would make concessions and contracts publicly disclosable, establish the EITI as legally autonomous body, and ensure participation of existing and new investors in such exercise. 14 The adoption of the new EITI legislation will have been accompanied by proper regulations and proper capacity- building in relevant government agencies as well as CSOs. 18 investment management (PIM) in the country. In particular, the roles and the linkages among the three central government offices in public investments: President’s Office Planning Commission (POPC) as the custodian of the overall public investment strategy, Prime Minister’s Office (PMO) as the coordinator of the sector ministries’ work as well as the PPP agenda, and MoF as the fiscal authority managing overall allocation of Government resources. The inadequacy of in- house technical expertise has also prevented a sound evaluation of projects and their selection within and across sectors. Significant improvement in the prioritization of public resources allocation and controls for effective implementation of projects is critically needed. The emphasis on PIM is aligned with the Government’s effort to close existing infrastructure gaps and is expected to grow in importance over time given the prospect of future domestic revenue derived from natural gas production. 51. Clarification of the mandate of POPC and its legal framework is required for establishing the proper institution of PIM and ensuring linkage between FYDP and the budget process. POPC has commissioned a study to review its functions and legal mandate in light of its new role as a Government think tank charged with responsibility of anchoring implementation of TDV 2025 and guiding the national economy. The Government has drafted a bill to amend the 1989 Planning Commission Act (PRSC-11 prior action) that is anticipated to be submitted to the Parliament in May 2014. Among the issues under consideration are clarification of the role of POPC with regard to PIM and demarcation of responsibilities and coordination among POPC, MoF, PMO, and the newly formed Presidential Delivery Unit (PDU) 15. 52. The PIM operational manual is critical for mainstreaming the use of proper economic and financial assessments of public investment projects. POPC has initiated the drafting of the PIM operational manual that will be adopted by the Government in March 2014 to guide MDAs, Regional Secretariats (RSs), and LGAs to prepare standard project proposals that will be included in the budget(PRSC-11 prior action). The manual will set the standard framework for evaluating public investment projects. Building necessary capacity at POPC and other MDAs for PIM_OM use and implementation is critically important and has been identified by the joint PER process as the next important activity for support in strengthening PIM in the country. 53. The PPP regime in Tanzania is still in the early stages of development. A PPP policy was approved by the Cabinet in November 2009, and the PPP Act was enacted in August 2010. Following the PPP Act, the Government has successfully established an operational PPP Finance Unit within Ministry of Finance (MoF), as supported by the previous operation, PRSC-9. The PPP regulations operationalizing the PPP Act (the “PPP Regulations”) were issued in June 2011, setting up the approval process of PPP projects with functions of PPP Coordination Unit in TIC clarified. There are nonetheless some areas which are unclear, including lack of clarity on and complexity of the approval process, the approach to unsolicited bids, and managing fiscal risks associated with PPP. Also, lack of adequate funds from the government budget to develop the PPP agenda. 15 The Government has established Presidential Delivery Unit that is responsible for monitoring implementation of the NKRAs action plans, including strategic investment projects. 19 54. In line with the recommendations of the Resource Mobilization Lab of the BRN initiative, the Government has approved amendments to the PPP Act of 2010 (PRSC-11 prior action). The amendments include among other: (i) streamline the number of approvals for PPP projects; (ii) create PPP facilitation fund; (iii) establish rules for unsolicited proposals; (iv) establish procurement rules for PPP projects under the PPP Act (and not under the Procurement Act); (v) clarifying the management of contingent liabilities resulting from PPP projects; and (vi) combining the two current PPP Units in TIC and MoF into a single PPP unit in the MoF. Merging of the two PPP units will simplify and speed up the approval process of PPP projects while ensuring more focused ownership within Government. The new PPP regulations that will implement the amended PPP Act have been drafted pending adoption by the Government after the Parliament approves the amendments to the Act. Policy Area: “Improved quality of budgets and a stronger public financial management (PFM) system” 55. The Government has implemented PFM reforms registering substantial progress over the past two decades, but significant challenges remain. With support from the Public Financial Management Reform Program (PFMRP) and other donors, Government has improved its capability on Debt Sustainability Analysis (DAS), developed a macroeconomic forecasting model and financial programing module, strengthened the budget preparation system (including the upgrading of the IT-based Strategic Planning and Budgeting System), upgraded the IFMS and the IT-based payroll control program (Lawson), strengthened public procurement, established the Aid Management Platform (AMP), and strengthened the National Audit Office. The Government adopted a new budget cycle in 2013, which has advanced the timing of individual steps toward budget preparation, presentation, and approval by the Parliament by end June. This reform is anticipated to improve budget execution as the budget is approved before the start of the new fiscal year. Major challenges still remain in further strengthening the PFM system, notably in the areas of debt management, oversight of fiscal risk of public enterprises, transparency of discretionary tax exemptions and the executive budget proposals, and non-salary expenditure controls as the country anticipates an increase in external borrowing on non- concessional terms. The Government, through the PFMRP IV which began in 2012, is committed to further strengthening the PFM systems in line with the PEFA 2013 report, particularly in enhancing budget credibility, reducing the contingent liabilities of public enterprises and improving cash management. 56. The Government is taking measures to strengthen audit functions including through rolling out risk-based internal auditing to all ministries, departments, agencies (MDAs) and local government authorities (LGAs) as well as Government Business Entities (GBEs). MoF Internal Auditor General (IAG) has finalized public sector audit committee guidelines in December 2013, including stakeholders’ consultations (PRSC-11 prior action). The guidelines have also been published in January 2014. The guidelines will help improving the follow-up of audit recommendations by enhancing audit committees in MDAs and LGAs as well as Government Business Entities (GBEs) which receive subventions from the general budget. The Government has facilitated implementation of the Procedures Manual for the Quality Assurance Improvement Program and the Guidelines for Developing Institutional Risk Management Framework in Public Sector through: (i) issuance of circular by the Permanent Secretary Treasury effective from July 2013 which requires all Accounting Officers to implement the manual and the guidelines; (ii) IAG has developed action plan to be followed by MDAs & LGAs 20 in developing Risk Management Framework; and (iii) IAG has conducted risk management training (implementation and awareness) to 39 champions from 10 MDAs and 29 LGAs (PRSC- 11 prior action). These manuals and guidelines will complement the use of IFMS, which cannot provide a full guarantee that expenditures comply with internal audit procedures. 