AFRICAN DEVELOPMENT FUND

AFRICAN DEVELOPMENT FUND PROJECT : THE GOVERNANCE AND ECONOMIC COMPETITIVENESS SUPPORT PROGRAMME (GECSP) SUPPLEMENTARY FINANCING COUNTRY : UNITED REPUBLIC OF TANZANIA PROJECT APPRAISAL REPORT OSGE DEPARTMENT October 2013

TABLE OF CONTENTS CURRENCY EQUIVALENTS, FISCAL YEAR, WEIGHTS & MEASUREMENTS ACRONYMS & ABBREVIATIONS, LOAN INFORMATION, PROGRAMME EXECUTIVE SUMMARY, RESULT-BASED LOGICAL FRAMEWORK i-vi I INTRODUCTION... 1 1.1 Proposal Objective... 1 1.2 GECSP... 1 II RECENT DEVELOPMENTS... 2 2.1 Political Context... 2 2.2 Economic Context... 2 2.3 Social Context... 4 III PROGRESS IN THE IMPLEMENTATION OF THE GECSP... 5 3.1 Programme s pillars and implementation progress... 5 3.2 Results and impact... 6 IV. JUSTIFICATION FOR THE SUPPLEMENTAL FINANCING OF THE GECSP... 9 Operational objectives... 11 Expected Outcomes... 11 Development Partners coordination... 11 Beneficiaries... 11 Gender Impact... 12 Environmental Impact... 12 V. IMPLEMENTATION, MONITORING AND EVALUATION... 12 VI LEGAL DOCUMENTATION AND AUTHORITY... 13 6.1 Legal documentation... 13 6.2 Conditions Associated With Bank s Intervention... 13 VII- RISK MANAGEMENT... 14 VIII RECOMMENDATION... 14

Appendixes Appendix 1 Selected Macroeconomic indicators Appendix 2 Map of Tanzania Tables Table 1: Tanzania Key Macroeconomic Indicators Table 2: Implementation status - Component 1 Table 3: Implementation status Component 2 Table 4: Implementation status Component 3 Table 5: GoT Financing needs for FY 2013/14 to 2015/16 Table 6: Risk and mitigating measures Currency Equivalents As of 10 th September 2013 UA 1 = US$ 1.5153 (United States Dollar) UA 1 = EUR 1.1445 (Euro) UA 1 = TZS 2,446.54 (Tanzania Shilling) US$ 1 = TZS 1,575.60 (Tanzania Shilling) Fiscal Year July 1 st June 30 th Weights and Measures 1metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = 2.200 lbs 1 metre (m) = 3.28 feet (ft) 1 millimetre (mm) = 0.03937 inch ( ) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres i

Acronyms and Abbreviations ADF African Development Fund PBO Policy Based Operation (AfDB) AfDB African Development Bank PCR Project Completion Report AFROSAI-E African Organization of English-speaking Supreme Audit Institutions PEFA Public Expenditure Financial Accountability Assessment CAG Controller and Auditor General PE Procuring Entities CPI Corruption Perceptions Index PFM Public Finance Management CSI Core Sector Indicator PFM-PR Public Financial Management - Performance Report CSP Country Strategy Paper PFMRP Public Financial Management Reform Program DBR Doing Business Report PIP Public Investment Program DfID Department for International PPA Public Procurement Act Development DP Development Partner PPP Public-Private Partnership DPP District Public Prosecutor PPRA Public Procurement Regulatory Authority DRM Domestic Revenue Mobilization PRS Poverty Reduction Strategy EITI Extractive Industry Transparency PSD Private Sector Development Initiative EU European Union PSI Policy Support Instrument FDI Foreign Direct Investment TANESCO Tanzania Electricity Supply Company Ltd. FRA Fiduciary Risk Assessment TIC Tanzania Investment Centre GAP Governance Strategic Directions and Action Plan TEITI Tanzania Extractive Industry Transparency Initiative GBS General Budget Support TRA Tanzania Revenue Authority GDP Gross Domestic Product GoT Government of Tanzania Tsh Tanzanian Shillings IFMS Integrated Financial Management System TVET Technical Vocational and Educational Training IMF International Monetary Fund TZFO Tanzania Field Office (of the AfDB) KRA Key Result Area UA Units of Account LGA Local Government Administration USD United States Dollar MDA Ministry, Department and Administration MDG Millennium Development Goal MoF Ministry of Finance MTEF MKUKUTA NAO NDS NRM ODA PAC PAF PBL Medium-Term Expenditure Framework Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania National Audit Office National Development Strategy Natural Resource Management Overseas Development Assistance Public Accounts Committee Performance Assessment Framework Policy Based Lending (AfDB) ii

Loan and Grant Information BORROWER: EXECUTING AGENCY: United Republic of Tanzania Ministry of Finance FINANCING PLAN Source Amount (UA) Instrument African Development Fund (ADF) 38,385,104 Loan African Development Fund (ADF) 15,325 Grant Total 38,400,429 Loan and Grant ADF key financing information ADF Loan Service Charge Commitment fee Duration Grace period Unit of Account (UA) 0.75% per annum on amount disbursed and outstanding 0.50% per annum on amount disbursed and outstanding 50 years 10 years Timeframe - Main milestones Programme approval 27 November 2013 Effectiveness Loan 15 December, 2013 Disbursement Loan 25 December, 2013 Completion 31 st December, 2013 iii

Programme Executive Summary Programme overview Programme outcomes Programme s beneficiaries Needs Assessment Bank s Added Value Institutional development and Knowledge building The goal of the supplemental financing, which is aligned with the GECSP, is to support reform efforts aimed at improving Tanzania s business enabling environment and enhance private sector development. It specifically targets interventions geared towards improving the performance of the energy sector which is critical to attaining accessible, reliable and affordable power in Tanzania. This will ultimately help improve access to and reduce the cost of energy thereby impacting positively on private sector development and the business environment. The stated goal is in line with component 3 or GECSP, focusing on Improving private sector development. The programme outcomes remain the same as those of the GECSP. However, particular emphasis is placed on the outcomes of component 3: Private sector development, which are (i) Improved time it takes to pay taxes; and (ii) installed electricity capacity. Improved efficiency in payment of taxes reduces time cost to businesses and access to affordable electricity remains a binding constraint to private sector development, hence the need to continue reforms efforts. These outcome measures will therefore continue to be supported through the supplemental financing arrangement. The beneficiaries of the additional budget support are the same as those of the GECSP, namely the Tanzanian population. Improved efficiency in payment of taxes and improved access to reliable and affordable energy will directly benefit entrepreneurs, and these will eventually translate into better service delivery and more efficient market mechanisms. Tanzanian entrepreneurs of all sizes will be better able to contribute to the country s inclusive growth and development processes, by operating within a more conducive business environment with more effective electricity infrastructure and with less bureaucratic procedures. The Government of Tanzania has demonstrated strong commitment to improving economic performance through private sector development. The operation will help build on the achievements recorded by the GECSP so far and help address the existing challenges of the power sector in view of its impact on private sector development, economic growth and poverty alleviation. The Bank is in a strong position to support Tanzania s business enabling environment and private sector development reforms. This is an area in which the Bank has a strong mandate and capacity to deliver. Over the past few years, the Bank has scaled up efforts and reoriented policy towards this area. Targeting private sector development as one of five operational priorities in the Bank s Ten Year Strategy is evidence of the importance attached to this subject. The Bank s second Governance Action Plan GAP II, which is currently being reviewed, also places renewed focus on the Business Enabling Environment. The Bank will improve its knowledge of supplemental financing and, by supporting private sector development through energy sector reforms, gain a better understanding of Tanzania s energy sector, in preparation for a new budget support operation focusing on the energy sector, envisaged to commence in 2014. iv

