17 / /L~9 /i7 - r;,)e
Public Disclosure Authorized FILECOPY
TANZANIA
AGRICULTURALADJUSTHENT PROGRAM
VOLUMEII
EXPORTCROP MAURKETINGAND INPUTS Public Disclosure Authorized
Supplementto Report No. P-5200-TA Agricultural Adjustment Program
(Credit 2116-TA, Approved March 30, 1990) Public Disclosure Authorized
Public Disclosure Authorized Southern Africa Department Agriculture Operations Division Africa Regional Office CURRENCYAND EQUIVALENT UNITS
Currency Unit - TanaanSan Shilling (TSh)
Dec. 1985 US$1 - TSh 17 June 1986 US$1 - TSh 40 June 1987 US$1 - TSh 63 June 1988 US$1 - TSh 96 June 1989 US$1 - TSh 145 Feb. 1990 US$1 - TSh 193
FISCALYEAR
Government - July 1 - June 30 MAIN ACRONYMS USED IN THE TEXT
AISCO Agricult.iraland IndustrialSupply Company BOT Bank of Tazxanis CRDB Cooperative and Rural Development Bank CSD Child Survival and Development Program DAFCO Tanzania Dairy Farming Company Dfl Dutch Guilder ZEC European Economic Community SIB European InvestmentBank ERP Economic Recovery Programme ESAP Economic and Social Action Programme FAO Food and Agriculture Organization - UN IC Industrial Company (owns and operates cotton ginneries) ICO International Coffee Organization IDA International Development Association IFAD International Fund for Agricultural Development ILO International Labor Organization IM4F International Monetary Fund IRTAC Industrial Rehabilitation and Trade Adjustment Credit (Cr. 1969-TA of November 1988) IUCN International Union for Conservation of Nature and Natural Resources LSTG Pounds Sterling MRC Multi Sector Rehabilitation Credit (Cr. 1741-TA of November 1986) NAFCO National Agriculture and Food Corporation NAPOCO Nationtl Poultry Company NARCO National Ranching Company NBC National Bank of Commerce NNC National Milling Corporation (the grain parastatal) OGL Open General License Facility PCS Primary Cooperative Society (the first-tier cooperative society, within the RCUs) PER Public ExpenditureReview PFP Policy Framework Paper PSAP Priority Social Action Programme RCU Regional (or subregional)Cooperative Union (the second tier cooperative society) SAP Structural Adjustment Facility SGR Strategic Grain Reserve SIDA Swedish InternationalDevelopment Authority * SPPF Special Project PreparationFacility
TANSEED Tanzania Seed Corporation TCOM (Cashewnut) Tanzania Cashewnat Marketing Board TCMB (Coffee) Tanzania Coffee Marketing Board TCMB (Cottoni) Tanzania Cotton Marketing Board TFA Tanganyika Farmers Association TFC Tanzania Fertilizer Corporation UNDP Uufted Nations Development Program UNFPA United Nations Fund for Population Aitivitl.es UNICEF United Nations Children's Fund WORKING AP-ERS (in two volumes)
PREFACE
In order to preparethe AgricultualAdjustment Program and developthe neces- say co s for the Programamong the Government,IDA and the interesteddonors, seer missionswere caried out during 1988and 1989. These missionsinvolved severalconsultants and donor personnel,and workedclosely with the then Ministres of Agricultre and LivestockDevelopment, arid of Local Governments,Coopeatives and Marketing.
Thesetwo Volumespresent the main workingpapers produced during that preparationperiod. Each paper reflectsthe situafionand findingsas of the date of their preparaton and, as such, each of them is somewhatdated. In the meanwhile,the Govemmentproceeded to implementits Agricultural AdjustmentProgam, and the sectorsituation has been significanttymodified. Manyof the recommendationsstmming from the workingpapers were implemented,while others were modifiedor posponed. It has beenconsidered usefil, however,to make these workingpapers available as they containmuch of the information,data and analyseson whichthe policy decisionshave teen adopted. Muchof the informationcontained in the papersis not otherwiseavWailable. No atempt at updatingthese papershas been made. They are presentedhere as they were when Wr contentswere used to substantiatedecision proposals or to recom- mendadditional sudies. Updatingthem wouldhave requiredrepeiion of mostof the missionscaried out te, requiringan enormousamount of time and money. Most of these paperswill be supersededby the completionof the Long-TermPespective Study the Governmentis preparing,and by the AgricultualSector Report which the Bankis preparng in order to supportthe Goverment's LTPSand to updatethe analyticalbase for its policy and lendinganalyses. VolumeOne includespapers on land resourcesfor rainfedproduction, economics of agriculturalproduction, and grain marketingin nual and urbanareas. VolumeTwo includespapers on the marketingof major exort crops (cotton,coffee and cashewauts) and on the supplyand distributionof agriculturalinputs. The report of the FAO/CP agricultal reviewmission, issued in March 1988,and its annxes are not included. TANZANIA
AGRICULTURALADJUSTMENT PROGRAM
Contents of the Working Papers
Working Paper Title Date
VOLUMEI LANDRESOURCES AND GRAIN MARKETING
No. 1: Land Resource Potential for Rainfed Production 08/89 of Maize, Bunded Rice and Wheat
No. 2: Economics of Agricultural Production 09/88
No. 3: Marketing of Basic Food Commodities 04/88
No. 4: Cereals Marketing Policy and Food Security 05/88
No. 5: Food Crops 07187
No. 6: Open Markets for Grain in Urban Areas 10/88
VOLUMEII EXPORTCROP MARKETINGAND INPUTS
No. 7: Appraisal of the Cotton Marketing System 07/89
No. 8: Improving Cotton Marketing 10/88
No. 9: Policy and Action Program for Cotton Marketing 05/89
No. 10: Coffee Marketing Arrangements 03/89
No. 11: Improving Coffee Production and Marketing 08/89
No. 12: Cashew 4arketingand Processing 03/89
Mo. 13: Export Marketing of Tobacco 01/89
No. 14: Supply and Distributionof AgriculturalInputs 07/88
No. 15: Input Supply and Distribution 03/89
No. 16: A StrategicAssessment of the Fertilizer 05190 Industry in the SADCC Countries Workint Paper No. 7
TANZANIA
AGRICULTURALADJUSThENT PROGRAM
WORKINGPAPER
APPRAISAL OF THE COTTCN MARKETINGSYSTEM
Southern Africa Department Agriculture Operations Division Africa Regional Office Workins Paper No. 7
AGRICULTURALADJUSTMENT PROGRAM
WoRKriG PAPER
APPRAISAL OF THE COTTONHARKMETINGSYSTEM
Table of Contents
PaLe No.
INTRODUCTION 1
I. THE TENDERSYSTEM 2
II. IMPLEMENTATIONOF SALES 4
III. THE DOMESTICMARKET 5
rv. QUALITYCON5ROL 8
V. PRODUCTIONAND LOGISTICAL PROBLEMS 11
VI. FUTUIR EYPORTMARKETING 13
Tenders .o 99999999090009000*** ...... *...o.. 13 Auctions ...... *... 14 conclusions .. . . 15
VII. FUTUREDOMESTIC IBXAETING 18
Procurement ...... 18is...... Deliveries * 18 Quaityn ...... is Pricing 90009099000909 90999000 19 Credit Terms ...... s****vv¢¢eX 20 VIII. PROPOSEDCHANGES IN THE STRUCTUREOF THE COTTONSECTOR 22
Retention of Ownership of Cotton Products Until Sold ...... 99090990009000 22 Quality Control ...... *...... ** 23 Marketing .*...... *...... e*...... 23 Forwarding and Shipping o..*0.*9...... 23
Ix. REC TIONS 24
Export Marketing ...... -..--... 24. Domestic Marketing ...... 00990-0--...... 24 Research and Seed Breeding Program and Multiplication Scheme ...... ****.** 24 Quality Control ...... ***-*-*-*- .. 24 Lint Transportation ...... 0...... 26
X. ACKNOWLEDGEMENTS 27 Working Paper No. 7 Page 1
INTRODUCTION1/
It has recently been proposed that the Tanzania cotton Marketing Board should change the system by which cotton lint is sold from the current tender method to that of auctions.. Tanzania is no stranger to cotton lint auctions as this was the system employed by them until 1973 when it was changed ir favour of sales by tender. Although no official records are available as to the reasons for the change, it is presumed that the auction system was at that time found to be no longer satisfactory. Other cotton producing countries, including neighbouring Uganda, and Sudan who formerly sold their lint by auction also changed to alternative methods.
./ Thisreport was prepared by the British Cotton GrowingAssociation. Working Paper No. 7 Page 2
I. THE TENDERSYSTEM
1.1 Buyers must be registered with T.C.M.B. in order to participate in tenders. On application for registration,,. potential buyers must state the nature of their business and provide trade and banking references. 1.2 Depending upon the size of the crop, the progress of processing and movement of the cotton there are on average six tenders for cotton lint held each year. Tenders are based on forward sales of six months, although when spot cotton is available at the Dar es Salaam warehouse this is offered for nearby shipment. T.C.J.B. normally include a sellers' option of three consecutive months on shipment to allow for any delays that may occur. Sales are based on P.O.3. 1.3 The first tender for each forthcominq crop is normally held in March. This will be based on historical experience of the crop as to what quantities and qualities can be expected to be available for shipment from September onwards. The second tender will be announced usually around May/June once the development of the crop has been analysed and a more accurate estimate of the crop size can be assessed. Subsequent tenders are announced at reqular intervals throughout the year based on feed-back reports on the progress of quality, processing and logistics in conjunction with an analysis of world market trends. The quantities and qualities of cotton offered at each tender will vary, depending upon the aforementioned criteria. 1.4 Actual qualities offered for tender are based entirely on the one selling type grade andaGANY" are categorised as 'ARM" (roller ginned cotton from the Western Growing Region) with a staple (fibre length), guarantee of Type 1 (1 1/8), Type 2 (1-3/32) and Type 3 (1-1/16)v "ARC" (Roller ginned cotton from the Eastern Growing Region) with staple guarantees of Type 1 and Type 21 and "ASG" (saw ginned cotton) Type 3. "ARCOcotton is also known as Type 'DARM" which is the same quality as Grade 'GANY". 1.5 In order to hold a tender, discussions are held between management and marketing personnel regarding timing and details of cotton to be offered. On approval by management, a telex announcing the intention to hold a tender in 14 days is sent to all registered buyers and to Cotton Outlook. This details the proposed catalogue, contractual term and the tender closing date and time. cotton Outlook publish details of the tender in both their daily telex and weekly magazine to their subscribers, this is to give any other potential buyers the opportunity to register and participate in the tender. Working Paper No. 7 Page 3
1.6 Bidding on the tender is generally made by telex, although those buyers with representatives in Dar es Salaam may respond via their local office. Due to constantly changing market trends most bids are generally received during the last two hours before the tender closing, with Yugoslav buyers tending to bid early in the day as do Far East buyers because of the time difference. Telex bids are passed straight to the General Manager. Rowever, security appears to be lax and the telex operator is known to enter into discussion on the machine with buyers enquiring as to who has bid and at what levels. This apparently has frequently resulted in the changing of bids already given.
1.7 At the appointed closing time, management and marketing personnel assemble to study and consider the bids received. All bids are responded to, whether successful or not. The highest bids for each quality are generally accepted and in the event of part of the catalogue still rsmaining unsold, T.C.N.3. will invite a few of the next highest bidders to counter offer using prices already accepted as a reserve price base. Counter offers are accepted on a "first come' basis. 1.8 on conclusion of the tender, contracts for qualities sold are drawn-up in accordance with the terms and conditions as laid down by T.C.lB. These are detailed in a booklet issued to every registered buyer. Working PaDer No. 7 Page 4
II. IMPLEIMTION OF SALES
2.1 Cotton is ginned in lots of 100 bales. Each bale weighs on average 181 kg. Lots are sampled on the basis of 4 percent (ie 1 sample represents 25 bales). The samples~ are sent to the nearest T.C.M.B. zonal office for despatch to the classifier in Dar es Salaam. On average samples take one month to reach the classifier from the time of ginning. On occasions lint bales will arrive before their respective samples (one batch recently took seven months).
2.2 On receipt of samples, the classifier will check them and set aside this cotton for a particular contract (export or domestic). Half of each sample is retained by T.C.N.5. for testing and reference purposes, and half is kept for the buyer should he request them. Samples are kept for up to two years.
2.3 on receipt of sufficient bales of similar quality to complete a contract or shipment portion, the relevant buyer is notified.
2.4 The buyer sends his shipping instructions nominating the vessel on which he wishes the cotton to be shipped, generally giving at least two weeks notice, and opens his letter of credit accordingly. T.C.N.B. orders the required number of containers and places a shipment booking with the relevant shipping company. On completion of containerisation and documentation, T.C.N.3. then arranges delivery of the containers to the nominated vessel.
2.5 The buyer must take delivery of the cotton within the contracted shipannt period. Failing this carrying charges of 2 percent of invoice value will be levied, if the cotton has not yet been paid for S or if already paid for, storage and insurance charges at cost. WorkLns Paver No. 7 Page 5
III. THE DOMESTICMARKET
3.1 There are twelve textile mills in Tanzania which are currently [urchasing cotton lint from T.C.L.B. on a reqular basis. Cotton consumption by these mills is currently estimated to be around 75,000 bales. This has been difficult to assess, however, as most mills are presently operating well below capacity, some in the region of 20 to 30 percent at times. This consumption figure could be doubled if all mills were operating close to full capacity.
3.2 Whilst several of the mills, such as Sunflag, Cotex and C.I.C., are privately owned, the majority of them are parastatals. They are all, however, currently going through a liquidity crisis. A study funded by the World Bank is currently underway for a possible rehabilitation programme for the textile industry.
3.3 The mills buy their cotton lint direct from T.C.N.B. and, apart from Xwanza Textiles and Musona Textiles who draw their lint requirements through the T.C.N.3. Mwanza office from qinneries in the Nwanza Region, all other mills take delivery from the T.C.M.B. godown in Dar es Salaam. This appears to be logistical madness in a country currently suffering from an acute transport problem, when cotton is transported across the country past the gates of som mills and then has to be redelivered back,, all at the mills' expense. Despite the assurances of T.C.N.3. that mills have requested this method in order to obtain a better quality blend from a selection at Dar es Salaam, Norogoro Canvas would be quite willing, for instance, to obtain their requirements dirot from local ginneries and thus save some transport costs. The only explanation which could account for this system, which is only beneficial to mills in the Dar es Salaam area, is that T.C.M.S. is able to control the mills' purchases rather than let them negotiate direct with ginneries.
3.4 on the procurement of their requirements mills give T.C.N.3. an annual estimate which they up-date from time to time depending upon their needs. The only current limiting factor on the purchase of lint is that mills must pay cash in advance of taking delivery. This factor accounts partially for many of the mills operating at lw levels. Until a year ago, T.C.N.B. were selling on 30-day term but were forced to withdraw these, credit facilities due to mot of the mills' inability to pay and consequently rising debt. Working Paver No. 7 Page 6
3.5 The quality of lint which can be purchased by local mills is the standard "AR* Grade; however, as opposed to exports, no staple guarantee is given. The "AR" cotton comprises of Types 2 and 3 (1-3/32 and 1-1/16 staple respectively). All Type 1 (I 1/8) cotton, of which approximately 20,000 bales are produced annually, is reserved for export as a premium can be obtained on the InternationalMarkets. The small quantity of "BR" grade cotton which is produced is all consumed locally, although there is provision for this quality in the tender regulations should a quantity be available for export. 3.6 The mills complain that there is a great variation in quality (grade and colour) between var'.ous ginneries. They cannot stipulate that they require lint from a specific ginnery or make their own selection from available lint. The quality variation between consiqnments does cause problems and create difficulties in maintaining their own quality system on the yarn they are producing, especially for those mills who are exporting to Europe. There is obviously also a variation in fibre length as they are sold JOAR" cotton without a staple guarantee which could be either Type 2 or 3. A further quality problem being experienced is that of sisal contamination. Whilst mills are alert to this problem,,it can on occasions pass undetected through the spinning process resultinq in buyers rejecting or claiming on contaminated yarn. 3.7 In general, the mills feel that there is an urgent need for a more refined quality control system and that T.C.M.B. should endeavour to supply lint of uniform quality from one consignment to another. When this is not possible, they should be given the opportunity to make a selection in order to maintain an even quality blend throughout the season. There is also need for stricter control at the buying posts and ginneries to try and eradicate the sisal contamination probles. 3.8 The price of cotton for the domestic market is fixed annually. it is based on an ex-ginnery price and results from a calculation of the into-stor, price and T.C.M.B. operating costs, to give a break-even price. Approval has to be given by the Government before the price can be increasd. The current price is Tsh 175/kq for "AR" and Tsh 140/kg for "ER". Where relevant, tranoport charges from the ginnery to Dar es Salaam godown are levied at cost in addition to to the ex-ginnery price. Rates vary depending from which ginnery the cotton originates but average about Tsh 15/kg. Working Paper No. 7 Page 7
3.9 Future Proposals for Karketing 3.9.1 All mills spoken to were keen to maintain the present system of buying their cotton on a direct basis as they require it. They are totally opposed to buying on a tender or auction system where they will come into direct competition with international buyers, which could put them at a great disadvantage in obtaining their exact quantitative requirements and may necessitate their having to commit themselves further in advance than they would normally wish. 3.9.2 Whilst the mills in the Dar es Salaam area are satisfied with the present system of collecting their lint from the Dar es Salaam godown, those up-country would prefer to collect direct from nearby ginneries, both from logistical as well as cost point of view. Morogoro Canvas and Cotex would prefer to buy direct from the co-operative Unions, however, Ubungo Spinning Mill would do so only if they could negotiate the prices. 3.9.3 on lint prices, most of the mills are opposed to a fixed price based on production costs and would prefer more flexibility to allow prices to fluctuate in accordance with international cotton and yarn market trends. 3.9.4 While most mills freely admitted that they are experiencing financial problems, they feel strongly that credit terms should be re-introduced by T.C.M.B. as having to pay cash every time they require lint is restricting their production. Their argument is that they have to give the buyers of their yarn and cloth credit terms, otherwise they would not be able to sell; and it takes from three to six months from the time they buy the lint to receiving payment on the sale of their finished products. Workint Paper No. 7 Page 8
IV. QUALITYCONTROL
4.1 The Export Qualities offered fcr tender are categorised as follows: ARM TYPE 1 ARM TYPE 2 ARMTYPE 3 ASG TYP2 3 ARC TYPE 1 ARC TYPE 2 ARM - Indicates cotton to be roller ginned cotton from the Western Region and equal to Grade "GANY". AS6 - Indicates cotton to be saw ginned cotton equal to Grade "GANY". ARC - Indicates cotton to be roller ginned cotton from the Eastern Region and equal to Grade "DARS" (equal to GAMY). TYPES - Represent the staple guarantee of the cotton
1 - 1-1/8 2 1-3/32 3 - 1-1/16
BR - (B Grade roller ginned cotton) may also be offered to export, however the quantity produced is so minimal that this is normally all consumed by the domestic mills. 4.2 Although AR cotton is all sold against Grade "GAmY"there are two other grades in existence, "TANG, a full grade higher and "YEKA", a full. grade lower than "GAMY". 4 . 3 Standard boxes representing these three grades are renewed every two years and distributed as follows: 1 set with Liverpool Cotton Association 1 set with Bremer Bauxwollboorse 1 set with T.C.M.B. ent for arbitration purposes 1 set with T.Ce.NB. Classifier for working purposes 4.4 Buyers who receive Grade "TANG" against a "GANY" sale receive a bonus, whilst those who receive cotton of lower grade to "GM" (i.e. GMIY - 1/4, GANY - 1/2, GANY - 3/4, GANY - 1 (YRA)) may claim for the relevant stipulated allowance for such cotton. Worlkin Paper No. 7 Pase 9
4.5 The above described quality system is very basic and out-dated, even when managed efficiently. Premiums are being lost on cotton of "TANG" quality and allowances are paid out on claims on sub-standard qualities. Whilst these are less in monetary terms than if a lower price had been accepted for that particular quality, they do in the long term induce considerable dissatisfaction with buyers leading to a lack of confidence in both the cotton and the seller, not to mention the time and expense involved in settling the claims. 4.6 It must also greatly affect the buying attitude with regard to the prices bid as buyers will not be aware of the exact quality they are likely to receive and consequently will only be prepared to pay a lower price. Mills do rnet like claims or bonuses as the quality they require to spin for a particular count of yarn is carefully prograumed. This buying mentality is further compounded by the fact that the majority of T.C.M.B.*s clients are cottoil merchants who are buying the cotton for re-sale to mills and may be unable to place the cotton until after taking delivery of it and ascertaining its exact quality, by which time the market could have moved in their disfavour. They will take account of this when bidding at either a tender or auction based on forward sales of cotton of unknown quality. 4.7 The unsophistication of this quality control system is extended further to the staple (fibre length) of the cotton which is segregated into types by area/ginnery instead of being classified (basically the closer to the Lake or Coast, the longer the fibre, decreasing by area as one moves further away). Further fibre tests of Micronaire and Pressley (fineness and strength) are only carried out periodically as random checks at Ukiriguru Research Institute. However, no guarantess on these latter fibre characteristics are given on contracts. 4.8 Cotton qualities of both grade and fibre characteristics do vary from area to area (and indeed from farm to farm) and therefore pre-segregation by area for quality cannot be regarded as an efficient system, especially when seed cotton is transferred to another area for ginning. Both external and dometic buyers do complain about variations, especially in grade and colour, between different ginneries. They are not given a choice of area at time of sale or allocation and therefore quality variations do occur frequently between shipments and on occasionswithin shipments. Working Paper No. 7 Page 10
4.9 The whole quality control system of the industry is in urgent need of refining and most importantly discipline. From discussions with various sectors and from reports it is clear that the control is almost non-existent. Farmers initially do not properly segregate grades, the grading supposed to be carried out at buying centres is not taken at all seriously, and there is little or no check of segregation at the ginneries prior to ginning. Post-ginning classification of the cotton lint is mainly pre-determined and there appears to be little or no segregation of lint qualities prior to sale or shipment. 4.10 Acknowledging these deficiencies in the systems, the fact that Tanzanian cotton is still well sought after by the trade and obtains reasonably good prices (if not its former premiums) can only be regarded as a tribute to the people who developed the seed strains currently being grown. These too, however, are showing signs of deterioration as no effective seed-breeding programme is apparently in progress. This is due mainly to under-financing, specialist staff shortages and lack of sufficient transport at the Research Institute. The seed multiplication scheme is no longer efficient and there is no de-linting plant for the preparation of certified planting seed.
4,11 Recent fibre tests carried out in Liverpool,, on samples collected by Mr J Mitchell (member of the team currently studying rehabilitation of the textile industry) show a definite degeneration in most fibre properties. Workint Paver No. 7 Page 121
V. PRODUCTIONAND LOGISTICAL PROBLEMS
5.1 There is a large carry-over of unginned seed cotton stored at ginneries and villages in the cotton growing areas throughout the country. As at 31 May 1989 this stock was theoretically the equivalent of 104,695 bales' of lint, some of which is known to be from as far back as 1985/86. The total figure should be somewhat reduced now as some ginneries have continued production throughout the off-season and cotton has been transferred from the Mara Region to Nwanza ginneries. Nevertheless, the 1988/89 season will commence with a large carry-over of cotton the quality of which has deteriorated due to long storage and water damage. Consequently, the graders and classifiers should be vigilant to ensure that this old cotton is not mixed with the cotton which will be delivered from the current crop. 5.2 As at 31 May 1989 there were also 104,170 bales of lint at ginneries and railheads awaiting transportation to Dar es Salanls. This cotton which is all already committed to export and domestic contracts is valued at into-store price at Tsh2,57 billion (US$17;8 million), on which T.C.N.B. are paying interest on their overdraft at the rate of approximately TshS5 million (US$381,000) per month. The bales are being moved at a rate of approximately 30,000 per Month which will mean that there will still be a considerable stockpile to move once bales from the new crop are ginned from August onwards. T.C.N.3. are already committed to export some 80,000 bales from the new crop for shipment from September onwards and it is more than likely that if measures are not introduced urgently to increase the rate of transportation, T.C.N.3. will be confronted with a considerable number of late shipment claims from overseas buyers. If Tanzania Railways are unable to assist in increasing their rate of movement, it may be necessary to contract a floet of large trucks to move some of these bales by road as a short term measure, to reduce this stockpile arn alleviate the pressure on the railways. 5.3 T.C.K.B. have four godowns in the Dar es Salaam port area with a total capacity of 150,000 bales. There are currently only 37,000 bales in stock awaiting shipment or collection by local mills thus storage at the port is not a problem. Workint Paper No. 7 Page 12
5.4 The current crop is only estimated to produce 250,000 - 300,000 bales. The reduced production is a result of both adverse weather conditions at the start of the season and a switching of crops by farmers to paddy rice, cassava, millet and sisal. The reasons for the diversification from cotton this year are that farmers are dissatisfied with the producer price which is insufficient to enable them to purchase inputs of fertiliser and pesticides necessary to grow a good yielding quality crop. In addition there is a growing lack of confidence in the Co-operative Unions as last season many farmers were not paid on delivery of their seed cotton to the buying posts and ginneries, and had to wait considerable periods for their money. 5.5 Whilst the farmers must be commiserated with in this instance, the estimated lower production of cotton will on the other hand be extremely beneficial in giving some breathing space to the industry. It has been estimated that with the given size of crop all ginning, including the previous years' carry-overs, should be completed by March 1990. Apart from clearing up the backlog of seed cotton this will also allow ginneries plenty of time to carry out proper maintenance on all machinery before the next crop in July. 5.6 At the same time, this breathing space will be an ideal opportunity to plan and implement many of the changes which have been proposed for the industry. Working Paper No. 7 Page 13
VI. FUTUREEXPORT MARKETING
TENDERS
6.1 From discussions held with T.C.M.B. marketing personnel and a study of recent tenders (last 18 months), it would appear that T.C.M.B. do not place a pre-determined value on their cotton or fix reserve prices prior to the tender closing. In most cases the highest bid is accepted for each quality offered and the balance of the catalogue is counter-offered to the next highest bidders at this now established reserve price. Counter-offers are accepted on a "first come" basis.
6.2 As no professional buyer, whether merchant or consumer, is going to bid more initially than he would eventually be prepared to pay, it is conceivable that slightly better prices could be obtained by open bidding on an auction or negotiation by private treaty. Many of the reqular buyers maintatn, however, that with the tender system they may only get one chance to bid, and as this will be completely blind, they have to make it a good bid as opposed to an auction where .they can negotiate by bidding and at the same time observe their competitors' reactions.
6.3 The main advantages of a tender system over an auction are as follows:
- because time and expense of travelling are not involved, tenders are more likely to attract a greater number of buyers on a regular basis;
the notice period for a tender can be of shorter duration than that which would be required to give potential buyers the chance to organtse themselves to attend an auction. This has the advantage that, in the event of a weakening in the market, the seller is exposed to comitment on the proposed catalogue for a shorter period of time;
buyers will be bidding for their total requirement on a tender catalogue, whereas with an auction the seller is unaware of each buyer's commitment;
in theory, as all communications relating to the tender are in writing (letter, telex or fax), details of each sale will be confidential between the seller and the buyers;
with a tender, the less experienced seller has a reasonable time available to study all the bids and, if necessary, discuss with colleague rather than have to make immediate decisions on acceptance or negotiation as in an auction. Workinft Paper No. 7 Page 14
6.4 The main disadvantage of a tender is that it eliminates the opportunity for real negotiation. Although a few of the highest bidders can be invited to counter-offer at or above a reserve price, it does narrow down the field of competition considerably,especially since each bidder is unaware. of how many of his competitors are also counter-offering. AUCTIONS 6.5 The main advantage of an auction is that it is an open system where everyone can participate on an equal basis. Active bidding by a good number of keen participants could achieve a higher price than may be obtainable by tender or private treaty. Especially in the case of auctioning spot cotton or special qualities. 6.6 The main disadvantagesof an auction over a tender system are as follows: all countries which previously marketed their cotton through auctions abandoned them many years ago, presumablyto more efficient and pro 'itable methods; the time and expe incurred by buyers in sending an executive With full powers of negotiation to attend the auctions. Further he may, after probably a week, return home unsuccessful. At the same time buyers have also expressed some concern over a possibly inadequate comunication system, whereby it would not be possible for all representatives to maintain contact with their bases, especially during critical negotiations. The suggestion has been made that auctions be held at a venue or alternative venues in Europe (for example Liverpool, Bremen, Geneva) as the majority of the regular buyers are based or have offices in Central Europe and Yugoslavia, with only one regular buyer from gong Kong;
- the seller would have to retain the services of a professional auctioneer who is also experienced in the marketing and quality characteristics of cotton; in order to obtain best prices, a good cross-section of interested parties would have to attend and actively bid: prices accepted from early lots could set levels for later lots of similar quality or value differences on different qualities, especially if there was any collusion between buyers as was the case when cotton auctions were previously held; period of notice required to hold an auction during which time any weakening in the market prices would be to seller's disadvantage once committed to an announced catalogue; Working Paper No. 7 PaSe 15
as opposed to a tender, the seller is unawarw of the quantity and quality requirements of each buyer; many buyers are not in favour of open disclosure of the details of their purchases to competitors; the onus is upon-the seller to establish reserve prices for each lot prior to bidding in order to make the decision on whether or not to accept final bids. CONCLUSIONS 6.7 Whilst an auction system does hold the attraction of possibly achieving better price levels through open negotiation by a number of buyers, it does appear to be outweighed by its disadvantages as well as the relevant advantages on the tender system. The first disadvantage aforementioned could probably be the sum of all others detailed - that is that there is no other known cotton producer which still markets its cotton by auction. 6.8 Whilat it is accepted that the current tender system is probably in the long term not the. most ideal method of selling, it does, under the present infrastructure of the cotton industry, serve its purpose well. El.9 It is therefore recommended, subject to the changes and improvements on the present systems, detailed below, that the tender system be retained: tightening of security on the confidential bids received, with no communication whatsoever with any of the buyers on the closing date of the tender prior to the official response to bids. It is recomrnded that a special telex machine be reserved for the receipt of bids only and situated in a position of totally restricted access. Alternatively, a telex machine with memory could be obtained. Bids received would be stored in the memory and only printed out after the closing of the tender by the General Manager, entering a confidential access code; the Tender Comittee currently consists of the general manager, marketing, finance and administration managers and the chief internal auditor. The Committee should be xpanded to include a senior representative from either the Bank of Tanzania Export Promotions Department or from the Board of Zxternal Trade. If necessary to reduce numbers, the administration manager could be opted out: tenders will be awarded to the highest bidder if that price is acceptable to the Tender Comitte. Counter offers, where relevant, will be made in bid price level order for each quality, that is the next highest bidder will be given first opportunity until the catalogue is sold out or there is no further interest at the reserve WorkinaPaper No. 7 Page 16
prices. Buyers with local representatives will not receive any preference on the order in which counter offers were made:
a more refined classification and selection of the lint is required after ginning in order to offer more defined qualities for export and thereby achieve better prices. There are at present three export qualities in existence (namely TANG, GANY and YEKA),, yet all cotton is being offered as equal to GANY, the middle quality. Even a segregation of these qualities would achieve a better overall price and restore some confidence in buyers to the cotton. With appr,dimately 95 percent of the crop being graded as 'AR", a full quality analysis and selection by classification of the forthcoming crop would result in likely production of an even wider range. This is substantiated by the comments from both export and domestic buyers on the wide variation of quality between ginneries;
additional staff should be engaged or transferred to the marketing department to relieve those personnel responsible for the marketing of the more mundane and routine daily duties thus allowing them more time to engage in the physical marketing, collation and interpretation of market intelligence and become more involved with the classifiers in studying and analysing the crop quality aspects.
6.10 The following operational sequences will be required: an efficient system of communication and liaison between T.C.N.8. and the RCU/ICs will be required to maintain a well co-ordinated and effective operation, the RCU/ICs ensuring that T.C.N.5. is kept fully up-to-date with reports on crop developmnt, quality, production and stock levels, and logistical progra ms. T.C.X.B. on their part will issue regular analysed market reports;
a speedier system of delivering cotton lint samples to the central classing roams in Dar es Salaam is a necessity;
on the organisation of tenders, T.C.N.S. would from the ongoing discussions with each RCU/IC propose a date for the next tender and compile a catalogue detailing separately the quantities and qualities to be offered by each RCU/XC. The tender would be announced in the same manner as at present and conducted in accordance with the recomendations made in Section 6.3. on the closing day of the tender all RCU/IC management must be available for immediate contact to discuss, accept or counter-offer on the bids received for their respective cotton. Alternatively, minimum reserve prices should be agreed upon beforehand azrA T.C.L.B. given the authority to Working Paeer No. 7 Page 17
negotiate from these levels. On conclusion of the tender, T.C.N.B. as agent would draw up sales contracts on behalf of the respective sellers.