57. Tanzania is increasingly moving to non-traditional sources of financing such as non- concessional borrowing and PPP and therefore monitoring associated fiscal and quasi- fiscal risks is critically important. Currently the debt management functions are spread among four offices of the Government of Tanzania (at MoF and BoT) making debt management less effective. Recognizing this and with TA support from the World Bank the Government has decided to establish a consolidated debt management office within the MoF. To operationalize the proposed consolidated debt management office, the Government is revising the National Debt Strategy and amending the 2004 Government Loans, Grants, and Guarantees (GLGG) Act. The MoF has completed and published on its website in January 2014 the Medium Term Debt Strategy (MTDS) in line with prudent practice, whereby liabilities arising from off-budget project implementation, pension contribution arrears, and other liabilities that have been committed on future budget are recognized as central government debt (PRSC-11 prior action). The MTDS provides key inputs for revising the NDS and amending the GLGG Act. The MoF has also completed drafting and submitted to the Cabinet the proposed amendments to the GLGG Act (2004) in February 2014. (PRSC-11 prior action). The Government targets the Parliament session in May 2014 for submission of the GLGG Act amendments. 58. The Government’s commitment to disseminate budget information is critical for demand-side accountability and improved budget transparency. The Government has continued to publish budget books and budget execution reports on the MoF website. As a result, Tanzania improved slightly its score on Open Budget Index (OBI), evaluated biennially, to 47 in 2012 from 45 in 2010. The Government has published on the MoF website: (i) Plan and Budget Guidelines for 2013/14 in December 2012; (ii) the executive budget proposal was submitted to the Parliament in June 2013; (iii) the approved budget for 2013/14 published in September 2013; (iv) the citizens’ budget for 2013/14 published in November 2013; and (v) budget execution report for Q4 of 2012/13 which includes budget out-turn in February 2014 (PRSC-11 prior action). Moreover, in 2013 the Government submitted to the IMF the 2009/10-2011/12 fiscal accounts for the first time in the GFSM2011 format for publication in the 2012 Government Financial Statistics Yearbook. There is also ongoing dialogue between the authorities and the Bank on publication of disaggregated public expenditure data by regions/district and by sector category on a regular basis, which could be made available in a user-friendly format such as BOOST. 59. Outcome indicators. The implementation of the actions supported by the DPO series has been monitored by the following indicators: (i) domestic revenue as percentage of GDP; (ii) time taken before publishing an annual EITI payment reconciliation report after the end of relevant FY; (iii) number of new public investment projects appraised in a year based on economic and financial analysis as outlined in operational manuals prepared by POPC as a percentage of total new public investment projects by ministries, departments and agencies (MDAs) in the same year; (iv) number of PPP projects signed after ex-ante value for money and affordability reviews by the Ministry of Finance; (v) approved budget broadly in line with policy objectives (MKUKUTA, FYDP, sectors policy priorities - based on the agreed formula in GBS); (vi) proportions of ministries, departments, and agencies (MDAs), Regions and local government 21 authorities (LGAs) that are electronically connected with integrated financial management system (IFMS); (vii) Open Budget Index (OBI); and (viii) average compliance rate of MDAs and LGAs with internal audit guidelines. Investment Climate Pillar 60. Both building sound institutions for SEZs and improving investment climate as regional transit hub directly contribute to the investment climate part of the PDO. The policy actions that supported the operation under two areas can help the country and its industries to leverage positive externalities through industrial agglomeration and economies of scale from regional integration, leading to larger downstream development impacts on production, employment, and transfer of skills and technology. The policy actions supported for SEZs are intended to strengthen the SEZ regime for managing zones that are based on physical agglomeration of industries. Removing investment climate constraints, particularly in terms of in-country transit and efficiency in border-crossing and port operations, enhances the ability for the country and domestic industries to leverage Tanzania’s geographical advantage as a coastal country, economies of scale from regionally integrated markets and developing more competitive logistics industries. It will also provide positive impacts on its neighboring countries. The areas are among the priorities of the FYDP I and are consistent with the new BRN initiative. Policy Area: “Effective institutions for promoting and regulating special economic zones (SEZs)” 61. The Government is committed to strengthening the SEZ regime through improved investment climate in line with FYDP. Towards that end, the Government has integrated the export processing zones (EPZ) program into the SEZ regime. This new orientation is aimed at gradually replacing the current program for EPZs. The objective of the SEZ program is to attract investors through the development of physical zones that have improved infrastructure provision, streamlined regulatory procedures, and relaxed export restrictions (that are typical in EPZs). To operationalize the legal framework for SEZs, the Ministry of Industry and Trade prepared and adopted the SEZ regulations on November 23, 2012 (Government Notice No. 359). These regulations distinguish the roles of the developer and the regulator of a zone, with the Government being the regulator in most cases rather than the developer. 16 Also, the regulations set forth selection criteria for developing SEZs with emphasis on economic and social impacts while providing guidance on the process of issuing and regulating licenses for developing and operating SEZs. They also encourage private sector participation in the development, operation, maintenance, and promotion of SEZs in Tanzania through PPPs. 62. Ensuring implementation of effective operational one-stop services center for SEZ investors and to build capacity for managing PPP contracts as stipulated in the regulations are the next steps. Implementation of a one-stop services center for SEZ-based enterprises is viewed as central to streamlining administrative procedures in those zones (notably in the areas of licenses, taxes, customs, work permits, visas, residence permits, and land matters) as the Government continues its effort to simplify existing procedures (PRSC-11 prior action). Towards this end, the Government has established a special desk at key MDAs such as Labor Office, Immigration, and TRA for fast tracking provision of SEZ related services. The 16 This would minimize the potential of failures from the Government’s intervention to address market failures. 