OUTPUTS OUTCOMES IMPACT Country and project name: United Republic of Tanzania: Supplemental Financing of the Governance and Economic Competitiveness Support Programme (GECSP) Purpose of the programme : RESULTS CHAIN PERFORMANCE INDICATORS Indicator (including CSI) Baseline Target MOV RISKS/MITIGATION MEASURES Contributing to maintaining an accelerated growth by strengthening economic, and improving the investment climate GDP growth rate 6.9% in 2010 >7% in 2014 Corruption Perception Index 2.7 in 2010 3.0 in 2014 Ratio of total revenue to GDP Ratio is 16.2% in 2010 Ratio is 18.0% in 2014 Human Development Index 0.466 in 2011 >0.6 in 2014 Outcome 1: Strengthened accountability, transparency and oversight of public resources 1.1. Enhanced budget accountability and transparency 1.2. Improved budget oversight 1.1.1. Average level compliance of PEs to PPA 69%/79% in 2011 >80% in 2014 1.2.1 Timeliness of examination of audit reports by legislature (CSI) 1.2.2 Implementation of audit recommendation made by CAG Outcome 2: Improved domestic resource mobilization Increased tax revenue generation Enhanced mineral resources management Ratio of tax revenues as a % of GDP Variation between payments made by mining companies and revenues by GoT Outcome 3: Accelerated private sector development Improved business enabling environment and investment climate Improved time it takes in paying taxes (CSI) Total electricity installed, capacity in MW Output 1.1: Budget accountability and transparency 1.1.1. PFMRP IV endorsed 1.1.2. Whistle Blower s Bill Output 1.2. Budget oversight 1.2.1.An increase in number of PAC members trained Endorsement of PFMRP IV Whistle s-blowers Bill Output 2.1. Tax revenue generation 2.1.1. Review of tax legislation and noncompliance sanctions 2.1.2. Elaboration of taxpayers communication strategy 2.1.3. Start review of LGA legislation Number of PAC members trained Tax legislation and non-compliance sanctions Taxpayers communication strategy LGA Legislation revised Examination starts 6 months after receipt of NAO reports in 2010 29% of audit recommendations fully implemented for FY 2008/9 Ratio is 16.3% in 2010 Variation in 42% in 2011 172 hours per year in 2010 1,077 MW in 2011 Final drafting of PFMRP IV No Whistle-blowers Bill 0 of PAC members trained in 2010 Harmonized tax legislation and inadequate noncompliance regulations No Taxpayers communication strategy LGA Legislation not adequate in allowing to strengthen capacity of LGA for revenue moblisation Examination starts 3 months after receipt of NAO reports by 2014 >50% of audit recommendations fully implemented for FY 2012/13 Ratio reaches at least 18% in 2014 Variation is <10% in 2014 160 hours per year in 2014 MoF NDS reports Transparency International report ADB Completion report Household Budget Survey Reports CAG Reports PFMRP III supervision report & PFMRP IV CAG Reports TRA reports & IMF staff reports 2 nd EITI reconciliation Doing Businees Report >1,247 MW in 2014 GBS Annual Reports PFMRP IV endorsed by end December 2011 Drafting of Whistleblowers Bill and endorsement by GoT submitted to Parliament by December 2012 25 PAC members trained by 2012 Tax legislation and noncompliance sanctions regulations revised by December 2013 Taxpayers communication strategy by December 2013 Start LGA Legislation revisions by 2013 GBS Annual Review reports PPRA Annual reports CAG Report MEM Reports Fiscal/macroeconomic risk: Mitigation: Continue to engage with GOT through policy dialogue to encourage implementation of on-going economic reforms. Implementation capacity constraints: Mitigation: Continue to build capacity through the ISPGGII Project; Work with other donors to provide coordinated support the development of the energy sector reform programme and related roadmap. Corruption: Mitigation: Enactment of Whistle Blowers Bill by Parliament in 2013. Fiduciary risk: Mitigation: Required safeguards to mitigate key fiduciary risks are being addressed through the PFM Reform Strategy IV. v

Output 2.2. Mineral resources management 2.2.1. Submission of 2 nd reconciliation report 2.2.2. Tanzania EITI (TEITI) Bill 2 nd reconciliation report finalised 1 st reconciliation report submitted in February 2011 TEITI Bill drafted Output 3.1. Enabling environment and investment climate 3.1.1. Operationalization of PPP unit within MoF 3.1.2. Introduction of PPP Finance Regulation to grant mandate to PPP unit for management of contingent liabilities 3.1.3. General Electronic Filing & Payment Regulations published as Government s notice 3.1.4. Undertake energy sector study. Comprehensive PPP procedures manuals produced PPP Finance Regulation to grant mandate to PPP unit for management of contingent liabilities General Electronic Filing & Payment Regulations published as Government s notice Energy Sector Study conducted Funding in million UA : ADF: 38,41 million UA No TEITI Bill prepared No comprehensive PPP procedures manuals in 2010 No PPP Finance Regulation to grant mandate to PPP unit for management of contingent liabilities General Electronic Filing & Payment Regulation not yet published as Government s notice No review of Energy Sector Strategy 2 nd reconciliation report submitted in to EITI Board by June 2012 TEITI Bill submitted by GoT to Parliament by July 2013 Comprehensive PPP procedures manuals and PPP documents developed by March 2012. PPP Finance Regulation endorsed by Government by December 2013 General Electronic Filing & Payment Regulations published as Government s notice by December 2012 Energy Sector Review conducted by end 2012 2011 GBS annual review report 2012 GBS annual review report TRA annual reports vi

REPORT AND RECOMMENDATIONS OF MANAGEMENT TO THE BOARD OF DIRECTORS FOR SUPPLEMENTAL FINANCING LOAN FOR THE GOVERNANCE AND ECONOMIC COMPETITIVENESS SUPPORT PROGRAMME I INTRODUCTION 1.1 Proposal Objective 1.1.1 This proposal presents the context, economic and technical justification for an additional Budget Support Loan to the United Republic of Tanzania, which supplements the Governance and Economic Competitiveness Support Programme (GECSP), approved by the Board in December, 2011. The additional budget support resources will make available to the Government of Tanzania a concessional loan and grant from the African Development Fund (ADF) window for a total amount not exceeding UA 38.41 million. This amount, comprising UA 37.297m from the ADF 12 PBA loan allocation, UA 1.088m from ADF loan resources from cancelled operations, and UA 0.015m from ADF grant resources from cancelled operations, will be disbursed in one tranche during the fourth quarter of 2013. 1.1.2 Through this additional financing, the Bank will assist Tanzania to pursue reforms being implemented within the framework of the GECSP, particularly component 3 focusing on Private Sector Development. As access to affordable electricity continues to be one of the binding constraints to economic growth and private sector development in Tanzania, the operation will place particular emphasis on supporting the implementation of the recommendations of an energy sector review prepared under the on-going GECSP. Implementation of these recommendations will support Government efforts to improve the economic competitiveness and private sector development. It will also help enhance fiscal space, thereby allowing the Government to direct expenditures towards key sectors critical to development. 1.1.3 The Government has made significant strides towards the achievements of the objectives of the GECSP, including surpassing a number of targets (including the capacity targets set for the energy sector (currently 1501 MW against a target of 1247 MW in 2014); However, the emerging unanticipated energy needs triggered by the growing economy and the expansion of the industrial sector has made it urgent for the Government to take some costly emergency measures while attempting to ensure that medium-term solutions are initiated to ensure the sustainability of both the energy sector and public finance as well as the competitiveness of the private sector. The Government is, therefore, facing urgent additional financing needs, while funding from the other partners in the Budget Support Group is not adequate in the short-term and high borrowing cost through the financial markets will impact negatively on the debt sustainability of the country. It is in this context that this Supplemental Support is proposed. It will also help address another challenge of the GECSP, i.e. improved efficiency in time it takes in payment of taxes and thus revenue generation and sustainability of the public finance. 1.2 GECSP 1.2.1 GECSP was approved by the Board in December, 2011 for a total amount of UA 100 million from the resources of the African Development Fund (ADF) window. The programme is aligned to the country s medium term national growth and poverty reduction strategy, MKUKUTA II, covering the period 2010/11-2014/15. It is a medium-term mechanism to achieve the goals of Tanzania s Development Vision 2025, which aims to transform the country into middle income country status by 2025. MKUKUTA II is structured around three clusters: (i) growth and reduction of income poverty; (ii) improvement of the quality of life and social wellbeing; and (iii) good governance and accountability. 1