6.11 With the proposed changes to the cotton industry, the RCUs will in the future offer their cotton individually in smaller lots, as opposed to the current system where each type is represented on the tender catalogue only by the total number of bales available. Regular buyers have through experience developed a preference for cotton for each type from certain areas and ginneries. If so offered, these cottons would attract more competition and consequently a better overall price than presently being achieved, whilst the cotton known to be from less desirable locations would probably obtain lower prices. Even if in the end the overall average price was comparatively no better than under the present amalqamated system, it would profit those RCUs with the 'better styles'", and could be a source of inducement to improvement in quality to the RCUs offering less desirable cottons.
6.12 In the lonq term,, the most efficient and profitable method of marketing cotton is by private treaty - negotiating each sale individually with buyers. In selLinq by this method not only can the seller come on and off the market as his cotton availability and international price levels dictate, but can also expand clientele in the end-consumer market, that is selling directly to spinning mills. This would require, however, a far more selective quality system than the one existing at present in order to be able to service each client's individual requirements. Working Paper No. 7 Page 18
VII. FUMUREDOMESTIC MARKETING
PROCUREME 7.1 As the locally produced cotton is the only source of raw material available to domestic mills, it is not recommended to put them in a position of direct competition with internationalbuyers in order to obtain all their necessary requirements. Whilst the revenue earned from the export of cotton is essential to both the cotton industry and the country, so too is the need to support the domestic textile industry whose own exports over the last year have exceeded Tsh720 million (US$5 million): therefore a guaranteed supply of cotton lint to it is vital. It is recommended therefore that the present system of procurement by the mills be retained. Mills should provide T.C.M.B.with a forecast of their estimated annual requirements prior to the commencemen of the cotton season to enable these to be catered for in conjunction with an ongoing export programme. 7.2 Under the proposed restructuring of the industry there would be a multiplicity of sellers (RCU/ICs) with T.C.N.B. only acting as an agent for them. The domestic mill would then be able to procure their requirements from any of the sellers. In so doing they could either approach T.C.N.B. as agent or go direct to an RCU/IC. 7.3 While this may be the case, it is recommended that all RCU/ICs should appoint T.C.N.B.,9at least for an interim period, as their agent for sales of cotton to the damestic mills in order to maintain a qood coordination between domestic requirements and the ongoing forward sales to the export markets and the overall organisation and administration of all lint sales. This will certainly be an extremely important factor under the proposed new infrastructure of the cotton sector. In the event, however, of any RCU/IC deciding that they wish to deal directly with the spinning mills, they should be made fully aware that they must supply T.C.M.B. with full details of each sale that they conclude in order that this may be taken into account in the overall cotton marketing programe. DELIVERIES 7 e4 In order to avoid unnecessary logistical problems and high transport costs, it is recomnded that wherever possible and subject to quality availability the mills should be allowed to procure cotton from nearby ginneries. QUALITY 7.5 The recommendations made in 7.1 and 7.2 above notwithstanding, it is strongly rcoended that the Working Paper No. 7 Page 19
current policy of only selling the highest qualities and longer staple cotton by tender should be retained. It is recognised that these styles of cotton are very much in demand and earn valuable premiums from foreign buyers. However, the domestic market should not be deprived of access to these styles of cotton and should any mill require cotton of better quality than the standard 'AR' grades, for perhaps a partinular higher quality end product, they should be given the opportunity of procuring it by participation in the tenders. 7.6 At the same time, it must also be recommended that more emphasis be placed on the selection and supply of more uniform grades of cotton to the domestic buyers in order that they can achieve the manufacture of more uniform quality yarn. As the local market generally buys on a spot basis, it should be possible to allow buyers the opportunity of 'approving' their cotton prior to delivery/collection or of making a selection from available styles of cotton. This system operates successfully in many other countries and is beneficial to both parties in that the buyer thereby confirms his acceptance of the cotton and the seller has the assurance of there bein no future claims or complaints on quality. PRICING 7 e 7 There are three basic methods which can be used to calculate the price of cotton lint to the domestic market.
7.8. Fixed price based on the cost of production is the system currently being usd and which many spinners claim is unfair because they fee. they are being made to pay for inefficiencies and inflated costs in the system. Those mills which are exporting manufactured products also feel that they are at a disadvantage to their international competitors in not gaining any benefits from seasonal price fluctuations. 7.9 Price based on export parity would entail the issuing of a new price basis after each tender, basing the formula on prices achieved on the tender for qualities similar to those being sold to the domstic market. The tender price is a forward delivery price and therefore must be backed off to an actual delivery price by deducting the theoretical carrying charges for forward delivery. Carrying interest charges are generally based on the National Bank's prime rate of interest. The resultant actual delivery price would then be converted to the local currency at the official exchange rate on the date of sale and backed off from an F.O.B. basis to an ex-ginnery price. This back-off cost would include all costs involved AW getting the cotton from the supplying ginnery to a F.0.S. Dar es Salaam basis, that is current Working PaDer No. 7 Page 20
transport cost and relative elements of freight forwarding and handling costs.
7.10 Price based on import parity would be equated to the cost incurred by a mill of importing similar styles of cotton from other origins. This method is, however, more difficult to calculate as it would be based on many hereto unknown and varying costs of freight, shipping, etc. from various origins which would have to be thoroughly researched and constantly monitored.
7.11 With the proposed new structure of the industry, it will no longer be possible or practical to retain the current national fixed price system which is calculated on a cost basis by the present sole seller, T.C.N.B. With a multiplicity of sellers, a more flexible method of pricing the lint will be necessary and the sellers will require a basis on which to formulate lint prices for the local market.
7.12 The only disadvantage of a formula which originates from prices or costs quoted in a foreign currency is that it is susceptible to devaluation of the local currency and the price will rise in relation to devaluation. The risk of any major devaluation must therefore be weighed against the only alternative - that of prices originating from the production costs of each RCU or even each ginnery and subject to both actual and anticipated local inflation.
7.13 In theory each spinning mill could negotiate its own price with a RCU. Whilst this could happen on lower grades of cotton, it is more likely that the RCUs will wish to equate prices for higher grades with the levels that they could achieve from export. It is therefore recommended that the export parity formula, as described above, be applied by T.C.N.3. and all RCUs for the pricing of cotton lint to the domestic market. It is a simple formula to calculate and does allow for fluctuations in prices on the world market which is beneficial to tho textile industry in being more competitiv, with their export products.
7.14 As the cotton from each RCU will be individually offered on the tenders, it is more than likely that variation in prices may occur between lots of basically the same quality and this will obviously be reflected in the prices offered to domestic buyers. In this event it will be up to each buyer to choose his own preference for quality and price.
CREDIT TER
7.15 It is appreciated that T.C.N.B., and in the future the Working Paper No. 7 Page 21
RCUs or ICs, cannot continuously carry the textile industry by supplying cotton lint to them on an unofficial and unspecified long term credit. It is hoped therefore that the current World Sank project on the textile industry will come up with a solution to their present liquidity problem, which will allow mills to purchase lint on a more reqular basis through the re-instatement of the former 30-day credit terms as opposed to the present situation of cash before delivery which is an unsatisfactory and time consuming arrangement for both sides. Working Paier No. 7 Page 22
VIII. PROPOSEDCHANGES IN THE STRUCTUREOF THE COTTONSECTOR
8.1 It is proposed that the Regional Co-operative Unions establish industrial companies to manage and operate their cotton ginneries on a more commercial and viable basis. Initially these industrial companies would take over the ginneries and gin the cotton for RCUs for a fee. Their activities would expand on a phased basis to include the procurement and sale of inputs to farmers, the purchasing and grading of seed cotton, the ownership of the oil mills and marketing of oil and seed cake, the marketing of cotton lint both to domestic mills and for export, and the procurement of finance direct for the purchasing and processing of the cotton. It is envisaged that for the industrial companies to operate with full financial and commercial autonomy, RCUs would expand the shareholding of the Company to include banking houses and private commercial enterprises. Nyanza Cooperative Union is well advanced in the establishment of a such a company with the revival of their former subsidiary, Nyanza Industrial, in which shareholding will include two of the banks. Nyanza are also involved in discussions with Shinyanga and Mara Cooperative Unions, whlo are also progressing along similar lines, about an investigation into other mutual areas of benefit.
8.2 An engineering company, Pamba Engineering Limited, has already been established with co-ownership by all Cooperative Unions. This company has been formed to manufacture necessary ginnery spares and to procure and import those which cannot be made locally.
8.3 It is therefore hoped that once the industrial companies are fully operational, they will inject a more commercial attitude into the quality control and processing of the crop, which is apparently lacking at present.
RETENTION OF OWNERSHIP OF COTTON PRODUCTS UNTIL SOLD
8.4 This would mean that the RCUs and eventually the induetrial companies would retain ownership of the cotton lint and offer it for sale bv auction or tender as opposed to the present system of selling it to the T.C.N.5. This would eliminate the nocessity for double financing of the crop and at the same time hopefully create a better financial awareness of the necessity for strict quality control and processing and handling of the crop through financial gains or losses when they come to market it.
8.5 It is strongly recommended, however, that T.C.N.B. be retained as a sole and central agent for the Government and the RCU/ICs providing the quality control on the crop Working Paler No. 7 Page 23
and the organisation and admninistration of all lint sales (export and domestic). QUALTY CONTROL 8.6 The primary marketing and grading of seed cotton at village level would remain the responsibility of the Primary cooperative Societies, whilst T.C.M.B. could in liaison with the ICs provide graders and classifiers at all the ginneries to maintain and improve quality prior to ginning. T.C.N.1. could also be responsible for the classification and selection of cotton lint for the ICs to offer for sale to domestic mills and to export. As a central body involved in the quality control and marketing, it would also be necessary for T.C.K.B. to advise and liaise on research and seed breeding programmes, extension and sed multiplication schemes. MARNETING 8.7 The advantages of a central selling organisation are: a large and well known organisation handling all the country'ssales will attract more interest from a wider range of buyers; provision of maximum market intelligencefrom already established international contacts; the concentration of knowledge and exertise will work to the country's best advantage, especially in preparing and administrating an anual marketing programe which will phase forward sales and cater for domestic requirements.
FORWNRDINGAND SHIPPING 8.8 Whilst acknowledging that T.C.N.S. are already operating a shipping department which is presently handling all the cotton orts and domestic deliveries, there are also commercial companies based in Dar es Salaam who may possibly be able to offer the same service at more competitive rates. Since all the changes which have been proposed, or are already being implemented, are designed to create a more commrcial and financially viable industry it is only right that if commercial freight forwarding and shipping companies can provide the IC/RCUs with a comparable service at more competitive rates, they should be free to choose whom they wish to deal with. Working Paper No. 7 Page 24
IX. RECOMMENDATIONS
9.1 EXPORT MARKETING
Having analysed the advantages and disadvantages pertaining to both auction and tender systems, it is recommended that, subject to the changes detailed in Section 6.3, the tender system will still best suit the country's requirements at present for the export marketing of cotton.
9.2 DOMESTIC MARKETING
- As detailed in Section 7, it is not recommended that domestic mills be made to participate in the tenders for the procurement of their basic cotton lint requirements. They should, however, be given the opportunity of participating in the tenders to obtain the higher qualities which currently attract premiums on the export market;
- it is recommended that the pricing of cotton lint to domestic mills be based on export parity as detailed in Section 7.9;
- it is recommended that a more flexible system be adopted on the aspects of quality and delivery.
9.3 RESEARCH AND SEED BREEDING PROGRAIQMEAND SEED MULTIPLICATIONSCEME
Effective and well managed programmes need to be maintained to ensure continued production of a cotton which will be able to compete on the world market with the fibre qualities and characteristics required by a sophisticated textile industry as well as to provide farmers with a certified seed or pure variety from which he can benefit on yield and pest and disease resistance.
It is essential that in conjunction with the seed multiplication scheme that a de-linting plant be.built to process and prepare a good quality plantinq seed.
It is understood that ODA have recently been investigating these issues, hopefully with a view to assistance.
9.4 QUALITY CONTROL
9.4.1 Buying Centres While the responsibility of the primary grading at the buying centres lies solely with the Primary Cooperative Societies, it is essential that T.C.N.B. maintain their liaison with the buying Working Paper No. 7 Page 25 centres and extension officers to endeavour to ensure that grading is being carried out correctly. It is hoped that with the establishment of the industrial companies stricter control will be more forthcoming from their side.
9.4.2 Ginneries
It is recommended that at least one trained grader be stationed permanently at each ginnery, not only to check-grade on cotton delivered by the Primary societies but also to seQgregate as much as possible any variations in quality aspects occurring within the basic 'A' grade seed cotton. This will result in the production of more uniform even-running lots of lint.
9.4.3 Lint Classification
- It is recommended that all the present marketing and classification personnel be given further extensive training in cotton classification, fibre testing and marketing to.assist them in recognising the necessity for quality selections and enable then to keep up-to-date with the requirements of buyers;
- additional classifiers should be trained to cater for future expansion in the system;
_ the present T.C.M.B. central classifying rooms in Dar es Salaam require considerable upgrading to enable classifiers to perform a more finite classification and selection system. Provision should also be made for the acquisition of fibre testing equipment. Initially, it would be necessary to purchase one Micronaire machine and one Pressley tester (fibre fineness and strength, respectively) to enable T.C.N.B. to carry our more regular tests on the lint fibre characteristics. The recommendations and measures which have been suggested are not short-term exercises. Initial and advanced training can be an expensive and lengthy process and should be carried out progressively over a period of time. The refinement of the quality selection pgramm will initially require a dedicated study and analysis of the cotton lint which will be produced this season to see in which ares the system can be improved for the future as well as improving quality for sales from this crop. This exercise would be assisted by back-reference to the lint samples which have been retained from last year's crop. on the question of the training of graders and classifiers, many large buyers have the necessary facilities and many of them may be willing to assist in some training for their own future benefit. It is understood, for instance, that Ralli Bros & Coney in Liverpool have assisted in this regard in the past and may be willing to do so again. It has also been suggeste that Zimbabwe may be willing to help if approached. Providing they were Workint Paper No. 7 Page 26
agreeable to assist in the training of personnel from one of their major market competitors, this would certainly be of great benefit as they have a sophisticated quality control system and they also carry out on-going training programmes for their own graders and classifiers.
9.5 LINT TRANSPORTATION
It is recommended that in order to alleviate a severe 'bottle neck' in the system once new crop cotton comes on-stream, that investigations be made into the logistics and costs of moving part of the backlog of lint bales at ginneries and railheads through to Dar es Salaam by road haulage. WorkLna Paoer No. 7 Page 27
X. ACKNOWLEDGEMENTS
PERSONS MET IN TANZANIA:
Mr. A. Denness Agricultural Officer, World Bank Mr. Farahani Director of Marketing, EMCM Mr. T. Fille Operations and Marketing Manager, TCMB Mr. N. Komba Assistant General Manager, Kilimanjaro Textiles Dr. Krishna General Manager, COTEX Mr. L. Law Chief Engineer, BCGA Tanzania Mr. B. Leffler General Manager, Morogoro Canvas Mill Mr. J. Manyinya Chief Classifier, TCMB Mr. Maselle operations Manager,, Nyanza Cooperative Union llr. J. Nhondo General Mnager, Friendship Textile Mill Mr. J. Mitchell British Textile Technology Group Mr. z. ckono Marketing Officer, TCNB Mr. A. Mpuya Zonal Manager, Mwanza, TCOB Mr. V. Mrisho Deputy Principal Secretary, KLOCM Mr. C.K. Patel Chairman, TCMB Mr. Prassad Production Manager, Ubungo Spinning Mill Mr. Sharimo Principal Secretary, MNLCK Mr. Sunga operations Officer Nwanza, TCMB Mr. J. Tlgray Financial Accountant, SUNGURATEX Mr. Uyagwa KLGCM Mr. A. Verhoek Project Manager, V.A.S. Mr. K. Wamunxa General Manager, Morogoro Polyester Textiles Mr. G. Wasira General Manager, TCNB
QIM MinistryM- of Local Government, Cooperatives and Marketing
TCM - Tanzania Cotton Marketing Board V.A.S Advice, serice and Supplies for Agricultural Products, The Netherlands Working Paper No. 8
TANZANIA
AGRICULTURALADJUSTMENT PROGRAM
WORKINGPAPER
IMPROVINGCOTTON MARKETING
Southern Africa Department Agriculture Operations Division Africa Regional Office Working Pai,erNo. 8
TANZANIA
AGRICULTURALADJUSTMENT PROGRAM
WORKINGPAPER
IMPROVINGCOTTON MARKETING
Table of Contents
Page No.
I. EXECUTIVESUMMARY AND CONCLUSIONS 1
II. BACKGROUND 4
2.1 The Task Force *.* ...... *...... ,...... 4 2.2 The Cotton Sector ...... 4
III. EXISTING SYSTEM 7
3.1 Production and Marketing ...... 7 3.2 Processing 8 3.3 Storage 8 3.4 Transport 9 3.5 Pricing Policy ...... 9 3.6 Cost Structure 10 3.6.1 Cooperative Unions ...... 11 3.6.2 Tanzania Cotton Marketing Board ...... 06..... 11 3.7 Selling Price for Lint ... 12 3.8 Infra-Structural Constraints .... 12 3.8.1 Manpower .. 12 3.8.2 Financial Control .. 13 3.8.3 Pricing Policy ... 14 3.8.4 Processing 16 3.8.5 Procurement 17 3.8.6 Conclusions 17
IV. PROPOSEDSYSTEM 18
4.1 The TCMB Role in Cotton Marketing .... 18 4.2 Autonomy for the Cooperative Unions 19 4.3 Purchase of Inputs 20 4.4 Reduced Financial Assistance .. 20 4.5 Benefits 20 4.6 Constraints and Critical Issues 21
V. IMPLEMENTATIONSCHEDULE 23
ANNEX 1 EXISTING SYSTEM(Supporting Tables) ANNEX 2 PROPOSEDSYSTEM (SupportingTables) Working Pager No. 8 Page 1 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER IMPROVINGCOTTON MARKETING I. EXECUTIVESUMMARY AND CONCLUSIONS 1/ he Government of Tanzania is anxious to improve and strengthen its existing marketing and pricing policy systems in order to improve the efficiency of the functions and operations of the cotton sub-sector. Another objective is to guarantee cotton producers the maximu share of tho not revenue realised from cotton exports and increased production. It also seeks to reduce Govenment financial assistance (subsidies) to loss making public institutions and to increase the country's foreign exchange earnings. The proposed Agricultural Adjustment Credit Project will support the policy change objectives reamnded by t Task Force Teamin August 1988, which are outlin aJ Option a of the proposal. This proposes to strengthenthe xisting marketingand pricingpolicy systm by:- - Giving full autonoy to the Cooperative Unions to retain ownershipof cotton lint and cotton seed until it is sold. - Allowingthe Coopertive Unions to markettheir own cotton lint through an authoriszed Government approved Brokerconversant with cotton trading on the internationalmarket.
- Allowing the Cooperative Unions to procure their own spareparts for theirginneries and for farers using foreign exchange rti. - Appointingthe TOIB as an authorisedcotton Broker sarbject to negotiations withthe Cooperative Unions and the Govrmt n fees/comissiLon. - Introducing a two tierpaymet systm whichwill be d"igne to benefitcotton end the sector as a whole.
- Introducing/formlatingan export parity price for domesti cottonlint in relation to producerpric". Under the proposalsthe nt would retain cotrol of foreign exchange and would cntinue to exercise overall supemision o the cotton industry. The CooperativeUnons would contiue to perfom the function which the hav o ' for the TCI3 such as the preparation, disatrution, storage and ta tatio of seed for planting. Their additional functions would include mobilisation of rail and road haulage to tranort cotton lint bales to Dar es salam for exportand tor local sale. _/ This paper was prepared by the British Cotton Growing Association. Working Paper No. 8 Page 2
Thesefore the proposals suggest that the functions of the cooperative Unions would be as follows: - The purchase of seed cotton from the farmers through the Primary Societies. - The transportation of seed cotton from the buyinq contres to the cotton ginneries. - the storage and subsequentprocessing of the seed cotton. - The storage of baled cotton lint and cotton seed.
- The mobilisation of rail and road transport to move lint and seed to Dar es Salaam for local use and export.
- The secring of the necessary finance for crop purchaso, transportation, processing administration and brokers tes.
- The prcurent o spare parts for the ginneries and the necessary inputs for the farmer using the foreign exchangeretention system.
- The local ales of lint and sed.
However, the Task Force recognise. the constraints facing the Cooperative Unions in implemnting thes policy changes. These onstraints ae mainly storage, ginning capaity and transportation. The Govennts of Tanxania and the Netherlands and other donor countries are addresing the problem but it is envisaged that it will take two years before the syste enjoy any major improvement. mplementation of the recommen d chang are therefore scheduled to take effect from the 1990/91 cotton season. Meanwhile it in imperative that the proposals and recend ations sade by the Task Force be approved by the Government of Tanzania by the middle of November 19S so that negotiations between the parties roncaernd can begin. The primary benefits ftro the propoals would be:
- A reduction and subsquntly a total elimination of Gove t fifancial assistance and the elimination of losses incurred by the TOW. - The abolition of the unbalanced, complicated "in-store" pricing structur instituted by the Cooperative Unions. utu p will be for the beefit of the Cooperative Unon and their Primary Society associates. Working Paver No. C Page 3
- The elimination of double financing for the two bodies dealing with cotton. - Th* introduction of a residual pricing system by the Cooperative Unions and the Government to allow for crop shortages and fluctuating world market prices. - The introduction of a two tier payment system designed to benefit cotton producers and the Cooperative Unions. - The retention of foreign currency earnings by the Cooperative Unions to improve their supply of inputs to farmers, their procurement of spares and related items which are vital for efficient operation. in addition the policy chaneg is designed to encourage financial acumen in the Managemet of the Cooperative Unions in term of financial control, production, operations, labour utilisation and to force them to streamline the pr"ent accounting system. A price stabilization fund is also to be established and will be funded by the increased earnings of the cotton sub-sector during periods of favourable world cotton prices. The fund vill be designed to minimise the negative impact of price fluctuation. Workint Paper No. 8 Page 4
II . BACKGRO,VND
2.1 THE TASK FORCE A Government Task Force composed of representatives from the Ministry of Agriculturo, LivestoCk and Development, The Ministry of Ial Government, Cooperatives and Marketing, The Treasury, The Bank of Tanzania, and the Cooperative unions was appointed to study the present marketing and pricing policy deficiencies which affect the cotton sub-sector and to propose to the Government ways and means of improvingthe system. The objectivewas to maxmise the farmer's share of revenue reaLised from cotton exports,. to increase the country's foreign exchange earnings and to reduce the Goverrment'sfinancial assistanceto the cotton sector. The Task Force also coveredthe following: - A reviewof TCNE's organisational struc, performance and capability. - An enamination of all costs incurred by the TOM and the Cooperative Unions on production, marketing, transportation, administration and sales. An examination of the possibility of the Cooperative Unions being involved in cotton exports and the feasibility of establishing an organisation which would co-ordinato cotton exports for the Cooperative unions.
- An analysis of the system and procedures governing the export marketing of cotton with a view to proposi ways of increasing the efficiency of the proces and reducing operational costs and possibly introducing private partcipation. - An exmination of the ftture role of the TCNBin the event that the Cooperative Unions are given a mandate to exprt cotton lint and cotton see. A study of producer price in relation to export prices.
- a cr ive examinationof t fficiency an possible area of cost reuctio in accordanc with Government Economic Recovery roagrammepolicy guieines.
2.2 THE COTTONSECTOR cotton in Tanzania is the second major export crop after coffee, geneating much needed foreign exchange for the ount. During the period 1975 to 1985 production declined significatly due to the breakdown of the regional cotton industry infrastructure and the marketin# systms. Workint PaDer No. 8 Page 5
Another contributory factor to the decline were the numerous changes that the industry has experienced during the past 20 years* In the late 1960 5 the Lint and Seed Marketing Board (LMs) was responsible for the marketing of cotton with the cooperative Unions acting as agents in buying the crop from the famers. in 1973 the Tanzania Cotton Authority (TCA) replaced LSMBas the sole body responsible for cotton production and its related activities. Due to MC's xigement and lack of financial control, losses continued and operational xpenses increased. In response to TCA's operational deficiencies legislation to re-establish Cooperative Unions was introduced. An Act of. Parliament legalised Coopeative Unions as the sole enterprise responsibl, for cotton production and processing. The Tanzania Cotton Marketing Board (TOM) wa established by the Goverment in 1985 after the TCA was dissolved, to control the marketing of Tanzania's cotton lint and cotton seed for both export and domestic requiremnts. since then cotton production has r to the levels of the 1970's. This recovry as bee attained in the following ways:
- Increased producer prices.
- Favourable sasonal condition. - Availability of basic consumr goods providing an incentive to farmers to increse cash crps production. Lover price for food crops.
- Th introduction of the Zmerogec Aid rgram financed by the herandsove to arret the deteriora condltion of processing facilities and .the owned ad operated by the Coopeative Unions. Production of sed cotton has trebled froc 98,000 tonne (180,000 bal") in 1985 to 257,000 tonnes (477,563 bales) in 1987/86, surpasing the record crop of 231,000 tonne produced in 1972/73. In an attempt to gin the 196, 000 tames of sed cotton produce in 1986/67 the ageing cotton procesing facilitie owned by the Cooperative Unions had to topate continuuly throughout the year without a break for preventive mant ac The existing processing inrastructure is not capable of processingmore than 164,000 tonnes. Workint Paper No. 8 Page 6
Therefore recent Government plans to improve the existing infrastructure and the ginning capacity through its Economic Recovery Programe and the Cotton Ginnery Capital pevelopment Programme financed by the Netherlands Governmnt is a step in the right direction. This will increase export earnings. xzprovements to the sector which include the installation of three new ginneries, storage, the rehabilitation of village go-downs and feeder roads are earmarked for completion during the next two and a half years. During this time Tanzania is expected to increase its cotton production to 273.000 tonnes, approximately SOO,000 bales of lint. Working Pap)er No. 8 Page 7 III. EXISTItNGSYSTEM
The overall Government objectiVOe on the cotton industry is to maximize production, support the national progra for economic independence and to generate foreign exchange eMarnings. A Goverment Act sets outs the basic frame work to motivate farmers for increasing production and to establish the machinery by which Government is supposed to regulate and control the marketing of cotton lint and to provide the necessary technical assistance to improve the cotton industry. 3.1 PRODUCTIONAND MARXETING There are two major institutions involved in the production and marketing of Tanzania Cotton, these being: The Regional Cooperative Unions weo established by the Goverment in 1982 under the Coopertive Societies Act and are reponsible for: - Provision of agriculture inputs. - Provision of finance for the purchase of seed cotton from its member primary societies.
- Collection and sportation of seed cotton trom the primary socioty buying cntrs to the processing facilities.
- Processing of see cotton through its cotton ginneries and store. - Provision of credit services for inputs to its priary society members.
The Tanzania cotton marketing Board (TCNI) was established under Act of Parliament.in 1985 and is responible for:
D Buying cotton lint and cotton seed proce"ss by the Cooeraiveunions. Qulity Control
- Transportationand marketing of cotton lint and cotton seed for bot oeort and domestic requirements. From the above functios and objectives of the two institutions, it is evident that TCKB's role in the cotton sector is relatively uolicated and straight forward, in that it iv. only conc with the rt of lint and cotton ised. By comparison the coprative Unon have a far greater role involving input sUPPly, production, storage, processing and transportation. The cost production for ths 87/88 seson is given in Annex 1 Table 1. Workina Paver No. 8 Page 8 nowever, in spite of TCNM's minor role in the cotton industry, the Board has continued to make substantial losses in its activities in the last seven years. This has placed a financial strain on the Cooperative Unions who are dependant on payment from TClB in order to maintain their cotton operations. 3.2 PROCESSING There are 24 cotton ginneries in the Westen Cotton Growing Area consisting of 22 double roller ginninq outfits and 2 saw ginning plants. The Eastern Cotton Growing Area operates 10 double roller ginning plants. Further details of the qinneries owned by the Cooperative Unions are given in Annex 1 Table 2. These ginneries are old, most of them built in the 1950's and ome dating back as far as 1920e Production efficiency is low due to the old age of the equipment, lack of spare parts and the absence of trained manpower to run and operate the ginnries. Details of the ginnery performanc is given in Annex 1 Table 3.
Presnt ginning capacity is estimated at 164,000 tonnes (300,000 bales) of see cotton. Production for the 87/88 cotton seaon is etimated at 257,000 tonnes (477,563 bales). This projected increase in production will pose substantial problms for the Cooperative Unons if they are to precs the entire crop before the net seasn begin. This in turn means a heavy financial buden on the Cooperative Union in terms of interest to be paid on funds borrowed for crop
It is therfore Imperative that the currnt increase in cotton produation is matched with iameased ginning capacity through modernisation ad rehbilitation of the present faciliti". It is undstod that the Government of Tanzania and the Netherlands ornment is address this problm by the provision of three now cotton gn i to be operational in 89/90 capale of processing 75,000 tonnes or (140,000 bale). 3.3 STORI Lack of storago facilities at both primary buying centres and the cotton ginneris has inhibited marketing efficiency and production. The end reult ha been delays in see cotton purchases and t to the farms. This in turn has affected the Cooptive Union -financial viability and opations. To match the increas in cotton production it is vital to expand storage facilities, for a successtul, efficient system within the cotton sub-sector. Workinr Pa2er No. 8 Pago 9
gxisting storage capacity is approximately 130,000 tonnes at village level: 28,000 tonneg at the ginneries and approximately 6,000 tonnes in the Eastern Cotton Growing Areas* To alleviating current problim facing tho Cooperative Unions, as a medium term measur. The Governmentfs- propose to build 400 new stores, rehabilitate 390 go-downs at village level and 16 go-downs at the ginneries.
3.4 TRANS8POT Transport is equally vital to an efficient, successful marketing system. However, for the system to operate efficiently its success in performance is dependant on many factors. The major constraints facing this sector are, the present conditions of the feeder roads to the village and towns and the main trunk roads to Dar. At tims these roads are impasable during the wet seaso.
Eqwully the national rail network is beset with numerous problems namely lack of locomotives, mata, rolling stock wagons. It is satisfying to note that a number of donor countries including the overment of Tanzania through the Economic Recover Progam are addressing this problem with utmost urgency. Tzania is losing millions of its such needed foreign exchane earnings frm lost crop exports mainly due to inefficient t ort systems. 3 PRI5CING POLICY The Governmt of Tanzania dtn the major producer prices for export ps,uch as cotton. coffe and cashew. The price of s otton paid to the cotton producer is determind by the Ministry of Agricultur and Livestock Developmet (MUM). The rketng Development Dureau within NAW is responsible for draw up the criteria used in arriving at the producer based specifically ons
- Pam labour costs ad inputs i ferttliser,, -ic , land prparation, cultivation eat.
- Th prevailing national economic conditions namely, flation, exchange rates, interet rates, in-store price, marketing costs etc. The objectives of taking the latter into acount are to guarantee , and provide the cotton producr with an income suffi ciet to match the prevailing cost of living. Producer prices are uin October ach year before the new plantin seaon. picthe buying of soe cotton from the producer cne June Workint Paper No. 8 Page 10
he Government is also responsible for fixing the in-store pricG for cotton lint, this is the price which the Cooperative Unions will receive per kilogramme of cotton lint fro TCMB (ex ginnery price). The in-store price paid by the TCu to the Cooperative Unions basically comprises of the producer price paid by the Cooperative to the farmer through its primay societies, plus additional costs incurred by the Coperative Unions ie in purchasing seed cotton at the primary society level, transportation,storage and processing qinning costs. This price is made public between April and gay, after consultation between the TCIM,, The Cooperative Unions, The Treasury and representatives of Sanks which are involved in crop fitancing. The system ha worked reasonably well in the sene that it assesses a fair and accurate estimate of the sectors production costs only. The major drawback with the system is that the in-stare price and the prices are nnounced half a year earlier and are deterined without fully taking into account the revenue side of the sector. The 1986/87 season this producer cost recovery approach came into direct conflict with National Zconosic financial restrictions. The agreed local in-store price was higher than the world market price for cotton exports. The unawareness by the Treasury of the full financial impact in terms of national subsidies and cash r ie ts mant that TCIX had no funds. The Coopti i did not got paid and interest charges an tht increas, creating critical cash og within the sector. The producer prices for cotton ad steadily over the past twenty year. Declining world market prices in 1985/86, coupled with TCXI s* enormous oas, ha made it difficult to maintain the producer price in rel terms.