22 Government has set aside office space at the Benjamin William Mkapa (BWM) SEZ where staff from those key MDAs will be housed. The Government through relevant MDAs has appointed staff to be relocated to the BWM-SEZ office by letters signed in January 2014. The operational guidelines for PPP arrangements in the SEZs has been finalized and approved by the EPZA Board in December 2013 (PRSC-11 prior action). Policy Area: “Improved investment climate as a regional transit hub” 63. Facilitating safer and faster road transport along key corridors in Tanzania is part of the Government’s initiative to enhance the country’s advantage as a transit hub. The numerous roadblocks in Tanzania are serious nontariff barriers (NTBs) that affect not only the competitiveness of the landlocked neighbors of Tanzania but also affect the country’s own latent potential as a regional transit hub. Numerous police checkpoints is among the problem areas identified in the Tanzania NTB Elimination and Monitoring Plan prepared by the National NTB Monitoring Committee in Tanzania as a part of a regional initiative at East African Community (EAC) level. Tanzania has reduced the number of police checkpoints along the corridor between Dar es Salaam and Rusumo (border posts with Rwanda) from 54 to 15. 17 64. To facilitate trade at the border posts, the Government has set up joint border committees (JBCs) and one-stop border posts (OSBPs) at key border posts. The establishment of JBCs between teams of multiagency representatives from two bordering countries is a notable first step toward establishing OSBPs. However, efficiency and effectiveness of JBCs vary. Challenges include lack of clear legal and institutional mandate, inadequate infrastructure (especially power) and lack of clear guides on cargo clearance at the borders, especially for informal traders many of whom are women. 65. To continue improving environment for border traders, including informal traders, the MoIT has developed and widely disseminated a simple guide (operational manual for border traders) for clearance of cargo across Tanzania borders and at the port of Dar es Salaam (PRSC-11 prior action). The guide helps to increase awareness of required procedures for trading and clearing goods across the borders and at the port of Dar es Salaam by collating together information of all relevant border-related procedures such as customs and immigration. The Government has widely distributed the guides to traders through the six Joint Border Committees (JBCs) and at the Dar es Salaam International Trade Fair. However, for better dissemination the Government needs to prepare the Swahili and simpler versions of the guide for informal traders. 66. Improved efficiency in port operations is another critical element in improving competitiveness as a transit hub. The poor performance of the port over the past few years has been a key impediment to trade in Tanzania. The dwell time at the Port of Dar es Salaam declined from above 20 days to around 9 days in 2011 partly due to the one-stop center, inaugurated in July 2011. In 2012, the average dwell time for imports increased to 10 days while for transit it increased to 17 days on average according to a recent World Bank study (2013). The study also indicates that the cost of dwell time is estimated to be equivalent to about 5 percent additional tariff for bulk cargo and about 23 percent additional tariff for container cargo. 17 This was also one of the quick-win actions for improving business environment as programmed in the Government Roadmap on the Improvement of Investment Climate in Tanzania. 23 Furthermore, in 2012, the study estimates that Tanzania’s economy lost US$1,759 million and its neighboring countries US$830 million due to inefficiency in the port. The inefficiency is due outdated infrastructure at the port, corruption, long delays at anchoring and use of discretionary rules that contribute to the typical asymmetric information problem between port administrators and users. 67. To improve the business environment, the Government must aim to improve the efficiency of the port of Dar es Salaam. The Government has implemented the following measures to improve port efficiency: (i) strengthened implementation of custom regulations which require manifest to be lodged electronically 24 hours before arrival of the vessel by effecting penalties for non-compliance; (ii) started to implement the Action Plan to move Tanzania Port Authority (TPA) to landlord status, including completion and adoption of feasibility study for berths one to seven with options for public private partnerships (PPPs); and (iii) developed and implemented action plan to merge cargo management and clearance under the new automated custom system (TANCIS) (PRSC-11 prior action). In addition, the accountability in the port of Dar es Salaam was upgraded by appointing new Board and Management of TPA, which have begun to generate momentum for change. Nevertheless, continued efforts to improve port efficiency are still critically needed. Improved transparency in the port operations would also contribute to improved revenue collection since almost 90 percent of Tanzania’s international trade transits through the port gates. The one-stop center is a temporary arrangement before the establishment of an electronic single window operation—a Port Community System – its procurement process is still under way. 68. Outcome indicators. The implementation of the actions supported by the DPO series has been monitored by the following indicators: (i) average container dwell time and ship turnaround time at the Port of Dar es Salaam; (ii) average time taken for trucks to cross the main border posts; (iii) number of operating investors in the existing special economic zones; and (iv) average time taken for operators to get license within the zone. C. LINK TO CAS AND OTHER BANK OPERATIONS 69. The PRSC series is well aligned with the current CAS for FY12-15 and consistent with the World Bank’s Regional Strategy for Africa. Under the CAS Outcome 1.1 (improved business environment and financial intermediation), the PRSC operation is expected to provide a platform for policy dialogue and support critical structural reforms for private sector development. The PRSC series, through its focus on Tanzania’s competitiveness as a regional transit hub, contributes to CAS Outcome 2.2 (increased access to and quality of transport services), while its focus on domestic revenue mobilization contributes to Outcome 2.4 (improved management and delivery of urban services). The cross-cutting emphasis on transparency of revenue mobilization and budgets contributes to the accountability and governance foundation of the CAS and the regional strategy for Africa. The focus on investment climate supports the competitiveness and employment pillar of the regional strategy. An improved PIM and the implementation of the newly established PPP framework also contributes to the improvement of the country’s competitiveness. The vulnerability and resilience pillar of the regional strategy is captured by the series as it is anchored on macroeconomic stability and improving the country’s resilience against exogenous shocks. 24 70. The other Bank operations in Tanzania are complementing the PRSC series to support the CAS outcomes. The Urban Local Government Strengthening Program (a program-for-results operation) has significant focus on revenue mobilization and PFM of urban LGAs, complementing the central government focus of the PRSC series. The Power and Gas DPO series (and TA) supports the power and natural gas agenda, including the fiscal sustainability of the energy sector which is a critical element in macro-fiscal stability of the country. The DPO is also addressing governance and PFM issues as well as private sector development within the energy sector, including the natural gas subsector, complementing the PRSC series’ support to the Government’s effort to build overarching institutional frameworks related to those issues. The Bank is finalizing its operation of support to the Southern Agriculture Corridor of Tanzania initiative, while the recently approved additional financing for the Private Sector Competiveness Project has had a significant focus on land. Meanwhile, new operations on PFM and Governance and on private sector development are being considered. D. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 71. The reform agenda supported by the PRSC series derives from Tanzania’s MKUKUTA II and FYDP I. MKUKUTA II and FYDP I were developed through intensive consultative processes with a wide array of stakeholders, including civil society organizations (CSOs). The revamped joint Government and donors PER process has continued to provide another platform for consultations on fiscal policy reforms. PFMRP IV provides a coordinated platform for technical dialogue on PFM in the country. The PFMRP IV program, a basket fund to support the Government’s effort in PFM reforms, focuses on strengthening revenue management, planning and budget management, budget execution, transparency and accountability, budget control and oversight, change management, and program monitoring and evaluation. The design and the monitoring of the PRSC series in the area of PFM are coordinated with the PFMRP IV evaluation framework. Finally, the GBS annual review provides another wide forum, with participation from the Government, DPs, private sector and CSOs, for discussing and consulting on policy reforms required for achieving bigger impact on poverty reduction. 72. Like in the past, the proposed operation is implemented through the harmonized framework for the GBS including Japan, through JICA, providing parallel financing with IDA PRSC. 18 The GBS is the Government’s preferred aid modality that provides financial assistance to the overall national budget, counting for 6 percent of the government budget and 24 percent of the total foreign aid to Tanzania in FY2012/13. 19 Under the harmonized GBS framework in Tanzania, the DPs coordinate their policy dialogues with the Government through a structured Cluster Working Groups and Sector Working Groups, guided by the annual PAF agreed between the Government and the GBS donors. The PAF is evaluated jointly by the GBS donors and the Government every year. The PAF 2013 which was assessed in November 2013 was overall successful. The PRSC series primarily contributes to Cluster I (growth and reduction of income poverty) and to Cluster IV (macroeconomic management and public financial management) within the GBS framework. 20 The Bank team also has been contributing to the other two clusters, by participating in the annual sector review process and sector working 18 Japan has been providing parallel financing with all IDA PRSC operations since PRSC-4, except for PRSC-9. 19 The 12 DPs participating in GBS are: African Development Bank, Canada, Denmark, European Union, Finland, Ireland, Japan, Germany, Norway, Sweden, United Kingdom, and the World Bank. 20 The Bank co-chairs the macro/PER group of the Cluster Working Group IV. 25 groups and jointly monitoring the progress toward goals set in the PAF. Moreover, the Bank and the IMF staffs collaborate closely based on the regularly updated Joint Bank-Fund Work Program, notably on public expenditure management, financial sector, debt sustainability, and poverty reduction strategy assessment. V. OTHER DESIGN AND APPRAISAL ISSUES A. POVERTY AND SOCIAL IMPACT 73. The proposed operation is expected to contribute to poverty reduction and improved social conditions in the country through a combination of channels. These include job creation through improved business environment and service delivery through the focus on fiscal policy and management. These channels are detailed below. 74. First, SEZs development will have a positive pro-poor impact through employment generation and improved access to infrastructure, and the policy actions supported by the operation will strengthen the Government’s capacity to better regulate zones and minimize any risks of negative social impacts. To minimize any risks of negative impacts from future zone development, the SEZ regulations integrate elements on social impacts (for example, implications for job creation, population resettlements), both (i) in the requirements for SEZ development proposals and evaluation criteria for issuing SEZ developer licenses and (ii) in the legal obligations of SEZ developers. The SEZ regulations also have a positive gender dimension by including potential for female employment promotion as a part of the assessment for providing SEZ developer licenses and specifying as a part of SEZ developers’ obligations to provide equal gender treatment to female workers within SEZs for investments and labor-related matters. The regulations also provide Export Processing Zones Authority (EPZA) a function to execute PPP arrangements in connection with establishing SEZs based on the 2010 PPP Act. However, since the experience on PPP policy and regulations is new in the country, the EPZA will need to build its capacity to manage PPP operations and explore PPP arrangements. EPZA has also developed operational guidelines on PPP arrangements for SEZs consistent with the SEZ, EPZ, and PPP Acts. 75. Second, facilitation of border crossing will have positive social impacts by providing a more secure business environment for informal traders, who are mostly women. This operation and the series support the Government’s interventions to reduce regulatory and administrative burdens on border crossing through developing an operational manual for border trade (“cargo clearance guidelines”) and disseminating it widely for traders to increase their awareness of required procedures for trading across the border. These traders are usually poor women who most often are not aware of required procedures for trading across the border. 76. Third, the increase in transparency of revenues from natural resources will have a positive poverty impact. The Government’s decision to institutionalize EITI and provide a sound framework for EITI operations will have pro-poor impact by ensuring that revenues from natural resources are collected transparently and applied efficiently to priority spending programs in order to build human and infrastructure capital. 26 77. Fourth, a better quality budget and PFM system are important factors in increasing value for money in social sectors, thereby contributing to more pro-poor spending patterns. There are marked geographical disparities at the district level in health and education expenditure per capita, with corresponding differences in poverty incidence. Within sectors, incidence of expenditure is biased toward richer households. Improved quality of budgets through sound budget planning and execution will enable better targeting of districts where the poor lack access to health and education. 78. Finally, improved PIM will help the Government plan, select, and implement the most cost-effective projects. The optimal use of PPPs should help increase technology and management skills transfers while increasing Government budget space. This combination would lead to an improvement in the stock of physical capital, notably in infrastructure, that is critical to shared economic growth. Increasing access to power and transport infrastructure is viewed as a key channel to improving the business environment, encouraging private sector development, and thus encouraging job creation. Such infrastructure will also lead to the integration of remote areas, including poor rural households, in growth processes. B. ENVIRONMENTAL ASPECTS 79. The policy actions supported by the operation are not expected to generate significant negative environmental impacts overall. 