1.2.2 GECSP aims to consolidate and deepen reforms supported by the previous GBS operations, Poverty Reduction Support Loans I, II and III, and is closely linked with the Bank s second Institutional Support Project for Good Governance (ISPGG II). It is also fully aligned with the Bank Group s Country Strategy Paper (CSP) 2011-2015. Moreover, it is aligned to the 2011-16 Partnership Framework Memorandum governing General Budget Support in Tanzania. 1.2.3 Disbursement of the GECSP loan is scheduled in three tranches over the three year period 2011-2013. The first and second tranches of UA 25 million and UA 35 million were disbursed on 29 th December, 2011 and 13 th December, 2012, respectively. 8 7 6 5 4 3 Figure 1: Real GDP Growth 2002-2012 (Percentage) 1.2.4 The overarching development goal of the GECSP is to 1 contribute to maintaining an accelerated economic growth by 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 strengthening economic and financial governance and improving Source: Tanzanian authorities and IMF staff estimates the business enabling environment. GECSP s operational policy objectives are (a) strengthening the accountability, transparency and oversight of public resources (component 1); (b) improving domestic resource mobilization (component 2); and (c) improving private sector development (component 3). The programme s expected outcomes are: (i) enhanced budget accountability and transparency; (ii) improved budget oversight; (iii) increased tax revenue generation; (iv) increased mineral resources management; and (v) improved business enabling environment and investment climate. 1.2.5 The proposed supplemental financing operation is linked to the Tanzania 2011-2015 CSP, which is built around two strategic pillars: (i) infrastructure development; and (ii) building an enabling institutional and business environment. It is also in line with the Bank s Ten Year Strategy, Private Sector Development Strategy and the draft Governance Action Plan (GAP II). It is also in line with The GoT s medium-term development strategy, the National Strategy for Growth and Reduction of Poverty (NSGRP-II). 2 II RECENT DEVELOPMENTS 2.1 Political Context 2.1.1 Tanzania is politically stable and has a reputation for peace. After becoming a multiparty democracy, Tanzania has held four peaceful multiparty elections (every 5 years). Transparency International s Corruption Perception Index shows that Tanzania had a score of 3 in 2012, thereby ranking 100th out of 182 countries, which is an improvement over the 2010 score of 2.7, when the country was ranked 116th out of 178 countries. The Mo Ibrahim Index of African Governance shows similar trends. Over 2008-2011, Tanzania s ranking improved from 12th to the 10th position, out of 48 Sub-Saharan African countries. Challenges remain, notably in the area of public sector efficiency, which are addressed through a gradual reform process, including the on-going review of the constitution. The constitution review process, which is fully participatory and is due to be completed by end 2014, aims at enhancing the governance system in the country. 2.2 Economic Context 2.2.1 Tanzania, during the last decade, has experienced high and relatively stable economic growth rates. The average Gross Domestic Product (GDP) growth rate from 2002-2012 is 6.9% (Figure 1). Economic growth continued to be remarkably stable over the past few years demonstrating the country s resilience to domestic, regional and global shocks. The main growth drivers have been trade, manufacturing, transport, communication, financial services, and recovery in power generation. The key factors explaining Tanzania s strong and steady performance include: (1) the rapid growth of 2

a number of economic sectors 1 ; (2) the fact that volatility has been confined to sectors with limited overall impact on GDP; (3) the relativelyslow growth of the agricultural sector; (4) the steady expansion in domestic demand; and (5) the country s limited exposure to external shocks. 2.2.2 Tanzania s monetary policy aims to support economic growth and maintain price stability. The Bank of Tanzania maintains a tight monetary policy stance by maintaining the key policy rate at 12%. In line with a prudent monetary policy stance, private sector credit grew by 18.2% in 2012, slightly lower than 20% target, and significantly lower than 27.2% growth recorded in 2011. Private sector credit was channelled to manufacturing, building and construction, trade and personal activities. Improved food supply, stable energy prices and a general favorable external price environment helped ease inflationary pressures in the economy, with annual headline inflation falling consistently from a decade high of 19.8% recorded in December 2011 to 7.6% in June 2013. 2.2.3 Tanzania s fiscal position strengthened significantly in Fiscal Year 2011/2012 (June-July) after three consecutive years of difficulties, especially in meeting revenue targets, and subsequently, growing fiscal deficits. The overall fiscal deficit (after grant; cash basis) declined from 6.4% of GDP in FY2009/10 to 5% in FY2011/12. This fiscal consolidation stemmed from strong revenue collection and government efforts to slow down non-priority 2 expenditure growth protecting key infrastructure projects and social spending. Domestic revenue for fiscal year 2011/12 exceeded the budget target by about 4%, a notable improvement from the previous three fiscal years when collections were 10% below target. 2.2.4 In FY2012/13, the overall fiscal deficit is projected to be in the range of 5.8% of GDP, higher than in FY2011/12. Fiscal revenues were lower than anticipated by 0.7% points of GDP. Government maintained expenditure in line with resource availability. Wages and salaries and domestic interest payments turned out to be higher than expected. Financing needs of the state-owned power utility company, TANESCO, increased. TANESCO s financing gap for 2012/13 was estimated at US$438 million (1.4% of GDP). In the short term, Tanzania is finding it increasingly difficult to cope with the financial difficulties of the power sector, which has a negative impact on private sector development. While the fiscal and external balances still appear to be under control, their sustainability is currently seriously threatened by TANESCOs financial deficit and other arrears accumulated by the central government. According to Government projections, accumulated deficit of TANESCO alone (excluding subsidies) will be between US$760 million to US$1 billion (about 3 to 4 percent of GDP) by 2014. The key risk to Tanzania s economic and fiscal outlook thus stem from heightened financial difficulties of the power utility TANESCO eroding fiscal space. Failure to address the problems of the energy sector will therefore continue to impact negatively on the country s fiscal position and retard private sector development. Table 1: Tanzania: Key macroeconomic indicators (% of GDP, unless otherwise indicated) Indicators Fiscal Years 2009/10 2010/11 2011/12 2012/13* 2013/14* 2014/15 Real GDP growth (%, Calendar year) 7 6.4 6.9 7 7.2 7 Real GDP growth (%) 6.5 6.7 6.7 7 7.1 7.1 Consumer prices annual average rate (%) 10.5 7.0 17.8 11.6 7.2 5.3 Broad money (M3) 25.1 22.0 11.8 14.5 13.0 -- Current account, incl. official transfers -9.0-9.4-16.5-14.3-15.2-13.0 Total Public debt 33.8 40.4 39.8 41.6 43.3 44.0 Gross official reserves (months of imports) 5.2 3.9 3.6 3.7 3.6 3.7 Overall Fiscal balance incl. grants -6.4-6.6-5.0-5.8-5.0-4.0 Overall Fiscal balance, excl. grants -11.1-11.3-8.6-9.5-9.2-7.0 Source: Tanzanian authorities and IMF staff estimates. * Projections. 1 The public sector grew from 15% of GDP to over 27% since 1997. This is in contrast to formal private sector, which remains small, with private investment having grown only marginally from the level of 10-12% of GDP in the early 2000s to 14-18% since 2007. The public sector expansion was largely financed by foreign aid. 2 Concurrently, nonwage recurrent expenditures were cut by about 2 percent of GDP, including a significant decline in transfers to local governments and in goods and services (maintenance and equipment). 3

2.2.5 The 2012 Debt Sustainability Analysis (DSA) 3 indicates that Tanzania remains at low risk of debt distress, but close monitoring is warranted. Tanzania s risk of debt distress remains low even when taking into account government borrowing from both domestic and external sources, including on non-concessional terms. External debt amounted to US$10.7 million in 2012, equivalent to 37.3% of GDP. However, the DSA raises some concern in case of persistently large primary deficits funded by non-concessionary borrowing. This risk highlights that a sound debt management strategy, a conservative approach to non-concessional borrowing, and commitment to fiscal discipline are necessary to maintain debt and fiscal sustainability. Alternative downside scenarios in the DSA also illustrate that debt indicators would be sensitive to significantly lower long-term growth, or low productivity of public investment. This highlights the importance of a sound debt management strategy and rigorous evaluation of the quality and feasibility of infrastructure projects, to ensure healthy rates of return on investments. Tanzania s business climate 2.2.6 Tanzania offers a well-balanced and competitive package of fiscal incentives to attract foreign direct investment. The country has signed double taxation treaties with several countries and is a signatory to several multilateral and bilateral agreements on protection and promotion of foreign investment. Investments in Tanzania are guaranteed against nationalisation and expropriation. Institutional support for priority investment projects is readily available from the Tanzania Investment Centre (TIC), which serves as a one stop facilitative centre for all investors. 2.2.7 However, Tanzania faces several challenges, despite its efforts to improve the business environment. The country s ranking in the World Bank Doing Business indicators stood at 134 out of 185 economies in 2013, a slippage of one point from the 2012 ranking. The 2013 Report saw improvements in Starting a Business (4 step improvement to 113 th ) and registering Property (3 step improvement to 137 th ). Major challenges continue to exist in Dealing with Construction permits (174 th ) and Paying Taxes (133 rd ), all out of 185 economies. With respect to getting electricity, the country slipped one point from 95 th to 96 th and on Getting credit, a 2 point slippage, from 127 th in 2012 to 129 th in 2013. The 2012-13 Global Competitiveness Report ranked Tanzania 120th out of 144 economies, same as the previous year. The report shows that the country s ranking was affected by low-quality infrastructure, including unreliable power supply, which impacts negatively on the cost of doing business. The Government is increasingly placing emphasis on public-private-partnerships to address the infrastructure constraint. The regulatory framework to encourage private participation in the infrastructure sector has been enhanced with the approval of PPP Regulations 2011 to complement the PPP Act. 2.3 Social Context 2.3.1 Tanzania s main challenge is to make sure that growth translates into a significant decline in poverty. More needs to be done to ensure that economic growth is inclusive and translates into employment generation and declining poverty. Headcount poverty has persistently remained at about 30% since 2001. 4 Per capita income in 2012 was US$ 570. Income inequality, as measured by the Gini coefficient, has remained unchanged. The Gini coefficient for household income is 0.37 in 2010/11 compared to 0.36 in 2008/09. This is partly a result of Tanzania s economic structure: high population growth of 2.6%, insufficient employment opportunities are being created for the urban poor and the agricultural sector is employing about three quarters of the workforce. Yet the contribution of agriculture is about one quarter of GDP but with an average annual growth of only 1% in per capita terms. Growing income inequality is compounded by inequities in access of basic public 3 Source: Joint World Bank/IMF Debt Sustainability Analysis, July 2012. 4 Official poverty estimates have not been updated since 2007. Yet the National Bureau of Statistics produced poverty headcount estimates based on two rounds of the National Panel Survey in 2008/9 and 2010/11, using a cost-of-basic-needs approach anchored at a daily intake of 2,200 kilocalories per adult equivalent. Most observers believe that the panel surveys deliver a useful and valid trend analysis. 4