Details of the cost of production, producer prices and ginning costs are given in Annex I Tables 4-6. Following the devaluation of the Tanzania Shilling in 1967, the producer price has incrsed by 30* representing a marginal deline in rel term. In 1987/88 the producer prie Ws increased by a further 15% in spite of the falling world market prices. 3.6 COST STRUC The major elements containedin the overall cost srcue are the producer price, the Cooperative Unions marketing costs and TCXB's operational and marketing xpense Thi cost structr is described below. Further details are presented in Annex 1 Tabloe 7-11 which summarises the Cooperative Unions costs which make up the in-store price charged to TOM. Workcint Paper No. 8 Page 11
3.6.i Cooperative Unions
- The Cooperative Unions marketing costs which in fact form part of the in-store price structure, include also the society levy which is reimbursed by the Cooperative Unions to the primary societies. This cost actually contains expenses incurred by the primary societies and represents operational, administration, salaries and wages, buying of seed cotton and distribution of farm inputs at village buying centres.
- Handling and transport represents costs incurred in seed cotton packaging-baling, maintenance of stores, go-downs and the transportation of seed cotton from the primary societies stores-go-down to the ginnery. Other costs are cash insanc incurred during movement of cash to farmers. Crop surac paid by the Cooperative Union is based on total value of the cotton crop intake. Interest on overdraft Reprents interest rates paid by the Cooperative Unions to the Banks on money borrowed for seed cotton purchames.
- Administration and ginning fee represent the Cooperative costs incurred on salaries, wages, office maintenance, telephone and office equipment. Ginning fees cost incurred on ginning operations maintenance.
3.6.2 Tanzania Cotton Marketing Board-
- Salaries, staff ad beefits and travelling. This cot is cposed of salaries, wages, ial benefits, training,, staff welfare and travlling incurred by TOM*
- Transport and Administration cost incurred by the Board in ters of priting office stationery, rent, office suppli, t lephone, telex, rates, electricity, other related admiistatio cots. rapotcharges include transportation, freight charges in moving cotton lint bales from the ginneries to the railhead and Dar es Salaam port for export.
-CTB's other costs include, cotton promotion expenws insuranc covering cotton lint bales while in the Cooperative Unions store and in transit to the port for export. Repairs and maintenance costs consist of vehicle repairs, buildings, furniture and eqpment fuel and lubricat. Worcnz- Pa2er No. 8 Page 12
- Financial charges include revenue stamps, bank charges on estimated interest on current and past overdrafts. The overdraft level is influenced by the volume of lint purchases, the selling price of exported lint which conatitute 80% of the total sale revenue. 3.7 SELLING PRICE FOR LINT Tanzania cotton is of the medium staple American Upland variety with a staple length of between 1-1/16' to 1-3/32", graded on the International Market as good middling. The selling price is dependant on the prevailing world market prices. Sales statisticsfor the period 1977 are given in Annex 1 Table 12. For local sales TCNB establishes the sellingprice before the beginning of tho crop season based on full cost recovery system which in ludes the in-store price (ex-ginnery), paid to the Cooper tive Unions, plus TCM's operational and marketing cost . It is therefore not surprising that the price per kilograme of lint for the domestic market as always been higher compared to the epoirt price. The cotton lint sales to dozestic textiles mills is given in Annex 1 Table 13.
3e8 INFRA-TRUCTURAL CONSTMlINTS The Cooperative Unions act provides the vital link betwen the producer and TCKs as its marketing outlet for cotton products besides providing its own aembers, primary soities with the necessary input requirements and facilities. However the following constraints have been identified. 3.8.1 Manpower The Task Force findings indicate that pest and present experience has demonstrated that the current set up of TIOM does not provide the industrious attitude, motivation, nor the nageet capability to cope with increased production. Likewise the Cooperative Unions lack infra t e capacity and trained nag nt. n the other hand cottn pr e have responded by i sing production as dmonstrated in the last tw a Given the right producer prices, availability of consumer goods, and favourable weather conditions they are capable of meeting national puction targets and the overall national revenue from cotton exorts. It is unfortunate that this .-eiponse by farmers is not supported by the existing marketiag system or bY the regional infrastructure. Workiniz Paper No. 8 Page 13
the Cooperative Unions depend on the TCMS for its revenue to pay the farmers and meet its own operation, and production costs. The delays in payment to the Cooperative Unions by TcMB due to lack of organisation, initiative and foresight has created enormous financial difficulties for the Unions to meet their commitments and objectives. The present state of affatrs will have serious repercussions on future projected production as cotton farmers will evantually be forced to grow other crops which guarantees them cash on delivery. other major factors include the inability to meet the contractual commitments of overseas sales. No effort by managekent is made to improve the current situation or explore other ways in minimising the storage periods for cotton lint scattered all over the country at the ginneries. anagemlent also need to seek alternative ways of transporting lint bales to Dar es Salaam for export. 3.8.2 Financial Control Another worrying factor is the inability of TCKB to control finance expenditure. Daily and yealy control of actual aqainst budgeted expenditure is not possible because accounts are always behind schedule. The latest audited accounts for TOSMare 1982/83. Draft accounts for the 83/84 to 1986/87 are still with the external auditors. The TOM financial standing and performance is reflected in the following nett losses incurred over the past 7 years. Table 3.1 Nett Loses Incurred by TCOB
Year State of Accounts Nett Loss (Million Tgh) 1980/61 Audited .8 1981/82 Audited 366.3 1982/83 Audited 942*0 1983/84 Draft 352.5 19S4/65 Draft 615.3 1985/86 Draft 847.6 1986/87 Draft L,523.1
As of 30th June, 1987 the Overdraft position of TOMD was reflected as follows: WoLkin2 Paper No. 8 Page 14
Table 3.2 Overdraft Position Of TCX1
Season Organisation Overdraft Position t(Sillions T8h)
1963/84 TCA 454 0 1984/65 TCA 1,683.6 1985/86 TOED 594.1 1986/87 TCE 2715.3 others 76.3 5,523.3 December 31, 1987 6,418.5
Acounts are usually not up-to-date which erodes the very basic es"ntials required in price formlation. The recurrent budget for TOEDtogether with the total profit and loss stt t is given in Annex 1 Tables 14-15. 3.8.3 Pricing Policy The annual review of the producer price gives the assurance to farmer that their asa adjusted to cope with production costs, which in tur encourages and motivates the producer to increase production. However, the present famework in which pricig policies are based does not relly e a cost effectiveness in productio nd rk by either TM or the Cooperative Unions. A formlao is usd to guarantee the recovery of costs both by the C ai Unions embodied in the in-store pricing system andthe TC's marketing costs through the periodic assumptions by TOE that the Gm t will inevitably a"ssum resposibuility for its operational overdrafts. This gives rise to excessive, r o cotton marketlg and preet which in ost case are not justified. The current system allows the duplication of marketing functions particularly in crop financing whreby the Cooperative Unions and TC are financ p ly by the banking system for the same crop. This carr the daer of double fncing and the violation of a credit litaton. Working Paper No. 8 Page 15
rre. seed given to cotton growers should be discouraged. The annual total tonnage * distributed free amounts to approximately 30,000 tonnes, out of which only 10,000 tonnes is actually planted. The value of 30, 000 tonnes which amssOuntstco I74 million TSh (at S,800 TSh per tonne). In addition TCXB incursan extra 20 million TSh in seed dusting and chemicl powder. Ginningcosts which are calculated annually and form part of the in-store price, do not reflect the actual costs incurred bY the Coopeative Unions. Under the present pan-territorial producer pricing system, the farmers near the primary arketing centres are in fact subsidisinq the more distant located cotton produers. There is also the tendency by the Cooperative Unions to build into their in-store prices safety margins to take care of possible reductions during negotiations wit, TCQ. Annex 6 illustrates the su*mary of in-store priced, in which the cooperative Union costs increased by 85% while the producer price rose by 15%. credit rwuirements for the Cooperative Unions and the TOND are supposed to be based on projected total production of seed cotton. Likewis Tc5 requirements are based on the total number of bale to be produced by the Cooperative unions. Past exerience has shaow signiticant variations in matching production and arktng costs in relation to credit requiremnts. Until the second quarter of 1987 the otton *ed price was conicered (by TOED) of equal value to the lint in spite of varied comosiio n terms of value, its uses and out-turn percetge tfactors. Du to the high price charged to oil mllero, the cotton seed is not sold, creati enormous storage problem for the Cooperative Uniom a. their ginneries. The price was reduced frm 9,500 TSh per tonne to 5,800 TSh per tonne in 1987. Present export price for cotton see is around $100 per tonne. The cost tru for both the Cooperative Unions and the TCOS reveals the nature of operational costs incurred in production apd marketing. The present structure leaves ample room for. local value added, on lint and cotton see. For exampl the total sale price of finishe fabric material made from 5,250 toes of co lint amounts to 2,008.6 million TSh. Thus the average snaes p kilo of cotton lint used is 383 TMh, while the cotton lint cost is 61.25 Tgh per kilogramme. The difference of TSh 301.75 represnts the potential value added. Workinf Paper No. 8 Page 16
As can be seen from the above cost structure, there is no positive system for the Government or the TCXB, to verify the ctlent of over or under recovery of the operational costs incurred by the Cooperative Unions out of the in-store prico paid for lint. Which in fact makes it difficult to establish whether the operational costs are just and reasonable. in the past four years cotton production costs have exceeded sales revenue, resulting in enormous subsidy requirements by the TCHO. The Government have not devised means to absorb thes 108os1s which in some ways are attributed to the present policy system.
Table 3.3 Cotton Seed Pricing Structure
Grade AI (TSh/kg) ER (Th/klg)
Producer Price for Seed Cotton 13.00 7.00 Society Levy .50 .50 Union lev 1.30 1.30
Total 14.80 8.80
Seed Out-Tur Facito 64.0% 64*0* Proportional Value of Seed 9047 5.63 Rounded Of To 9.50 5.60
3.8.4 Procesing Seed cotton stocks to be carried torard into the 88/89 season still unginned are etiatd at aately 589000 tonnes or 106,000 bales. Production for the 88/61. season is estimated to be approxtly 2186000 tonne (4009000 bale). Financial costs aring these carry overs in terms of storage charges and interet rate due to the inability to tranport the same to Dar es Salaam by TCW will have adverse fistrain an the Unions and Government as a whole. Workint Paper No. 8 Page 17
3.8.5 Procurement Te present procurement arrangement which only authorises TCHI to purchase ginnery spare parts for the Coopative Unions, through the foreign exchange retention system has and is causing unnecessary delays in spare parts orders. There is no compelling effort on the part of TCNB to expedite Union orders because TOlD is not responsible for the running of cotton ginneries. This attitude has also caused considerable loss on production efficiency due to lack of spare parts and increased interest charges on overdrafts for both the cooperative Unions and TCMO. This prolonged holding period for seed cotton and the delay in cotton lint production has resulted in the loss of the much needed foreign exchung earnings. 3.8.6 Conclusions The major weakness within the presont marketing system is the lack of comtment and aotivation by management to reduce expenditur, thereby minimising losses ad interest charges on the continuing unending and accumulative overdrafts. This can be summarisd as follows: - The inability by TOEDManagemnt to control, operate within given available resources and the lack of initiative and effort to generate rvenue during avourable world market price conditions. - The inefficient, ineffective accounting syste within the Doard which has been responsibl for not effectively monitoring TCl's financial standing, and performance. The inability by the acount division to produce budget expenditure data on schedule. - The inbility to plan annual marketing strategy in order to cope with and exports. Durng the past year export contracts for lint bales have been cce lled by prospective overseas buyer due to TOMD's failure to honour its contracte agreemnt for deliveroy. Working Paer No. 8 Page 18
nv. PROPOSEDSYSTEM
The marketing system proposed by the Task Force is intended to overhaul and streamline cotton marketing and pricing polioy in ord-er to create an efficient cotton industry. This increased flexibility in cotton exorts and related by products will be achievedby the following measures: - Reduction in TOW'a role in the marketingof cotton. - Proridefull autonomy to the Cooperative Unions to retain ownershipof cotton lint and cotton soed until it is sold. - allow the Coopative Unions to procuretheir own iputs and spare parts through foroign exchang retention. - Reduced Goverrment assistance in the form of subsidies MA the underwriting of lossesincurred by TOED. Present losses indicate a TSh 5 .5 billion overdraft incurred by TOW alone. These proposed marketing angemnt would not involve major change In the preent being carried out by the Cooperative unions and tprimary societies. Under the proposls the Governmet would still assume control of foreign gg and retain the overall supervision, plig of the cotton industry.
4.* TEE TOWMROLEIZR COTTON I~T TOW's role in the new proposed set up will be onv d into a Goveranmt approved broker system it Will therefore sell linto, through its already etablished overses cotton market channels and coatacts, and the moitoring world market prices on behaf ot the Cooperativ Unions. This will entail a different sytem to be worked out oan recovering TCID's marketing, a inistration costs based on a broker fee or commissio tucturee The a t to be worked out with the authorisd Cotton Broker (TOCD) will have to specify clearly its functions, which should inlude market forecat, world sarket price monitoring,, aintaining a register of cotton buyerso delivery cmmitment in conformity with.. eport procedures and regulations and the final payment to the Coopertive lnions. Workint Paver No. 8 Page 19
he authorised Cotton Broker (TCMB) approved by the GrJ,rernment will be paid a predetermined, negotiated fee as a fixed percentage of sales. Financial charges for overdraft lines arising from delivery and marketing costs will be the cooperativeUnions responsibility, as the Cotton Broker (TC) function will be to negotiato the sale of cotton lint elonging to the Cooperative Unions. The agreemet drawn up y the Cooperative Utnions and the Broker (TClB) will be *ubjectto a 2 year review. 4.2 AUTONOMYFOR THE COOPERATV UNIONS The Cooperative Unions will be the sole owner of cotton and all by products from production, to processing and marketing through the Goverrment approved authorised Cotton Broker. The introduction of two tier paymnt system to cotton farmers is deigned to give maximum nett revenue share on export earnings. The system intended will involve two payments to te tfarmerswhereby the base price (producer price) is the first payment and the second payment is the balance after dductinq marketing and operational costs incurred by the unions. The Cooperative Unions will continue with the functions which they perfored for the TOM such as planting sed preparation, distribution, storage and transportation. Additional functions will include mobilisation of the rail and road haulage to transort lint bales to Dar Salaam for export and local sales. Under these proposals the functions of the Cooperative unions vould be as follow: Purchase of see cotton. Transportation of see cotton frm primary societies buying centres to the qinneries.
- GrdNg of seed cotton lint. Procesi^n and storage of lint and cotton sed. - Nobilisation of rail and road tnpot to move cotton lint bales and cotton ed iand for export.
- Securing and o bti rdraft from local banks necessary for crop purcha, p tio, operations and administration costs. Pr_o of spares and input provision to cotton
-andling and execting of local sales of lint and cotton 8se. Working Paper N4o. 8 Page 20
T. overall policy chantes are intended to give the cooperative Unions a self reliant and mature approach to Onaging their own affairs and at the same time increase gsineaa acumen. They will gain the ability and motivation to generate revenue through a well and organised, co ercial structure and nagentand avoid the preent unnecessary payment of interest rates on overdrafts that arE forced upon them by the Tanzania Cotton Marketing Bard. 4.3 PURCHASEOF INOPU under the proposals, the Cooperative Unions should be given foreign exchange retained, from export sales of cotton lint. This angnt designed to Improve input and spare part prouremnt, at the same time increasing the ginneries production efficiency and reduction in interest rat" paid by eCoopetive Unions on overdrafts. The Unions involved areShireu Cooperative Union, Nya Cooperative Union, Nara C ative Union th teronCorative Unions. it is that the newly formd Pamba Engineering Comany b anza owned by the Cooperative Unions who have the controlling shar" in the Compny) and TCMS, could be suited to perform the Profunctions on behalf of its sahold.
404 REUCED FIACAL SISTANCE To eliminate the double fncig problm which presntly erist, it in proposed that the Unions be the only institutions alloyed to apply for secure overdrafts from the National Bans for cotton pe 4.5 3ZNzEFTS In summary, the major befits from the proposed change in the tg Syte poliCy as Proposed will bes The d gagen.t of -over t frm the direat financial involvement in the cotton by allowin cotton p c to ther own affairs through their 1respectivecooperates unioe.
- Abolition of the in-store Pricing stMuture as the sal proceeds Will be for the benet of the Cooperative Unions. 1esidalPricing sytm will be instituted by the Cooperative Unon. in an event of short falls which cannot be absorbed by the cotton crop, the Cooperative Unions will have to present and justify any assistance necessary from ov t Or othe financing institutiows. This ngement is designed to instil cost ffectiveness in the UnionM m g stture. Vorkinft Paper No. 8 Page 21
- TCHM will be accountable to the Cooperative Unions for its performance and operations.
- Elimination of double financing to the sector. Funds/overdraft facilities presently being given to Tanzania Cotton Marketing Board, will be available to other bodies requiring financial assistance.
- Modification of the present export retention system to allow the Cooperative Unions to import their requiremonts for machinery and equipment, spare parts, handling and packing materials. As the end user they have more incentive for timely ordering.
- Propagation of rural savings and c t schmes and the introduction of the passbook system for cash security, minimising cash movement and credit demand.
- Establishment of a Price Stabilisation fund whereby the excess of actual selling price during the crop season over the average exort price tablished at the beginning of the sason will go into a fund to be antrusted with a Board of Trustee.
Introduction of the residual payment schem involving two paymnts to the farmes,w the bae price (producer price) will be the first paymnt and the second pyent being the balance after deducting the allod marketing costs of the broker, the Unions operation costs, and any paymet to the price stailisation fund. Export parity prices and estimated producer price are calculated and presented in Annex 2 Tables I and 2.
4.6 CONSTDUWS AND CRIMCAL ISSUES
Export crop ket in the cotton industry is a broad spectrum of trlated activitie which lu the efficiency of the Marketing Syst. sintd system being roads in the rural areas,t storage, gining capacity, research and extenion and uc prices.
The present situation in Tanzania clearly indicates that the cotton subsector is facing enoro infrastrutur pl . If the industry as a whole is to survive and mata its position as a major export crop and foreign exchange earner these problems require immediate rectification. WorkintPaper No. 8 Page 22
To strengthen the existing marketing functions and structure into an efficient unit, which will generate foreign exchange, ihance the countries economic progress in agricultural crop p°orts, it is vital that the present constraints facing the cooperative Unions be improved before the proposed system in implemented. This will provide the Cooperative Unions with the much neoded boost in production efficiency and operations, which in turn will enhance marketing efficiency, financial effectiveness and provide a viable financial base. The Government is very much aware of the problems associated with the cotton sector, and these are now being addressed through The Econoic Recovery Programme and through other Aid Agencies notably the Netherlands Goverament who are currently involved in the rehabilitation of Tanzania 's cotton ginneries. Nowever, it is envisaged that it will take another two years before the sector and the Cooperative unions can benefit from these major improvemeats. Workint Paper No. 8 Page 23
V. I1PLEMEATIONSCHEDULE
Change in the marketing pricing policy will be executed by the Government of Tanzania through the Ministry of Aqriculture and Livestock Development and the Ministry of Local Government and Cooperatives. Tmplementation Schedule which gives the Cooperative Unions autonomy to market their cotton lint and related by products should be fully implementedin the 1990/91 cotton season. in order to achieve this deadline the following implementation schedule is suggested. This is shown diagramatically in FigureS. - Appraisal of the Proposed Agricultural Adjustment Credit Project should comence on 28th November, 1988 in Dar es Salaam by a World Bank Appraisal Mission. - Approval by the Cabinet to the proposed market policy chnges is rweired by December 86 to January 89. - The Goverrment to appoint a team of experts to set up the new tructura, organiation changes involving the Cooperative Unions. TOM and the Ministry co ned, Tem to conclude its task by February-March,1989. This may require Parliamet Act after completion.
- Wegotiations of loan between the Government of Tanzania and the World Dank are propsed for 21st April 1989. The Doard presentation on credit proposals, arrn nts is e ak for June 89. with the loan co ffective by October 1989. it is sug dthat the Cooperative Unions be given the right to sel their cotton lint to local ons textile mills in the 69/90 se"an after approval by the Cabinet on change of policy. a.re5
ACTrITT ltETATIOwSCHEIDUL kAGRCUIUR ADL;IUT 1988 CBDIT PROTCT 1989 IvmTY 0 D J F K A 1990 *raisal X J J A 8 0 3 D J F wroval 1 a unwht by zAnst oan licy $ge.
Mt. poSintea .udy teas to it up new g.Str?ut igostiation 'Bank aoard Presentation ,an Approval efectivn"es oop Unions Litonofy and orwation of cm3an cotton roker
0 Working Paper No. 8 Annex 1 Page 1 ANNEX1: EXISTINGSYSTEM
TRu 1 PflFaw=Tj . T ANlDp1m6 TO 1ABw1 =0=1 MUIR1987/88 He== MD
Typ. Typ. M. Mqrove HAd oxi am Tract & Rizrd Tam.
LD (l/) 400 450 750 1100 }Rll! PacS (SWVI A)A 22.35 22.35 22.35 22.35 ER 10.4510.45 10.45 10.45 B (SV): 90%AR 844 95 L870 23276
r_lr7MwBMww 10 10 10 10 I _ 1IsTrif 28 8 a D-lf~ ~ S 1 1 _m .7 7 Mt%in 6 2 40 40 50 10 YvII 1 1 2 2 DmRVWI'fl5 20 23 35 45 12 4 6 10 ZA1 R IN 132 110 159 96 16T MPFp (Sw a
LAN W 8096 809 3461 - (tem 541 776 1347 - t1A) - 4875 NE=G(LN 3138 lxmJER m NM 2.5 539.5 1349 qP VA6 1 729.625 730 EESSCII fIDm LI= 3/6* 2.51 250 2632 2632 5264 5264 NTS gm 1 :2 200 260 337 675 51 .Cw 8 PE0F crC= PM 2 CR3 500 1269 1269 1904 1904 T!0Z 302 302 302 302 =ML cm Wmm 4442 5890 9929 20867 GP= mm= (S a) 4002 3632 5941 2389 RE8 T LRn (SURm I am 30 33 37 25
SOU NM Key Typ - Typical Impr - Improved Working Paper No. 8 Annex 1 Page 2
ThXZ 2 OWRS OF GUM= Mt CP MU
UX coP n NO XF DOM SnvMM SA
Wm SblS P4aa ±m> U Im 6 223 3 Nymnz :S t±mVkiia 1 295 3 vim ±agimcm~ a3 96 - a ^Ian c 1 40 - Sid3 1A -. M 1 12 - 1~ba~~ a h1~1 50 o
Sub'4lin1 23 716 - 6 a= HIuya pA±mi ox 1d 10 ?Nr§9X@ IPA±aM~Q= UM 6 57 10 aeOP pAOp am mLc 1ID p 10 - IUa4sazo XativS oap Di 1 6 1~~~~ - - -8 Sub'l1 10 67 34
Tatl!a Tiza 33 783 34 6
SMxz 3 szau as eai o X o n
221,740 69,816 42 1982/83 21a963 74,405 34 m3/6 230,04 26,667 so 94/85 268#980 110#930 41 19Do 157,56 74,,73 47 L967 342,10 140,494 41 7/S _: 416,707 7658 19
AVD,UP 263t300 99e31 34
S2OS C Io. Working Paper No. 8 Annex 1 Page 3
T 4
COT OF CaUW iEDCflM 3N 5W WEOM R=Xff (MM 1qot parity,
blmit Qty prio/m value total forex 2Svw%±t (TM)- Productiw 0 offec. Priam Ia 400.0 22.35 8940 19000 21461
Seas Ia; 0.0 0.0 0 0 0 pmtici4 ha 1.0 2630.0 2630 2236 1420 mat.±als Met 1.0 1830.0 1830 1647 915 sub-tatal 4460.0 3882.5 2335.2
A lEn-da 10.0 laM S plEn-daMrag 28.0 =zvad~stqg lN-dt 1.0 wasdiz Man-day 40.0 picdd lEan-da 1.0 hau%wVadizq 1n-d 40.0 Vwn-da 12.0 Sub-to3al ln-da 132.0 52.00 6864 6864 0 Rat= to 3a4.) 34 15 145 * attic. t lEatro= (ab) -2384 8253 19126 24t ftrity PrimOfficial am
Value t" I dmtieo wlin 4480 * bozdar primw 15117 Eflftive ma§etm o.. (E) 0.30 Not -Ic lastit (NAB) 8253
E(tcwz et( 0.57 Dilicit Xange rte (T to w$) 56.85 sutas - Losi Working Paper No. 8 Annex 1 Page 4
TR= 5
PJM CER Ir 0 SEES CTM ;N SIIM
ACTUAL PRICZ CME MCIC EXUCP F RM CE (D86/87 Vhlus) (1986/87 - 100)
Yawr AR MR AVURwMIS AR AtCV AR M AVEPARi
2977/78 2.30 1.15 2.28 20.57 10.28 20.39 122 113 124 1978/79 2.40 1.20 2.83 18.50 9.25 21e81 10 102 132 L79/80 3.00 1.30 3.03 18,11 7.85 18.30 107 86 I
1980/81 3.20 1.50 3.50 15.32 7.18 16.76 91 79 101 1983/82 3.70 1.70 4.48 14.20 6.52 17.19 64 72 10$ 1982/83 4.70 2.50 5,72 13.46 7.16 16.38 J0 79 99 19834 6.00 3.20 8.01 14.18 7.57 18.94 64 83 311 W4/85 8.40 4.50 12.40 24.27 7.65 21.07 8 84 128 I985/86 13.00 7.00 1622 17.21 9.27 21.34 100 n29 1g9868 16.90 9.10 16.51 16.90 9.10 16.51 100 100 100 1987/88 19.45 9.10 16.93 15.56 7.28 15.25 92 80 92 1988/89 22.35 10.00 21.73 15.54 6.96 15.2 92 76 92
NMI uw as deinatw NsU = WaEZi 6
UNYA GMU oirenMw Mf FR LUCN 3985/86 cost tm axtma k i 9ayt km a Mab;p Na Mgm1amdll in, UlUrem Pbmm Nymbiti WIbld
6*inU 0.46 1.25 0.57 0.41 O.4 0.76 1.02 salaries 1.2 1.63 0.74 0.61 0.67 0.48 0.83 0.50 0.32 0.40 0.69 1.15 0.60 2.S3 0.36 0.37 0.52 91kig Ituia1 0.66 0.90 0.65 0.72 1*15 0.67 l.21 1.22 1.02 Fad 8 IAtrlmnts 1.09 0.76 0.88 0.68 0.46 0.66 0.96 0.93 1.22 1.39 0.55 3.05 1.20 1.39 0.97 IpAfr via*t & 1. 1.00 1.64 1.17 1.03 0.90 1.62 2.49 0.92 3.71 1.64 Pds*Im & StatSamy 0.90 1.25 0.25 0.09 0.14 0.10 0.22 0.12 0.25 0.13 0.17 0.23 0.13 0.14 Truw:!. 0.09 0.15 0.14 0.08 0*09 0.14 0.30 0.13 1.29 BE* 0.10 0.21 0.13 In*tvst & Orgs 0.22 0.55 0.27 0.16 0.23 0.28 0*75 0.34 152 0.24 Otbl .xt 0.06 0.27 0.46 1.43 0.64 0.57 0.62 0.76 1.53 0.99 2.79 0.75 0.70 0.77 ma1 Glmlz Oft 4.22 7.30 4.74 4.35 4.68 6.26 10.08 6.00 17.71 6.25 Gindn Fee 5.03 5.59 5.25 5.25 5.25 5.25 5.25 5.25 5.25 5.25 5.25 5.25 5.25 5.25 Yew oat 2*tllta932 1932 3959 95 1959 932 2966 194 1923 3932 3977 lAnt O*Pt (LB) 2211.70 627.00 26.10 2151.40 1465.80 933.90 461.70 1020.50 173.30 144.30 2330.80 1098.86
So Kyr .xp d
tt
0102 s ~ ~~~~|K0jn# 4. Workin_ PaperNo. 8 Annex 1 Page 6
TR=B 7
ANLS 0r I-N3 PBICES196S/86
WMC.U. NlDW= CGt.
IVP At. Cv. laP At. ON. S1oq gAq 4 Saoq Sb/q % Ptfor WM 13.00 13.00 100 13.00 13.00 10 Erly Piddl 3uo SOOOetIavy 0.50 0.50100 0.50 0.50 100 amh & cz m p 0.09 0.0 111 0.09 0.04 4 ftd n gqibtral 0.10 0.15 lSO 0.10 0.14 140
IntAzmt 0.40 1.30 325 0.40 0.89 223 wo 4d11-1 I 1'l 0.15 1.49 993 0.15 0.73 487 Cub Tratopat 0.10 0.26280 0.10 0.23 230 CMP Tnowpwt 0.45 0.66 1 0.45 0.48 17 qjb4ft OOI cm" 1.79 4.50 251 1.79 3.00 166 T. t1iaa - I _ 1 4 .79 17.50 11 14.79 16.00 106 Tat. Mlb= mt lift 44.1L5 52.23 1S 44.15 47.77 106 G ?imOnl t 5.25 5.41 103 5.25 6.00 114 DtD4tor.x Cat 49.40 57.64 117 49.40 54.76 111
8WZg,) - 19866 Working Paper No. 8 Annex 1 Page 7
TAM 8
AN5X.YSIS0? ~nIIRE PCZ 1986/87
Cm C.U. NV= C.U.