80. In general, the existing GoT regulatory and institutional framework encourages sound environmental management of investments associated with its expenditures. Projects financed through the Government budget are required to follow national rules and regulations pertaining to environmental assessments conducted in a participatory process. The Environmental Management Act (EMA) 2004 and associated regulations require due diligence in managing environmental impacts emanating from government operations and investments, including investments by TANESCO to expand its power generation capacity. The EMA mandates the National Environmental Management Council, under the Vice President’s Office, to undertake enforcement, compliance, review and monitoring of environmental impact assessments (EIAs), and research, as well as to facilitate public participation in environmental decision-making, raise environmental awareness, and collect and disseminate environmental information. The EMA also requires each sector to establish an environmental section to ensure that sectoral operations are conducted in accordance with the law’s provisions, to coordinate aspects related to the environment, and to ensure that environmental considerations are integrated into sectoral planning and project implementation. These environmental units have been created in most sectoral ministries. Five ministries (agriculture, health, infrastructure, water, and energy and minerals) had developed their sector Environmental Action Plans for implementation. However, their environmental management capacity could be significantly strengthened, particularly regarding the incorporation of environmental considerations in the programming and planning. 81. Notably, a Strategic Environmental Assessment (SEA) is a legal requirement for any law, regulation, policy, program, or development plan. The EMA calls for a SEA to be undertaken on all laws, policies, programs, or plans to assess the likely effects of those efforts on the natural environment. The Government, with World Bank support, has recently launched preparation of an SEA to support development of the natural gas sector. This SEA is being 27 financed through the World Bank’s gas technical assistance project (ESCBP) and will provide guidance to NEMC, VPO and MEM on systematically integrating environmental and socio- economic concerns in project development, operations and maintenance of oil and gas sector activities. This SEA would represent one of the first examples of an SEA in Tanzania. 82. The GBS also supports the Government’s efforts to monitor and mitigate environmental and social effects of public expenditures. The implementation of the EMA has strengthened in-country capacity somewhat for screening investments for environmental effects and for identifying mitigation measures for reducing such effects. The EIA process is well designed and is a legal requirement under the Act. EIA recommendations are infrequently monitored, and enforcement has been a continued challenge, given limited capacity particularly at the regional and district levels. 83. The supported policy actions could potentially cause significant effects on the country's environment, forests and other natural resources, if environmental aspects are not properly attended and adherence to national laws and regulations is crucial. SEZ development and more intensive trading and transport activities may potentially result in environmental degradation. The promotion of PPPs could also have significant effects if compliance with national laws and regulation is not ensured. 84. The existing environmental regulatory framework will be enhanced for SEZ development. To minimize risks of negative impacts from future zone development, the SEZ regulations supported by this PRSC series integrated environmental aspects, both in the requirements in SEZ development proposals and evaluation criteria for issuing SEZ developer licenses as well as in the legal obligations of SEZ developers. This includes the requirement to attach to a zone development proposal EIAs and SEAs, including proposed mitigation measures, as required by EMA 2004. 85. Facilitating transport and transit facilitation to improve the investment climate as a regional transit hub will have indirect effects. Although the ultimate outcome of the supported policy actions will be more intensive trading and transport activities, which may lead to more congestion and environmental degradation, such impact is indirect and is compounded by other factors, such as economic and climatic conditions. At the same time, JBCs, OSBPs and Operational Manual for border trade supported by the current PRSC series will improve transparency and may likely lead to better control on trade in environmentally sensitive goods, such as timber that is illegally logged in neighboring countries and transported to Tanzania. 86. Public investments in infrastructure are largely covered by existing regulations. The World Bank applies a variety of existing analytic tools in analyzing potential effects of the Government’s environmental management capacity in infrastructure as a part of the public investment plan. These include an SEA under previous PRSCs and analytic work underpinning environmental aspects of investment projects, including Bank projects in the roads, water, and energy sectors. Enhanced PIM including PPPs, one of the policy areas of the operation and the series, will provide an opportunity to ensure that environmental aspects are properly covered based on existing national laws and regulations. 28 C. PFM, DISBURSEMENT AND AUDITING ASPECTS 87. While Tanzania’s public financial management (PFM) remains among the best in Africa, there are still significant challenges. The 2009 and 2013 PEFA scores reflect same deterioration of the PFM systems since 2005. The latest 2013 PEFA highlighted several key problem areas – (i) weaknesses in non-salary internal control systems; (ii) fiscal risk to the budget posed by some public enterprises; and (iii) unreliable cash forecasting, multiple budget reallocations, execution of the budget through a monthly cash rationing system and ineffective commitment control, all of which impede on service delivery. Tanzania lowered its rating in the area of PFM in 2011 CPIA by the World Bank and remained at the same rating in 2012. Nevertheless, the Bank and other DPs continue to support the Government’s effort to address challenges in the PFM system including macro and fiscal forecasting, predictability of budget execution, harmonization of debt systems, and timely implementation of audit recommendations through phase IV of the PFM Reform Program (PFMRP). 88. The Government has increased the amount of budget information made widely available to the public. The Government budget for the financial year beginning July 1, 2013 (FY2012/13) was presented to the Parliament on June 13, 2012 (before commencement of the new financial year) and approved on June 21, 2013. The budget presented to the Parliament in the form of the budget speech (and accompanying four volumes of the budget books as submitted to Parliament) by the Minister of Finance was immediately made available on the MoF website. The approved budget books are also available in hardcopy and are posted on the ministry’s website. For the financial year beginning July 1, 2013 approved budget books were posted on the MoF website in November 2013. 