services by large parts of the population. These include access to reliable sources of electricity, consequently undermining private sector activity. In terms of social development, the country has made significant progress over the past decade, notably on child survival, infant mortality, and primary school enrolment. However, more work needs to be done in the area of public service delivery to improve quality. Tanzania has made some commendable progress in a number of areas, and remains on track to achieve the Millennium Development Goals (MDG) targets in gender equality, child survival, infant mortality and primary school enrollment. It is worthy of mention that Tanzania has prepared a draft National Social Protection Framework which, if finalised, could provide a broader framework for social protection programming an accountability. III PROGRESS IN THE IMPLEMENTATION OF THE GECSP 3.1 Programme s pillars and implementation progress 3.1.1 The GECSP supports the GoT s ongoing reform programme, whilst consolidating gains and deepening reforms, which the Bank has supported in its predecessor GBS programs, notably the Poverty Reduction support Loan III. These reforms are strongly aligned to Tanzania s development objectives as set forth in the country s National Development Strategy (2010/11-2014/15). It supports three main areas of the country s reform programme, namely (i) Strengthening accountability and transparency of public resources; (ii) Improving domestic resource mobilization; and (iii) Accelerating private sector development. 3.1.2 The operational policy objectives are expected to lead to enhanced budget accountability and transparency; improved budget oversight; increased tax revenue generation and enhanced mineral resource management; and improved business enabling environment. 3.1.3 The Government has made good progress in implementing the programme. The operational policy matrix below summarises the status of implementation: Component 1: Strengthening accountability and transparency of public resources 1. The Public Procurement Act aims at improving the effectiveness and efficiency of public procurement. Procuring Entities have recorded major improvements in complying with the requirements of the Public procurement Act. 74% compliance rate was achieved in 2012. 2. Despite minor delays in preparation of the Whistle s-blowers Bill, Government remains committed to finalizing it for presentation to Parliament. Key stakeholders have been identified and arrangements are underway to carry out the necessary consultations and further measures continue to be taken with a view to building on the achievements already recorded. 3. Government has made good progress in increasing the level of implementation of audit recommendations of the Controller and Auditor General. The implementation rate is currently around 50%. The number of audit recommendations has reduced significantly over the past couple of years, highlighting improvements in public financial management. The migration from IPSAS cash to accrual basis for the Central government commenced from July 2012. The first audit under IPSAS accrual compliance will cover the period July 2012 to June 2013. Please note that IPSAS has some provision that allows governments to adopt partially ( for example for Plant and equipment- the provision gives 5 years to be fully compliant). Component 2: Improving domestic resource mobilization 1. Tanzania has taken major steps to review tax legislation and non-compliance sanctions. Following the budget speech of 2013/14 the government has reviewed tax laws administered by Tanzania Revenue Authority that grant exemptions with a view to controlling and instituting measures to improve supervision. Tax laws affected include VAT, Income Tax and Tanzania Investment Act. 2. Some delays have been encountered with the review of Local Government Legislation but Government remains committed to implementing this measure. This is aimed at improving Local government Authorities own source revenue mobilization. DPs continue to closely monitor progress in the implementation of this measure. 3. Tanzania finalized and submitted its second EITI Reconciliation Report to the EITI Board and was declared EITI compliant in Dec. 2012. This is expected to lead to greater transparency in the management of natural resource revenues. 4. Progress is being made towards the drafting of the Bill of legislation institutionalizing EITI and establishing an enabling framework for EITI s operations, to be submitted to Parliament by October 2014. GoT is committed to its implementation and stakeholder consultations, currently ongoing, will be completed by November 2013. This will be followed by preparation of the draft Bill by end 2013. Further rounds of consultations will be carried out during 2014 before submission of the draft Bill to Parliament in October 2014. This legislation will further institutionalize 5

the TEITI process in Tanzania, support continued compliance with existing EITI reporting requirements and the implementation of the new EITI standards. Following consultations between the Government and DPs, it was agreed that the target date for submission of the Bill to Parliament be moved to October 2014. Component 3: Accelerating private sector development 1. The PPP Unit within the Ministry of Finance became fully operational in 2012. In order to further strengthen operational efficiency, the Government plans to merge the Unit with the PPP Unit of the Tanzania Investment Centre into a single unit within the Ministry of Finance. 2. The Authorities have already prepared the draft PPP Finance Regulations. This is currently awaiting formal stakeholder validation before endorsement. 3. GoT has prepared the draft General Electronic Filing & Payment Regulations. it is currently being internally processed for sign-off by the Attorney General s office and relevant Minister before its publication as government notice. The initial delay was due to the fact that the regulations had to wait for the review of Procurement Act to ensure consistency with the legislation. That review process has now been finalized and the Act passed by Parliament. 4. The Government has carried out an Energy Sector Review in 2012 with the support of the GECSP. Government is taking appropriate measures to implement its recommendations. 3.2 Results and impact 3.2.1 The implementation of the reform measures outlined in the above table have yielded positive results and impact. As Government continues to deepen on-going reforms by pursuing the remaining measures, the programme s expected outcomes and impact will become increasingly evident. The section below highlights the key results, by component, of the GECSP implementation to date. Component 1: Strengthened Accountability, Transparency and Oversight of public resources. 3.2.2 The expected outcomes of this component are: (i) enhanced budget accountability and transparency, and (ii) improved budget oversight. Information provided by the Controller and Auditor General and the Accountant General s Department has shown that Tanzania has made significant progress in public financial management, including on the aspects of transparency and accountability. This was corroborated by the DPs of the Public Financial management Reform programme (PFMRP) Group. Parliament s oversight function continues to be strengthened and, in February 2013, a Budget Committee was established, as recommended by the Auditor General. The budget cycle has also been revised recently to enable the budget to be approved before the commencement of the fiscal year. The preparation and auditing of accounts and presentation of the audit report to parliament are now carried out as legally required. 3.2.3 During the fiscal year 2012/13, Government commenced the implementation of a five year action plan to enable the preparation of financial statements using International Public Sector Accounting Standards (IPSAS Accruals Basis). The Government has prepared and issued Guidelines for Implementation of Institutional Risk Management in the Public Sector and the Quality Assurance Improvement Programme. In addition, the Government prepared an Internal Audit Manual, which is in line with the International Professional Practice Framework (IPPF) that will be used with effect from 2013. These documents will help improve performance of the internal audit function in the public sector. 3.2.4 In an effort to improve the procedures and enhance efficiency and value for money in public procurement, the Public Procurement Act (PPA) No. 7 of 2011 was enacted to replace Act No. 21 of 2004. The public procurement regulations will also need to be finalized before the Act can become fully effective. 6