ISP Act x,v lS Act *w 1986/87 sMq Sla % Sb4q Sb4fq %
oPri 16.90 16.90 100 16.90 16.90 100 lIy Piddzi Bmi socity zevy 0.88 0.88 100 0.88 0.88 100 C& Cw ub 0.14 008 57 0.4 0.09 64 I'PoJdzig3btiuals 0.27 0.12 44 0.27 0.14 52
Inta_int 0.95 0.96 101 0.95 0.72 76 WI iat,I 0.50 0.68 136 0.22 0.46 209 Cash t Oelwt0.18 0.10 56 O.8 0.15 83 3 ¶a&zp=t 0.81 1.44 178 0.81 0.45 56
sub-Tcftl c=p ctou 3.73 4.26 11 3.45 2.89 84 btt UMiiaiC ae5) 20.63 21.16 103 20.35 19.79 97 aT.I- WM Cod"t (lit) 61.58 63.16 13 60.74 59.07 97
ne zq | uOt1.02 3.54 32 8.89 4.73 3 In*4tam cst 72.60 66.70 92 69.63 63.80 92
SW Act- Ay.xm, Sm Am,- rmTot Ak8
MDDDf Mhlsi, , 1987 Working Paper No. 8 Annex 1 Page 8
TAM 9 I; OF UWm COS iF O BW IOF =DTO-STO PE TM 1987/88
am UN= U = N tv
AR St a E
SOciety Iwy 1.75 1.75 1.75 1.75 UhiSn ampCewAUM 1.45 1.45 1.45 1.45 .25 .25 .34 .34 Cubh 1.06 .06 .06 .06 Cub D _uxm .09 .09 .09 .09 amp nmucenm .62 .62 .62 .62 Jut _wa 2.37 2.37 2.37 2.37 Dllt en CI .60 .60 .68 .68 Ad,, ill .3S .30 03!N 30
S5btma1 5.79 5.74 5.96 5.91
Total SOiCy a v1a am amNwd1ti 7.54 7.49 7.71 7.66 prodLa PnIs 19.45 9.10 19.45 9.10 9if91. (V IQ Smd 26.99 16.59 27.16 16.76 aft-T!l= 1ecc 33.5% 30.0% 33.5% 30.0% U,u±vu1u,n Lift 60.57 59.30 61.07 5.687 6il§pin (Ifn 4h) 14.8U 14.81 25.47 1"5.417 taGin '.54 .54 .54 .54 b-Ginmy Pri 95.92 70.65 97.06 71.86 sm6W* (P FiO Lift) pz~aow 58.06 30.33 56.06 30.33 t TO TOM 61.0% 43.0% 60.0% 42.0% 11Won 37.86 40.32 39.02 41.45 % TI Ttmll 39.0% 57.0% 40.0% 56.0% 95.92 70.65 97.06 71.6 10 100% 100% 10%
80s im, Tak Pazvs Iat 98 Working Paper No. 8 Annex I Page 9
T 10
SUN= OF MM 1987/88 E pRaCC9-S:M SZ3CIR (SWI)
Ct - Big Thiia Sman Tdin AR ER AR U
Pzw price 19.45 9.10 19.45 9.10 Socety l0y 1.75 1.75 1.75 1.75 UmkIienlevy 5.79 5.74 5.96 5.91 sub-toal s/t sad oattai 26.99 16.59 27.16 16.76
~at-~ fboe (1) 33.5% 30.0% 33.5% 30.0e in iXt 80.57 55e30 81.07 55.87 feeS±wdzq 14.81 14.81 15.47 15.47 2btal 3brJatt1zg & Giwiz 95.38 70.1 96.54 71.34 Glnazy zdablitat±m 0.54 0.54 0.5O 0.54 1TaU1 nto-stci din 95.92 70.65 97.08 71.88 L986/87 uto-sabM pWia 69.91 49.53 73.02 52.49 Cbd " to I987/8 lvel 37.0% 43.0% 33.0% 37.0%
S=Ms M, APTB11 TM's AMIt SMtYM 0L ACL D:M MD ANh Iss PR 1986/87 AND E IV!D2 7/68 (1) (2) (3) (3MI Bbs ) 1966/87 1987/68 87/68 vrmm Salas Vol1 (3h Ba1l) 319,000 450,000 350,000 (3-1) 1 Iym_ c.t 74.9 5242 52.2 (22.7) T _arupa~tat±cn 271.2 335.5 260.9 (10.3) Sl1s~atiai 104.1 85.3 85.3 (18.8) 51.9 98*3 98.3 (46.4) !1 1 1~ 28.7 49.9 49.9 (21.2) D:po±atim* 26.0 - (26.0) o -inb1.Stores 16.4 _ (16.4) t ft TM CICO= 2.3 ( 2.3) 8ub-Sta1 575.5 621.2 546.6 (28.9) Qwz:t OD 306.7 860.5 678.6 371.9 ast COD 554.2 1206.4 1206.4 652.2 OV#al Taw 143. 2666.1 2431.6 952 Note 0wS1I flalit d--awi at T J far 450,000 bL bt zw~ e 3t0,000 bii.s dtX s _~lz Z failt1 am CpWA±tyof glmF_w. Sams Tk I ft 196I qB 12 AES OF CXNU LWI BY T.C.N.B. EmP SAim vinnc mAm iuMr SALES QLWIY VAWB VAIM iCR MCE gMwRm VAIZE RmC MWM~ VAUJB Ttrm ash. K Ws K aj s/jq 1MM RaC1( Ub.K TM " Si.K /M3 1977/78 30309 410.02 51.21 13.57 1.70 1978/79 39228 14187 160.12 12.70 44396 590.1 464.57 58.62 1."4 1.49 14020 13.29 1979/80 51512 642.93 197.92 14.12 53248 662.5 12.44 77.85 22.73 1.54 002 21.77 14.12 1960/61 39493 56.46 68.39 65514 854.7 13.05 1981/82 14.29 1.73 15634 256.71 16.42 55127 33547 448.08 51.82 13.36 1.54 821.2 14.90 1982/83 24894 16559 264.61 1596 50106 712.7 358.02 36.67 14.38 1.47 13483 14.22 1963/84 35678 745.37 214.03 15.87 38377 572.0 14.91 58.95 20.78 1.64 11711 250.62 21.40 1984/85 20440 623.02 34.85 30.48 47589 996.0 20.93 1985/86 l.71 16325 429.67 26.32 36765 23663 530.05 28.43 22.40 1.20 1052.7 28.63 1986/87 43027 13218 576.13 43.59 36881 1106.2 1901.74 37.47 44.20 0.87 12670 29.99 1030.70 61.35 55697 2932.4 52.65 ANeragQ 36189 639.98 52.12 16.25 1.46 13514 318.45 23.67 49703 958.4 19.68 Soa=: TOWS,31B I- TANI 13 aP1U LW? SUM DQKWI'C q9UB MUM Tatt.KM l02ati L976/77 1977/78 197W9 199/6 1S6/1 1986 292/83 63/ 1965 1985/66 196687 t NS nt h nt oh t Nml t h t i Nt ShH t S Nt OhH t MfN t M OMEr 3888n 47.0 5602 70.0 6005 63.1 S805 83.7 6161 99.0 5267 64.9 5435 77.2 4618 98.4 4636 323.4 3501 154.8 3620 271.1 mautExD6M 1919 23.5 2934 36.5 201229.2 2028 26.5 1309 21.0 2612 44.2 2665 4405 1626 35.5 1255 32.9 705 31.2 215 16.1 fi 9RdomE MU 776 9.4 240529.1 2271 31.7 190929.2 171143.2 2155 34.6 176427.2 132928.6 1032 27.2 770 34.0 425 31.8 c= DM 266 3.3 634 9.0 1222 19.0 969 16.3 1017 LS.7 1565 34.2 1708 45.0 1619 80.4 626 46.9 sRCGOFD CNN tlr zOmr 1721 42.4 1443 63.81748 130.9 MMI Moa 156124.0 348144.4 3536 49.1 3323 45.9 276141.4 109617.2 525 .1 1072 20.6 1751 49.7 - I33 669W12.0 977 15.01267 20.1 1373 20.3 LO5 21.91330 36.0 EUFIM AMb 109 1.62635 37.4 149323.2 2758 44.7 102215.6 2763 44.5 1958 49.01488 65.61239 92.8 antw* 161 2.3 33 0.3 7*. 536 91 17*8 922 22.0 1355 5909 2496 186.9 IUZ 6146 103.9 14422 10 1419 198 17364246 15634 261.816157 262.314357 216.6 51 301.7 16315 429.9 11061 489.9 10369 776.5 ti w eea 1l1e MM,ill, mg M ,l, maot D0 & cotX, ht!usimI etc. 00 0-4C Working Paper No. 8 Annex 1 Page 13 TM 14 E OF TO~~X2LZAN 072M=R IggTMBMW 187/88 (1) TOWSb 1 StaffS uts: Salaries wa ktgs 22,621,540 0.12 1uJzia1 WA Oth,0 .m fits 3,070,720 0.02 T±iniig 1,707,450 0.01 Staff Welfare 10,371,020 0.05 Tzuwllzq 14,446,400 0.08 b-Ttal 52,27,130 0.28 2 1kwat du -m L 335,56,00 1.80 3 i tzuive Savmia Dixuo'o's serivi 2,051,000 0.01 hiut 1,940,000 0.01 GmzgLra1 27,952,330 0.15 Subttal 31,943,330 0.17 4 1tt pzotA 49,926,900 0.27 5 Zazum Olaya 52,300,000 0.28 6 Fimna m*k Iwgo- 670,000 0.01 Dt& an 0/D 831,400,000 4.47 A3u Ut1 28,460,000 0.15 Sub-TOW 8600,530,000 4.63 7 SaJF md Iti}nuz 70#736,000 0.38 8 111& ta"- , a t s 27#,496,000 0.15 9 mo aM IZ±e 711,230 0.15 T 1,481,3t1,630 7.96 (1) t itansta vcm uw base en an mtlutti w at 350,000 balm of antai. Cniv1i"m TRrn Dax 7RNM MrM AND ICSS ACO Fm Y ENED UM KOU20 ARU L98 VAB MM MUM, 30.4.81 30.4.82 30.4.1B3 30.4.84 30.4.85 30.6.86 30.6.07 30-6.88 BAUM- 1IXt: 343.7 619.8 w k717.4 PA $1.1 1231.1 2051.4 INEW 64200 31.50 489.0 ft% 20 8161 6.2 L190.6 3681.6 91l5o7 10041.8 725-8 1206.4 1245.9 1457.3 3221.7 5733.0 OWrl @VSAtLESO OMM W1 230.0 96.5 301.0 1S10.1 ER73m i44.6 28C.2 569.3 orP 1t.1t 5Sl.9 534.3 566.1 8B8.4 1X43.3 131!;.8 m _ cowl 4086.6 3608.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2415*3 1s_m 0.0 0.0 0.0 0.0 0.0 0.0 02f Orq 000 0.0 293.3 2U.5 68.5 70.5 77.4 0.0 0.0 260.9 1:afi RWC 230.0 96.5 29.2 17n07 674.8 286.3 VO al! r MM 569.3 #K11 747.3 9U.3 431.9 I.2 726.0 254.1 30.5 .N2 G491q OR> M23.4 2.5 2B3.9 I.2 519.9 -UG.8 -51.8 -IU.2 BAUMs AND _11SN IKI_M 0 0.0 0.0 0.0 A _ 0o.o o.o o.o o.o Sll_oeW 204.1 283.0 939.0 51|6o2 W7006 541.4 546.6 F a ~~~~~~~~~49.0 28!;o7 W-,2 269.9 2M.5 223.1 "4.6 815,0 M5.0 _ N l*7 15.9 17.0 lam O9_SE 22.0 35.1 24.9 40.2 A 265.6 384.1 2226.8 838.7 1L328.8 C0609 1401.8 2170o.7 oil REVM 26.4 164.5 33.0 54.7 193.C 150.0 "7.5 7.5 OR IQS SBS -008 -227.1 -9099 -625.S1 -615.3 -8277 -0536,1 -2715.1 tSlSDI- 81tIE BLMS 0.0 0.0 OoO 273.3 on SUS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 e.o o.o o.o0 NEI!~ aRI1Bcs LOS -0.8 -127.13 M909 -352.5 -615.3 -W.77 -1536.1 AECIB ~~~~~~~~0.0 -2715. 1 0.0 o.o o.o o.o o.o o.o o. 0 NO ,v 0.0 0.0 o 0.0 0.0 0.0 0.0 0.0 0:0 gz Oln=R S 0.0 -239.2 -32.1 0.0 NEWSRO PM I 0.0 -19.9 1.3.0 OoO.0 -0.8 -3.3 -2.0 -352.5 -61.3 -7.6 -1523.1 -2715. BNAC BR W D!PRM 0.0 o.o P w C o,o o.o o.o o.o o.o o.o ADJI. 0.0 0.0 0.0 0.0 0.0 an C!R LOS 0 8BI!M 0.0 0.0 OeO -0.8 -366.3 -942.0 -352.5 -615.3 -847.6 -1523.1 -2715.1 Sce: Task Fboree Renort I QRR Working Pager No. 8 Annex 2 Page 1 ANNEX2: PROPOSEDSYSTEM TABLE 1 COTTONEXPORT PARITY PRICE Us$ tam 5hl FOMcm cottm lift I-t Lot im au Prim. 1590 FiSultt, irALMUMs 0 FSC,- -- -° It5 price nr 1590 19000 159000 500 0 Eq=L+- lMyMS 0 0 0 0 Fcct blaigq 2390 2032 239 1793 Mp prt-stam 350 315 210 105 q t ity prim 1 60 15551 -98 of lint 0 Der eid a" - dam xi 150 Ptaiat, Oiman=cm 0 3 Prime ~Der 10S 0 zq=rt levy/turn 0 0 0 0 P=t bWa1±g 2390 2032 239 1793 Tzuport prt stoz 350 315 210 105 t Prity pric:12260 12654 151 -89 of Cake I Da145 i isAml pri 447 Pftuieft linumam 0 C price - 447 44700 44770 44770 0 ~~ort levy/turn ~~~~~0 0 0 0 P=t 12390 2032 239 1793 qp pot:E 350 315 210 105 Dqot ftz'ty pric 47440 47047 45149 1696 c1tu* t If tumem t ned cettcn lint 0.34 t Md mksm0.39 mt-tal mmd odl 0.11 ow/ipot awity pWI- Of sad c&&a0 Der TM i gad mttc 63128 63372 64549 -1176 15 4 5 30 75 1540O 1232 306 924 Vorking Paper No. 8 Annex 2 Page 2 fZ 1 D. Us$ thmi Toal Fe= TCal Intezt 3630 3630 0 3630 irna_w 442 444 452 -6 mib-total 5712 5390 77 4621 E:=t poaity Peice *~-sto~.@ Der 57416 57982 63779 -5797 Gizu~1rsct 6240 5616 374 1872 24=t Pr/ity -4 at giTIy 576 523" 60035 -7669 tmMp~t to gimmy 780 702 486 234 130 111 13 98 M & bGz 200 160 100 80 0v /coMP levy 235 166 47 141 ZAost 1962 92 0 1962 IZV=M 256 262 300 -38 Twvstm 1126 0 0 0 448 3404 928 2476 ~tparity price to Uu pzft at TUU Dot 46466 4696 5917 -10 19W87 000'ta qba dtoe pff 2359.0 !tal cm L 93.8 sta axta 2265.2 pzuew pri J 22.35 Not PO i a 0.46 8m: ft I ti KLini Working Paper No. 8 Annex 2 Page 3 TAM 2 EftimtWd ELoor profs rims an rm M prim oa cMfW basean is tmo=rt parity prica tap. P- Yt n. bo Dar-S 1am 0 46.49 48.96 !ter MORER 0.69 45.60 48.34 Tap 0.89 45.60 46.16 Do_ma 1.00 45.49 48.06 KW±mnwdam 1.07 45.42 48.00 Amba 1.22 45.27 47.86 Tab=& 1.47 45.02 47.64 s hvmp 1.70 44.79 47.43 Meimzu 2.47 44.02 46.74 Liadi 2.47 4.02 46.74 Mbqa 3.65 42.4 45.68 NM=a 1.93 4.56 47.22 -igm 1.95 44.54 47.21 Simidia 2.05.4 47.2 Zrinp 3.43 43.06 45.87 NMara 2.90 43.59 46.35 iwiwa 2.87 43.62 4.38 Ribs 4.03 42.46 45.33 5.56 40.91 43.94 Official p1 22a.35 ku mA fi Working Pager No. 8 Annex 2 Page 4 TA3LE 3 International Prices - Cotton 1988 2000 Coaents -U8$/ton .-- Cotton lint 1 1590 2150 fob Dar Cotton sed cake 2 150 150 fob Dar Cotton see oil 2 447 447 cif Us WGUf/cit Fertilisers 1 152 250 average Ura TS 1 World Bank price proleations in contant 1986 prices 2 Xcarketing Dovelopmnt ureau. Dares Salaam. Working Paper No. 9 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER POLICY AND ACTION PROGRAMFOR COTTONMARKETING Southern Africa Department Agriculture OperationsDivision Africa Regional Office Working Paper No. 9 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER POLICY ANDACTION PROGRAMFOR COTTONMARKETING Table of Contents Page No. PREFACE 1 RECQIMENDATIONS i I . COTTONSECTOR CONSTRAINTS AND PERSPECTIVE 1 II. THE CASE FOR POLICY CHANGES 5 III. MAIN ELEMENTSOF THE PROPOSEDCOTTON MARKETING SYSTEM 7 3.1 Short Ternm Policy Recommendations 7 3.1.1 Ownership 7 3.1.2 Marketing Arrangements 8 3.1.3 Producer Prices 9 3.1.4 Cotton StabilisationFund 13 3.1.5 Additional Tasks for the RCUs 15 3.1.6 IndustrialCompanies 19 3.1.7 The Role of TCMB 21 3.2 Medulm Term Policy Recommendations 24 3.2.1 Reducing Marketing Margins 25 3.2.2 Maximising the Farmers Share 26 3.2.3 Maximising Foreign Exchange Earnings 26 3.2.4 Minimising the Government'sInvolvement 28 ANNEXA. Industrial Companies ANNEXB. Recurrent Expendituresof TCMB ANNEXC. Rail transport of Cotton Lint Bales Workina Paaer No. 9 Page i TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER POLICYAND ACTION PROGRAM FOR COTTONMAKETING PREFACE* Within the context of the Economic Recovery Program. (RP) and the PolicyFramework Paper (PFP) for the period 19686/9 - 1990/91, the Government of Tanzaniais formulatinga policy package for refoms in the agricultural sector. This package shall covor reformsias a) grain marketings; b) export crop marketing; c) agriculturalinput supply; and d) other iLsuessuch as legislation,efficiency improvemets etc. On the basis of this package, the World Bank-willprovide funds to Tanznis (for the OGLfacility) in the fom of the Tanzania Agricultural Adjustment One (TAU&I) credit. With reference to the export crops, the objective of the Tanzanian Government is to mrove the efficiency of the marketing systems by means of general policy reform for all crops and specific reform for cotton, coffee, tobacco, and cashe auts. Presently the Tannans Gowernmet and the World Bank are in the final stages ot preparin the blue prints for the desired policy reforms and action progranme an the World bask intends to appraise the policy package vithin the contextof Its TAM"l credit in June 1989. This report deals with the Tanzania& marketingsystem for cotton. It contains the recemendations on general and specific policy refoe as medeby Mr. Max van der Sleen to the World lank in March/ April 1969. * This report was prepared by M. van der Sleen of the Netherlands Economic Institute Workinst Paper No. 9 Page ii RECOMIENDATIONS I. Maia elementsof the 2rogosed CottonHarketing S*stea It is proposed that the cotton marketingsystem is changedin two phases. Phase one coversthe period 1989/90 - 1990/91 and phase tvo covers the period 1991/92 - 1992/93. Recommendations for Phas* one 1. The RCUsare made the owners of the list and sed produced fromthe seedcotton crop. 2. The statutory tasks of TOM are reduced tos a) The organisation and administration of all Tanzanian lint sales; b) Market intelligence for the Goermeat and for the owers of the lint and seed(I.e. the RCs*)t c) Quality control and maintaining the quality standards of Tanzanian cotton lint, lacluding: i) the ginnery inspectorate, Li) cottoa classification for bales delivered for "se, ILI) advise to the relevat research an exte"sio bodies on the cotton indsetries view and needs regarding - researc an ne vareit Ls -seds"ultlplication, and - tLmin and content of etsesio messages to be brodcast to farmes. 3. All Cotton Lint sale contracts(spot and forward, dometac, lnternatilol) are arranged through a centrally orgalsed sale system with clearly defined procedures and operated os behalf of the Government by TOO. The role of TOMIwill be to a) organse on a regular basls the sle of Tanszaaa liat either through an auction or through a tender systess and b) to ensure that the quality of lint WorkingPaPer No. 9 Page $ii delivered by the RCUs for shipmaet to the buyerscorresponds vith the contracted quality. TQCS will not be allowed to tradeon its own account and will only act as a contract party if an RCU requestsTSMl to act as their authorisedselling agent. 4. Dometic lint sales are deregulated.Local tetlle mill. are allowd to bid for all typeo of cotton, at the salesorganised by TCS, againstforlga buyers.Destic an foruignbuyers would bid on the b ass of WS$ cents per lbs of lint l DM. Dowetic buyers would pay In local currency. For convrslon of the forelgn exchange bid Into the local currency equivalent, tw exchange rate prevalent at the tie of the actual delivery of the lint to the buyer woud apply. S. for dometic liat sales contracts, the buyer determies whether he wats to tae delivery directly ftom the RCle of tbhruh the forwarding agent appointed by the RCJ (e.g. T). 6. The CUs in Nun,e Shlnyangat Mera, abora and SiBeamlo establish Industrial Companis (2Os). The assets of these coMpaiev shell include all gianeries and olmlls no ownd by the RCUs. 7. The activltl* of the ZCOsshell includes a) ginning of seedoettom for a gSiing fee b) ml111" of cttos see c) smareg oft soedeette ol nd cake prefowt by the ICO S. Tbo *ltetrdiscontinus with the amo swat oC nat Lou wideproduer prices or NW contiaueswith a m_ditied producer price system ia which this price ects as a minim or floew price. Za the lutter ase the Government should be prepard t, o-WO compasation paymate to the RCU., shold the wvrldmerket prices for liat drop below a le"vl determined borehan as thoe minmum price reuSNr for the CUA to recover their costs gi"n the II producer price. Workinz Paper No. 9 Page Lv 4. Each RCU establishes its own buying post price at or above the level of the MALD producer price. Moreover the RCUs introduce into- ginnerydelivery bonusses(into-ginnery price). 10. The famers and the primary societies are fre* to choose whether they wvnt to deliver their soedcotton at the ginnery buying pos'tor at the buyingpost of the primary society. 11. TCQS Is res4tganisodin accordance with Its more restricted role as follows$ a) the budget &ad staffof the parastatal TOO, are limitedto the fulfillewat of TOO's statutory functionstowards the cotton sector; and b) the productlon and comercial actlvitiesof TCIS are seperated from the statutory tasks and put lnto limitedliability companies reglisteredunder Cap 212 with share holdings by TCED and/or interested parties lncludingthe RCVs (e.g. TOM forwarding agency, solventextraction plant). 12. The main task of the TOMDforwarding company would be to take delivery of the list bales, send to Dar so Salaam for onward shipmats, Into Its warehouses (Kuralini) nd to ensure that the bales are shipped according to the delivery dates specifled In the sale contracts held by the RCU. To proote efficiency and cost effectivees" i the forwarding operations, the RCVA/ZCOS should be free in the selection of their forwarding agent. Recomndat ions ghase two 13. The RCUu authorise the XCOsto expand their activities to: a) seedeotton buyin from the RCU/ primry societies or directly from the farmers. b) seedcotton tranport from the rural primry-society godovs to the ginneries; c) gLanlng and ollLlng; Workinz Paper No. 9 Page v d) local and internationalselling of lint and seedl e) delivery of lint and seed to the godowusof the forwarding/ shipping agent). This impliesthat i) each RCUwill continue to fulfilllts main task of buying the crops from theirmembers; 1i) the RCUs sell their seedeottoan to their 1COs; and III) eachICO will Sins and sell tho lint and seed on its own account. 14. The Industrialunits of the lOe are *stablishedas subsidiary companies with full responsibility for buyin, glining ad oluiling and selln. These subsidiary c.opaies would of course operate wLthin the sam overal policy fraomerk as the WCOOI.e. as dictated by ICO's Board of Directors and, indirectly, dletated by the RC1. 15. Each subsidiary company(ginery) deterines its own into-gisnery price/c.q. the delivery bonus applicable to eoottos delvered to its sates. 16. The Goveruost, It It wants to rduce Lts lnvolvement ia the cotton sectorto th e teat possible, *could dissolve TCUo sad authorisethe ownersof the crop (i.e. the 31. and ICo*)to establsh a "Growrs Association3 responsiblefor mrket ltetlliCeae, sale orgaaisation en superislon, quality control ete. Working Paper No. 9 Page vi II. Action grograe Activity Action Date I Ownership 1.1 GOT consults with RCUs and TOMS GOT May 69 on nov system 1.2 Modiflcation of Laws GOT May/July 89 1.3 RCUs are informedof their new GOT Nay 89 responsibilitiesas of 89/90 1.4 TCMSis informedof new responsibilities GT May 89 2 RestructuringTCMS 2.1 Preparation TClD restructuring Prograe TOCH/MIGM May 89 2.2 Implaentation TCOE reorgaistatien TCHB/MIOI season 89/90 3 Lint sales by auction or tender 3.1 gstabliabment uction/tender rules TOM April 89 3.2 Preparation of standard selling contracts and toem of sale TOll Nay 69 3.3 Textile sills are informd of llnt sale TOES Nay 89 system and their registration as buyers 3.4 Start auction/tender sale sytem TOES June 69 4 Industrial Cogpanies 4.1 Advise to RCU's to establlsh IC0's UIW Oct. 89 4.2 Approval cOs by cooperative mabrer RCU June 89 (General e"ting) 4.3 Registration ICO's RCU's Oct. 89 4.4 Introduction new operating rules ICo season 89/90 4.5 Implementation staff training programs RCU/ICO season 89/90 4.6 Full operations ICO's as ginnig companies RCU/ICO April 1990 4.7 Registration of subsidiary compaies iCO sasoon 90/91 4.8 Operation of subsidiary companies ICO Akiril 1991 4.9 Impaslon of activities of ICC to seed- coton buying an sellnag ICO June 1992 5 Produr Prices 5.1 natrodutionof prducer prices as miaim or floor prices MAW October 89 5.2 Introductionof producer price GOT/MI October 89 copeonsatiomsystem 5.3 Introductionof buyingpot price system ICUs season 89/90 5.4 Introductionof intoginewryprices RCOm season90/91 (delivery bonu system) Working PaPer No. 9 Page 1 I. COTTONSECTOR CONSTRAINTS AND PERSPECTIVE 1.1 During the 1980s the cotton sector has recorded financial losses in every financial year. Before the introductionof the ERP and the start of the exchange rate depreciation policy in June 1986, the sectoral losses were mainly the resu.t of the overvalrution of the exchange rate. Since 1986, the losses are mainly due to an escalation in interest payments by TCM5 and by the RCUs on bank overdrafts. 1.2 In the last financial yea: 1987/SB, interest costs amounted to Some 451 of the FOS price for cotton lint. To put this figuro in perspective, the total interest burden of the cotton sector should not be more than some 10 2 of the FOS costs given the current interest rates and in normal conditions. 1.3 The three main reasons for the escalation Ln financial/interest costs ares i) deficiencies La the transportationsystems ii) deficlancies In ginning and olailling capacity; and iii) "There is no la-built motivation or comelling force for TCOS or the Cooperative Unions to miniaise the impact of the deficiencies in the supportive services (transport, ginnLig, storage facilities)..1 eads OThe prleing systea does not encourage cost effeetS*enessin marketing." 1 ) 1.4 Tues do£tcencies beom apparent when the farmrs responded to the hlgher produer prices for cotton and to the improved producer price payment discipelio by the RCUs, with inceased production of seedeotton la 1986, 1967 ad 1966. Ia 1965 the famers produced some 90.000 tons of seedcotton mmd in subsequent years production reached respectively 180,000 tona, 220,000 tons and 160,000 tons. 1) Quotation from the GOTTask force Report on export crop marketing efficiecy -cotton-, August 19". Workint Paper No. 9 Page 2 1.5 These higher crop levels had two implications: Firstly, the seedcotton crop exceeded ginning capacities and this resulted in a prolongationof the ginning season from 6 months in the early 1980s to over one year in recent seasons. As a result the overdrafts required by the RCUs for crop payments to the farmers increased and the period betveen buying and ginning and payment by TCOi for lint delivered ex ginnery prolonged from a target average of 3 months to over nine months. This in itself increased the interest costs for the RCUs with 300 2. 1.6 Secondly, the quantities of lint (bales) and seed to be transported from WCGA railheads to Dar as Salaam, exceeded the capacity of the railway system in the past two seasons. E.g. in season 1967/86 the ginneries produced on average som 33,000 bales per month and TRC moved on avorage 26,200 bales per month. This situation is aggrevated by the fact the ginneries tend to reach their peak production in the first six months of the season, whlle TRC cotton haulage performance peaks ln the second halt of the season. As a result the average period duriag which bales ate ia transit from the railheads to Dar es Salaam has steadily increased from a targoetperiod of I month to over 6-8 montlP at prsent.. 1.7 The fian1cial implications of this situation have been that: 1) TOl's outstanding overdraft and interest paymats over thls overdraft inreased as reaues from lint sales were delayed by 6 mothsI amd IL) TOll's demos for higher overdrafts, as needed to pay the RCus on ties for liat bales dolivered ex railhead, were not met and TOOl was not able to pay the RCUUon tim, which liturs lacreased the RCU's interest paymets on their overdrafts. iLI) The RCU's requiredaddltional overdraft facilities to finace their operations and, as ia many caces, the banking system was not prepared to provide additional credit lines, the RCUSare now In severe liquid!t, ;O,blems which cripple their operations. Workina PaPer No. 9 Page 3 1.8 This report sua-ary starts with the above observationsbecause it should be clear to the re4der that, while the current plans for reorganisingthe cotton marketing system are designed to improve the costefficiencyof the cotton sector, it should not be expected that the proposed policy package for cotton can by itself bring about a viable financial environment for the sector. 1.9 GOT and wB are aware of the organisationaland structural shortcomings affecting the performance of the cotton sector. They also agree that the current financial problems and the aeed for GOT to subsidise the sector can only be removed by a strategy of joint implementationof rehabilitationprograies and policy changes which aim ats i) Rehabilitationof the transport system from wCe to Dar2). ii) Rehabilitationof ginneries and oilmills. iii) Improving the costefficiencyof the cotton marketing system. 1.10 With respect to the physical rehabilitationprogrames positive steps are being taken. The Dutch Goervmaent and th EEC have committed funds for rehabilitationand new construction of ginneries and ia another 3 years ginning capacity should be increased from 350,000 bales to some 500,000 bales. The World Dank and other donors are mounting programs for improving the transport system and in this field results may becam noticeable in the next 4 to 5 years. 1.11 With referace to the neod of policy changes which aim to improve the orgaaisatloal efflclency in %he cotton marketing system, the GOT and VD have agreed e the basic principles for export crop reform in 2) Transport rehabilitation efforts should focus ons a) expanding the capacity of TC oanthe central liAe from 11anaa to DAR to a level at which TRC can transport 50,000 bales per month throughout the year; and b) rehabilitation of the roadlink from bvana via Shinyana, Nsage, Sinlidsto Dodam. It was noted by the consultant that the Dodoma, SSgida, Nzega road Is not Includedin the new WS financedroad rehabilitation project. It is stronly retomeended.toiaclude these road sections In the progra= on a prioritybasis. Working Paver No. 9 Page 4 the Policy Framowork Paper, 4 November 1988 (PFP). A specific policy package for cotton, to be implementedin the period 1989/90 - 1990/91 is now under preparation and this report is meant to contribute to the preparationprocess. 1.12 Thus taking into account that programmes for TRC rehabilitation and for ginnery rehabilitationhave only just started, it may well tage another 4 to 5 years before tho physical and organisational infrastructureis improved to the extent required for a viable cotton sector and before the proposed policy changes with respect to the cotton marketing system will result in the desired reduction in marketing margins and a return to protitability in sectoral operations.Until that time the need for GOT subsidies/financial support to the sector has to be reckoned with. WorkinEPaper No. 9 Page 5 II. 7..E CASE FOR.PQLICY CHANGES 2.1 Faced with the problems of the cotton sector, GOT appointed in 1988 a Task Force with terms of reference to propose ways to: i) improve marketing efficiency; ii) maximise tho farmers' share of net revonue from cotton; iii) increase foreign exchange earnings for the country; and iv) minimise goverument'sfinancial assistance to the cotton sector. 2.2 The Task Force reported in August 1988 (see footnote 1). On the current cotton marketing system the report makes, aongst others, the following comments: - "The present marketing system does not have the flexibility to cope with the increase in production. There is no in-built motivation or compelling force for TCKS or the Cooperative Unions to meet the increase in production and to miniaise the Impact of the deficiencies in the supportive services (see also para. 1.3 above)"; - "A fundameatal weakness in the existlag system is the lack of adequate compelling forces or standards In finanaLl performance"; and - 'The pricing system does not encourage cost effectivenessin marketing" 2.3 As smdlo for the weaknesses In the system the rtport lists a numbr of masure needed for operational liprovements and the report gives thee oti0ons for structural sprovemstst Option A. mrolvng the existing system. Option D. Agencyseystae with TC0f becoming as authorised marketing agent selling cotton list for the Cooperative Unions for a fee or commission. Option C. Growers Association with the marketing of cotton lint for the membOr Cooperative Unions taken over from TCOI by the Association. Workint Paper No. 9 Page 6 2.4 n the viev of the Task Force these options should be taken up one after the other in the coming three years. 2.5 These recotmendationsand similar recommendationsfrom other Task Forces, which looked at other export crops, paved the way for the agreement which was reached between GOT and WJ on the text in the PFP which states the following principles: "The Government intends to increase the flexibility of export crop marketing and to put greater pressure on marketing margins byt i) reducing the role of the marketing boards to nonmonopolistic agents of the cooperatives and of Governmat instruments for the provision of quality control and marketing intelligence; ii) allowing the cooperatives to retain owoership of the crops until they are sold, rather than transfer it to the marketing boards; and iii) giving the cooperatives more autonomy also for procurement through the establishmet of a two-tier priclng system for cotton. .... 3) 2.6 With reference to the above the consultant was asked by the Ws to analyse the appropriatenessof the above principles for policy reforms in the cotton sector and to prepare a blueprint for the action prograo wblich is aneded to bring about the desired improvement in cotton marketing efflelcncy. The findings of the consultant are sumarinsd La the following chapter. For details on the proposed arrangemeats reference is made to the ansemes. Workint Paper No. 9 Page 7 .III.MAN ELEMENTS OF THE PROPOSED COTTON MARKETINGSYSTEM 3.1 The cotton marketing svstem is defined to cover the organisational setup of the following activitiess a) crop payments to the farmers b) crop buying procedures c) seedcottoantransport to the ginneries d) ginning and oilzilling e) transport of lint and seed to the buyers f) cottonlint, seed and seed productsselling i.e. marketingproper g) GOT taxationand *ubsidiesfor the sector h) other issuesincluding - bankingfacilities and crop financing - seed breeding and multiplication - plantingseed preparationand distribution - supply of agriculturalinputs - supply of industrialinputs - access to foreign excheang for imports. 3. A distinction s made betveenshort term and medium ters policy changes. This distinction follows from a number of practical difficulties which have to be overcom before the desiredsystem can becom operational. The most important short term constraints are the current deRlciecies la the supporting Lnfrastructure which have to be overeom before one can expect that the orgenisations In the sector can operate oa a viable basis. 3.1 Short Term Polic Recoi.dat ions 3.1.1 On rsAlo 3.3 As of season1989/90, the RCUs should becoae the owners of the lint and seed producedfrom the seedcottoncrop. -6 Workint Paper No. 9 Page 8 3.1.2 Marketin; Acran;ements 3.4 All cotton lint for export and for the domestic narket is to be sold by auction or by tender to be organised by TCMB on an FOB price basis. 3.5 During the nineteen eighties, the quality of the lint and tiA premium price of the lint has declined. To promote improvements in quality and to obtain the best prices for quality, the selling system should be refined. Currently bales are sold on the basis of one grade (GANY) and 4 types including one saw ginned type and 3 roller ginned types. The types are defined with reference to minimAu guaranteed staple length. Better prices could be realised if the actual staple length and grade were used in selling. Easentia) for such a refinement will be a more uniform standard in ginning per ginnery and cotton classificationat the ginneries. 3.6 The lLmitations on domestic sals* should be lifted and domestic buyers should be free to bid against overseas buyers for all qualities offered by the RCU7 for auctioning/tendering.Local spinners would bid in foreign exchange and pay in local currency. For conversion of the foreign exchange bid into the local currency cWutvalent, the exchange rate prevalent at the time of actual delivery to the buyer should be applied. 3.7 In principle TOM should not have any contractualobligations for the detiveryof liat or soed. All contractsshould be betweenthe buyersand the sellers(ACU) directly ualess an RCU requests TOES to act as their sellingand foarding agent.The latter my well be the most practicalapproach for the smallercotton proucers in the Easternand WesternCotton GrowingRegions. For sales contractsfor liat from the 3 large producers i.e. Mwana, Shinyanga and Mars, the RCU should be speclfied as the seller In the contract. 3.8 For export contracts, TOES could act as the forwarding/shippin agent for the RCUs. For local sales contracts, tbh buyer should be Workint Paver No. 9 Page 9 free to choose if he wants to take delivery through an agent, e.g. =:*O, or direct from the RCUs. For local sales, price discounts, equivalent to the transportation :osts ex-ginnery to the TC!1Bgodowns, should be given if the buyer wants to take delivery ex-ginnery. 3.1.3 Producer Prices 3.9 Under the current marketing system, the Governmeat announces a nation-wide producer price for seedcotton. This producer price is the price at which the primary cooperative societies buy the seedcotton from the farmers on behalf of the Regional Cooperative Unions. This price is the starting point of the sectoral .costplus based price structure. RCU costs are added to the producer price and this results in an *Into-store Price3 which is the price at which the RCUs sell the lint and seed to the Tanzania Cotton #arketing Board. The main features of this prico system are the following: i) The price which the farmers get for their produce is determined by GOT; ii) The.RCUs recover the producer price paymets to farmers through the into-store price arrangement; and iii) Losses as well as profits oanliat and seed sales, which may result from a high level of producer prices in times of low world-mrket prlces and vice versa ar* taken initially by TCHB and eventually by GOT. 3.10 Under the proposed marketing system the RCUs wuld becom the owmer of tbe lLat and seed until they are sold to overseas and local buyers and each RC would determine the price to be paid to Its farmrs. To achleve the twin objectives of meiisinM farmrs' revenue and mazxiisingforeign exchangerevenues (amogst others through licreased production), each RCU should be allowed/encouraged to: 1) announce its own buyin post price before the start of the planting season (announcemat is S tembetr/October); and Workint Paper No. 9 Pasge10 ii) adjust the price upwards (not downwards) during the growing season in the case of favourableworldmarket price expectations (announcementsin February/Marchand in Juno, always prior to starting the bu7ivg season). iii) announce a supplementarypayment or dividend, but only when actual sale revenues significantlysurpass the revenue expectationswhich were held by the RCU when the final buying post price was announced. 3.11 This system of flexible buying post/purchasepricas and supplementarypayments in the cats of *windfall proflts* is recommendedinstead of the two-tier paymet system mentioned in the PFP in which the level of first paymeat Is determined before the planting season and a second paymnt follows one or two years after the farmers received the first one. The advantagesof the proposed system over a two-tier paymentsystem are the following: a) The,farmers benefit more when they receivea price at the time of crop delivery, which reflects as much as possible the vorldmarkoet price which each RCU anticipates to get from cotton list sales, than when they receive a sm.11er paymet first and an additional paymet at a later date.4) b) If worldmarket pricesrise, following the first anounceenat of the buying post price in September/October, the RCUs can still influence productloa if they announce an iLcrease in their buying post price before, say, March. This is due to the fact that an iacre"edprice caa timulate fa^rm to iprove yields by putting more ffort a their crop husbandary ctivitLes (e.g.better weedln, lnsecticidesapplication, harvesting). c) In the two-tiersystem, second paymets need to be announcedevery year and the often high cost associatedwith the administrationand Implementationof this paymet is incurred whether the paymet Is small or large. In the proposed systm the U wouludonly announce 4) Vhes each RCW announces its final buyiag post price in June, they will have sold forward se 50 S of the crop d thu have a fairly accurate Idea of their forthe.isg sale revenue. Workin8 Paper No. 9 PagSe-11 *supplementary payments or dividends" in those years when realised sale revenues substantially exceed (say by 252) the expectations which led to the finalbuying post price announcement and whic3. were based on the forward sales performance uptc Jure. 3.12 In the system described above, the current practiee of GOT setting the producer price is replaced by a system in which each RCU determines the prices to be paid to theirmembers. The objective is that the paymentsreceived by the farmershould be as high as possible without endangering the financial viability of the marketingsystem i.e. the Regional Cooperative Unions and their Industrial Coampaaies (see section 3.1.6). The features of the proposed system comparedwith the current systemof nation-wideproducer prices area i) In thosO years when worldmarketprices are high, the famer would receive a better price than ho would have received if the producer price vas fixed by GOT as is done currently (no real increase). ii) In those years when worldmarket prices are low, the RCUs would havO to set prices at levels which are below the current producer price levelin order to preventlosses. 