89. The GBS accounts (called Poverty Reduction Budget Support or PRBS) used by the DPO series, is annually audited by the Comptroller and Auditor General (CAG). The latest CAG report for FY2012/13, issued in November 2013, provided an unqualified opinion. The Bank, like other DPs, was availed with a copy within a month after completion of the audit. This report confirmed the integrity of PRBS funds and made recommendations on a number of improvements to the mode of operations, which have resulted in new technical improvements to the related financial operations. In light of the above, the fiduciary risk to Bank funds being disbursed to BoT for onward credit to the exchequer account is considered to be low. 90. An updated IMF safeguards assessment of the Bank of Tanzania (BoT) was finalized in November 2012. It found a strengthened governance and safeguards framework at the BoT, including its audit committee and establishment of a risk-management function. The assessment noted the importance of continued strong oversight by the BoT’s board over remaining noncore functions and over compliance with statutory limits on credit to government. The audited accounts of the BoT for 2012/13 with an unqualified opinion are published on the BoT’s website. 91. The proposed credit will follow the Bank’s disbursement procedures for development policy loans/credits. The untied finances will be disbursed against satisfactory implementation of the development policy program and not tied to any specific purchases. Once the credit is approved by the Board and becomes effective, and at the request of the Borrower, the proceeds of the credit will be deposited by the International Development Association (IDA) in an account designated by the Borrower and acceptable to the Bank at the BoT (central bank of 29 Tanzania), and forming part of the country’s foreign exchanges reserves. The Borrower shall ensure that upon the deposit of the loan into said account, an equivalent amount is credited in the Borrower’s budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system within 30 days after the disbursement is made. 21 If the proceeds of the credit are used for ineligible purposes as defined in the Financing Agreement, IDA will require the Borrower to, promptly upon notice from IDA, refund an amount equal to the amount of said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this credit will be the responsibility of the Ministry of Finance. 92. Audit arrangements. The proposed credit finances the Consolidated Fund, which is subject to audit by the CAG. The CAG is required by law to present the audit report on the public accounts to the Parliament within nine months of the financial year end. IDA will have access to those reports. D. MONITORING, AND EVALUATION 93. The implementation of the DPO series will be monitored by the Government and the World Bank participation in the preparation and the assessment of the annual PAF. As part of an overall framework, supervision and preparation of the operations in the series take place in collaboration with other donors and in consistency with the MKUKUTA review mechanism. The GBS review will be conducted annually for an overall assessment of progress made in each of the program areas. The Partnership Framework Memorandum of GBS sets the framework for M&E under GBS. The Government and GBS partners will keep track of their performance relative to jointly agreed indicators, targets, and actions listed in the PAF. The PAF has incorporated some of the prior actions of this operation and the series. Monitoring and dialogue processes will follow an annual review process aligned with the Government’s planning, budgeting, and MKUKUTA II review cycles. All formal performance assessments will be undertaken jointly by the Government and GBS partners. VI. SUMMARY OF RISKS AND MITIGATION 94. The overall risk of this operation is considered to be MODERATE. 95. Political and country-level governance risks. While overall reform momentum has reduced, domestic accountability has continued to be limited. The PRSC series focus areas are aligned with the Government’s priorities, which will contribute to forging consensus around selected topics in order to strengthen the momentum toward improvement of the overall reform environment. The deliberately limited scope of this series will allow the operations to focus specifically on the selected issues and directly facilitate the domestic process of establishing consensus on them. The Bank’s participation in the GBS framework will be a mechanism for monitoring the firmness of such alignment. The revamped PER process, with the creation of the “PER Champions’ Group,” will also help support the dialogue on the selected areas, including PIM and tax exemptions. The series’ cross-cutting emphasis on transparency and information access further reduces accountability and fiduciary risks by generating domestic demand for 21 For the past PRSC operations, the authorities submitted such receipts after the disbursements with Exchequer Receipt Vouchers attached with some time lags of 40 to 70 days for PRSC-7, PRSC-7 supplemental, and PRSC-8. 30 good governance. The PER exercise also supports actions to strengthen the watchdog role of beneficiaries at the community level through disclosure of the flow of resources at the grassroots level and expenditure tracking of financial flows from the central government to the LGAs. This PRSC series engages civil society organizations (CSOs) in monitoring reform progress. 96. Macroeconomic-fiscal risks. Among the exogenous external risks, the economy remains exposed to variations in prices on international market, notably of food, fuel and gold. On the domestic front, the most important risks arise from fiscal policy as discussed in the earlier macroeconomic section. These are: (i) shortfalls in revenue collection while increased public spending, particularly from the BRN initiative; (ii) financial distress in the energy sector; (iii) accumulation of arrears in particular the pension sector and contingent liabilities from the parastatals; and (iv) level of debt with increased non-concessional borrowing. The PRSC series provides a platform from which the Bank can engage in a dialogue with the Government on macroeconomic and fiscal conditions so as to build resilience against external and domestic shocks and maintain fiscal sustainability. The PRSC series benefit from the macro-fiscal dialogue through the IMF program and the PER process which offers the platform to monitor recent fiscal development and inform policymakers, and debt sustainability diagnostics such as DSA and debt management technical assistance activities. The Power and Gas DPO supports investment and TA projects, including financial sustainability of the energy sector. The PRSC series, as well as the PER dialogue process, also pushes for greater fiscal transparency of the public sector accounts, including to SOEs operating in the energy sector as well as the pensions system. 97. Fiduciary risks. The overall PFM system in Tanzania remains adequate for PRSCs and the fiduciary risk directly related to this operation is low. However, more broadly, the relatively low capacity in PIM and PFM, including budget planning and execution pose risk in the country’s PFM system. The ongoing PFMRP IV program, the PER dialogue process, as well as the PRSC series are important channels of dialogue and technical support to prevent further deterioration of the PFM system. 