3.2.5 The table below shows implementation progress against impact and outcomes indicators. Performance Indicators Average level compliance of PEs to PPA Timeliness of examination of audit reports by legislature (CSI) Implementation of audit recommendation made by CAG Indicative Target Status at September 2013 >80% in 2014 The level of compliance of PEs has significantly increased. The average level, based on a new system of measuring compliance, was 74% as at end 2012. Compliance assessments are conducted once a year and the one for 2013 is expected by the end of the year. Examination starts 3 months after receipt of NAO reports by 2014 >50% of audit recommendations fully implemented for FY 2012/13 Component 2: Improved Domestic Resource Mobilisation. Audit reports are generally examined by Parliament within the timeframe stipulated by Law. The Law requires that the reports be submitted to Parliament during its first sitting in April and debated within 6 months of receipt. It is also noteworthy that the new budget cycle requires that the draft budget be tabled by Parliament between April and June. Hence the audit reports can only be considered after completion of that process. Government has made good progress increasing the level of implementation of audit recommendations. The implementation rate is currently around 50%. The number of audit recommendations has reduced significantly over the past couple of years. 3.2.6 The expected outcomes of this component are: (i) improving tax revenue generation and; (ii) enhancing mineral resource mobilisation. Government has implemented a number of measures aimed at improving domestic revenue collection by expanding the tax base, improving revenue collection procedures as well as reducing tax exemptions. These measures include (a) improvements in the systems for collecting and administering tax and non-tax revenue; (b) expansion of the tax base through formalization of the informal sector in order to capture them in the tax net; (c ) reviewing various laws that grant tax exemptions with the aim of controlling and minimizing them; (d) reviewing the system of property tax collection in cities, municipal councils, towns, districts and townships with a view to improving it; and (e) reviewing sources of revenue and collection system in the Local Government Authorities in order to increase revenue. 3.2.7 During the current fiscal year, the Government plans to embark on the implementation of additional measures, such as further reducing tax exemptions by abolishing VAT exemptions on tourist services, and establishing one-stop border posts. The Government also plans to implement measures to strengthen the effectiveness of Electronic Fiscal Devices (EFD) linked to the Tanzania Revenue Authority Database, and operationalize the Revenue Gateway, which is designed to improve tax payment systems through electronic real time gross settlement. 3.2.8 The EITI Board declared Tanzania EITI compliant on 12th December, 2012. This is very timely considering the country s recent natural resources discovery. Tanzania has committed to be transparent and to have open dialogue about how the country manages the potential new resources. Earlier this year, the country s 3rd Reconciliation Study Report for the year to 30th June, 2011 was released. The Government has experienced some delays in finalising and submitting to Parliament an Extractive Industries Transparency Initiative (EITI) Bill and related regulations. In recognition of the challenges faced, an agreement was reached with Development Partners to move the target date for implementation of this action from 2013 to October, 2014 in the GBS Performance Assessment Framework (PAF). 7

3.2.9 The table below shows implementation progress against impact and outcomes indicators. Performance Indicators Target Status at September 2013 Ratio of tax revenues as a Ratio reaches at least 18% in Tax revenue as a percentage of GDP stood at Almost % of GDP 2014 17.7% in 2012/13. The target set for 2014 has virtually Variation between payments made by mining companies and revenues by GoT Variation is <10% in 2014 Component 3: Accelerated Private Sector Development (PSD) already been achieved. The level of variation in 2013 stood at 2.21%. The target set for 2014 has therefore already been surpassed. 3.2.10The expected outcomes of this component are: (i) improvement in the time it takes to pay taxes; and (ii) total electricity installed capacity (MW). The component focuses on assisting the GoT s on-going efforts to improve the enabling environment for private sector development. Government continues to purse measures geared towards improving the efficiency of processes required for payment of taxes as well as improving access to affordable and reliable electricity both of which are critical to private sector development. 3.2.11 During 2012/13 the Government has continued to strengthen the PPP framework with the objective of making it the main vehicle for investment in public infrastructure. Consequently, the Government has carried out an initial appraisal of potential PPP projects in ports and road sectors. These include construction of Dar Chalinze Expressway and development of Katanga, Mtwara and Mwambani Ports. The PPPs will be critical to generating the huge amounts of resources required to improve the increasing infrastructure requirements of Tanzania s economy. In view of the challenges posed by multiple units and offices dealing with PPP related issues, the Government will merge the PPP Units into one Unit and review the PPP Act and Regulations with a view to improving them during the course of 2013/14. In addition, the Government plans to establish the PPP Facilitation Fund to finance feasibility studies for PPP projects in the country. 3.2.12 An important aspect of Component 3 of the GECSP is energy sector development, in view of the critical impact of reduced cost and improved access to energy on the cost of production and transportation of goods and services and, hence, on economic competitiveness and private sector development. As already explained, the GECSP electricity installed capacity target of 1,247 MW for 2014 has already been surpassed, partly due to increased capacity resulting from EPPs/IPPs. The Government has set new targets and plans to install an additional 1,310 MW of new capacity by 2015/16. This will be critical to meeting the increasing energy needs of the growing economy and expanding the industrial sector, as well as for the success of government s efforts to improve economic competitiveness and create the enabling environment for business growth. The new target is therefore being supported by the GECSP. 3.2.13 The table below shows implementation progress against impact and outcomes indicators. Performance Indicators Target Status at September 2013 Improved time it takes in paying taxes (CSI) 160 hours per year in 2014 Government is taking huge strides to reduce the time it takes to pay taxes, which currently stands at 172 hours. Total electricity installed, capacity in MW >1,247 MW in 2014 The current installed capacity stands at 1, 438 MW. The 2014 target of 1,247 MW has therefore already been surpassed. 3.2.14 From the above, therefore, it is clear that Tanzania has made significant progress in the implementation of the GECSP, even though some challenges remain. With the strong commitment demonstrated so far, the programme is expected to achieve its envisaged development objectives upon completion. In this regard, access to the resources of the supplemental financing will be critical to the completion of on-going reforms to achieve the programmes stated goals. The Bank will therefore 8

continue to be fully engaged through the ongoing policy dialogue, with the support of the Tanzania Field Office. IV. JUSTIFICATION FOR THE SUPPLEMENTAL FINANCING OF THE GECSP 4.1 The table below highlights eligibility criteria for supplemental financing, as per Section 6.4 of the revised PBO Policy, all of which have been met: Criteria 1 The PBO is being implemented in compliance with provisions of the Loan or Grant Agreement 2 The country is unable to obtain sufficient funds from other sources on reasonable terms or in a reasonable time: 3 The time available is too short to process a further freestanding Bank operation 4 The country is committed to the program and the implementing agencies have demonstrated competence in carrying it out. Status Since signature of the Loan Agreement in December 2011, the Government has fully complied with all provisions of the Loan Agreement. Implementation has been smooth. In March 2013, Government of Tanzania secured US$ 300 million through a World Bank DPO to support the energy sector over a three year period. While this is useful in helping pursue some of the measures covered by the GESP, it is inadequate. The cost of mobilizing the required resources through financial markets is high. Hence supplemental financing is timely. The resources are urgently required and will need to be accessed within the next three months. It is therefore difficult to process a free standing operation within this short timeframe. Tanzania has demonstrated strong commitment to the GECSP in view of its huge contribution to the country s development efforts and implementation capacity remains adequate. This has yielded positive results, as demonstrated by the programme s performance to date. 4.2 In addition to meeting all the eligibility criteria for supplemental financing, as required by the PBO Policy, there is strong justification for providing supplemental financing to help the Government of Tanzania fully implement the GECSP and related measures. Table 5: Government financing needs for FY2013/14 and projections through FY2015/16. (Billions of TSh) 2012/13 2013/14 (Proj.) Total revenues (incld. grants), of which 2014/15 (Proj.) 2015/16 (Proj.) 8,758 10,999 12,378 13,852 Tax revenue 7,937 9,885 11,124 12,449 Non-Tax revenue 822 1,114 1,253 1,403 Grants 1,777 2,320 1,855 2,021 Total expenditure and net lending of which 13,341 16,053 16,731 18,254 Recurrent expenditure 9,035 10,958 12,053 13,169 Development expenditure, of which 4,306 5,095 5,181 5,723 Local 2,113 2,471 2,767 3,065 Foreign 2,193 2,624 2,414 2,657 Overall balance (cash basis) (2,805) (2,734) (2,498) (2,381) Foreign borrowing (net) of which 2,689 3,331 2,285 1,695 Project loans 892 844 928 1,028 Programme loans 1 628 625 526 617 Non-Concessional borrowing 1,586 2,252 1,280 822 Scheduled amortization (217) (390) (449) (771) Domestic borrowing (net) 116 (597) 213 685 Financing 2,805 2,734 2,498 3,065 1 AfDB to disburse UA78.41mn (last tranche of UA40mn + Suppl. Financing) in FY2013/14. World Bank to disburse USD100mn in FY2013/14. Source: Ministry of Finance,- Projections July 2013 9