3.13 If the Govermat should consider that it is in the national interest to protect the fanoers from significant downwardfluctuations in the worldmrket price for cotton, then the followingaddltion to the outlinedsystem Is proposed: - The Government (ALD) announces a nation-wide producer price in September/Octoberl This price then serves as i) the minima or floor price for th eaoning season at which GOTguarantees that the seodeotton will be boght from the farmrs; and ii) this floor price serves as the mianlm for the buying post prices, to be announced by each RCU before the start of the season. 3.14 It is recamended that the GOTproducer price does not exceed the producer price of the previous season plus a partial compensation for the domesticinflation rate over the previou year. The size of this compensation would be determined by GOT but should not result In a real increase In the producer price. Working Paper No. 9 Page 12 3.15 Since in the proposed new marketing system there is no "nto- store Price", the RCUs will be faced with any financial losses resulting from a producer price set by MALD at a level higher than warrarted by the worldmarket price. Therefore, it is strongly recommended that: l) GOT only announces a producer price if it accepts the obligation to compensate the RCUs for losses which are attsibutable to the level of the producer price; and 2) GOT informs the RCUs of the compensation syutem applicable to the season. In this respect it is proposed that a) TCMB advises MALD and MDI of the expected average selling price for cotton lint on the vorldFarket in the coming season; b) MDD advises MALD on the worldmarket price which would be required for the RCUs to break even, given different producer price scenarios and taking into account the expected developments in macro economic parameters (i.e. exchange rate, inflation rate and interest rateQ) and an estimate of crop sixe. c) MDB advises pALD on the level of cmpeasatioa paymats (if any) that would be required given the etimates of worldmarket prices and breakeven prices; d) GOT announces the producer price and informs the RCUs of the breakeven level anA of the worldmarket price which will be used to to determine If compensation paymeats need to be made. e) GOT provides for compensation payments li the budget year following the producor price annoueemeat if the price expectations by TCMI are below the breakeven price computed by MDI. Note that by the time GO prepares Its budget, the RCUs will have made their first lint omrwa sales and a fair Idea of further developments in the actual worldmarket price would be available. 3.16 rn order to keep the compensation paymnt procedure as simple as possible, it is reccomeendd the decision to enter into compensation paymets will be based only on price developmets in the worldmarket only and are not linked to actual sales realised for the different export types. It Is proposed that a compena"tion foala is worked out by TOMI and MDI ia wich the breakewen price for Tansania. lint sales is expressed in ters of a target level for the Liverpool A* index Working Pa2er No. 9 Page 13 for cotton. On the basis of this target value of the "A" index for ^otton, GOT would inform the RCUs that compensationpayments wvii be made if the simple average of the actual movement in the "A" index during the marketing season, say January to October, turns out to be lower than.the level of the target "A" index price. Compensation payments should be transferreddirectly into the crop purchasing accounts of the RCUs against certified crop purchasing records for the applicable buying season. 3.1.4 Cotton StabilisationFund. 3.17 Every cownodity market experiences price fluctuations. In the case of cotton the price fluctuationshave been relatively minor and -majordisturbances were shortlived. Nowever with the entry of the PeopilesRepublic of China on the market as exporter, the price instability has increased and for the medium term the price expectations are subdued. Forecasters rarely dare to set medium term A index price levels above US 60 cents per pound. 3.18 At US 60 cents per lbs, the cotton sector in Tanzania could be profitable provided the physical infrastructureserving the sector is rehabilitated and provided that the recent escalation in the cost of the cotton marketing system is stopped. Studies undertaken in 1987 and 1968 indicate that the breakeven point for the cotton sector lies at some US 52 cents per pound for new ginneries and at US 57 cents per pound for the 'average' ginnery under the following Onormal conditionst i) the ginning season has a duration of no more thn 6 months; ii) the period between buying of seC0otton 4ad ginning is on average 3 months; iii) the period between gLaning and shipping of lint Is on average 2 m0rnths; iv) ginningcapacity utilisation is 701 (i.e. downtimeis 30 Z of the total available number of shifts); WorkinR Paper No. 9 Page 14 v) farm prices are equivalent to 60 USS cents/kg of lint i.e. equal to 45 per cent of the average export revenues (i.e. 60 US cents per b:s).Note that this farm price would work out as 20 US cents per kg of seedcotton or at 30 Tsh per kg for the next season. This assumes that the average exchange rate applicable to sales in the next season (November 1989) is Tsh 150/$. 3.19 With this perspective one can expect that in the medium term the financial performance of the sector will improve but downward fluctuations in the worldmarket price may from time to time result in financial losses. 3.20 Currently, GWT is considering the establishmentof a cotton price stabilisationfund. The consultant is not in fav3ur of this instrument. In the new cotton marketing system each RCU will have its own responsibilityfor its financial results, i.e. for its own financial viability. In such a structure it is difficult to envisage that one central price cotton stabilisation fund can function. 3.21 Instead of a stabilisation fund, it is recommended that the short term financial problems are handled by specific activity related assistance from the Government and or the banking system to each RCU separately; and any medium term financial problems, which would be of a more temporary nature, are handled by the banking system. 3.22 For the short term GOT financial assistance to the RCUs could take two forms i) producer price compensationpayments (see pars. 3.16 above)} and ii) compensation payments for those additional interest payments which can be clearly attributed to the deficiencies in the rail transport system. 3.23 For the medium term the producer price compensationsystem should be *able to cope with problems caused by worldmarket price fluctuations.Other financial problems should not be the responsibilityof GOT and these should be handled by the organisations operating in the cotton sector with the aid of the banking system. Workint Paler No. 9 Page 15 3.24 In this context it should be noted that as owners of the crops, the RCUs will be in a better position than previously for makling profits on their cotton activities.As such the respousibilityfor strengtheningtheir financial positions in profitable years should rest with them. It is therefore recommendedthat a fixed percentage of cotton related profits, say 402, is used to strenghten their financial pocition. This could be ensured through a directive from the Registrar of Cooperatives. 3.1.5 AdditionalTasks for the RCUs 3.25 In the new set up of the cotton marketing system the etooperatives as owners of the seedeotton crop and as owners of the products produced from seedcotton will have to take over the responsibility from TCMB for a number of activities: i) financing of the cotton lint for the transit period between ginnery and delivery to the buyer (FOB or ex-godown); ii) transportationof lint from the region to the TCKB godowns; iii) transportationof seed if sold for export; iv) cotton classificationand quality control; v) purchase of industrial inputs. 3.26 To improve accounting standards and financial control, it is essential that the cotton related activities are strictly separated financially frm the other activities handled by the RCUs. With respect to financing this means that separate bank overdraft faci-litiesneed to be obtained for: seedcotton buying, transportation to the ginneries, ginning and oilmilling, lint transportation and the purchase of industrial Inputs. 3.27 Each overdraft should be guaranteed on the basis of assets and stocks. In the event that the borrever is not able to repay the overdraft, the bank should become the owner of the guaranteed assets. Wor,kingPsaer No. 9 Page 16 3.28 As the RCUs w$il receive revenues from their lint only once it is delivered to the buyer, the RCU will have a strong incentive to reduce the transport transit times to the extent possible and to look for alternativetransport means in these periods that the railtransport system is not capabie to meet the demand for lintbales- and seed transport.However one should not set his expectationstoo high in this respect. The only alternativeswould be i) road transport to Dar eS Salaam, however the capacity on this mode is limited due to the bad condition of the Dodomc-N:ega road and the Nzega-Shinyanga-Mwanza road; or ii) export via Kenya, also for this route transport to and across the border has its limitations. 3.29 In the coming years it will remain essential that GOT instructs TRC to give a high priority tc lint transport. In this respect it is recomended that TRC allocates trains and designates a number r,-, wagons (180) exclusively for the central line with cotton products as their only return load and cotton inputs as their priority cargo for the upland stretch.5 ) 3.30 Railtransport contracts should be concluded between each RCU and TRC. In the case of Mwanza and Shinyanga these contracts should specify that TRC will haul, saN, 4,000-S,000 bales per week from regional stations. The RCUs should be responsible for advising TRC on a weekly basis at which stations the wagons should be left for loading. At the railway stations itself, Union personnel should assist TRC personnel in identifyingwhich bales should be loaded. The role of TCMB in this matter should be limited to the interest of the agent: i) to inform GOT on the overall transport performance; ii) to Latervene on behalf of the RCUs with GOT if the overall performance of TRC falls below requiremnats; 5) In order to facilitate control of the movement and use of the wagons allocated for cotton it is recommended to paint these wagons with an eyecatching colour. -17- Workins Paper No. 9 Page 17 iii) to inform the RCUs on the quantity and type of bales received in their godowns and on the availabilityof the bales relative to the bales required for meeting contracteddelivery dates 3.31 As owners of the lint, the RCUs will have a direct interest in monitoring and where possible improving the quality of lint produced by the ginneries. Moreover they will need to have accurate information of the quality offered against sales contracts. In order to improve lint quality in the coming years, and in order to improve the control over ginning standards in lint production, it is essential that in each ginnery the lint produced is classified. At the moment cotton -.assification is done by TCNM alone. It is recommended that cotton classers are recruited and trained in season 1989/90. 3.32 One of the main problems affecting ginning and oilmilling performance in the past has been the irregular supply of industrial inputs: (fuel), ginnery and oilmill spares, baling materials and packing materials (gunny bags etc.). Insufficientaccess of the sector to foreign exchange and inadequateoverdraft facilities as as well poor ;ommunicationswere main causes for the irregular supply of these essential inputs. 3.33 To overcome these problems it is essential that a) the banking system ensures that funds are available for the purchase of the essential industrial inputs whether from overseas or from local suppliers, b) the RCUs are given the responsibilityfor organising their own inputs and delegate to each ginnery the responsibilityfor; i) identifying their own industrial input requirements; 1i) obtaining quotations, ordering, importlicencingand portclearance,quality Working Pager No. 9 Page 18 control etc; as well as for iii) the storage of these inputs.6) 3.34 On access for tialeRCUs to foreign exchange, it is recomended that the OGL facility is made available as the main channel for funding operational inputs such as: a) ginnery- and oilmill spares; b) baling- and packaging materials; c) vehicle parts etc. The annual requirementof operational inputs for cotton production amounts to approximately 30 $ per bale of lint: i) ginnery spares: - $16/bale ii) baling materials and packing materials: S 10/bale iii) vehicle spares S 4/bale. 3.35 Per ginnery the annual foreign exchange needs for operations thus averages from $ 500,000 to $ 600,000 at an annual production of 17,000 to 20,000 bales per season. This implies that the current OGL ceiling of US $ 500,000 may Just be sufficient for the financing of RCU cotton operations, provided that each ginnery and oilmill owned by the RCUs is accepted as a seperate applicant for the OGL facility. 3.36 In addition to access to the OGL facility, the RCUs need excess to funds which can be used for: a) replacement investments i.e. ginning machinery; and b) emergency items, such as specific engine spares not normally included in stock orders, for which delivery within days is needed to prevent main disruptions in production. For these needs, foreign exchange retention accounts would be suitable, with each RCU having its own account with Incoming funds equal to say 3 S of all domestic and overseas lint sale revenues. 6) In the short term Pasba Engineering Ltd shall operate as the agent for the RCUs in VCGAwith respect to handling ginnery spares and baliAg materials. This organisation was set up as service company for the cotton sector. The RCUs in WCGAand TCHB are the shareholders of this company. For the medium term one would expect that other agents will offer their services On a competitive basis. One important function for PEL is to undertake, on behalf of the RCUs, the quality control for all ginnery spares purchased from manufacturers in Tanzania. Especially in the coming years this function will be essential to avoid the manufacture of substandard spares. -19- Working Paser No. 9 Page 19 3.1.6 IndustrialCompanies 3.37 With reference to improving the efficiency of the cotton marketing system it is important to realise that: a) the activities of the CooperativeUnions are not limited to cotton alone; and b) poitica.l influences from the regional/cooperativelevel tend to * extent to management decisions and to operationaldecisions on all operational levels to the detri.ent of efficiency in operations. 3.38 In order to preserve the social and political benefits of the cooperative structure while at the same time safeguarding its organisational,operational and financial viability, it is considered essential that the day-to-day management and operatlonal tasks of the RCUs can be conducted independentlyfrom cooperative political influences and with maximum efficiency. 3.39 In this context it is recommended that the Regional Cooperative Unions are allowed and encouraged by GOT to develop in a direction in which its operationalactivities are handled by limited liability companies in which the RCUs have the majority shareholdings and thus can cetermine overall policies in line with the wishes of the farmers through their representation in the Board of Directors for thes companies (e.g. industrial companies, transport company, distribution company). 3.40 For the cotton related activities of the RCUs It is recomended thatone or more Industrial companies (ICOs) are set up per region which are made responsible,on behalf of the Cooperatives for all the cotton related activities, i.e. buying, gining and selling. 3.41 Given the financial problem which currently face the sector and in view of the time needed to introduce the coacept of the ICO to the members of the RCUs, the scope of activities of the ICOs could be restricted in the imediate future (through a policy directive from the Board of Directors) to: -20- Working Paper No. 9 Page 20 i) ginning of seedcotton for a ginning fee; ii) milling of cotton sged; iii) marketing of seedcotton oil and cake produced by the ICO. 3.42 Cotton buying, delivery of seedcotton to the ginneries, the marketing of lint and surplus seed, and delivery of the lint to the local buyers and or marketing agent TCMB, would then initially remain the responsibilityof the RCUs. 3.43 The establishmentof the ICOs is not a goal by itself. Changing the organisationalstructure alons will not improve performance in operations. For this to happen, it is essential that a number of organisationalprinciples and operating rules are established which are not in existence today. A detailed proposal for th. establishment of the ICOs in Mara, Mwanza, Shinyanga, Biharamuloand Tabora is presented in Annex A. 3.44 Some of the main changes recoeaeded are: a) The lCOs should be registeredunder Company Ordinance Cap. 212 as limited liability companies. b) The memorandum and articles of association should define the business of the company as buying, handling, processing and marketing of agricultural produce bought from the union members. c) The memorandum and articles should allow for the establishment of subsidiary companies and the issuoing of sharaesto third parties d) The powers of the Board of Directors should be clearly defined to broad compay policies, the appointment of the General Manager, and the dividend payments from profits after tax. The Board of Directors should have no direct influenceon personnel policy and the day-to-day operational decisions. .) The majority of the Board of Directors should be appoLnted from RCU management staff, the minority should be elected from RCU members. The G.M of the RCU should be the chalrmas of the ICO Board of Directors. -2X- WorLkng Paner No. ! Page 21 f) The company should obtain its working capital and other capital requirementsdirect from the banking system and eventually from its own cash flow. g) 1COs' financial independencefrom the RCUs should be guaranteed by business contracts which establish the rights and obligations of the ICO vis-A-vis the RCU. 3.45 These contractual rights and obligations should include: a) The ICO has the obligation to weigh and grade the seedcotton delivered to the ginneries. b) The ICO has the right to reject seedcotton which is significantly below the standard of the seedcotton sample boxes prepared by the RCU. c) The ICO has the obligation to keep full records of the seedcotton weighed in at the ginnery and the weight of seed and lint produced. d) The ICO has the obligation to classify all cottonlint produced e) The RCU has the obligation to pay the ginning fees within two weeks after taking delivery of the lint ex ginnery. f) The ICO has the right to charge interest to the RCU for delayed payments and the ICO can take possession of lint in lieu of payment iif RCU payments are delayed by more then, say, two months. 3.1.7 The Role of TCMB 3.46 Under the current system TCOB is the owner, seller and shipper of all cotton lint and seed produced in Tanzania as well as the sales organiser, provider of market intelllgence,quality controler and ginnery inspector. Under the now system the RCUs are the owner, seller and shipper of the lint and seed. The statutory tasks of TCMB would be limited tos a) The organisation and administrationof Tanzanian lint sales b) Market intelligencefor the Government and for the owners of the lint (i.e.RCUs/ICOs); c) Quality control and maintaining the quality standards of Tanzanian cotton lint. This will include: WorkingPaper No. 9 -22- Page 22 1) the ginneryinspectorate; il) cottonclassification as a check on the qualitydelivered by the RCUs againstsale contracts;and iii) adviseto the rele%antresearch and extensionbodies on the cotton industriesviews and needs regarding - research on new varieties - seed multiplication,and - timingand contentof extensionmessages to be broadcastto farmers. 3.47 These statutoryfunctions are importantboth for the producers and ownersof the lint as well as for maintainingthe confidenceof the localand overseasbuyers in the availabilityand qualityof the Tanzaniancotton. To ensuresmooth and productivecooperation between the Governmentand the ownersof the lint, the managementof the main cottonproducing RCUs shouldhave a strongrepresentation in the TCMB Board. 3.48 The price obtainedby Tanzaniafor its lint does not sufficiently reflectquality. Lack of uniformityin ginning-and in seedcotton qualityas well as dificultiesin meetingcontractual delivery dates have contributedto the currentpractice of sellinglint on the basis of types and a singlegrade Insteadof on the basis of the qualityand grade of individualbales. Though the reasonsfor sellingby type and one grade are understandable,this classificationdoes not do Justice to the qualitypotential of the lint. 3.49 Tanzaniais a small producer(O.51 of world production)and threforeshould endeavor to obtainthe maximumbenefit from its specialcotton caracteristics i.e. cleancotton (handpicked),aep free (rollerginned). To improveexport prices, quality needs to be improved. To stimulatequality improvement it will be necessarythat the producer of better quality is rewarded with better prices. Therefore it is recomuended that the RCUs class the lint bales produced by them and that they inform TCZBof 1) the quality caracteristics to be offeredat the auctionor the tender;and ii) the Working Pgger No. 9 Page 23 -23- quality they have produced and will deliver for shipment under the sale contracts. 3.50 The decision to opt for an auction system or a tender system should be taken by the sellers in COnjUnCtion with TCHB. In the case of tenders, TCMB would prepare the portfolio on the basis of inforwation from each RCU, organise the tender, receive the bids and advise the RCUs on acceptance of the bids. Following acceptance by the owners, TCMB would prepare the contracts to be signed between the buyer and the seller, and supervise the implementationof the contract. TOCMBitself would not participate as buyer or seller except when TCMB would act as selling agent on behalf of one or more RCUs. 3.51 For thess statutory functions TCMB should receive a fee from the RCUs equal to, say, 2 per cent of the value of the lint sale contracts. 3.52 In addition to TCMB's statutory functions and in addition to the services which TQC3 might provide (agaList payment) to the smaller RCUs as selling agent, TCKB will ofcourso offer its services to the RCUs as wharehousing and shipping agent. TCMD owns substantial storage capacity in the port area (150,000 bales) and is the only experienced cotton shipper In Tanzania. In this field competition from other agents could develop in due course provided that the RCUs are not oblidged to choose TCQB as the wharehousing/shippingagent for their contracts. 3.53 It Is recommendedthat TCOl negotiates with the Government (NLGOl)and with the RCUs two sepersat fees. One for its statutory role and one for its commercial role as wharohousing and shipping agent. It Is recomended that "statutory fee" and the "agency fee" are both set at a percentage of the contract price. The level of these fees needs still to be determined but as a rough guideline, the combined value of these fees need not exceed 5 Z of the selling price (see Annex B). The statutory fee would be paid by the orners to TCMB Worklx ?Pa_erNo. 9 Page 24 -24- overseas buyer that TCMB will act on its behalf as 1) the shipping agent or as ii) the shipper. 3.54 It is recommended that during season 1989/90 GOT relieves TCMB of the activities which are not relevant tV its statutory functions or commercial operation as wharehousing/shippingagent. These include the following: a) The import of agricuitural Inputs (agro-chemicals). b) The preparation and allocation of planting seed. This task should be taken over by the RCUs, under the guidance of MALD. c) Kwamsisi farm. The implementationof this project and its supervision should be taken over by MALD. d) foproco oil mill. It is recomeanded that this company is sold to private interests or handed over to Morogoro Cooperative UnAon. e) The Moproco solvent extraction plant should be established as a limited liability company owned by TCH3 and shares could be offered for sale to third parties. f) Iacomplete ginneries and oilmills. A number of development projects were started in the days of TCA. Progress on these projects is very slow. The existing assetr should be offered for sale to private interests or should be handed over the the RCUs. g) Importation rA ginnery spares, baling materials etc. In the past TCOB has acted as the sectoral iWporter for a number of these items because TCKB had theforeign exchange retentiov account for the cotton sector. In the new system TCOD will not have such an account. These imports should be handled direct by the RCUs. 3.2 Medium term policZ recomendations 3.55 For the medium term the main objectives of policy changes should be to establish the cotton marketing system in such a way that: 1) the marketing cost margins can b, reduced to the extent possible 2) the share of the farmers in net cotton revenues is maximised 3) foreign exchange earnings from cotton are maxiiised 4) the Gov't involvementand financial assistance can be minimised. WorkingPa'Kr No. 9 Page 25 -25- 3.2.1 Reducingmarketing margins 3.56 The short term policychanges outlined above do set the stage for substantialimprovements in the efficiencyof the cottonmarketing system. However a number of other steps have to be taken in order to (usingthe terminologyof the GOT Task Force Report)create the "in- builtmotivation and compellingforce for efficiency"at all levelsof the system. 3.57 First of all the ICOs should,.assoon as the financ34loutlook of the sec-orimproves, and as soon as they have proven that they can operateefficiently, expand their activitiesto seedcottonbuying from the farmersor from the RCUs and to selling.In other words in the mediumterm the ICOs shouldbecome the key organisationsin the cotton marKetingsystem. Only if this happenswill it becomepossible to separatethe cottonactivities from the other tasks of the RCUs and willthere be the directlink betweencost, qualityand revenues which is the compellingforce for efficiency. 3.58 Secondlythe ICOs as plannedfor Hwanxaand Shinyanga,due to their size, run the dangerof becomingvery large and bureaucratic organisationswith substantialoverheads. Moreover there is a danger that within the ICO insufficientincentives are built in for the separateindustrial units to maximise efficiency.In this respectit is recomended that when an ICO is establishedthe followingmeasures are taken: i)Th.estaff establisbmentof the ICO head@fficeis limitedby a directivefrom the Board of Directors; ii) All industrialunits (i.e ginzeries/oilmills) which are part of an ICO are registeredas subsidiarycompanies. iii) In the medium term subsidiarycompanies should becomefully responsiblefor its operationsand administrationand financei.e seedcottonbuying, handling and sellIAgand thus competewith each other withinthe ICO structure. Working PaperNo. 9 -26- Page 26 3.2.2Maximising ______the farmersshare 3.59 The scope for paymentsto farmerswill dependon i) sales revenuesfrom lint ana seed, and on ii) the size of the marketing margins.Currently the producerprice equalssome 40X of the revenues from lint sales.In the medium term futurethis percentagecould go up to at least 50 S if the followingconditions are met: - currentworld marketprices are maintained; - the currentexchange rate policyis continued; - the physicalinfrastructure (ginning, oilmilling, transport) is rehabilitated; - the policychanges for the reorganisationof the sectorhave the desiredeffect of reducingmarketing cost margins. - the RCUs are given sufficientaccess to overdraftfacilities and creditlines for the timelyfinancing of their operational requirements. 3.60 The proposedbuying post paymentsystem will also providea mechanismfor maximisingpayments to the farmers.For the medium term it is recommendedthat the systemis carriedone step furtherin the sense that in additionto each RCU announcingits own buying post price, also each subsidlairycompany is allowedto announceits own into-ginneryprice. 3.61 The reintroductionof the into-ginneryprice will providean monetaryincentive for farmersand for the primarysocieties to transporttheir cottonto the gianveriesand to the gimneryof their choice. 3.2.3 Maximisingforeign exchange earninas 3.62 In order to maximiseforeign exchange earnings in the short run, it was recomeandedto organisethe sale of lint throughan auctionor tender and to stimulate the domestic textile industry (which can export yarn etc) by giving them access to all lint grades at export parity prices as buyers on the auction. Workint Paper No. 9 27- Page 27 3 63 In the medium and long term, foreign exchange earnings w&tether from lint sales or from yarn and cloth exports will depend on the quality of the lint produced in Tanzania. Short term measures to improve the quality of lint are: i) enforcing the seedcotton grading standards by allowing the ginneries to reject substandard seedcotton; ii) better control over the ginniAg process through cotton 7) classificationin the ginneries 3.64 For medium term and long term improvementsin the lint and seed quality it is essential that seed breeding and seedmultiplicationis improved. The fact that the quality of Tanzania's lint and 3eed has sofar not significantlydeteriorated, despite its neglect in these fields, is fortunate. The two major varieties UK 74 and UK 77 have turned out to be strong. However if one considers the improvements which have been made in the field of breeding in e.g. West Africa, it is clear that Tanzania is nov substantially behind in this field. For the survival of the sector it is imperative that efforts are now undertaken to continue with the breeding programe in Ukiriguru and that it is analysed to what extent the West African varieties can be used to improve the varieties in Tanzania and to improve the foreign exchange earning capability of Tanzanian cotton. 3.65 With respect to seedbreeding,multiplication, and planting seed the following is recommendeds i) A seedbreeding programe is formulated for Ukiriguru. The responsibility should rest with MALD. ii)-Seedmultiplication farming is established as a private enterprise under supervision of Ukiriguru. iii) Planting seed is sold at commercial prices to the RCUs and later to the ICO ginneries. iv) The RCUs and later the ICO ginneries supply the planting seed to the farmers at a nominal price of say I Sh/kg. 7) See also Annex A. Working PaDer No. 9 Page 28 -28- 3.2.4 tMinimisingthe Government's involvement 3.66 The change in ownership of the cotton seed and lint from TCHB to the RCUs, reduces the role of the Government from a major party in the operations of the sector to a small party mainly responsible for supervising sales and quality. In the short term TCMB will combine its new statutory activities (GOT lint sale organiser/supervisor)with commercial activities (on behalf of those cooperativeswho choose to retain TCMB as their forwarding agent). In the medium term the Governments involvement in the sector can be reduced further when TCNB is dissolved and replaced by two companies registered under the Company Ordinance Cap. 212: - The cotton auctioneeringcompany, owned by the RCUs and ICOs; and - A cotton forwarding agency, with shareholdingsby those unions who want to use this company as their agent.) 8) This recosmeandationis similar to Option C - Cotton Growers Association - as given in the Task Force Report (see also paragraph 2.3). WorkingPaper No. 9 Annex A Page 1 INDUSTRIALCOMPANIES 1. ApProach 1. Under the new setup of the cotton marketingsystem the Cooperatives are the owners of the cotton crop and they will offer their lint for salo at the centrally organised auctions (or through tenders) organised for the sector by the TanxaniaCotton Marketing Board. Each Regional Cooperative Unionwill be responsible for: a) establishing the buyingpost price for seedcotton b) buying the seedcotton from the farmers; c) delivery of the seedoottonto the ginneries; d) ginningof seedcotton;and milling of cottonseed; e) sellinglint and seed to local and overseasbuyers (utilLing the TOEB auction or tender system) f) delivery of the lint designated for export to the godova'of the forwarding/shippingagent; g) marketingof surplus seed; h) marketingof seedCottonoil and cake produced by the union oil mills. 2. With referenceto improvingthe efficiencyof the cottonmarketing system it is Important to realise that the Cooperative Unions are working on behalf of their members i.e the fazmes organised in rural/prlmry cooperative societies. As such the maagemat of an RCUIs responsible for its performace to the executive comittee of the cooperativeand is ultimately responsible to the general meetingof the cooperative.In daily practice this means that the RCU's are higly political organisations and it has turned out to be very difficult to containpolitical Influencesto the Union's policy levels. Political influencestend to extendto management decisionsand operational decisions on all operationallevels to the detrimentof efficiency ln operations. Workint Paper No. 9 Annex A Page 2 3. In order to preserve the social and political benefits of the cooperative structure while at the same time safeguardirg its organisational, operational and financial viability, it is considered essential that the day-to-day management and operational tasks of the RCU's should be conducted independently from cooperative political influences and with maximum efficiency. 4. In this context it is proposed that the Regional Cooperative Unions are allowed to develop in a direction in which its operational activities are handled by limited liability companies in which the RCM's are majority shareholders and determine overall policies in line with the wishes of farmers through their representation in the Board of Directors for these companies. 5. For the cotton related activities of the RCU's this implies the establishment of Industrial Companies (with subsidiary companies) which are allowed to undertake, on behalf of the Cooperatives, all the activities mentioned in paragraph 1.1 above (buying, ginning, miling, selling). 6. In the Ju diate future, the scope of activities of the Industrial Companies (ICO) could be restricted (through a policy directive from the Board of Directors) tot i) ginning of seodcotton for a ginning fee; LI) milling of cotton seed; iii) mareting of seedeottoan oil and cake produced by the ICO. 7. Cotton buying, delivery of seedcotton to the ginneries, the marketing of list and surplus seed, and delivery of the lint to the forwarding agent would then initially remain the responsibility of the RCU's. S. The three main argumentsfor limiting the business of the ICO's in the initial years of ICO operations are: a) The deflciencies in the physical infrastructure i.e. railtran#- port, road transport ,and godown capacity and ginning capacity Working Paper No. 9 Annex A Page 3 are such that currentlY the chances of financially viable opera- tions (i.e survival) would be slim for ICO's responsible for all operational and financial aspects of the cotton marketing system. This would especially be so in the case bumper crop seasons were to occur. b) Management capability is presently insufficiently available/ developed for the operation of companies that buy, gin and market. c) The proposed changes have to be introduced to the cooperative members. As the buying aspectis most relevant to the farmers, there is a strong reluctance oanbehalf of the farmers to accept a move which would replace their union as buyer. Once the ICO's prove to be efficient in ginningand milling, It will be easier to convincethe farmermembors that they will benefit if the responsibilityfor buying and sellingis transferred to the 'CO's. 9. The main argumentagainst limiting the functionsof the ICOs initiallyis that, using the terminology of the GOT Task Foreo Report on cottonmarketing efficiency: *the in-built motivation or compellingforce for *fficiency*will for the time being be less strong in the cotton marketingsystem than it could be Ia the case all cotton related operational responsibilitiesof the RCU's weretranferredto the ICO's. Nevertheless the practical considerationslisted in paragraph 8 Justify a step by step approach. The managementof a big union drew the parallel with the Halaria cure tivaquinewhlch requiresfour doses of pillss44,,2,2. Tll ICO with ginningfunction only, representsthe first four pills. The remainderi.e. buyingand sellingis essential to cure the patient; 12 pills at one go may kill the patient. Working Paper No. 9 Annex A Page 4 2. Establishmentof Industrial Companies 10. In November 1988, the concept of establishing industrial ginning companies was discussed between some of the main RCU's and the Government in connection with outside (Bilateral Assistance) funding for the construction of nay ginneries in Mwanza, Mara and Shinyanga region. An agreement in principle was reached that industrialginning companies would be established on a regional basis. The proposal of establishingmore then one industrial company in Iwanza and Shinyanga is for the moamnt not acceptable to Nyanza C.U. and SHIRECU. 