98. Capacity risks. Limited capacity to implement and manage the reform agenda in the public sector represents another risk. This includes, most notably, capacity constraints in PFM, including budget planning and execution, and PIM. Serious PFM capacity constraint in the local governments is of particular concern as the Government pursues its decentralization policy. The strengthening of the PER dialogue process as a mechanism jointly conducted by the authorities and other DPs to better inform the budget process is one of the priorities of the PRSC series as well as of PFMRP and GBS more generally. Specifically, building necessary capacity at POPC and other MDAs for PIM_OM use and implementation has been identified by the joint Government-DP PER process as the next important activity for support in strengthening PIM in the country. The policy in the area of domestic revenue mobilization incorporates a capacity- building agenda through a set of analytical activities with MoF, TRA, and POPC. More generally, relevant knowledge work under the PRSC series to build analytical underpinnings will also maximize the participation of the Government and other national stakeholders, such as CSOs and the academic community, so as to enhance the analytical capacity and the knowledge- sharing environment in the country, which are essential to enhancing domestic accountability. 31 Annex 1: LETTER OF DEVELOPMENT POLICY 32 33 34 35 36 37 38 39 40 41 42 Annex 2: POLICY AND RESULT MATRIX Policy Area PRSC-9 Prior Action PRSC-10 Prior Action PRSC-11 Prior Action Results Outcome Indicator Baseline Current Target FY2010/11 FY2013/14 FY2015/16 1. Enhanced - The Recipient’s - The Recipient has prepared, The Recipient has drafted - Domestic revenue 16.50% 17.8% 19% efficiency and Controller and Auditor jointly with other members of legislation institutionalizing the as percentage of transparency General has issued a report the EITI’s Multi-Stakeholders Extractive Industries GDP in domestic clarifying the discrepancy Working Group, its second Transparency Initiative (EITI) revenue in the Recipient’s first EITI payment reconciliation and providing a sound mobilization Extractive Industries report and submitted said framework for EITI’s operation - Time taken before 20 months 24 month 16 month Transparency Initiative report to the EITI Board with in its territory and has publishing an payments reconciliation a view to obtaining EITI completed stakeholder annual EITI report. compliance status. consultations on the draft payment legislation reconciliation report - The Recipient has - The Recipient’s Cabinet has after the end of introduced a nil-band in the approved a bill to enact the Tax relevant FY. Recipient’s presumptive Administration Act and said income tax system, as applied bill has been finalized by the to small enterprises, with a Attorney General’s Chamber. view to enhancing the said system’s equity. 2.Sound - The Recipient has - The Recipient has taken the - The Recipient has: (a) - Number of new 0% 0% 50% public established in the Ministry following measures to drafted a bill to amend the public investment investment of Finance a functional strengthen planning and Planning Commission Act of projects appraised in management public private partnership monitoring of public 1989; and (b) initiated a year based on including unit to be responsible for investment projects in development of a public economic and public private fiscal risk allocation and FY2012/13 budget: (a) budget investment operational manual financial analysis as partnerships other financial matters proposals for strategic public to provide guidance for the outlined in (PPPs) relating to public private investment projects were ministries, departments, and operational manuals partnerships. assessed and approved in line agencies and the local prepared by POPC with guidelines issued by government authorities to carry as a percentage of POPC, and (b) directives were out economic and financial total new public issued for the Recipient’s analysis of public investment investment projects ministries, departments, and projects. started by agencies and local ministries, government authorities - The Recipient’s Cabinet has departments and (LGAs) to prepare actions approved amendments to the agencies (MDAs) in plans, cash-flow plans, and PPP Act (2010) to: (i) the same year. quarterly progress reports for streamline the number of their development approvals; (ii) create the PPP - Number of PPP expenditures and submit them facilitation fund; and (iii) projects signed after to POPC for the latter’s establish rules for unsolicited ex-ante value for 0 0 3 43 Policy Area PRSC-9 Prior Action PRSC-10 Prior Action PRSC-11 Prior Action Results Outcome Indicator Baseline Current Target FY2010/11 FY2013/14 FY2015/16 scrutiny and making proposals. money and recommendations to the affordability Ministry of Finance regarding reviews by the actual release of funds on a Ministry of Finance. quarterly basis. 3.Improved - The Recipient has - The Recipient has - The Recipient has published - Approved budget 75% 75% 100% quality of published a citizens’ guide strengthened MOF’s internal on the MoF website: (a) broadly in line with (FY2011/12 (FY2012/13 (FY2015/16 budgets and to the budget, prepared in audit department’s operations guidelines for the preparation policy objectives budget) budget) budget) stronger collaboration with civil by adopting a risk-based of the annual plan and budget (MKUKUTA, public society organizations, internal audit methodology for FY2013/14 by December FYDP, sectors financial designed to improve based on international internal 2012; (b) the executive budget policy priorities) management transparency and public audit standards. proposal as submitted to its (based on the agreed (PFM) system access to budget Parliament by June 2013; (c) formula in GBS information. - The Recipient has the approved budget for PAF as in annex 7) connected the LGAs with the FY2013/14 by September central government through 2013; (d) the citizens’ budget - Proportions of MDAs:100% MDAs:100% MDAs:100% - The Recipient has EPICOR. for FY2013/14 by November ministries, Regions:100% Regions:84% Regions:100% implemented a time-bound 2013; and (e) the year-end departments, and LGAs: 0% LGAs: 88% LGAs: 100% action plan for FY10/11, report on preliminary budget agencies (MDAs), based on the outturn by November 2013. Regions and local recommendations of its government national audit office, to The Recipient has: (a) through authorities (LGAs) address the identified its Internal Auditor General that are weaknesses in issued public sector audit electronically implementing its integrated committee guidelines to connected with financial management improve effectiveness of audit financial system. committees MDAs and LGAs; management and (b) facilitated information system. implementation of the Procedures Manual for the - Open Budget 45 47 55 QAIP and of the Guidelines for Index (OBI) Developing Institutional Risk Management Framework (IRMF) in Public Sector, issued by the Internal Auditor - Average 0% 0% 70% General. compliance rate of MDAs and LGAs - The Recipient has: (a) with internal audit completed and published the guidelines MTDS, which recognizes as central government debt off- 44 Policy Area PRSC-9 Prior Action PRSC-10 Prior Action PRSC-11 Prior Action Results Outcome Indicator Baseline Current Target FY2010/11 FY2013/14 FY2015/16 budget liabilities, including from pension funds and other parastatals; and (b) submitted to its Cabinet proposed amendments to the Government Loans, Grants and Guarantees (GLGG) Act of 2004 4.Effective - The Recipient has - The Recipient has adopted - The Recipient has - Number of 39 98 80 institution for enacted the Economic Zone the Special Economic Zones established a single one-stop operating investors promoting Laws (Miscellaneous Regulations 2012 which services center of key in the existing and regulating Amendments) Act which provide an operational ministries, departments, and special economic special amends the Export framework for implementing agencies (MDAs) for special zones economic Processing Zones Act and the Special Economic Zones economic zones (SEZs) zones (SEZs) Special Economic Zones Act. investors