4.3 The first justification is that improving the business enabling environment, supported by the programme, is critical to achieving Tanzania s development objectives, including those of the GECSP. Lack of enabling infrastructure, particularly energy, remains a major constraint to the private sector development. Although the GECSP targeted outcome of electricity installed capacity of 1,247 MW has already been surpassed, the existing capacity is still far below the country s energy needs which continue to grow. Government therefore plans to install an additional 1,310 MW of new capacity by 2015/16 under the Big Results Now Initiative. This is in recognition of the fact that shortage of reliable energy supply is Tanzania s most pressing binding constraint to economic growth. Tanzanian entrepreneurs continue to face crippling energy shortages, which impact on the cost of production and overall competitiveness. Almost 75 percent of Tanzanian enterprises consider routine load shedding and power outages as the most serious constraint, while another 15 percent mention it as a significant problem. It is also important to note that the development of SMEs is critical to the attainment of inclusive growth. Addressing Tanzania s power sector challenges is therefore critical to improving economic competitiveness and creating an enabling environment for business. In this context, therefore, continuing to support related reform measures within the framework of the GECSP through supplemental financing is critical. 4.4 Secondly, Government continues to subsidise the state-owned power utility TANESCO to guarantee service delivery and this has implications for fiscal stability. Over the last decade the country has witnessed a growing power generation deficit caused by below-average hydropower generation capacity and insufficient development of new generation capacity. In response, the stateowned power utility TANESCO entered into high-cost emergency contracts with privately-owned emergency power projects. The power sector has accumulated arrears estimated at US$250 million (about one percent of GDP) and the company s financial gap may continue to grow until more efficient power generation capacity replaces the emergency power supply. By end 2014, the total cumulative financial gap could reach between US$760 million and US$1 billion (about 3 to 4 percent of GDP). To keep the company afloat, Government continues to divert limited resources away from critical sectors of development to address electricity sector challenges. This has the potential to undermine prudent fiscal policy. As Table 5 shows, the fiscal deficit for 2013/14 (which is driven by government s energy sector interventions), is projected to be 2.734 billion Tanzania Shillings, before declining slightly to 2.498 billion Shillings in 2014/15. These will be finance mainly through foreign borrowing (including Bank GBS resources). Resources availed to the Government through supplemental financing will be used to consolidate gains made in the GECSP programme, including those related to the energy sector. This intervention will, therefore, help free up other resources that would otherwise be used to bail out the energy utility. The resultant fiscal space will help the Government to focus on addressing other development priorities. 4.5 Thirdly, Government has made good progress in implementing the reform measures being supported by the GECSP. The additional resources to be available through supplemental financing will be critical to fully implementing the reform programme. With a strong focus on private sector development through improvements in the energy sector, the supplemental financing will also provide a strong basis for the next General Budget Support Operation, focusing on energy sector reforms. In this regard, it is worthy of mention that the Bank will work closely with other Development partners to support GoT with technical assistance (TA) to develop and implement the energy sector reform programme and Roadmap and capacity building support. In the context of preparations for the next Budget Support Operation planned in 2014/15, consultations with Development Partners have already begun. This is necessary to ensure maximum coordination, including with the World Bank, which approved a USD 100 million programmatic loan under the First Power and Gas Development Policy Operation in March 2013. 10

Operational objectives 4.6 The goal of the additional budget support is to support the Government of Tanzania s efforts to fully implement the GECSP and related measures, particularly those related to component 3: Accelerated private sector development. It will specifically help government to improve access to reliable and affordable energy and improve the processes required for payment of taxes, both of which have a direct bearing on private sector development. Expected Outcomes 4.7 The expected outcomes of the operation are those of Component 3 of the GECSP, focusing on Accelerated private sector development (PSD). These are: (a) increase in total installed electricity capacity; and (b) reduction in the time it takes investors to pay taxes. Regarding the increase in total installed electricity capacity, it should be noted that the initial target of achieving total installed capacity of 1,247 MW by 2014 has already been surpassed. However, inadequate capacity remains a challenge as already alluded to. Through the additional financing therefore, the Bank will support the Government in its efforts to meet the higher installed capacity targets set out within the framework of Big Results Now Initiative. This measure therefore continues to be relevant. On the reduction of the time it takes investors to pay taxes, the target under the original programme was set at 172 hours. This measure will therefore continue to be supported, with a view to bringing about efficiency improvements in the tax payment processes. 4.8 In addition to the above outcome indicators, the following measures will be supported within the framework of the supplemental financing for the GECSP: (a) Adoption by the Government of an energy sector reform roadmap (by June 2014); (b) Studies to inform the new structure of TANESCO and TPDC and the energy sector reform roadmap (by June 2014); (c) Performance/management audit of TANESCO (covering financial management, procurement systems and governance aspects - by June 2014). 4.9 The above measures are not covered in the current PAF, but will be incorporated in the next one to be agreed in November 2013. The Bank will ensure effective monitoring through usual policy dialogue with TZFO as well as the half yearly supervision missions. Development Partners coordination 4.11 Tanzania receives GBS from three multilateral DPs (AfDB, the EU and the World Bank) and nine bilateral DPs (Canada, Denmark, Finland, Germany, Ireland, Japan, Norway, Switzerland and the United Kingdom). The AfDB, through its Tanzania Field Office (TZFO), will co-chair the Joint Energy Sector Working Group JESWG in 2014-2015. The World Bank recently disbursed in the last quarter of FY2012/13, the first tranche (US$100 million) of a three-tranche US$300 million Energy Sector Development Policy Lending (DPO). AfDB proposed operation is being developed in collaboration with the other DPs, and especially the World Bank s DPO and related capacity building project. Beneficiaries 4.12 The beneficiaries of the additional budget support are the same as those of the GECSP, namely the Tanzanian population. Improved access to reliable and affordable energy will benefit the entire population. Tanzanian entrepreneurs will particularly benefit, given the importance of low cost reliable energy supply in reducing the cost of production and enhancing competitiveness. It will enhance their participation in economic activities and, hence, contribute to inclusive growth and development. Businesses will also benefit from improved processes in the payment of taxes. In addition, given that the supplemental financing resources are likely to create fiscal space, government will be in a better position to direct expenditures to sectors critical to development, which will benefit the entire Tanzanian population. 11

Gender Impact 4.13 Access to electricity in Tanzania remains low (about 18%). The increase in installed capacity that will result from the supplemental financing resources will help increase access to energy to all Tanzanians, particularly women. Also, given that low cost of energy is good for business in general and SMEs in particular, women entrepreneurs are likely to benefit. Environmental Impact 4.14 The GECSP has been classified under Category III in June 2011, in line with the Bank s procedures for environmental and social impact assessments. This remains the same under supplemental financing. V. IMPLEMENTATION, MONITORING AND EVALUATION 5.1 Implementation arrangements: The overall responsibility for the implementation of the programme remains with the Ministry of Finance (MoF). In line with Bank policy on PBO and the Paris, Accra and Busan Declarations, implementation, monitoring and evaluation of the Program will follow the country s systems, including audit arrangements. The Bank will use the Performance Assessment Framework (PAF) indicators agreed between the Government and DPs to monitor the operation of the General Budget Support. The Government will submit the CAG s audit report to the Bank in accordance to the MoU between the Government and the Development partners. The other audit reports for the Central Government, Local Government, Public Authorities and Other Bodies are usually available in the CAG s website and the Bank is always provided with copies after the respective audit reports have been submitted to parliament for approval. 5.2 Public financial management system and fiduciary risk assessment: The overall conclusion of the assessment of the Public Financial Management System is that the country s PFM system is reasonably adequate to support the proposed supplemental financing of the Tanzania Governance and Economic Competitive Support program. The assessment of the PFM system is largely based on the results of 2010 and 2013 PEFA assessment; the DFID and AfDB joint country fiduciary risk assessment 2011; the 2012 IMF Safeguards of the Bank of Tanzania (BoT); the General Budget Support Review (GBSR) 2012; the report on the evaluation GBS in Tanzania 2005-2012 and the Controller and Auditor General s (CAG) report June 2012 on the mode of operation of GBS. The PEFA 2013 Assessment indicates that the PFM systems have been improving in line with the Government s on-going commitment to PFM reform and the overall residual fiduciary risk is Moderate with the overall trajectory since 2010 being positive. This is an improvement from the PEFA 2010 and the DFID and AfDB FRA 2011 which concluded that the overall risk was Substantial. The General budget support Review conducted in 2012 rated the overall PFM performance as Satisfactory. The CAG issued unqualified opinion on the mode of operation of GBS. Many of the required safeguards to mitigate the key risks are addressed in the Public Financial Management Reform Strategy IV (milestones will be amended to incorporate the new findings of the PEFA 2013). Detailed PFM assessment report is shown in the Technical Annex. 5.3 The 2012 updated IMF safeguards finalized in November 2012 noted that the BoT had strengthened its governance and safeguard framework, including the audit committee and establishment of a risk management function. The assessment also noted the importance of continued strong oversight by the BoT s Board over remaining non-core functions and over compliance with statutory limits on credit to Government. 5.4 Audit: The utilization of loan proceeds will be audited in conformity with 2011-2016 Partnership Framework Memorandum. Hence, GoT will provide the Bank and other Development Partners with Controller and Auditor General s annual audit report on the Public Accounts of Tanzania. This report will be presented to the GBS DPs promptly after submission to Parliament, due nine months after the end of the fiscal year. 12