11. To make the ICO's as efficient as possible and with a view to developing each industrial unit manag6d by the ICO into a viable and cost efficient entity, it is recomended that in the three regionsin which the RCU owns more than one giAneryor oil mill (MARA, MWANZA, SHBNYANGA), each ginnery/oilaillcomplex should in due course be registered as a subsidiary of the Industrial Company. 12. The managemea of Nyanza C.U. received the mandate for setting up Nyanza IndustrialCompany (1989) Ltd. from the Unions General Meeting held on 24 Febuary 1989, Theorhave informed TID and TCOHthat they would like to form an InterimBoard of Directors for guidingthe set up of the companyand they intendto aske TIB to draw up a draft versionof the Nmrandu and Articles of Associationfor the company.Mara C.V and Shirseu have not yet taken asy firu steps towards the establishmat of industrial companies in their regions. 1) The tyanza IndustrialCompany (MICO) will Include only the viable ginnaries and oilaills.This mesa that the ginneries of Bukumbi, asse, Myamailo will not be part of the XCOand will remain under the direct control of the RCU. Working Paper No. 9 Anne% A Page S 13. The time schedule outlined below is tight but not impossible.The registrationof the companies during the coming ginning season should be possible for all RCU's in VCGA. However it may be optimistic to expect that the companies will be ready to start operations before the start of season 90/91. This will to a large extent depend on the response of qualified personnel to the advertisement for senior staff positions in the companies and past experience has shown that qualified personnel is difficult to recruit. This is especially so for positions in ginneries as these are generally located at considorable distances from the regionalcentres. 14, tt is recommeaded that the starting date of the ICO's in HMra, Hwanza and Shinyanga is set for April 1990 i.e the start of the overhaul period in preparstion of the new ginning season 1990/91. In the meantime senior staff positions of the ICO's could be filled while the remainder of the permanent staff could be appointed as of April 1990. This first interim year could then be used to try out the new operatiAg procedures in a fey selected ginneries and to provide trainin for selected staff positions (see also paragraph 49). Working Paoer No. 9 Anne,.A Page 6 15. For the establismaentof the ICO's the actions to be undertaken are: ------______----_------____--___------_------_---_-__------ Activity Action Timing 1.0 RCU management calls general meeting RCU June 89 and obtains mandate for set up of ICO 2.0 An interim Board of Directors for the RCU June 89 TCO is appointed (RCU,TCMB.TIB,NBC) Under the guidavee of the Board of Directors the following activities are undertakent 2.1 Preparation of Articles and Memorandum TIS July 89 of Association for the Company 2.2 Valuation of the fixed assets and RCU/TIB July 89 stocks vhich the RCU shall transfer to the ICO in the form of RCU equity 2.3 Proparation of ICO staff establishment RCU June 89 and personnel policies 2.4 Advertisement for staff positions June/July 2.5 Preparation of the fianmcial structure RCU/tIN June/July 2.6 Establishment of guidelines on RCU June/July ICO operating procedures/rules 2.7 Preparation of the contract which RCU/TIB August will govternthe services provided by the ICO to the RCU. 2.8 Registration of the Company under the RCU Sept. 89 Company Ordinance Cap 212. 2.9 Registration of the subsidiary companies RCU April 90 under the Company Ordinance Cap 212. 3.0 AppoLntment of the Board of Directors shareholdersOct. 89 4.0 Appointment of ICO senior staff BD Oct. 89 5.0 Appointmaet permanent staff ICO Jan. 90 6.0 Preparation of tae budget ICO March 90 for first year operations 7.0 Cotract negotiatioas betwese ICO ICo/RCu April 90 and EUC on services to be provided and ICO ginnn fees 8.0 Start first year operations rcO April 90 9.0 Preparation staff training progra mmee io August 89 10.0 Implemsatation staff training programmes ICO Oct. 89 to Narch 90 11.0 Implementation operating rules seasoa 89/90 in selected ginneries 12.0 Start full operations icO season 90/91 ______------______------_ _------___ ------WorkingPaPer No. 9 Annex A Page 7 3. Proposalsfor the ActionPr3graLme, Period 1989/90-1990/91 16. In this sectionrecommendations are made with referenceto measureswhich shouldbe takento enablethe Industrial Companies to developas viableand efficientorganisations. In section4 the policymeasures for the period1991/92 - 1992/93are outlined.In that periodthe subsidiarycompanies should be furtherdeveloped. 3.1. Memorandumand Articlesof Association 7. The Articlesset the scope for all futureoperations for the ICO.With referenceto paragraph5 above and to allow for the developmeatin the medium term of more tha one industrialcompany per region,the articlesshould not restrictthe businessof the ICO to ginningseedcotton and millingand sellingof cotton seed products,but shouldallow for the buying,processing and selling of aSricultural produce. Secondlythe Articloeshould allow the ICO to sot up subsidiairy companies with the sam business definition. Thirdly the Articlesshould allow for equityparticipation in the ICO by third partiesin addition to equity from the RCU's, TIJ and GOT (through TCI)). Fourthly the Board of Directors of the company should have the pover to formulate general ICO policy as well as have the power to determie the business activities of the ICO ia any particular year. Zs this way the RCU's can limit the activities of the ICO initially to soeedotton ginUin and cotton seed milling (see paragraph 6). 3.2. Registrationunder Comanv OrdinanceCaL 212 18. It is proposedthat once the ICO's (ZCO,SRZCO and HICO) are established,the ICO eg1istersin due course eachindustrial unit i.s. glnneries/olLaills,seperate oilmills and eventually Workint Pager No. 9 Annex A Page 8 rice mills, as a subsidiary company. The purpose of establishing subsidiary companies is in the short term to: 1) facilitate access to imports via the OGL system; ii) strenghten accountabilityand promote costefficiency in the operation of the separate industrial units; For the medium term the purpose is to; iil) develop the subsidiary companies into fully developed compa- nies wich will handle the buying, processing and selling of the crops on behalf of the cooperative and farmers from which the crop is bought. These compWaies would operate in a compe- titive environuent and this would provide the final incentive for cost efficiency and product quality improvementswhich are necessary to maximis farmers income from the crop and to mauimise sectoral income form the crop. 19. Th. establishmnt of the ICO's is not a goal in It self. Changing the organisational structure alone will not improve performance in operations. What is essential Is that the ICO'. are set up in such a way that it beo mes possible to (re)introducethose operating procedures and financialcontrol mechanisms that are essentialfor achieving product improvemat and for achieving the operational and accounting standards which are essentialfor cost efficient operationsand for the organisationaland finacial viabilityof the ICO' sad through them for the viabilityof the cotton marketig system. 3.3. Orggnisationlorinciglos 20. For the IC's to operate as envisaged it is essentialthat the company Is set up with referenceto a number of principles. i) The polLtical influence of the Cooperatives should be limited to the level of broad company policles; ii) The financial structure of the company should be cleat and sound whe its starts operating. Working PaPer No. 9 Annex A Page 9 1ij1i)he company should be working in an environment which stimulates efficient operations, output and product quality improvements. iv) The company should be working in an environment which allows for financial viability. 21. The first principlecan be safeguarded by setting up the ICO's as limitedliability companies in which the Cooperatives are represented as majority shareholders through the companies Board of Directors. Moreover as the Boardof Directors is not selected by the ICO itselfbut by the Cooperative it is essentialthat at leastthe majority of the board is electedfrom qualified and experienced Union personnel. Likewiso the representativeson the board by the other shareholders i... TCMI and TIN should be selected on the basis of professionalmerit. 22. It is recomended that for the interimBoard of Dlrectors, the body which will be responsible for establishingthe company, personnel is appointed with professional standingin the fields af: 1) companyorganisation and company law (TIN?); 2) company finance and accountingl 3) Personnel manamnt; 4) Ginnery operations; 5) Oil milling operationas 6) company mangemat 23. TIe secondprinciple requiroe that 1) the fixd assets and stocks which will representthe RCU's equity Investmentin the ICO's are ptopely valuedj il) no debts,other the diLrectly related to ths fixedassets and stocks, are tranferrd from the RCV.to the ICO; 24. For Mg a valustionreport of 1986 is availableand thia might be used as a basis torthe valuationof the assetswith the assistance of TIN. 25. The financialstructure of the ICO's in tara,Evana and Shinyanga shall be changedby the constmectlon of new ginnertoe at bulamba, Nuchosa, Naava and tva hus. In order to properly reflectthe Workinga Paer go. 9 Annex A Page 10 changes in new equity and long term debts in the accounts of the ICO's, it Is recomended that all expenditures on construction and supervision are accounted for separately until the date that the facilities are coiissioned and transferred to the ICO's. With the transfer of the now ginneries to the ICO's, TC?4 and T13 will become minority shareholders in tho ZCO's. 26. The third and fourth principlo mentione4in paragraph 20 are dealt with in the followiAg sections. 3.4. Overatinarules Ginnina contracts and ICO revenues 27. The industrialCoapaaies will in tho initialphase, gin seedeotton on behalf of the RCT's for a ginningfee. The list and seed produced will remaln the owaerschi of the RC. The ICO can buy cotton seed from the RCU and mill and soll the products (seed cake and seedcotton oil) on taeir own account. 28. The ICO shall gin the seedeotton on a contract basis. The contract conditions should be set iA such a way that there is an incentive for the ZCO to mitain. the iaheret quality of the seedcotton receivd to the eatent possible in the gining process. This can be dome by linkig the revenue from ginning too i) the S of lint retrieved from the snedeotton in the ginning prooes;l Li) the gSwini quality I.e. the grade (and perhaps the staple length of the liat produced); i*l) delivery of the lint and seed into-ginnry In accordance with the contracted delivery period. 29. Thus the contract betwe*e RCU and CO should specify the following points. Working Paper No. 9 Annex A Page 11 a) The quantity and grade of the seedcotton to be delivered by the RCU to the ICO. b) The quantity of and quality of the lint and seed to be delivered by the ICO to the RCU with reference to a target 2 of lint to be retrieved from the seedcotton. c) The ginning fee which the RCU shall pay the ICO for the contracted quantity of lint. d) The bonus system and penalty system for above standard or substandard performance against the contract. 30. In order to incorporate in the contracts a meaningful gin out- turn target figure, a gin out-turn test should be conducted for each ginnery using a representative saple of seedcotton delivered to the ginnery on a regular basis. This is necessary as the lint percentage which can be obtained from seedootton is not uniform throughout the season. It is proposed that the contract gin out-turn figure is set at a standard 1.5 2 points below the test results i.e. if the test shows a 34.8 2 lint weight, the contract should be based on an average gin out-turn of 33.3 S lint. 31 The contract terms should be adjusted oanth basis of these tests. The following procedure is reccinaded. a) For budgeting purposes and the initialcalculation of the ginning fe., the ECU inform the ICO at the beginningof the seasoa(April) hw much seedcottom It expects to delLver to the ICO gi1nneie.1 b) durin the sason the contractual target gin out-turn for lint is revised on a monthly basis. c) Monthly or two monthly contracts are prepared for actual ginning operations with reference to the initial ginning fee calculations which were made on the basis of the initial estimate by the RCU on the quantity of soedeotton to be gined by the ICO. d) Once the cumulative total of the monthly cootreets has reached the level of the initial ACUcrop -etimate, addltloal Working PaPer No. 9 Annex A Page 12 contracts for ginning would be negotiated at a ginning fee which reflects operat.ng costs oniy, etc. 32. The ginning fee should be set at full cost recovery level. This should Lnclude all operating costs, capital cost, including depreciation, interest payments, ICO overhead and a 102 profit/contingenciesmargin. In a period of unanticipated changes in operating costs due to exchange rate adjustments and inflation, the ginning fee should be adjusted during the season. The price indicators warranting such an adjustment and the mechanism for adjusting the ginning fee should be established at the start of the season by the ICO and RCU jointly. 33. The profit of the ICO should originate from i) raising the ginning out-turn above the contractual out-turn, and li) the quality of the ginning performance to be determined on the basis of sampling of the lint produced with respect to lin marteting qualities. In thir respect it is proposod that the additional lint, which is produced by achieving a higher percentage of lint from the seedcotton than contracted for, becoms the ownership of the ICO. 34. As the ginning cost structure and ginning out-turn results are different between roller ginning and sawglnning , it is recomended that seperate ginning fees are set for sawgmnning plants and roilerginning plants. Setedcottes cad4 and cotton classificlatio 35. In the proposod structure Lt will becom essential for the ICO and each ginnery within the ICO, to keep close control over 1) the weight mad grade of the ueedcoeton delivered by the RCU to the ginnery gates 1) the ginning performace; ILL) the quality of the lint produced. 36. To execs.ls this control, it is essential that the ginnery operates on the basis of the following rules. Working PaPer No. 9 Annex A Page 13 i) grading of soedeotton at the ginnery. ii) proper recording of the seedcotton used in ginning and of the weight of lint and seed produced iii) clissificationof the cotton lint at the ginnery. 37. All seedeotton received by the ginnery should be weighed in and graded oantho basis of seedcottoansample boxes. These boxes should be prepared by RCU staff (the buyer). Grade deviations should be recorded and in the case of seedcottoanoriginating from a primary society which is substantially below grade, the ICO through its ginnery should be allowed to reject the seed cotton. This opera- ting rule is not in existence to day. However it is essential both for the financial perfomance of the giunery and for improving the grading standards by the farmrs and for improving the buying standards at the buying posts at the primary cooperative societies. 38. In order to establish the ginning outturn it Is necessary that proper records are kept of the amount of seedcotton used in the production of lint. It is proposed that seedcotton after it is graded and weighed-in at the ginnery Is allocated to designated seedcotton godowas and that a full record Is kept of the amount of seedOotton ia each godown. Ginning should be based on the amount of seedeotton in one store at the time. Once the store is epty, the lint poduced and the seed produced should be recorded before *inning from an other store coaeaces. Ginning out-turn should thus be calculated on a store by store basis. 39. Th RCU will become the owner of the 1lnt. RCU revenues from cotton lint sales will depend on the quality of the lint produced. Quality claims will be passed on to the RCU. VLth reference to the objective of maxisising sales revenues the 3C has the incentive to improve the quality of the 1lnt and It s iaportant to them to have an accurate record of the qualLty of the lint received from the ICO gianeries. Woreower Lt ould be in the best Interest of WorkingPaPer No. 9 AnnexA Page 14 the RCU to stimulatethe ICO in producingthe highestquality of lint possible. 40. It is proposedthat this incentiveis providedin the form of a bonus or penaltyper kg of lint producedby the ICO. This bonus or penaltyshould be linkedto marketingcaracteristics of the lint to the extentthat this is influencedby the ginningprocess. The practicaldetails of such a systemhave still to be worked out. 41. To implementthe above operatingprinciples, it is necessarythat each gilnery has a seedcottangrader and a cottonclassifyer on its staff.At the momentsuch staff is not available.Seedcotton graderscould be trainedlocally. Hovever cotton lint classificationis a professionand trainingwith TCS: and overseas will be required. 3.5. Administrativestructure Cg2!e_anstructureand resopnsibilities 42. The ICO's in Nara, Nwanzaand Shinyanga,shall own a numberof industrialunits (ginneries,oilmills, ricemills). Each industrial unit shoulddeelop in due course into an subsidiary company.In the Interimperiod each Industrialunit should operate as a cost/ profit centre with lts ow accounts. 43. The responsibilitiesof the ICO headoffice towards the industrial units should be as followss 1) negotiations on contracts betweenICO and RCU; 1i) provlsion of operatingfunds; iLi) coordination,purchase and supply of industrial inputs:- fuel, ginneryspares, balingmaterials, packaging materials; iv) marketingof seodcotton cake, seedcottonoil etc v) personnel policies; vi) giLnery lnspection ad quality control. Working Paper No. 9 Annex A Page 15 vii) ginnery engineering services. viii) insurance and site security. 44. The industrial units should have full responsibilityfor: i) all production matters of the industrial unit. ii) all the operationaldecisions for the industrial unit. iii) budgeting and accounting for the industrial unit. Staff establishaent 45. In order to control personnel costs, company personnel should be recruited oanthe basis of operational requirements, professional qualificationsand merit. In this respect it is essential that for each industrial unit as well as for the ICO headoff ee a staff establishment proposal is prepared and job descriptionsiAdicating minimum qualiftications are formulated. Such a proposal on the staff requiremnats for rollertype ginneries and saw type ginneries is currently undertaken by the staff of the Dutch Cotton Assistance Project, and their report should be available as of mid Marct. It is recomeanded thAt this proposal is used as the basis for the recrultmet of ICO staff. Staff s4leries and s 4stJem 46. The ICO (and at a. later stage the subsidiary companies) shall be free to establishIts own salsry,allowance and staff incentLve system. It Is recnmended that the salary system as recently devloped by the Board of DLrectorsfor Pamb nginseeringLtd (shareholders T^3 and WC's) ts adopted for the ICO. 47. For the staff Incentive system It Is proposed that this is based on the performance of each industrial unit separately. As a guideline It Is proposed that the Incentive is paid in the fom of a bonus at the end of each financial year. The bonus should be paidfrom a fixedperceatage of grossprotits reservd for this purpose. Working PaPer lo. 9 Annex A Page 16 Stafftrainin; 48. One of the main problems in the cotton industry is the absence of training facilities for ginnerypersonnel. Currently work has started on the preparation of training programe for ginnery personnel within the context of the Dutch Cotton Assistance Program=. Implemntations is expected to start by January 1990. This programs will focus on personnel in functionswhich require vocational training levels. 49. There are sofar no trainingfacilities nor are there funds availablefor the training of staff in the higher eschelons. For the ICO's crucial staff functionswill be: I ginneryengineers/managers 2. ginning engineers 3. powr house engineers 4. Cotton classifyors 50. For these functions it will be difficult to recruit qualified personnel in Tanzania. One hopes that If an attractivesalery and allowance package is offered by the I0O, quallfled engineers can be attracted. Even them additional trainig relevant to cotton and ginning will be required. For the posts of cotton classifyers personel Is siply not available and full traLinng will be requlred. 51. 2he precise training requiraments can at this stage aot be deteusine. She training of gimary engineers, g1ining engieersad powerhou"engineers say reqire 4 months of traini" abroa (e.g. in Ziabwo), the trainin of cotton classifyers may take 4 months i Lverpool(UX) and ia the US and 2 months with TCil. 3.6. Finalnc of ICO ogeratioas 52. In the initial year(s) of operations the COwill have no working capital, and will have to apply to a bak for overdraft facilities (e.g. MIC). As guarantee for the overdraft the ICO shouldoffer Working Paper No. 9 Annex A Page 17 the company assets. The ICO should apply for two overdraft accounts: 1) general operating costsa 2) industrial inputs 53. The RCU should pay the ginning fees within, say, two weeks after notification from the ICO that the bales of list can be collected ex-ginnery. rn the case of nonpayment by the RCU, say within two months, the ICO should be allowed to charge interest to the RCU and to take lint in lieu of payment at the ex-ginnery equivalent of the auction price. Budgeting and accounting procedures ------ 54. Every industrial unit (ginnery) should have its own bankaecount. The ICO should deposit the funds necessary to pay for the operating expenses. Transactions between the ICO and the industrial unit should be based oan cash transactions. For withdrawals from the account authorisation would be needed from the Ginnery ng inser/manr, agfginnery accountant. 55. ICO annual budgots should be prepared on the basis of separate budgots prepared for the industrial units (1.e. subsidiary companies) and the ICO hoadoffice. The ICO budget should specify: ICO overhsad 9 fixed cost. for each subsidiary company and variable costs for *ea subsidiary company. 56. Coetaccouting should be the responsibility of the accountants of each industrial unit under the supervision of the ICO company accountant. 57. Revenue accounting Including the determination of the ICO ginning fee via-h-vis the RCJ, should be done on the basis of revenue accounting for each Industrial unit seperately. If this Is not done, It will become virtually impossible to assoure the performance of the seperate industrial unit. Working PaPer No. 9 Annex A Page 18 58. Determination of ginning fees. The ginning contract between the ICO and the RCU can specify two gin out-turn factors and two ginning feem. One for roller type ginning and one for saw type ginning. However in order t: stimulate ginning performance it is recomended that by the ICO itself seperate gin out-turn targets and ginning fees are agreed upon for each ginnery seperately. This will enable each ginnery to operate as a profit coentr and this ui1l assist each industrial unit in developing as a subsidiary company. Financial viability and independenceof the ICO e______------e----- 59. As long as the ICO's business Is llmited to ginning an behalf of the RCU, it will remain dependent for a large part of its revenue on the ability and willingness of the ICO to pay the gianing fees on time. As indicated in paragraph 53 above, this finaeial risk of this dependence can be limited by two contractual clausess I) The ICO can charge Interest to th lCO for delayod paymats; and 2) The ICO can take possession of lint in lieu of payment. 60. A second safequard which needs to be built into the ICO establisheat, Is againt a decision by the Board of Directors to trmager ICO beak balances to RCU accouats. Such an action should only be allowd La the event that the Bord of Directors should decide to desolve the WCO.As long as the ICO ti an ongoing businss , the Soad of Dlrectors should only be able to detemine the leel of dividend payments, from ICO profits after tax, to the shareholders. 4. P.owals for the Action Prolgam. Period: 1991L92 -1992193. 61. The policy changes In this period would be geared tot i) the ICO's taking over the seedcottom buying and list solling functions from the RCUs. This could entail direct buying from the fa^re of buying from the It= Workina Paper No. 9 Annex A Page 19 Li) Changing the ICc's in holding companies with subsidiary compafies. 62. It is recomeanded that the rights and obligations of the ICO headoffice and of the subsidiary companies towards each other are changed as followve 63. Responsibilitiessubsidiary companies. a) seedcotton buying b) seodcotton transportationto the ginnery c) seedcotton ginning 4) delivery of lint to railloads e) crop financing f) financing of operating costs g) announcemeat of the into-ginnery price h) budgeting and accounting i) personnel policies J) site security k) insurance of seedcotton, lint ete. I) paymeat of Laterest charges *a loaarepaymeat on debts. 64. Responsibilities of the ICO boadoffice a) imlemntation of broad company policies as deteialnd by thl ICO board of Directors b) maretia of the CO products (lt,s.ed,cottos cak,oll) c) orgaaisatlos of transport from the region to domstic and ove b"es. d) paymet of sales proceeds Into the accounts of tha subsi4dary compaies. e) approval of anual budgets and investmet proposals of the subsidlary compaies. f) announcemat of the ICO buyiag post price. g) preparation and distribution of planting seed 0) ginnry Inspection oa qualLty control 1) the provision of ginery e.g moorLig servlces Working PaEer No. 9 Annex A Page 20 J) the organisationof staff training programss on behalf of the subsidiary companies. k) payment of dividends to the shareholders 1) payment of company taxes a) company savings and investments. 65. The operational cost incurred by the ICO headoffice should be charged to the subsidiary companies. The overhead costs should be paid by the subsidiary companies on the basis of the total sales proceeds. Working Fa er No. 9 Annex B Page 1 RECURPlNTEXPENDITURES Or TCiB under the current and proposed marketing system for cotton L. In the proposed cotton marketingsystem, the statutory role o! TCIM is reduced froms the Covervent's lint and seed buying anid selling organisationwith supervisionover all cotton relatedactivities bn the country, to: the Government'sorganizer of lint sales on behalf of the ROC'sand the governmentbody responsible for market intaelligenceand quality control. 2. TCIl will not anymorebe trading on its own account.Thus TCIl will not requireoverdraft facilitiesfrom the Banks other tha for financing its own operations. la tabl B.1 below the impactof these changes ia flnancial term is outlined. Colum 3 suarizes the recurrent costs of TCOI as budgetted by TOMl for the ongoing season 80/89. Colum 4 shows the share in ths total costs which is made up by headoffice costs and the costs incurred by TCES for its comorcial functions in Dar es Salaam. Colum S gives an estimate of the costs that Ts would be incurring if Its role was reduced as proposed. 3. The met seigniicant changes In the costs of TCO are ofcourss registered under the codes which rpresesat actlvities to be shifted undr the proposed marketinl system frm TS to tbh RCO's: 550 - Transport charges 600 - nrance charges 670 - Repair ad malatenance 690 - Stamp duties 652 - Intereston overdrafts 4. Related cost reductions are found 8uderthe budgetcodes 500-540 (personnl) ad 090 (fuel and lubricants). These are the Working Paper No. 9 Annex B Page 2 consequence of the fact that TOG can close down their zonal offices &ad would not anymore be involved in the transportation of lint bales or cotton seeds. 5. The total recurrent cost for TCMI in its now form are estimated, by TCMBitself, at some Shs 335 millionfor season 1989/90 (see Table B.1). In this estimateTCM5 has assumed that it will continueto act as shipper/ warehousing and forwardingagent for all lint produced by the RCU's and sold for export and for the local marJet. 6. The statutory tasks of TCM4 take up about 55Z of the recurrent cost estimato presentedin Table B.I. The costs of commrcial activities such as warehousing and forwarding account for the remaining 45Z (601 labour costs, shipping and handling charges, insurance etc.). 7. The ginning fee required for TCKS's statutory functions is estimted to range froa 1.6 to 2.5 perent of the market value of Tanzmia's lint production, depending oagst othen on the total volume of the crop delivered to Dar eo Salam for sale. The fee for TCM4acting as warehousing and forarding agent, is estLmated in Table 5.2 to range frm 1.6 to 2.5 percest of the bales handled by TOSS. Working PaPer No. 9 Annex B Page 3 Table R.1. Recurrent expenditures of TCMI in the current and in the proposed cotton marketing system (budget basis) (in Sha million) Proposed Current situation situaetion TCHB TaB TCM Budget Description Total Heod office Total code 88/89 88/89 89/90 500 Saleries and wages 50.3 24.4 22.0 510 Tominal and other benefits 4.7 2.3 1.5 520 Training expenses 10.1 6.3 4.8 530 Staff welfare 18.4 9.3 13.5 540 Travelling expenses 43.1 14.1 8.3 550 Transport charges 495.3 555 Lint bales (ratlhead-Dar) 219.J 561 Dusted seed 60.0 562 Lint bales (godowm-port) 23.0 25.0 580 Administrative services 31.2 16.6 20.0 600 Directors'services 3.8 2.7 2.8 610 Audit fees 1.7 1.3 1.9 620 Cotton promotionm expenses 44.0 25.3 622 Research expenses 30.0 629 Other 13.7 640 Shipping/handling charges 89.9 89.9 91.6 651 Bank charges 24.4 23.4 0.1 653 Revenuestamps 103.5 103.5 10.0 660 rnsurancecharges 86.2 70.9 36.0 670 Repair & Maintenance 121.8 44.8 18.0 690 Fuel and Lubricants 31.1 7.6 5.0 720 Taxes and levies 4.0 1.0 0.3 SUBTOTAL 1,163.5 746.1 304.5 652 Interestse8aso overdraft 1,013.5 1,013.5 30.0 TOTAL (a) 2,177.C 1,759.6 334.5 Sourcet TCM a) code 652 does not includeinterest paymets oanoutstanding overdraftsfrom previous seasons Working PaPer No. 9 Annex B Page 4 Table 1.2. Estimates on TCMH fe. level under the proposed cotton marketing system 1. Statutory fee calculation TCMBrecurrent cost (Shs million) 335 4 3 5 a) Costs statutory tasks (Shs million) 184 239 Number of bales sold 350,000 Cost per bale (Shs) 526 683 Bale price (Shs) 33,600 33,600 TCQiMstatutory fee in terms of bale price 1.62 2.0X 2. Forwarding agencl fee calculation Cost commercial functiot 151 196a) Number of bales handled 250,000 Cost per bale (Shs) 602 783 Bale price (Sha) 33,600 33,600 TCI1 statutory fee in terms of bale price 1.82 2.32 3. Total of two fees 3.4% 4.4% a) Assumes cost level 30 2 higher than calculated in Table B.1 b) Assumes TCHI does not act as forwarding agent for local sales General assumptions - RCU production of lint bales 350,000 - Overseas sales 250,000 - Local sales 100,000 - Average price Scents/lbs lint 60 - Avorage bal, price ($/400 lbs bale) S/bale 240 - Average exchango rate Shs/S 140 Working Paper No. 9 Annex C Page 1 RAIL TRANSPORTOF COTTONLINT BALES Cotton -int railage from WCGAto DAR(181 kg bales) Season 1987/88 1987/86 1988/89 1988/89 Month Cumula- Cumula- Cumulative difference tive tive in performance (1988/89-87/88) July 11,011 11,011 7,733 7,733 (3,278) 702 August 17,941 28,952 43,556 51,289 22,337 177? September 13,176 42,128 19,298 70,587 28.459 168% Octobea 9,774 51,902 8,003 78,590 26,688 1512 November 25,032 76,934 45,231 123,821 46,887 1611 December 25,642 102,576 36,868 160,689 58,113 157S January 24,725 127,301 27,808 188,497 61,196 1481 February 7,056 174,357 30,572 219,069 44,712 1262 March 29,388 203,745 23,186 242,255 38,510 119S April 51,421 255,166 May 20,716 275,882 June 39,042 314,924 Total 314,924 242,255 Average - 12 months 26,24 - first half 17,096 26,782 - second half 35,391 Notes rn January 1988 100 tarpaulins were provided to TRC. According to TRC this enable the use of 100 open wagons for cotton lint transport. Performance TRC ia cotton lint haulageimproved from 17,100 bales in season87/88 to 26,900 bales In the first half of season 88/89. This increaseis equal to 100 additional wagon loads per month. Working Paver No. 10 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER COFFEE MARKETINGARRANGEMENTS Southern Africa Department Agriculture Operations Division Africa Regional Office Working Paper No. 10 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER COFPEE MARKETINGARRANGEWENTS Table of Contents Page No. A. BRIEF REVIEWOF THE TANZANIACOFFEE INDUSTRY 1 I. Production ...... 1 2. Export Processing ...... 3 3. Classificationand Auctioning ...... 4 4. Payments to Producers ...... 8 B. FUNCTIONS OF TCMB(EXCLUDING MARKETING) 9 1. Status Quo ...... 9 2. The Functions of a New Coffee Board ...... 10 3. TCMB as Input Supplier ...... 13 C. THE ROLE OF UNIONS 14 1. Management of the Mills by Unions ...... 14 2. Practical Implications - Mill Management and Finance ...... 15 3. Financing of Coffee Stocks Until Receipt of Sale Proceeds ...... 16 4. Procurement of Inputs ...... 20 5. Foreign Exchange Retention ...... 20 D. FUNCTIONSOF THE COFFEE BOARD- MARIKETING 22 1. Marketing Issues ...... 22 2. Marketing Systems ...... 23 3. The Use of the ICO Quota ...... 26 4. The Role and Future of TCMB's Export Division ..... 27 5. Summary ...... 29 6. The Board's Payment System ...... 30 E. RECOMMENDATIONS 32 1. Tanzania Coffee Marketing Board ...... 32 2. Marketing ...... 32 3. Foreign Exchange Retention ...... 32 4. Procurement of Inputs ...... 32 5. Status of Coffee Mills ...... 33 6. Auctions - Existing and New TCMB ...... 33 7. Classification,Grading and Payment System - New TCMB ...... 33 8. Accounting - New TCMB ...... 33 9. TechnicalAssistance ...... 34 10. Payment Delays in Banking System ...... 34 F. LIST OF PERSONS MET 34 WorkingPaper No. 10 Page 1 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER COFFEEMARKETING ARRANGEMENTS * A. BRI! RZfLV_WOP THE TANZANTACQOE! INDUSTRY This paper deals with the post-bamestmarketing activities in the industry, althoughsome introductoryreferences are made to production and processing. The writer is aware of various reviews of the industry. but believes it is useful to present this brief overview as a background to the various policyissues which need to be addressed. 1. PRODUCTON 1.1 Tanzania pioduces four main types of coffes Tzruly High Grown Mild Arabicas In the Northern areas (Ximanjaro. Arusha, *tc); Mild Arabicas, grown at somewhat lower altitudes in the South; and lobustas and Hard Arabicas, grown in the lukoba regions. During 1972173season, production wass High Grown Milds--28,837 tomes; Loer Grown Hilds-63.172tomens HsardArabicas-.2,342 tomes; and Iobustas--l0,133tomes. total production was 47,484tomes. During the 1980181season, production wast High Grown Hilds-- 38.291tomess Lower grown Nilds--14,197tonmes; Hard Arabicas--2,336 toffee;and lobustas-.11,767 tomes. Total productian was 66,611 tonmes. During the 1986187 season, production wvas: igh grown Milds-- 14,943tonnes; Lower Grown ilde--12*393tomnes; Bard Arabicas--1,878tons; aud Robustas--11,909tomes. Total productionwas 41,143tomnes. The 1907188cco is given by TCNB as 46,728tomes, of which: 33.611 ilId.