and has developed - Average time 7 days 7 days 3 days Act so as to promote a operational guidelines for taken for operators common regulatory regime public private partnership to get the license for both types of zones. (PPP) arrangements for SEZs. within the zone. 5. Improved - The Recipient has issued - The Recipient has - The Recipient has taken - Average container Dwell time Dwell time Dwell time investment a government circular established Joint Border measures to improve port dwell time and ship = 12 days = 8 days = 5 days climate as a reducing the number of Committees at border posts efficiency including: (a) turnaround time at Turnaround Turnaround Turnaround regional permanent police with high traffic volume as a strengthening implementation the Port of Dar es time=8 days time=5.7 days time= 4 days transit hub checkpoints along the Dar prelude to the establishment of custom regulations which Salaam (2012) es Salaam-Rusumo corridor of one-stop border posts under require manifest to be lodged from 54 to 15 with a view the Roadmap on the electronically 24 hours before to facilitating faster and Improvement of the arrival of the vessel by safer movement of goods Investment Climate in effecting penalties for non- and promoting interagency Tanzania. compliance; (b) starting to coordination. implement the Action Plan to - Average time 2 days 1 day 0.5 day move Tanzania Port Authority taken for trucks to (TPA) to landlord status, cross the main including completion and border posts adoption of feasibility study for berths one to seven with options for public private partnerships (PPPs); and (c) developing and implementing action plan to merge cargo management and clearance under the new automated custom system (TANCIS).. 45 Policy Area PRSC-9 Prior Action PRSC-10 Prior Action PRSC-11 Prior Action Results Outcome Indicator Baseline Current Target FY2010/11 FY2013/14 FY2015/16 - The Recipient has developed operational manuals (guides) for cargo clearance at the port of Dar es Salaam and across borders and has widely disseminated the same to increase awareness of required procedures for trading across the borders. 46 Annex 3: FUND RELATIONS ANNEX Tanzania: Taking Steps to Enhance Fiscal Sustainability Press Release No. 14/67 February 25, 2014 A team from the International Monetary Fund (IMF), led by Paolo Mauro, visited Tanzania during February 12–25, 2014. The mission completed the assessment of the recent performance under the Standby Credit Facility (SCF) and discussed a possible new Policy Support Instrument (PSI) program.i The mission met with Hon. Saada Mkuya Salum, Minister of Finance, Professor Benno Ndulu, Governor of the Bank of Tanzania, and other senior government officials. Mr. Mauro released the following statement at the end of the mission: “Performance under the government’s IMF-supported SCF program has been broadly favorable. Economic growth remains strong. With continued prudent monetary policy and benign developments in food prices in the region, inflation is expected to further moderate by mid-2014 to the medium term target of 5 percent. The current account deficit widened further in 2013, as the global prices of gold and traditional exports weakened. “Fiscal pressures last year (fiscal year 2012/13, July to June) resulted in the ceiling on net domestic financing agreed under the government’s IMF-supported program being breached by 1.2 percent of GDP. During the current fiscal year (2013/14), revenues are falling short of the assumptions embedded in the budget approved by Parliament. To attain a fiscal deficit close to the 5 percent of GDP target in the budget, the government has been appropriately cautious in releasing funds for budget implementation. The upcoming mid-year budget review is expected to reduce expenditure allocations to align these with available resources. Meanwhile, expenditure arrears have increased considerably, especially for road projects. To preserve the credibility of fiscal policy, further policy measures are needed to avoid the accumulation of new arrears and to clear existing ones after verification. “Preserving macro-economic stability is necessary for rapid growth to continue in the medium term. The key challenge is to preserve fiscal space for infrastructure investment and priority social spending while gradually reducing the fiscal deficit to maintain debt sustainability. The government’s tax policy reforms under preparation, including a review of the value added tax, have the potential to improve efficiency and to mobilize additional resources while sharing the burden more fairly. Nevertheless, the revenue shortfalls and subsequent expenditure compression experienced during the current fiscal year reinforce the importance of making realistic revenue assumptions during the upcoming budget cycle. “Agreement was reached at the technical level on policy measures that, once endorsed by the Government, would permit concluding the final review under the SCF, subject to approval by the IMF’s Executive Board. Broad agreement was also reached on the general outlines of a program that could eventually be supported under a new PSI, once detailed discussions are completed. “The next IMF Executive Board meeting is tentatively planned for late April 2014. “The IMF team is appreciative of the constructive and open policy dialogue and thanks the authorities for their warm hospitality during the visit.” 47 i The SCF supports low-income countries that have reached broadly sustainable macroeconomic positions, but may experience episodic, short-term financing and adjustment needs, including those caused by shocks. The SCF supports countries’ economic programs aimed at restoring a stable and sustainable macroeconomic position consistent with strong and durable growth and poverty reduction. It also provides policy support and can help catalyze foreign aid. (See http://www.imf.org/external/np/exr/facts/scf.htm.) The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies (see http://www.imf.org/external/np/exr/facts/psi.htm). Details on Tanzania’s current SCF are available at www.imf.org/tanzania. IMF COMMUNICATIONS DEPARTMENT Public Affairs Media Relations E-mail:publicaffairs@imf.org E-mail: media@imf.org Fax: 202-623-6220 Phone: 202-623-7100 48 IBRD 33494R1 TA N Z A N I A 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 endorsement or acceptance of such boundaries. 0° Tororo 0° To GAN DA U GAND A Kampala To Kampala Lake To Ka ge r a Victoria Nakuru K E N YA Bukoba Musoma Mara To Nakuru Buoen 2°S RWANDA KAGERA MARA 2°S MWANZA Lake Mwanza Natron Geita Bariadi To u Simiy K Kilimanjaro am GEI TA GEITA ARUSHA (5895 m) a SIMIYU Moshi BURUNDI Arusha To NGO CONGO Lake Malindi Mo Eyasi Lake SHINYANGA yow Kibondo Pa Shinyanga e Manyara KILIMANJARO n ga p o si Kahama 4°S ni ep Nzega Same F CO Babati St Mas ai sa KIGOMA PEMBA e St S teppe er NORTH Kasulu mb MANYARA OF Kigoma Tabora Singida Kondoa Kaliua DEM. REP. O PEMBA Iwe Tanga Wete SOUTH TA N G A Mkoani ZANZIBAR TA B O R A Manyoni NORTH Lake Ugalla Tanganyika DODOMA ts. Mkokotoni ZANZIBAR SINGIDA M Zanzibar Koani SOUTH & u CENTRAL ur i am Mpanda g DOD OM A DODOMA ZANZIBAR W N WEST K ATAV I Morogoro Kibaha Dar es Salaam wa DAR ES SALAAM Rung Grea t MO ROGORO MOROGORO IRINGA Rua ha PWANI Lake Iringa Sumbawanga Rukwa M B E YA 8°S n ge Utete 8°S RUKWA Mpui Ra ro ya IN DI AN ji e ufi be Mb R Kilom Kilwa Mbeya Kivinje du t an NJOMBE Ma Tunduma Ki Njombe O CE AN To pe L I N D I Kasama n ur u mk ge be re 10°S M Lindi 10°S Mtwara Ra To ng Kasama A MB Z AM IA B IA e Masasi To Songea TANZANIA Kasungu MTWARA Lake RUVUMA Tunduru vum a Ru Malawi To Chiúre 12°S To To Lichinga Marrupa MO ZA MBIQ MOZAM UE BI QUE 0 50 100 150 200 Kilometers 32°E 34°E 36°E 0 50 100 150 Miles 40°E JUNE 2013