5.5 Disbursement and Funds Flow: The proceeds of the additional budget support will be disbursed in a single tranche following Board approval and signing of the loan agreement. The proceeds of the loan will be deposited into the Bank account designed by the borrower and acceptable by the Bank at the Bank of Tanzania (BoT). The equivalent local currency will be transferred to the Tanzania Government Consolidated Fund account that is used to finance budgeted expenditure and appropriately accounted for in the financial management systems. The Ministry of Finance will write a confirmation letter to the Bank indicating that the amount deposited in the foreign currency account has been credited to the Consolidated Fund of the Government with an indication of the exchange rate applied. 5.6 Procurement: Consistent with the Bank s commitments on Aid Effectiveness, Tanzania s public procurement system will be used for the implementation of the proposed operation. Public procurement in Tanzania is governed by the Public Procurement Act of 2004 and its accompanying regulations. The Government enacted a new Public Procurement Act (2011) but not yet effective as the regulations are not finalized and gazetted. In line with the Bank Group Policy on Program Based Operations, procurement will be done following country procurement systems in accordance with the Public Procurement Law in force and its accompanying regulations. Overall there has been improvement in public procurement, despite compliance weakness. The proposed operation will put in place appropriate mitigation measure during the implementation. VI LEGAL DOCUMENTATION AND AUTHORITY 6.1 Legal documentation The financing instruments used for this operation are an AfDB Loan of UA 38,385,104 and an ADF Grant of UA 15,325 in the form of supplemental general budget support to the United Republic of Tanzania. This will comprise UA 37.297m from the ADF 12 PBA loan allocation, UA 1.088m from ADF loan resources from cancelled operations, and UA 0.015m from ADF grant resources from cancelled operations. This will be governed by a Loan Agreement and a Grant Agreement to be signed between the Bank and the United Republic of Tanzania. 6.2 Conditions Associated With Bank s Intervention A. Conditions precedent to Effectiveness of the Loan Agreement and the Grant Agreement. 6.2.1 The entry into force of the Loan Agreement shall be subject to the fulfilment by the Borrower of the provisions of Section 12.01 of the General Conditions Applicable to Loan Agreements of the Fund. The Grant Agreement will enter into force upon signature as provided under Section 10.01 of the General Conditions applicable to Grants of the Fund B. Conditions precedent to the disbursement of the loan: 6.2.2 No new conditions for disbursement have been introduced since the intention of the supplemental financing is to support government efforts to accelerate reforms and thereby urgently address the challenges of the energy sector which continue to impact negatively on private sector development. The Bank s engagement will also minimize the negative impact of the energy sector challenges on fiscal stability as stated in section 4. C. Compliance with Bank Group Policies 6.2.3 The GECSP supplemental loan complies with all applicable Bank Group policies and guidelines, including the Bank s PBO policy (section 6.4). 13

VII- RISK MANAGEMENT Risks Fiscal/macroeconomic risk: Table 6: GECSP Risk and Mitigating Measures Mitigating measures Continue to engage with GOT through policy dialogue to encourage implementation of on-going economic reforms. Implementation capacity constraints: Corruption: Fiduciary risk: Continue to build capacity through the ISPGGII Project; Work with other donors to provide coordinated support the development of the energy sector reform programme and related roadmap. Enactment of Whistle Blowers Bill by Parliament in 2013. Required safeguards to mitigate key fiduciary risks are being addressed through the PFM Reform Strategy IV. VIII RECOMMENDATION 8.1 Management recommends to the ADF Board of Directors to award the United Republic of Tanzania an ADF loan of UA 38,385,104 and an ADF Grant of UA 15,325 as additional budget support to be disbursed in a single tranche, in line with conditions set forth in this report. 14

Appendix 1: Assessment of PBO Prerequisites - TANZANIA Prerequisites Government commitment to poverty reduction, reform and inclusive growth Macroeconomi c stability Comments on the current situation The government of Tanzania s commitment to poverty reduction, reform and inclusive growth is strong. Tanzania has adopted Vision 2025 which aims at placing Tanzania through an unprecedented economic transformation and development to achieve middle-income status; characterised by high levels of industrialisation, competitiveness, quality livelihood, rule of law and having in place an educated and pro-learning society. Specifically, the Tanzania Development Vision 2025 outlines the country's social, economic and political aspirations for the first quarter of the 21st century with an underlying drive to reaching the middle-income country (MIC) status, with a per capita income of USD 3,000 (in nominal terms) by 2025. Vision 2025 is designed to be implemented through a series of five year development plans. Tanzania s third generation poverty reduction strategy, MKUKUTA II and MKUZA II both covered the period of 2010/11 to 2014/15 and represents the medium-term objective for Mainland Tanzania and Zanzibar. MKUKUTA II focuses on three broad clusters: i) growth and reduction of income poverty; ii) improvement of quality of life and social wellbeing; and iii) governance and accountability. Similarly, MKUZA II focuses on three clusters: i) growth and reduction of income poverty; ii) improvement of social services and wellbeing; and iii) good governance and national unity. The government introduced macro-economic policies and development programs with the aim of empowering the people and boosting economic growth in the country. Various policies and strategies were formulated with the aim of economically empowering Tanzanians so that they own, run and benefit from their economy and achieve Vision 2025. Tanzania continues to do well in maintaining overall macroeconomic stability which, along with institutional and policy reforms, has been a fundamental factor behind the strong economic growth rates. The economy has also continued to record strong export growth. Overall macroeconomic performance has been strong, with inflation declining to single digits and gross domestic product (GDP) growth projected at about 7% in the medium term. The main drivers of growth are telecommunications, transport and financial intermediation, manufacturing and construction, and trade. Continued emphasis on sound economic management and strengthening political governance could ensure that the newly found natural gas resources will indeed play an important role in Tanzania s socioeconomic transformation over the medium term. While the structure of the economy has undergone some changes over the years, progress in poverty reduction remains slow. Government, however, remains committed to addressing poverty and continue to pursue reform efforts. The Public Financial Management Reform Programme (PFMRP) started in the financial year 2008/09 with the aim of developing accountable and transparent institutional management and operational arrangement for aggregate fiscal discipline, strategic prioritization of expenditure and improved performance during budget execution. The aim is to ensure efficiency, effectiveness, transparency, and accountability in the use of public financial resources. Tanzania s macroeconomic stability is ensured and the medium-term macro-economic and financial framework is viable. The authorities have demonstrated strong commitment to policies aimed at containing demand pressures, strengthening macroeconomic stability, and preserving a sound fiscal position. Economic growth continues to be buoyant, with growth projected at about 7 percent in the medium term. The key risks to the outlook stem from pressures to increase spending in the 2013/14 budget, ambitious revenue targets, and potential delays in implementing the action plan in the power sector. The draft 2013/14 budget aims at further deficit reduction while preserving development and social priorities. Monetary Policy is being tightened to deliver 7 percent inflation by December 2013 from a high of 20 percent in late 2011. Structural reforms are ongoing, though at a slower pace than envisaged. A recent IMF mission (6th Review under the PSI and 2nd Review under the Standby Credit Facility Arrangement) confirmed that Tanzania met all performance/assessment criteria under the program, but most structural benchmarks were either missed or met with delays. The macroeconomic outlook is favorable, but vulnerabilities remain. The economy is projected to grow at an annual pace of about 7 percent in 2013/14 and in the medium term. Under the IMF program, fiscal and monetary policies will be geared to ensuring that domestic demand pressures do not become excessive, with further fiscal consolidation and tighter monetary policy planned in the near term. In the absence of external shocks, the baseline scenario envisages a further decline in inflation to 7 I