(both types); 2.701 tomes lard Ausbicassand 10,416tomes Robustas. TCKB'sestimate for 1948189is 55,130tomes. consistingof: 41,240 tomwe MUlds (bothtypes); 2,270 tomes lard Arabicas; and 11,620 tomesaobustas. (Soure:sMarketing Dew. Burau ad TCMS) 1.2 The High Grown ilds are of particularly attractive quality with good acidity and body, often with good flavour (especiallyEstate grown coffees) and generallya loes aggressive blender than Knya's, with considerableappeal In specialistsafkets. Estateproduction was 11,223 tomes In 1972173,and down to aroud oly 3,000 toomesin 1987188. See attachedproduction data "on TCGA, to which productionox nationalized estates should be added. There are 45 nationalized estates producing between 500 and 700 tomes annally. * This paper was prepared by H.J. van Hilten (const'ltant). WorkiniPaper No. 10 Page 2 The Mulds, which are grown in the South, have good character, but are oftenbadly processedand dried and containmany sour beans (causedby insectdamage), and normallyreach the market long after their qualityhas startedto deterioratewith age (transportproblems). BukobaRobustas are a good neutralfiller, well known and liked in both quotaand non quota markets. Becauseof their limitedproduction, they do not featureas PrimaryRobustas (unlike Uganda's, for example,with close to 200,000tonnes per annum). Hard Arabicastonnages are insignificant. The sharp fall in production of High Grown Milds is particularly disappointing,as it coincides with drastic changes in externalmarket conditions where quality is playing an ever biggerrole in the consumer's buying pattern, and where top quality Kenyan and Ethiopian coffees are fetching quLte impressive premia. Forecasts for both Kenya and Ethiopian Sigh Grown Milds are that premia of around 25Z may continue to be achieved over the ICO Other Mild Indicator. In the past, much of Tanzania's High Grown Milds fell into the same category, and had production been maintained,there would be considerable benefits today. 1.3 Production in the Northern Regions is mainlydown becauseof: nationalizationof estates,which have ceasedto be estatesin the sense of the word; lack of confidence.funds aLd inputson the part of remaining estatesand dissatisfactionand lack of inputson the part of smallholders. The 1988189smallbolder crop is reportedlyabout 13,000tonnes but the 1989190 total will be sharply down, according to industry sources, because no cheLicals are available to combat Coffee BerryDisease (CBD). Meanwhile, the rainy season has startedl Production ia the South is clearly on the increase and, should currentassistance programmes be fruitful,it is po*stblethat in the future most MLIds may corn from the South. From a marketing point of view this is regrettable because not only is the coffee of lower quality but it is also more difficult to evacuate. Robusta production has remained steady over the past 15 years. This is probably a reflection of the cultivar's resilience and limited input requirements. Similar trends have been observed in Uganda, where production always rmained above 120/150,000 tonnes despite the country's severe problems. 1.4 Processingthrwgh CoffeeVashing Stations (CWS) or Central Pulperies, as they are called by Tanzania Cooperatives, is mainly found on estates, although the DICU owns 13 CWS of which 7 are operational. Almost all smallholder.produced Milds are pulped using mostly small imported handpulpers of the drum tpe. (This type requires less water than does the disc pulper.) Robustas and Hard Arabicas are dried in the cherry and subsequently hulled. WorkinsPaper No. 10 Page 3 Processingthrough CWS normallyproduces better, more homogeneous quality than individuals who use hand pulpers and ferment, and wash and dry small quantities under greatly varyingconditions. This normallyresults in uneven and unreliable quality of bulk lots. Yet in the past, smallholdersin the Northern Region produced excellent qualities,mainly because: - Inputswere availableand coffeehusbandry was excellent; - VillageCommittees inspected the produceof each farmerand insistedon high standards of harvesting and drying; - Coffee from each PrimarySociety was normallysold at the auction under that Society'smark, resultingin rivalry betweenindividual Societies to beat the performanceof others; and - There were meaningfulprice differences at Union and Society level between differentqualities of coffee. If these conditions cannot be re-established, it might be opportune to review the question of CWS once again, although they have not proved popular in the past, in part because farmers do not like to carry cherry over any distance. Whetherthis would be differentfor the Southern Regionthe writer does not know. 2. EXPORTPIOCESSING 2.1 Robustasand Hard Arabicas are boughtby CooperativeUnions in hulled or unhulledform, processed for exportand raileddirectly to the port of Tanga for disposal by TCXB. The Bukoba mill is apparently in poor shape and can no longer grade by size so coffee is sold as UG or Ungraded. For theseRobustas, this does not make much difference.But, of course, anyonecalling his product 'undergrade is not exactly winningthe public relationsbattle1 Mild Arabicss are purchasedas Parchmentby PrimarySocieties. who pass them on to Cooperative Unions in truck loads. Until last year all mild Arabicawas processedby the Moshi mill, owned by the Tanganyika CoffeeCuring Co. (TCCCo). The coffeefrom the South is to be processed by two now Millswhich have been constructedin the Regionat Mbozi and Mbings. Consequently, no 1988189 coffee has been transported from the South to Moshi and accunulatedstocks reportedly are well in excessof 10,000 tonnes. This will pose severe storage and logistical problems when the 1089/90 crop starts arriving smetime during MaylJune. This, incidentally, means that the estimated 1988189 surplus over the ICO quota of between 8,000 and 13,000 tomnes (depending on which crop estimate one believes) will mainly, if not all, consist of Mild Arabicas from the South, as probably all Robustas and Bards will be needed to ensure the quota is fulfilled (of whlch TOO semsS reasonably confident - so far WorkiniPaper No. 10 Page 4 this year 3,400 tonneshave been sold to non quotamarkets of which 2,570 tonneswere Milds and 1,260Robustas). 2.2 Parchmentis gradedat PrimarySociety or villagelevel into three grades: - SpecialParchment u prime qualityof good whitish/brilliant colour; - Parchment number One - reasonable quality of still acceptable colour; - Parchment number Two - poor quality - should mainly consist of floaters(lights); At season'send, same Mbuni (driedcherry) may be deliveredas well; in hulled form it is known as 'EstateCleaned", if not as 'Cherry buni*. (The Swahiliword Mbuni is believedto have been derivedfrom the Amharic word Buna which means coffee). At the Primary Society level, it is not possibleto *valuateclean coffee, but growersknow very well which parchmentquality produces a good clean coffee. Unfortunately,there is now inadequat, supervision at village level resultingin ixmature/unripecherry being harvested, coffee not being adequately dried, etc. Improved supervision alone, however, cannot rectify this situation; there has to be an incentive which no longer exists. Coffee should be sold in auctionsunder the mark of each society, so all concerned can see and realise the effects of their actions and fetch any quality price differetiatls. Such arrangement. worked well in the past and would work again, especially in areas such as Aruiha and Kilimanjaro. where farmers have been producing coffee for generations. 2.3 Mlld Arabica Parchment is delivered to the Moshi mill of the Tanganyika Coffee Curing Co. (TCCCo) by the Unions. (It is understood that the future process at the new mills in the South will be similar to that followed in Moshi). Upon receipt, moisture content is tested - if this exceeds 14Z the parchment is rejected. Normlly, each consignment is milled separately but, as a general rule, TCCCo will combine small deliveriesinto a millingunit of 21300bags. Such bulkswill bear a fParchmentBulk Number'. Largerunits will be milledunder a separate 'Outturn umber' wvhichalso identifies the producer. 3. CLASSIFICATIONAND AUCTIONING 3.1 Clean coffeeis graded into no les than 10 physical grades - see attached Liquoring and Classification chart. Each grade is stored separately by TCCCo. Samples of each grade are submitted to TCMB's liquoring department, where they are assessed on Green Appearance, Roast Appearance and, most Importantly, the Liquor or Cup Quality. TCMBoperates a complex classification system with no less than 12 classesof Mild Arabica; this system should be simplified. For example, liquoring differences between FAQ Plus and Fair to Good are almost impossible to WorkingPaper No. 10 Page 5 describe.and are indeedminimal as is also indicatedby the attachedPrice DifferentialScales, where a differenceof one percentagepoint is made betweenthese classess 3 and 4. During1981183, a Mild Arabica classificationsystem was introducedin Ethiopiaunder Bank auspices,which is based on 5 classesonly. EthiopianWashed Mild Arabicasfetch prices equal to the very top Keyan qualitiesl TCMB does not adviseTCCCo of classificationresults and only communicates bulking instructions to prepare coffee for auctioning or allocation to CBC sales etc. Individual estates and Unions do get the classificationresults, but are in no positionto evaluatetheir correctnessnor can they challengethem in any practicalmanner. The followingcomments are offered: - TCCCo shouldreceive classification results as a matter of course,if only to be able to check that bulking instructionsdo not mistakenlymix good coffeewith bad; - Now that TCFvo is again owned by producers,it shouldact as a check oan CI and immediatelytake steps to establish its own l`_oring department; - Formal procedures should again be established permitting producers to contest TCHB classiciations. The present system is inoperable because it depends on the Mild Coffee Trade Association in Nairobi. whose appeal charges were not remitted in the past and whose service is therefore no longer available. Local arrangements need to be made instead, something which is perfectly feasible. 3.2 TCMB allocates individual lots to 'Bulks'which are prepared by TCCCo, and subsequently sampled to licensed exporters who buy in the auctions. All coffeerated FAQ or bettercan be printedin the catalogue under individual marks or outturn numbers; anything below will be bulked and only appear under a TCMI number and mark. This system operated satisfactorily 15/20 years ago because the majority of the coffeewas FAQ or better,but now this Is not the case. Currently, virtually no smallholder coffee appears under identifiable numbers. ESamples Auction Catalogue 10188 attached: 20,151 bags of which 1,411 under identifiable markse The present system should be reviewed as there are no physical constraintson TCCCo to presentcoffee in individuallots for auctioning. The bulkingthat now takesplace prior to the auction could be done after the event, in accordancewith the buyers' own preferences rather than those of TCMB. Societies cannot recognise their product in auctionand have become totally divorced from the relationship "quality/price', since: (i) they mistrust TCMB's findings In any case; (ii) are unable to check an the WorkingPaper No. 10 Page 6 performanceof their coffeein the auctions.so why bother,and (iii) at their level.price differentialsare almostmeaningless. It appearsthat the ever increasingamount of pre-auctionbulking done by TCMJwas, in part, due to the never endingprocess of *equalisation'which draggedthe betterperformers down to the common level.and in part to facilitatethe Board'sown exportactivities since it had no experience in comercialg bulking. and it is much easier to lump large quantitiestogether. In comparison,the Renya system,with more than three times Tanzania'sMild production,continues to auctionalmost all coffeeunder producers'marks! When availablefor auction,Estate coffees continue to be printed under their own marks. There have been attemptsin the past to suppress this, as the comparisonbetween private and nationalisedestate in auction becameuncomfortable. 3.3 Ahead of each auction,samples of lots to be sold are providedto licensedexporters - see attachedlist for detailsof those currently licensed. Please note that, although 3 Unions (UNCU, KCU and Coop. Union of Tanzania) are licensed exporters, they have so far not participated in the auctions. Each exportirwill make his own aisessmentof the quality and determinethe suitabilityof each lot for his particularpurpose. Thus, the TCKB classifications are neither known nor of interest to exporters. After purchase,each exporterinstructs TCCCo whether to bulk some of the coffeestogether or ship them as individuallots to Tanga. Shipping agents at Tanga take care of the clearing and forwarding/shipping, and collect/shipping documents, etc. TCH1 maintains an office at Tanga which deals with official documentstion as ICO certificates of origin. etc. Duringthe periodOctober 1, 1988 - March 9, 1989, twelve private exporters purchased coffee in auction, in addition to TCMB's own Export Division. According to TCMBmarket reports, total MLld sales by March 9, 1989 were: - To the Coffee Buyers Club - 5,064 tonness - To Private Exporters - 7,785 tonnes; and - To TCMB Export Division - 1,083 tomnes. NBs TCON statistics always include its own auction purchases under the heading private". Since the Coffee Buyers' Club's share was reduced from 502 to 30X, more coffee has been auctioned so far during 1988/89. Exporters must pay within 7 days from the date of auction - local firms may pay in TShs, whereas those representing foreign firms arrange for forex to be remitted to TCOB. Auction bids are currently expressed in US Dollars per 50 Kgo and converted into TShs at the rate of the day for invoicing. WorkinsPaper No. 10 Page 7 3.4 Mild Arabicas are sold *ax TCCCot Koshi. It is intended that future Mild Arabicas from the South will be sold as es Hbozi and Makambako (a rail head),where storage and bulking facilities are under construction. TCMDwill post coffeeliquorers there to carryout classifications.Care will be necessaryto ensurethat classifications standards are maintained at thesedistant locations, where individualliquorers are likely to come under pressure to ensure classificationresults are good*. Samplesare expectedto be sent to Moshi for auctioningin the usual manner, and exportswill take place through Dar es Salaam via the rail link Makambako-Dar.How successfulall this will be remainsto be seen.Meanwhile, TCMB has not formallydiscussed these matters with the exporters,whose enthusiasmmay not be overwhelming.This shouldbe done as a matterof urgency. Also, TCMB will need to have a presencein Dar es Salaam to avoid shipping documents having to travel between Tanga and Dar. 3.5 One difficultyfacing TCMD is the absence of a formal organisation of privateexporters. In the past, thesewere all groupedunder the Mild CoffeeTrade Association (MCTA) in Nairobi,which dealt regularlywith TCMI, Government. Bank of Tanzania,Railways, Marbours, etc. on policy issues. This is no longer the case. since the majority of MCTAmembers no longer operate in Tazania for well known reasons -- long periods without auctions and lack of confidence in Tanzania's willingness to stick to auctionprograms. once anounced. It is now an appropriate tim for exporters of TanzaniaCoffee to group thoeelves into a Tanzania-based Association. This would provide then with a forum for discussion, provide much needed liaison with Goverrment,TCES and all other relevantinstitutions, and act as a pressure groupwhen necessary. This move shouldbe welcomedby TCMI and Government, since an Asseciationwould representall exportersand avoidthe need for repeated discussions with individuals. as at present. Such an Association would include persons with adequate knowledge of coffee liquoring and classification. which would make it possible to re- establish the official appeals system vhich was previously operated in cooperation with the KCTA. (Such a system operates very successfullyin Kenya.) The Association would also be useful for the evaluation of research samples. soething which should not be left entirely to the TCMB. 3.6 Robustas and Bard Arabicas are sold on sample ex warehouse Tanga, basically In the same manner as KlIds. 3.7 One positive aspect of an auction system is the market coverage afforded through the various exporters. If 20 active exporters each make contact with 10 foreigp buyers once a week, this means 200 such contacts. If all coffee was channelled through TCMl's Zxport Division, its staff would have to conduct 40 such contacts each working day to equal this, which is clearly an impossibility. Another positive aspect is the ability and preparedness of individual companies to seek out and service small, but specialised WorkingPager No. 10 Page 8 markets. TCMQ's idea of selling coffee abroad is based on large parcels of averagequality, something which is fine for countriesneeding to dispose of hundredsof thousandsof tonnesannually. For a smalloroducer such as Tanzania. which has vers mood quality potential. thiasIs entirely the wrona nolicv (no matterwhat vested interestsabroad may adviseto the contrary). To extractmaximum benefit from the limitedICO quota that is available, coffeee2gort should be as individualisedand soecialisedas possible. Coffeequality is of the utmost importance,and Tanzania'srevenue is not maximizedby the bulkingof largequantities on the basisof administrative ratherthan comercial decisions. 3.8 A number of physicalconstraints limit the profitabilityof exporters.In the main, there are (occasionallysevere) transportation problemsbetween Moshi and Tanga and unacceptabledelays in the receiptof foreign payments, once exportdocuments have been lodged with the NBC (which apparentlydoes not operatea regularcourier system to dispatch documents abroad). Also, there are suggestions that payments are delayed by the consortium of banks under Bankers Trust, after buyers abroad have settled invoices (see attached letter of complaint from TOMBto NCB in this respect). The situationdescribed therein continues to exist at present for both TCMBand the private exporters. 4. PAMNS TO ODUCERS 4.1 Individual, privately owned Estates finmace their production costs through bank overdrafts. The Associationwhich groupsthem (TCGA) does not make any advance payments to them. When Estates deliver Parchment to TCCCo, they receive the *into store price which is set annuallyby TQCMD/Uios and Covernmt. Cooperative Unions handling smaliholder productionraise loan funds which are used to advance cash to individual Primary Societies. These purchase Parchment from individual members, combine it into truck loads and arrange dlspatch to the Kill or other designated collection centers. CooperativeUnions receive the "into-store' price once Parchment (or cleancoffee as the case may be) has been acceptedby a TCMB-owne'or approved centre. (TCCCo is no longer owned by TCMB, but the *into-store" price is paid on delivery there.) The 'into-store"price coversthe paymentmade to Societies, handling and bagging coats and (depending on Union efficiency) a *profit' element. In theory, therefore, the annual Union crop loans should be completely retired once all coffee has been delivered to TCMB. Details of the 1988/89 'into-store' prices are attached. 4.2 The linto-store' price is a 'firstpayment' for coffee,to be followed by subsequent 'interim' and 'final' payments. The 'final' payment is based on totalrealisation for the crop and the quality, as determined by TCMB's liquoring department. The quality aspect is accounted for by a system known as the 'basickilo', which adjuststhe delivered(physical) weight of clean coffee upwards or downwards in accordance vith the WorkingPaoer No. 10 Page 9 differentialsshow in the PriceDifferential Scales attached to this report. To put this in perspective, see the followings TCIE'sproposed CoffeeRealisation Account for 1987/88(attached) shows a total pay-outof TSh 266.0563per *basickilo' clean coffeefor Hilds. (Robustasand Bards are simplypaid on total realisation.)This means that a differenceon one percentagepoint in the classification/differentialscale equalsTSh 2.66 per kilo clean coffeeor 2.12 per kilo of parchmentat Union or Estatelevel. The maximum differencebetween FAQ - class 6 and the (neverachieved) top of Class 1 of 102 amountsto Tsh 26.60/kiloor US$ 10 per S0 kilos,whereas the real marketdifference would be much more than doublethis. The presentpay-out systempenalizes producers of good quality;does not penalizeproducers of substandardquality enough; overly generalizes quality issues and does not reflectactual quality premia paid at auction.If marketdifferentials were passedon in their entiretyby means of payingeach QualityClass on the basis of actual realisation. producers would be sc:Carately rewarded for better quality. The 'basic kilo' system can be used for this, if the scale was detersinedat the end of seasonand was based on actual realization. 4.3 Of course, it is difficult to run such a system when there are 12 classes of ild Arabica and most of the coffee is simply bulked together for auctioning. Thus, a thorough overhaul of the entire classification, grading,presentation and payment system is recomended, and technical assistanceshould be considered to assist TCHD in this work. It is also difficult to expect TCOB'9 present manual accounting systemto cope with such changes, and accounting would need to be computerised to accomodate 4.4 No interim payment was made during 1987188, and producers have to wait until the entire crop has been finalised before this will be made. This means. they are financing recurrent expenditure at costs which reflect current TSh values vis-a-vis foreign currencies, but only receive payment for their product on the basis of TShs which were converted from forex proceedsat a much earlierstage, and whose purchasing power has decreased enormously.This is particularlygalling when TCOB receivesregular sales proceedsand could,in theory, make regular interim payments which would, in part. alleviate this problem. This is further discussed in Section B dealing with TCGBIs present and future functions. B. FUNCTIONSOF TCMB - EXCLuDINGMARRTSING 1. STATUSQOtT 1.1 TCMB Management takes considerable pleasure in pointing out that the Board does eactly wbat is now demanded of its it acts as the producers" *'agent' and pays out actual sales revenues less costs and other deductions as 'may be appropriate." Rather than refer to the Board's desired status as an Agent, it is perhaps more appropriate to state that the Board should become accountable to producers and that both the scale of Working Paper No. 10 Page 10 its operationsand its costs shouldbe determinedat the startof each seasonin agreementwith producers. 1.2 In reality, the Board is presently not accountable to producers in any of the following major areass - Marketingpolicies for quota and non quota sales,marketing methods,licensing of buyers; - Qualityclassification of coffee,and the mannerof its presentationfor sale; - The Board'sgeneral scope of activities; - The levelof Boardezpenditure and cther costs: - The allocation of surpluses realixed on tradingaccounts by the Zzport Division. and exchange profits on syndicated sales- - The procurement of inputs, and - The hiring and firing of management staff. It may be argued that the Board of Directors includesa number of Union representativesand, therefore,represents producers, but this view is hotly disputedby producersgenerally. Given the known politicization of the cooperativemovement, this view must be accepted. At the time of the mLssion,no Governamentproposals were available for the restructuring and staffing of a 'new' Board, and all that can be given at this stage are recommendations on the way the future Board might operate. 2. 21! FUNCTIONSOF A NA COF BOARD 2.1 A coffee industry needs an apex. This shouldbe the CoffeeBoard, provided it is controlled by producers. Government participation is required, but should never be dominant, as is the case at present. Candidate-producer members should be selected by election rather than through nomination by Unions. The Kenyan selection system is a good example of how this can be done. There, the Board consists of Government appointees (Agriculture, Cooperative Department, Treasury, etc.) plus nine membors appointed by the responsible minister from a list of candidates who hav been elected on a district basis. Coffee Board management should be accountable to the Board. Senior management staff should be appointed through a selection process, not by Government nomination as is the case at present. In the Tanzanian contest, it is unrealistic to say that 'Boards can arrange for the dismissal of a General Manager who was appointed by the President this is the same as having the right to fire him. WorkingPaper No. 10 Page 11 2.2 Why does the coffeeindustry need an apez? Apart from practical and controlconsiderations, mainly because it does not operatein a free market. Coffee exportsare subjectto exportquotas. Exportquotas are negotiatedand obtainedby Government,not producers. Governmentis ultimatelyresponsible for adherenceto Tanzania'sICO obligations,not producers. Hence,even from a purelymarketing point of view. Government is heavilyinvolved in industryaffairs. There are threemain functions: policy,regulatory and physical. - Policyfunctions are normallyexecuted by Governmentthrough a single appointed ministry; - Regulatory functions are carried out through a CoffeeBoard or Authority,and - Physicalfunctions are carriedout by producers,processors, traders,exporters, researchers, etc. Government should rely on a Board to prbvide the background information necessary for the foroulation of policy. A permanent Board providessupervision of the industry, neutral enforcement of regulations, aud regular revies of the effects of Government policies. Government representation on the Board ensures that it participates in some of the importantdecisions which affectthe industry. and thus the economy as a whole. Therefore, even if the world coffee market were totally free from controls, it would still be necessary to have an industry apex. It is expectedthat, albeitwith great difficulty,a new coffeeagreement will be negotiatedlater this year; and there will be importantpolicy decisions to be made by both Government and the industry. 2.3 What should the functions of the new' Board be? - Regulate the flow of coffee to international markets; - Classify all coffee on quality for feedback to producers and allocation of sale proceeds; - Conduct auctions, collect and distribute sales proceeds: - License coffee warehousemen, millers and exporters, to ensure that they have the required facilities and expertise. If local consumption is subsidised, local coffee roasters are also required to be liceansed; - Negotiate annual crop advance levels with Government and banking institutions; WorkingPager No. 10 Page 12 - Liaise with international organizations as ICO/IACO and ensure Tanzania's obligations are met under the International Coffee Agreement, and - Supervise, liaise and assist with research, and evaluate research output. These are the functionsa Coffee Board should perform in the Tanzanian context. They cannot not be carried out by individual Unions who could not and would not be neutralas the Board shouldbe, whereas some of Government'sobligations CICO matters, licensing, etc.) are unlikelyto be ceded by it to privatesector organizations such as the Unions. 2.4 How could the Boardbe financed? Throughan agreedcost levied againstcoffee sale proceeds. Ideally,this would be a two-tieredcosting with a fizedcharge per bag or tonne,representing the Board'sbudgeted costs and a commissionpercentage, reflecting higher or lowersales values which would be used to rewardBoard staffin accordancewith performance. The Board would not make advance payments against coffee to be sold and would, therefore.require only a limiteaoverdraft facility to finance tst annual budget, unless the Unions could agree to provide this. The new office block constructed by TOG would provide good collateral which Unions may find useful. 2.5 Allocation of existing TCOB resources is under way in that TCCCo has been transferred to the Unions, *albeit on the basis of shareholding which is considered unfair by some of thm. The other main factory at Bukoba, BUKOP,was transferred sometime ago. There appears to be some operational problms in this factory. The two new mills awaiting commissioning at Mbinga and Mbozi should, in due course, be transferred to the Unions in question, once they have been satisfactorily commissioned. Whether this should mans that other Unions will bear part of the cost (sincethey have all contributedto the DevelopmentLevy togetherwith some Governrent funding) will have to be resolved. It is not yet clear if the Southern Unionswill be capableof physicallymanaging the new mills, but technicalassistance would be proavided by an EC PrograQm shouldthis be required. As a transitional arrangemnt only, ownership of the new mills could be transferred with the TOIl acting as Managing Agents for the time being. The Tanianlka Instant Coffee Cos No details were provided on this company's perfongance. If it is profitable, producers will no doubt be interested in acquiring it. But, if it is not (which is likely, given its limited production and the fact that single origin instant coffee is difficult to sell---also, this one counts against the export quota if sold to quotamarkets), it will be best to sell it to the privatesector Th Board'sNoshi office block and other fixed assets as 0-downs. etc.* These have all been financed either by growers directly or through retention of -trading profits of the Board's Export Division, and there WorkinsPaper No. 10 Page 13 is, therefore,no questionof their ownershipnot revertingto the Unions. in which manner thiswould be done shouldbe decided by the incoming Board, together with the Unions. Assets such as farms and workshos:s These do not belongin the Board,but their disposalmay be difficult. Bowever,most if not all of the Boardts Tangaoperations should probablycontinue. It is recommended that there shouldnot be any wholesalerush into forcing the total dispersalof Board assetsor activities,but insteadGovernment should finalizeits plans for the *new'Board as soon as possible. The present situation simply means things are more or less draggingon as beforewith considerable uncertainty on the part of Board employees, which is unhealthy. 2.6 The single most important issue here is that Governmentshould present its plans for the 'new' Board as a matter of urgency, and ensure that the new Board is in office by October 1, 1989, which is the start of the Board'sfinancial year and Quota year. Board members would then deal with these variousissues on the understandingthat Governmsentwould take over assets which may be unviable such as TCB farms, workshops and Tanica. It is estimatedthat the whole process would take at least a year to complete. At the same time, GoverneAntshould clearly indicate its position an the massivedevaluation losses which its policiescaused the industry during1986187 (TSh 1.4 billion,according to TCMB'saccounts), when pre- financedcoffee deals againstfuel importswere settledin TShs at the exchangerate prevailingat the time Goverment receivedadvance foreign exchange, whereas coffee shipments took place much later. Rad coffee been sold in zhe normal moanner, most of this amount would have accrued to the industry in the form of higher TSh prices at the auction. 3. Ts hI INrUTS UPPLI 3.1 There has been no *disengagement from any of these activities, and Governmentas well as TCMB sourcesset considerablestore by the fact that 'Unionsare generallyincapable of procuringinputs efficiently.* This should not deter them though, since the present arrangement is not efficient either, and. Unions complain certain chemicals are not available at all, others are supplied only partially, and often supplies do not respect the application cycle, rendering them useless at times. Government sources indicate that the TCMB's monopoly on input procurement will be abandoned and capable Unions will be able to procure their own. This comditment needs to be made public so that all concerned can get on with: (i) the disentauglement of the status quo; and (ii) planning for future seasons. 3.2 Vhile this may be well and good, there is an urgent need to determine the exact status quo regarding input supplies, the level of Union debts,and the ability of Unions to access foreign exchange which. at WorkingPaper No. 10 Page 14 present,they canaotdo. The need to quantifythe input questionis demonstratedby the proposed1987/88 Coffee Realization Account. The proposedrealization accouat shows a total deductionof TSh 3.45 billionfor coffeeinputs, leaving a number of Unionswith a negative balance. However,after objectionsby Unions that many of these inputshad not been receivedby them during1987/88, the amountwas reducedby TSh 1.31 billion,which only left four of the smallerUnions in a deficiton the 1987/88realization account. Unions complain of discrepanciesin the present arrangements, whereasquantities, types and qualitiesof inputsdo not alwayscorrespond with their preferences,and chemicalsare reportedlysmuggled wholesale out of the country. 3.3 Any move to disengagethe TCMB from the inputsprocurement process shouldbe precededby: (i) an immediateaudit of the statusquo; (ii) arrangements for Unions to access foreipg exchange throughthe OGL (at present, TCMBdoes not get any retention as such and depends, in reality, on 8OT's largesse); and (iii)arrangements with the banking system so that individual Unions can raise the necessary finance, since they are expected to put IOOZ of the funds up front. Resolution of the above issues is urgent. What appears to be an impasse at present, should not lead to future shortages. At the same tine, the cost of chemicals is so large that under no circumstancesshould anythingstill be orderedthat is not demandedby individualUnions. The progressivedevaluation of the currencyplaces a heavy burden on producers, whereas,so far, they have only partiallybenefitted from increasedTSh coffee prices. If the 1987/88realization account is to be believed.the cost of chemicals as charged by TCMB was already 261 of Mild Arabica producer payments in that year. There is probably an extremely good case for some fom of continued centralization of the procurement of inputs which permits bulk buying by someone." The Unions concerned should, therefore, be reviewing these issues now, but this is not happening, as all action is paralysed until Government makes its final position on the TCMBknown. C. THE BOLEOF IONS The role Unions play in the coffeecollection marketing process has been described in the Section A. This Section reviews the effects that proposed policy changes would have on the role of Unions. 1. OFOANAGENN T-E MILLS BY UNONS Transfer of the mills means Uhions would take on this responsibility,but in practicethe only imediate consequence should be financial, not operational. WorkingPaper No. 10 Page 15 1.1 :CCCosThe mill has alwaysbeen run as a separateentity, controlledby a Board of Directorsand managedby a GeneralManager. The presentincumbent appears knowledgeable, whereas the mill processesall coffeepresented to it. Providedthe incomingBoard of Directorswill run the Companyalong strict businesslines, the impacton the mill's performanceshould be positive. AlthoughMLGCt has expressedconcern over this matter,it shouldbe remomberedthat the company'smain shareholders (KNCUand TCGA) betweenthem establishedthe mill and ran it successfully until it was nationalised. The mill's present performance requires review, as its machinery park is old and some rehabilitation is needed. Equipment to do this for two of the four millinglines is available,but has as yet not been installed. No doubt the incomingBoard (thereis now an interimBoard) will review this and determine what the precise equipment requirements are, taking into account any changes in grading and export presentation that the new Coffee Board may introduce. 1.2 BigPY This mill has a long history of mechanical and organisational problems. The Union at present runing the mill is either unable or unwilling to effect the management changes that are required. However, the mill's product appears satisfactory and sells readily, even though it is not properly size graded due to equlpment failure. An assessmet of the mill's mechanical set up is to be made under EEC auspices. It is ophasized that the review should ensure that mill management and market requirements are fully beon taken into account before investment decisions are fnaUlzed. 1.3 Mbinaa and ibozl millet These two novw ills have been discussed in Section S. If they are to be managed by TCMD for the time being. with EEC-funded technical assistance, it should be possible to put together a management team that will eventually permit the Unions concerned to assume full responsibility. In other words, no immediate decision is required here, and instead the looming logistical emergency for moving the bulk of last season's crop to Dar es Salaam should be addressed immediately. 