percent by December 2013 and to the authorities medium-term objective of 5 percent a year later. The external current account deficit is projected to moderate significantly after domestic natural gas replaces expensive liquid fuel as the main source of thermal power generation (upon completion of the gas pipeline expected in 2015), but will remain large into the medium term. International reserves are targeted to strengthen gradually. Tanzania s risk of debt distress remains low, but the debt-to-gdp ratio has risen steadily over the past few years, and fiscal policy is envisaged to be set so as to ensure that the debt ratio stabilizes at about 45 percent in 2014/15. Satisfactory fiduciary risk assessment Political stability The overall conclusion of the assessment of the Public Financial Management System is that the country s PFM system is reasonably adequate to support the proposed supplemental financing of the Tanzania Governance and Economic Competitive Support program. Based on the recent PFM assessments (PEFA 2013, IMF Safeguards assessment of 2012, etc), the Public Financial Management system is reasonably adequate to support the proposed GECSP supplemental financing. The PEFA 2013 Assessment indicates that the PFM system has been improving in line with the Government s on-going commitment to PFM reform and the overall residual fiduciary risk is Moderate with the overall trajectory since 2010 being positive. This is an improvement from the PEFA 2010 and the DFID and AfDB FRA 2011 which concluded that the overall risk as Substantial. The General budget support Review conducted in 2012 rated the overall PFM performance as Satisfactory. The CAG issued unqualified opinion on the mode of operation of GBS. Many of the required safeguards to mitigate the key risks are addressed in the Public Financial Management Reform Strategy IV (milestones will be amended to incorporate the new findings of the PEFA 2013). The office of the Internal Auditor General has been established in line with the revised PFM Act 2010 and has already prepared good reports. All the MDAs have functioning internal audit units, which are receiving training. The National Audit Office is doing a very good job and has been rated by the peer review exercise conducted by AFROSAI-E in 2012 to Level 3 from Level1 status (the highest Level is 5) which places it among the best Supreme Audit Institutions in Africa. The Treasury Registrar prepares quality annual reports of Public Authorities (PA) and Other Bodies (OB) but does not prepare analytical reports on the fiscal risks posed by more than 200 PA and OB. The main challenge is the inadequate follow up of CAG s and Internal Auditor General s recommendations by the appropriate authorities. The PFMRP IV milestone will be amended to address the above mentioned weakness as one of the mitigation measures agreed between the Government and the DPs. The latest (2012) Transparency international s report ranked Tanzania 102nd out of 174 countries with a CPI score of 35 out of 100. This marked a drop in 2 ranks from 100th in 2011, which had a CPI of 3 out of 10. In spite of the drop in rank there was an improvement in the CPI score. Tanzania is doing better than other East African countries such Kenya, Uganda and Burundi, but less than Rwanda. The trend in the index for the last four years is: 2009-126th, 2010-116th, 2011-100th and 2012-102nd. The Tanzania Government, through the Prevention and Combating Corruption Bureau, is continuing to take measures to address corruption including the on-going whistle-blower Bill. The 2012 updated IMF safeguards finalized in November 2012 noted that the Bank of Tanzania (BoT) had strengthened its governance and safeguard framework, including the audit committee and establishment of a risk management function. The assessment also noted the importance of continued strong oversight by the BoT s Board over remaining non-core functions and over compliance with statutory limits on credit to Government. Tanzania is a one of the most stable countries in Africa. There has been a gradual increase in political pluralism. Tanzania s current president, Jakaya Kikwete, was reelected in October 2010for a second term with 61% of the votes cast. The ruling CCM won 70% of the seats in parliament. The country has enjoyed general political stability and national unity for about 40 Years. Tanzania is a union formed in 1964 between the mainland a German colony and later a British protectorate formerly known as Tanganyika and the islands of Zanzibar, Pemba, and several smaller islands. Transparency International s Corruption Perception Index shows that Tanzania had a score of 3 in 2012, thereby ranking 100th out of 182 countries, which is an improvement over the 2010 score of 2.7, when the country was ranked 116th out of 178 countries. The Mo Ibrahim Index of African Governance shows similar trends. Over 2008-2011, Tanzania s ranking improved from 12th to the 10th position, out of 48 Sub-Saharan African countries. Tanzania has issued a National Framework on Good Governance to elaborate the priority areas for which deliberate interventions need to be focused on in a continuous but stage by stage approach by each of the key players in the Governance System in the country. The players are the Central Government (The Executive, the Judiciary and II

Legislature); Local Government (and its agencies); Civil Society (and its organisations); Private Sector (and its organisations); and Co-operating Partners in Development. The objective of the framework is to help facilitate improved co-ordination of the various governance reforms and to identify specific areas for a targeted approach in supporting Governance initiatives. The framework has also identified institutions and reforms required in achieving the stated governance goals in the focus areas, including: people's participation in decision making for social, political and economic development; private sector and regulatory framework; constitutionalism, rule of law, administration of justice and human rights protection; gender equity and equality; accountability, transparency, and integrity in the management of public affairs; electoral democracy; and public service. A formal review of the country s constitution is under way and due to be completed by the end 2013. Harmonization The approach to aid management in Tanzania is guided by the Joint Assistance Strategy (JAST) and takes into account the international principles of aid effectiveness. The main focus of JAST is to promote national ownership and government leadership in development cooperation through joint actions that seeks to enhance the impact of development effectiveness. Development Partners Group (DPG) works with the Government of Tanzania and other domestic stakeholders to strengthen development partnership and effectiveness of development cooperation. By moving beyond information-sharing towards actively seeking harmonization and alignment of aid systems and priorities, the Development Partners (DPs) are aiming at increasing the effectiveness of development assistance in support of the Government of Tanzania s national goals and systems. Through JAST, Development Partners continue to work with Government of Tanzania to fulfill its objective of achieving sustainable development goals laid out in the National Strategy for Growth and Reduction of Poverty (MKUKUTAII and MZUKAII), the Millennium Development Goals (MDGs) and other national policies and strategies. GBS, which remains the preferred modality for aid delivery, is governed by the Partnership Framework Memorandum. Tanzania receives GBS from three multilateral DPs (AfDB, EU, and World Bank) and nine bilateral DPs (Canada, Denmark, Finland, Germany, Ireland, Japan, Norway, Switzerland and the United Kingdom). The wellestablished structure for dialogue consists of four clusters, 26 thematic working groups, and seven sector working groups. There are also working groups associated with basket funding in each sector. The Bank is active in relevant thematic and sector working groups, including agriculture, environment, water, public financial management, health and education, and General Budget Support. Since April 2013, the Bank is chairing the Development Partners Poverty Monitoring Group. The Bank is also deputy lead in the transport sector since 2011 and is co-chairing the energy sector donor coordination group since June 2013. III

% TZ Appendix 2 Tanzania Selected Macroeconomic Indicators Indicators Unit 2000 2008 2009 2010 2011 2012 2013 (e) National Accounts GNI at Current Prices Million US $ 10,552 19,443 21,762 23,766 24,958...... GNI per Capita US$ 310 460 500 530 540...... GDP at Current Prices Million US $ 10,186 20,680 21,299 22,396 23,474 29,941 33,832 GDP at 2000 Constant prices Million US $ 10,186 17,593 18,652 19,966 21,253 22,617 24,180 Real GDP Growth Rate % 17.9 7.4 6.0 7.0 6.4 6.4 6.9 Real per Capita GDP Growth Rate % 15.0 4.4 3.0 3.9 3.3 3.3 3.7 Gross Domestic Investment % GDP 16.8 29.8 29.0 32.0 30.4 28.9 29.0 Public Investment % GDP 5.7 7.9 8.1 8.2 3.5 2.0 2.2 Private Investment % GDP 11.2 21.9 20.9 23.8 26.9 26.9 26.8 Gross National Savings % GDP 14.1 19.2 19.9 24.1 20.5 24.6 26.1 Prices and Money Inflation (CPI) % 6.0 10.3 12.1 6.5 12.7 16.1 8.4 Exchange Rate (Annual Average) local currency/us$ 800.4 1,196.3 1,320.3 1,409.3 1,572.1 1,584.4... Monetary Growth (M2) % 14.8 19.9 23.8 20.2 14.4...... Money and Quasi Money as % of GDP % 17.1 25.6 27.9 29.9 29.2...... Government Finance Total Revenue and Grants % GDP 13.8 22.8 21.5 20.5 21.2 48.8 20.6 Total Expenditure and Net Lending % GDP 15.2 22.8 25.7 27.5 27.2 57.8 24.5 Overall Deficit (-) / Surplus (+) % GDP -1.4 0.0-4.2-7.0-6.0-9.1-3.9 External Sector Exports Volume Growth (Goods) % 27.5 7.1 7.3 9.0 10.2 9.4 11.8 Imports Volume Growth (Goods) % -3.0 10.0 7.7 6.1 18.1 15.7 5.9 Terms of Trade Growth % -3.8 5.8 6.8 17.2 1.1 6.0-10.0 Current Account Balance Million US $ -364-2,334-1,914-1,722-2,782-3,321-4,029 Current Account Balance % GDP -3.6-11.3-9.0-7.7-11.9-11.1-11.9 External Reserves months of imports 5.5 4.5 5.1 5.1 3.9 3.2... Debt and Financial Flows Debt Service % exports 17.4 4.1 3.6 3.3 2.9 3.3 4.5 External Debt % GDP 70.2 24.1 28.2 31.8 35.4 33.3 34.9 Net Total Financial Flows Million US $ 1,229 2,516 3,149 3,055 2,448...... Net Official Development Assistance Million US $ 1,064 2,331 2,933 2,958 2,445...... Net Foreign Direct Investment Million US $ 282 1,247 953 1,023 1,095...... 20.0 15.0 10.0 5.0 0.0 2000 Real GDP Growth Rate, 2000-2013 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2011 2012 2013 20 15 10 5 0-5 20 00 20 01 20 02 20 03 20 04 Inflation (CPI), 2000-2013 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 2.0 0.0-2.0-4.0-6.0-8.0-10.0-12.0-14.0 Current Account Balance as % of GDP, 2000-2013 2,0 00 2,0 01 2,0 02 2,0 03 2,0 04 2,0 05 2,0 06 2,0 07 2,0 08 2,0 09 2,0 10 2,0 11 2,0 12 2,0 13 Source : AfDB Statistics Department; IMF: World Economic Outlook, October 2012 and International Financial Statistics, October 2012; AfDB Statistics Department: Development Data Portal Database, March 2013. United Nations: OECD, Reporting System Division. Notes: Data Not Available ( e ) Estimations Last Update: May 2013 IV

Appendix 3 Map of Tanzania V