2. PRATIrCALIM QIA - ML AA ANDFINANCE The transfer of TCCCohas been carried out without addressing finAncial issues and, as a result, TCHB continues to finance the Mill's operating costs (as well as the crop advances against the parchment it receives). BWIP finaces its own operatingcosts and only receivesthe crop advance (into-storeprice) against clean Robusta/lardArabica when it is delivered to TCMB in Tanga. Nbinga/Mbozi are not operatioal and thus do not finance any milling costs; the Unions are paid the crop advance upon delivery of Parchment at TCM1 go-dowis at these points. WorkingPaper No. 10 Page 16 2.1 TCCCohas been run by deficitfinancing which was made up by TCMB as - and when required - budgetingwas thereforenot realistic.and the Curing Levy receivedby the mill was not representativeof actualcosts. The current Curing Levy of TSh 1.50 per kilo of parchment may have to be increasedto TSh 4.70 or 5.00 if a realisticbudget which allowsfor repairs, maintenance, equipment replacement, etc., is prepared. At present exchange rates, this milling fee would be more or less in line with that charged in Kenya, whereas the TCMBDevelopment Levy would no longer be paid). Management estimatesthe current financing requirement at TSh 350 million. There shouldnot be any real difficulty in raising this, as the mill representsexcellent collateral, especially now that it has been returnedto producerownership. The only questionappears to be whether it shouldbe up to TCCCo or to its shareholdersto raise these funds. Union preferenceis that they shoulddo so and the companywould, therefore, not have any overdraft facilities.As the Unionsnow own TCCCo,they shouldnot have difficulty in raising this finance, but there should not be any risk of funds not being availablewhen required. SUKOPfinances its own milling operations already. If ownership of the new mills in the South is transferredto the Unions, they should have the collateralto raise the financewith which tQ pay the Managing Agent (TCMB). It was not possible to obtain detailed information on BCUand the Southern Unions. KNCU's1986617 accounts have been audited;their 1987188 draft accounts are ready, but have not yet been audited. 2.2 Union requirementsto financemilling costs. export bags, etc. are modest and should not be difficult to raise, provided the mills are seen as activities separate from the Unions themselves, as is the case already for TCCCo. If mills are simply part and parcel of individual Unions, they will inevitably face the sort of problems now encountered in Bukoba. If, instead, the mills are ownedlrun by companies and Boards of Directors which include representation from interested parties (Coffee Board and Banks, for example), it will be easier to maintain appropriate operational and management procedures. After all, coffee mills are industrial undertakings which cannot be run by Comittee. If the mills are run as industrial undertakings, responsible to Boards of Directors, it would be preferable that they should raise their operating finance themselves. This could be in the foua of Bank overdrafts or loans from parent Unions, but it seems adisable that the availability of funding should never be in any doubt to ensure continuity of operations. 3. T-E FINANCINGOT COPFEESTOCKS UNTIL RECEIPT OF SALE PROCEEDS 3.1 Under the presentsystem, the Unionsraise financefor crop purchases and handling costs until TCMB pays the winto-store prices when coffee is delivered to TCCCoIn Moshi; collection points in Mbinga and Workins Paper No. 10 Page 17 Mbo:i. or receivedin Tanga.in the case of BukobaRobusta and Hard Arabicas. Unions (exceptingTCGA whosemembers arrange their own financing) raise these agreed costs mainly from CUDB. If TCMB cease payingan *into-storeprice.' the followingneeds to happen: (l) The 'into-store*payment is now raisedby TCMBfrom NBC: if double financingis to be avoided,NBC and CRDB would have to agree between them who would finance all, or part--- of each Union's requirements; (ii) The amountto be advancedper kilo would be negotiated annually betweenUnions, the banks and Government (actingthrough its representationon the CoffeeBoard or MLGCM). All thingsbeing equal,it would be the same as the current'into-store price.* Banksmay wish to operatethe systemin two stages,so they can monitorhow the drawing-downof fundsby Unions compareswith subsequentreceipts of coffeeby the millingand warehousing companies. Alternatively, these companies could be required to submit regular returns. giving coffee receipts pet Union. 3.2 The total financing requirement will only increase if the levelof advancepayment goes up, but the periodover which Union advanceswill be outstanding will increase considerably. Unions currently purchase most of the crop in four to five months (April-July, according to TCOG). With the exception of BCU, they have it delivered unprocessid to TCMB,and their financing cycle is therefore limited to, at most, siz months. Nov that they have to finance the crop through until sales proceeds have been received, this cycle will extend over the entire year, if all coffee can be sold duringa twelvemonth period. This is improbable,since a certain quantity of 'working stock' is always required. (If this was not available, there would not be any shipments if subsequentcrops were late.) The minimum 'working stock' requirement is 6,000 tonnes. Should production exceed the total of annual quota and non quota sales plus working stocks, there will be a surplus quantity to be financed as well. At this stage, it is not possibleto quantifythese totals as financing requirements, except to say that total levels of finance will not increase as a result of these uolicv changes. They can only increase if crops are larger or levels of advance payments are raised. Apart from the agreed producer prices, Union will need to finamce cumulative loan interest now carried by TCMG. 3.3 The levelof producerprices should, in the main, be based on an assessmentof market prospectsand the amountthat will have to be sold to non quotamarkets. The 1987188Mild Arabicaadvance payment, as shownon that year'sproposed Coffee Realisation Account, is almost 502 of total sale proceeds(before deduction of Development,TCMB, and CuringLevies and Inputs). As an advancepayment, this is perhapsnot unreasonable,but no WorkingPaper No. 10 Page 18 interimpaymeuts have been made in the last few years. What is not understoodis why the advancepayment for Robustasand Hard Arabicasshould be higher at 60Z of realisation. Even if this is based on higher transportationcoats which Bukobas would have vis-a-vis coffees from the NorthernRegion, it appearsunreasonable not to grant other Unions the same percentage of advance payment against expected proceeds simply because their costs are lower,whereas the value of their productis higher. See also the 1988189'into-store* price calculationfor differencesin 'into- store*prices. 3.4 Currently, TCMB assumes control (but, says the Board. not ownership) of coffeestocks as they are receivedby it, and the 'into- stores price is paid. This is a peculiar situation, as TCMB(not the Unions, it seems) pledges these stocks as collateral against its borrowings. (On March 24, 1989, TCMB's borrowings from NBC were TSh 2.4 billion;no formallimit exists anymore,but TSh 3 billion has been requested from NBC.) TCZB at any rate has the authorityto pledgethe stocksand use their sale proceedsto retireborrowings against them. How this authority was acquired is not clear. The Board considers that, in the case of TCCCo. it should not continue paying the "into-store'price "because it has not received the coffee., as TCCCois no longer under its control. The issue is, of course, not where the coffee is stored, but whether it is easily identifiable and acceptable to the banks as collateral. This should not present any major obstacles. 3*.S It is recamnended that all four mills should become individual LimitedCompanies (para. 2.2). All CoffeeMills shouldhave licensed millers and warsehousemn, as they perform both milling and storage functions. Licensed warehousemen issue Storage Warrants. Coffee cannot be removedfrom storageunless the relevantwarrant is surrendered.Coffee Buyerscan only acquireWarrants if they have paid the marketingagency (TCMG)for the coffee. Thus, all coffeeaccepted by the mills will have to be warranted,once it has been processed. This alreadyhappens in TCCCo. Until coffee is sold and paid for, these warrants will be held by the lending institution or its authorised agent. As TCMB will no longerbe the borrowing agency and cannot pledge the stocks, the banks may now wish to hold the warrants, but this would complicate administrative procedures considerably. Instead, the banks would have to accept that the four companies would not release any coffee without the requisite warrant being produced. In the case of Tanga, it is likely the Coffee Board might act as a warehouseman for the Bukobas and Bard Arabicas that are stored there. Furthermore, they would have to accept that the Coffee Board would not release any warrants without payment having been received by it in its Marketing or Trust Account, and that the Board would only make payments from this account to individual Unions through Bank transfers into designated accounts. WorkintPaper No. 10 Page 19 Each individual Union would pledge its coffeestocks and all sale proceedsas collateralto the bank(s). Sale proceedsaccumulated in the Board's Marketing Account would be paid out at regularintervals but lending banks could, of course, attach funds belonging to an individual defaultingUnion before thesewere paid out. 3.6 gy rEL NorthernRegion. Coffeestored with TCCCos No coffeebulked or dispatchedfor exportwithout warrants. No warrants released by Coffee Board unlesspayment has been received. SouthernRegion. Coffee stored with the two millinacouoanies: No coffeebulked or despatchedfor exportunless warrants released (by telex) by CoffeeBoard, Ioshi. No releasewill be grantedunless payment has been received. Bukobasand Other Hardss Coffeewill only be railedto Coffee Board go-downs at Tanga. Railway bills will be in favour of the Coffee Board. No coffee will be released at Tanga unless warrants have been released(by telex)by CoffeeBoard, Moshi. This will not be done unless paymenthas been received. CoffeeBoard. Undertaking no warrants will be released unless paymenthas been receivedin full. Marketiag Account. Utdertaking by Coffee Board through Conditions of Sale on Auction Catalogues that buyers must make payment to this account. Funds from this account may only be paid to Unions and are pledged to the bank(s) while in the account. Payments to Unions shall only be by bank transferinto designated accounts. If, at all, these arrangements still do not satisfy the lending banks,these shouldappoint an officer to countersign the release of Warrants and the operation of the Marketing Account. This officer should then, be pernanently stationed in the Board's premises. 3.7 What happens to the funds which accumulate in the Marketing or Trust Account? Currently, they are applied against the Board's overdraft. But, under the new system, they would accumulate as cash funds and should be transferred to indlvidual Unions on a regular basis, as they become available. Thus. the Board would make at least monthly interim payments to the Unions on the basis of funds received. This does not mean Unions would necessarily make regular interim payments to member Societies also, as they would first wish to retire their crop loans. Section D deals with the Board's marketing function, including interim payments that could be made depending on the averaging of sale proceeds over the entire year for both quota and non quota sales. WorkingPaper No. 10 Page 20 4. PROCUREMENTOF INPUTS The abilityof the NorthernUnions to do this is not doubted. The abilityof those in the South and in Bukobacould not be judgedby this mission. The advantage of Union procurement ought to be that those doing the ordering should know at first hand what is needed and understand why/when it is needed.so there would probably be more respect for crop programes than is the case at present. Centralisedbulk buyinghas its advantages,and althoughnot every Union requiresthe same inputs,it is clear that certainitems are in widespreaduse. Thus, individualUnions may wish to have a centralprocurement system for such items. If so, smallerUnions could piggybackonto this by having this systemprocure all their imports for them. The Board should not concern itself with inputs other than to jolt things along (if the Unions fall foul of officialdom, for example). There is no need for a procurement division in the new Board and, to keep one alive just for limitedpurchases of inputsis unnecessary. It is betterthat the Unionsare asked to settlethis between themselves,bearing in mind the dangersposed by the presentinconclusive situation.as referredto in SectionB. para 3.3. This processshould be set in motion and be completedby September30, 1989. This shouldinclude the establishmentof satisfactoryarrangements for the financizgof inputs and access by Unionsto the foreignexchange required. 5. IORNIGN EXCHANGE RTS ION It is not possible to speculate on the percentage of foreign exchange that should be retained by Unions and individual Estates, except to mentionthat IFI3t schemes elsewhere have, at times, included an element of free transferof fores, especiallyfor companies and farmers, who can serve as a powerful incentive"to produce the goods". 5.1 At present, TCHBonly acquiresa 102 foreignexchange retention on the non syndicatedsales. (Retentionaccounts on traditionalexport crops, coffee included,were terminatedas of April 1, 19891. Apparently,GOT does not permitthe industryany retentionon the syndicatedsales. In any event the matter is academic,since TCMB does not have real accessto its so-calledretention and relieson BOT'slargesse when foreignexchange is needed. Unionsand Estateshave never seen any foreignexchange retentions coming their way and are cynical about the issue. There are formidableobstacles to an agreementwith (no doubt an unwilling) SOT. To appreciate these, it is necessary to understand how coffeepayments are now made, assuming for the moment that the aneweBoard will not trade in or export coffee itself anymore. 5.2 Auction prices are expressed in USD and invoiced in TShs on the basis of the day's exchange rate. Buyers situated in Tanzania with adequate local funds will pay the Board in TShs. Buyers dependent on funds from abroad or those representing foreign firms will arrange for USD to be transmitted to the Board's Marketing Account. Thus, the Board can show WorkingPaper No. 10 Page 21 actualUSD receiptsfor some of its salesand only TShs receiptsfor the balance. In theory,BO couldaccept that auctionvalues be used to calculatethe retention,but SO is sure to argue that actualexport receiptsmay be less,certainly for thosecoffees bought by local firms in TSh. It is reasonablefor producersto arguethat it is not their responsibility to ensure foreign exchange receipts are in line with auction performance. This is clearly a BOT function, although the new Board could assist. The issue,however, should not be tied to the retention distributionsystem. Instead,30 shouldaccept that a combinationof auctionvalues, and those that may be realisedin directnon quota sales. will form the basis for the calculationof foreignexchange entitlements. This is essential as otherwise producers may have enormous difficulty in arriving at a tenable solution. BO3 is unlikely to pay much attention to producer claims, whereas the existing TCXB is unlikely to be of much help. Even if final export values do not tally exactly with the auctions (of course. they should norually be higher, but can at times be lower, if exporters make genuinelosses oanlong or short positions), the difference would be minimal. cosidering only lO0 or so of auction values would qualify for retention. 5.3 Using auctionvalues and those realisedin no quota transactions, it would be simpleto calculatethe Industry'stotal retention,which could be allocatedto individualUnions on exactlythe same basis as would be done for the distributionof finalpayments, reflecting the prices realised for each qualityof coffee. How individualUtions allocate this further down the chain (if at all),probably does not concernus. If the new Board's accounts system was computerised. such software is relativelyeasily installed by programers and could produceacceptable returns to B0T. However, having divided the retention total between all those entitled to it, how is it actually accessed? This is the major issue; the systems are relatively simple. 5.4 The retention could, of course, be accumulated by the automatic transfer of 10? of all ezternal paymeats received against coffee purchases or exports, but it would be difficult for the Board or Unions to monitor this, since they would not know when individual payments against export bills are received. The only sensibleway will probablybe to obtainvery strong guarantees from GO? and 30 that coffee.retentions will be based on auction values plus those of direct shipments by Board/Unions to non quota markets (Section D), and will be availableon call to the Unionswithin 45 or Working Paper No. 10 Page 22 maximum 60 days from the date each auction is held, and immediatelywhen payments against direct non-quota exports are received. There was no opportunity for the mission to discuss this in detail with either TCGA or KNCU, mainly because the writer had not formulated his views by then and also because different points of view were put forward (including one that foreign exchange retention is not affordable at this stage, and GOT should instead guarantee "free access to inputs as required* Instead until the economy improves). It is the writer's view, however, that the retention issue must be resolved in that, even if an interim arrangement is accepted for one or two years, the principle, system and date of introductionmust be clear and agreed as part of TANAA. D. FUNCTIONS OF TH COU BOARD - MARgETING 1. MAPZXtING ISSUES 1.1 The commnt has been made earlier that the coffee market is not free, is it is constrained by ICO export quotas and increasingly more restrictive rules governing sales to non quota markets (non ICO members). The ICO quota is negotiated by and allocated to GOT, who is required to administer it and ensure observance of ICO rules. The breach of those rules may result in quota reductions. Prices in non quota markets are between 40 and 60Z below those ruling in quota markets for Mild Arabicas, but only about 30 to 351 lower for good Robustas. The quota value of Robutas is thus much lower than Mild Arabicas. In other words, from the national perspective, it is more advantageous to ship Robustas to non-quota and Mild Arabicas to quota markets. This to indicate some of the policy issues that ICO membership brings with it. Tanzania must be a member of the ICO. Without this, its coffee would be excluded from most major markets. 1.2 The fiow of coffee to quota markets through the year is also regulated by the ICO. More or less equal tonnages must be shipped against the quota during each quarter of the coffee years it is not permitted to exceed these 'quarterly quotas.* Since crops accumulate in periods of less than six maoths, this means Tanzania must carry quota stocks over periods of ten to twelve months, plus the necessary working stocks, plus any surplus over these. Surplus coffees can be sold to non quota markets, but in theory only, at prices comparable to those charged to quota markets. If this bureaucratic ideal could work, there would be no need for quotas and real prices are as mentioned in para l.l. The issue that follows from the above is that not everybody's quota coffee can be marketed at the same time. Who will apply what criteria to determnde which coffee is sold when? When world prices are high during certain quarters and low during others, how will these advantages and disadvantages be shared out amongst producers? WorkingPaper No. 10 Page 23 1.3 if some of the proposalsnow being put forwardfor a now .uffee Agreement(the presentagreement expires September 30th. 1989) are accepted,it may becomeimpossible to sell to non-quotamarkets as is done at present.Consumers dislikethe two-tierprice systemthat has evolved. Why shouldthe West subsidizethe coffeedrinking habits of the Middle East, Comecon,etc.? A 'global* quota would mean inclusion of non-quota markets, whetherthey are willingor not. into the Agreementby means of imposinga total ezportlimit on all producingcountries. Non-quotamarkets probably representanother 15 to 20Z on top of the existingquota for member countries;for example,Tanzania might achievea total quota of about 50,000tomnes under such a scenario. This would mean that any coffee produced over and above this limit would be unsaleable.Who will decidehow this will affectproducers? It will not be easy to administera globalquota, and it may not work. But the questionof globalover productionwill have to be addressedone of these days. Eitherthere will not be any CoffeeAgreement altogether (as in Cacao)or controlswill becomealmost total. , 1.4 If the coffeemarket was free and Tanzaniawas not so dependenton the foreignexchange generated by coffee. It would be a simplematter to advocateabolition of all controls,including marketing boards; but this is not the case. Governmentand the industrymust addressthese issuesjointly, hence a Coffee Board is needed. The regulatory and administrative functions of the 'new' Board have been set out in Section B, but the Board's main function will be to provide impartial and efficient methods to distribute the effects of these and other market issues in an equitable manner between all producers. 2. MURTING SYSTEMS 2.1 The catastrophic consequences of the marketing arrangements of the- past few years (pre-financeddeals, coffee syndication deals, private deals by TCOB) are discussedin SectionS. The issue is simple: the industry eitherhas an auctionsystem or it does not. There is no way in which an auction system can be maintained alongside direct deals which undercut the people who are restricted to buying in the auctions. The suggestion in the Task Force report that this is possible should be dismissed. Successfulauctions depend on relatively simple principles: - there must be an adequate, regular and reasonably guaranteed supply; - there must be an adequate number of financially strong and independent buyers; WorkingPaper No. 10 Page 24 - there must not be any interference through arbitrary withdrawalof supplies from the system,which are subsequently used to undoeminethe market positionof auction participants,and - there must be an efficientand impartialbody to manage the auctions,collect and distributeproceeds, etc. Tanzania has undermined theseprinciples for a numberof years, and confidence in the auctionsystem is now at a low ebb indeed.It can be restored,however. 2.2 Re-establisbmentof an efficientauction system is an essential ingredient of market reform under TANAA.vhich inter alia means GOTwill have to find othermeans of securingits fuel facility. Such means are available,even if the excerciseis again limitedto coffeeas a subject vehicle(see SectionE). Auctionsbring the followingadvantages: tl) Almosttotal transparencyis providedto producersas quantities and values are known. This is why auctions are popularwith Tanzanianproducers. (ii) They provideaccess to numerousbuyers abroad through the exporterswhich participate.A single marketing organizationcannot equal this coverage. This is extremelyimportant for a small produceras Tanz&Aia. (iii) They are d4fficultto subvert,if sufficientnumbers of buyers participate. Single channel marketing is often corruptand inefficient. iv) They providethe type of competitionbetween buyers which individualproducers could neverhope to achieve, if they tried to market overseasthemselves. (v) They are a suitablevehicle to ensureregular flows of coffeeand funds. If properlyput together, auctionshelp to motivateindividual producersto producebetter quality, as they will have a reputationto maintainand a higherprospective price to fetch. 2.3 Auctions have alwaysworked well in East and CentralAfrica. They were abolishedin Uganda,suppressed in Ethiopia,and heavilyinterfered with in Tanzania. All these three countrieshave not shown optimn performance in terms of production and ezports, whereas Kenya maintained its auction system and has doubled its production in the past decade while maintaining attractive levels of payments to producers. In Ethiopia,WB has included as one conditionality for its third coffee project the preservation of at least a limited auction system (NB: this should not be compared with Tanzania though, since conditions are totally different). This was done in an attempt to ensure that, if one day Workin&Plaer No. 10 Page 25 a new administrationmay wish to liberalizethe economy,there will still be a hard core of exporterswith whom to startthe processof revitalizing the coffeeindustry (as has meanwhilehappened in Madagascar,also with WB and IS support). A hard core of exporters,interested in Tanzaniacoffee, still existsboth locallyand in neighbouringKenya; whereas there are a number of overseascompanies who are likelyto enter the trade in Tanzaniacoffee if only they had assuranceof regularauctions. Meanwhile,even the limitednumber of exportersthat have been participatinghave outperformed the CoffeeBuyers Club. GOT should not under estimate the impact its actions have had on buyers' confidence,both locallyand abroad,and assurancesthat auction programs. will once againbe respectedwill not be acceptedprima facie. This goes for both buyersand producers. One major difficultyfacing small producersas Tanzaniais to offer roasterssome continuityof supply, even if regularauction programes are held, as after all availabilityis not that largeto beginwith. If this relativelysmall production is now also interferedwith, as has been the case duringthe 1980's,many roasters(the finalbuyers) tend to lose interestand will considerthe coffeeonly when pricesare right. For example,the businessexporters built up with Sweetn over many years has been totally lost: no Tanzania coffee was exported to Sweden in 1987188 other, than 16 tonnes of Instant. 2.5 Could producersnot do their own marketinginstead? No doubt some of them could,but what about thosewho do not have the expertise? Could they accessoverseas markets effectively? As effectiveas throughthe auctions? Bow would they secureaccess to exportquota? What would be the basis for allocatingexport quotas in the first place? Would foreign exchange earnings be optimal? These are fundamental questions which are not easily answered. Would individual Unions acting as marketeers abroad not be susceptible to the seam corrupt pressures as are found in other manopoly marketing organizations? After all, the Unions have a monopoly on their members' product. Where would be the transparency that is so necessary and so strongly desired by all producersvith whom the issue was discussedduring this mission? In this context, the difference between monopoly and export marketing oust be clearlyunderstood. If Unionswere to sell coffee directlyoverseas, members would have littleor no insightin their actions,and a situationsimilar to or, in the end, even more objectionable than the statusquo (TOO) would arise. If Unionswould like to enter the field of export marketing, nevertheless, (Cbecause exporters make profits on their coffe*e) they can participate in the auctions like any other exporter, if they have the expertise and resources to do so. At present, none of the Unions have these and, individually, they will find them difficult to acquire, especially the expertise which is quite specialized, WorkintPaper No. 10 Page 26 3. THE USE OF TEE ICO QUOTA 3.1 The quota is extremelyvaluable to producers.as withoutit Tanzanisncoffee prices would be very much lower,especially for those producinglower quality. As mentionedin para 1.1, the quota is a national asset,an industryasset from which all producersshould benefit. If more coffeeis grown than can be shippedagainst the quota.all producerswill have to share in the lowerprices that will be realizedfor the surplus. WhetherGovernments worldwide should continue to expandcoffee productio: in the face of demandconstraints is, of coursedebatable. In the Tanzaniancontezt (the countryproduces both Milds and Hard Arabicasas well as Robustas),the questionarises how the quota shouldbe utilized. If price discounts for good Arabicas are so much higher in non- quota markets thAn for Robustas, the best policy for Tanzania is to destine Robustasto non-quotamarkets and sell Arabicasagainst the quota. But currentTCMI policy is that all regionsmust share equallyin the quota advantage,and thereforenon-quota sales must be made of all qualitities, not only Bards and Robustas. This policy does not make sense from a nation-wideeconomic point of view. Tanzania incurs efficiency losses. This is a political, instead of an economicaland commercial position, which results in increased non- quota losses for the industry. 3.2 The Governmentshould clearly define a non-quotasales policyto limit the financial discounts that have to be granted to foreign buyers. To be so, a large proportion of Robustas vould have to go to non- quota marketswith the resultant price differences being adjusted internally by the Board (inter-varietycross-subsidization). The Board would need to have a strong Marketing Committee to deal with this sort of issue. It must be obvious from the foregoing that there is no easy and fully equitable way in which the national ICO quota could be split between individual Unions. To do it efficiently, one would have to know, first of all, total production quite accurately; estimates would come from individualUnions and Estates who would, of course, realize that over estimating might produce a larger gsub-quota allocation. Secondl, one would have to allocate quota to lower qualities as Robustas, whether one wanted or not, since the issue would be intensely political. Thirdl, one would almost instantly destroy the private exporters, as most of them would have difficulty in working within such a system and would have to rely on Union adherence to supply and quota comitments. Finally, the Unions would automatically become the monopoly marketing channels that were discussed in para 2.5 above. Most importantly, however, it is impossible for a small producer like Tanzania to fragmten its export quota between 16 Unions and large individual producers as CDC who are likely to appear on the scene, and at the sam time, maintain an orderly marketing system that will have the confidence of buyers locally and abroad. This writer strongly recommends against any such suggestions, as to leading producers such as NCU and TCGA. WorkingPaper No. 10 Page 27 Insteadthere shouldbe a an auctionsystem for all quota coffee (definitiozof "quotacoffee to be determinedby the Governmentand the new Board).The auctionswould includelimited supplies of non quota coffee in consultation with exporters (who service small specialist markets in the Middle East and elsewhere),whereas larger non-quota deals (with centralizedeconomies. for example)would be promoted and negotiated by producersthemselves. 4. THE ROLE AND FUTUREOF TCMB'SEXPORT DIVISION 4.1 The divisionabove begs the questionwhat the futurerole of TCMB9sExport Division should be? The ExportDivision was established partly to improvethe Board's understandingof exportmarkets, and partly becausethe Boardwanted to becomean exporter.From the moment the started to participatein auctions,exporters mistrusted the Bcard'sintentions and with good reason. The Divisiondid not only procurecoffee from the auction,it also sold coffeeabroad directly from the pool. At times,the Board withdrewcoffee from the auction,if this was neededfor such direct sales. Accordingto TCOK management,the Divisionno longermakes direct deals.mainly because 'producersmistrusted these actions." Currently,the Divisionacts as agent for CBC, in that it executesthe shipmentsof coffeescontracted to CBC. Producerswill be pleasedto know that CBC makes a profiton this,which includesany exchangeprofits that may accrue between the time USD valuesare set (see Section1) and the countervalueis actuallyreceived. Profitand loss accounts for the years 1981182 through 19685/86are attached. 4.2 This writer does not consider TCM5should export or trade in coffees i) The Board sets the reserveprices at which it will sell coffee to the exporters, while at the same time it acts as their competitor and buys from itself. Often, the Board's reserve prices are not reached during the actual auctions, and lots are 'bid noted.' This means the Board may eitheraccept the bid imediately after the auction, or it may make a counter offer which remains fits until the following day vhen the exporter may either accept, counter offer or withdraw altogether. Exporters argue that the Board deliberately ignores local market conditions and bases reserve prices oanprice ideas which may have been received for limited quantity demnads from abroad. Worse. however, they believe (and may be right for all one knows) that the lots 'bidnoteds to the Export Divisionsometimes do not representactual bids from abroadat all, meaningthe Division was simply 'pushing' the price up in auction, and such lots are simply returned to the pool after the auction. Finally, exporters believe the Division receives favored treatment and at times receives coffee at prices below those pail by the exporters. Working Paper No. 10 Page 28 Ui) Exportersargue they are not at all againstcompetition. providedit is equsl competition.But, in this case, the same peoplesetting reserve prices are involvedin the buyingof coffee in auction.TCHB mmnagementargues that this is not so. since the head of the Export Division (whose title is PrincipalMarketing Officer- PMO) does not play a role in this. But inquiriesdown the line reveal that when the MarketingDirector is absent,the PMO does this jcb. The PMO has undergoneconsiderable training abroadand is probablyquite knewledgeable,but he is in an impossiblesituation and can never convinceanyone of his impartiality.Yet the Board is supposedto be totallyimpartial. iii) It is not satisfactorythat senior Board marketing personnel shouldbe on close termswith overseasbuyers, if they are engagedin both the marketing of the crop and the conclusion of actual transactions with such buyers. This is not acceptable to the major Unions either, who consider, and rightly so, that if the Tanzanian industry decides to participate in export marketing, it will be up to the producers, not to the Board. The Boardcan never convincingly win any of these arguments. There are far too many conflicting interests, and why indeed should it place itself in this position? Is it the function of a Board to "trade* using producers' money? 4.3 Para 3.2 argued that large non-quota sales should be negotiated by producersoutside the auctionsystem. The reason is that centralised economies often require large quantities against extremely complicated paymentformulae (counter trade, three or four way trade,barter, use of non conveertiblecurrencies, etc) which are difficultif not impossibleto handlefor individualexporters. Such transactionsoften hsve a distinct political flavour as well, which can at timesbe very beneficial as demostrated by the deals Tanzaniawas able in the past to make to make with Algeria (a new deal is apparently in the offingagain). Why should these not be handled by TCMD's ExportDivision? Again the answer is that this is not a regulatory Board's function. Board staff who are in charge of marketing the entire crop should not directly be involved in price negotiations with foreign buyers, and producers do not want it. 4.4 It is proposed that TCMBosExport Division be excised from the Board and be formed into a separate Limited Company as TCCCo, that is under the ownership of Unions - the Producers Marketing Co. (PKCo). This would achieve a number of objectivest - Staff of the new companywill be paid private sector level salaries and performance bonuses, something which is vital if comercial functions are to be satisfactorily perfomed. Board Management and export division staff appear to be in agreement with thLs principle (but probably not with Union ownership). WorkingPaner No. 10 Page 29 - The Board'sregulatory function and impartialitywill no longer be under suspicion,as the new companywould have to participate in the auctionson the same basis as otherexporters, and its staffwould no longerbe part of the Boardestablishment. (to ensurethis, the companyshould not be locatedin the Board"s headquartersbuilding in Koshi). - The Unions would acquire an export company between them. In this way they would be able to have the required trading expertise. Since overdraft funds would only be used to finance coffee boughtfrom the Board (at auctionsfor quota markets,and directfor non-quotamarkets), it shouldbe relativelyeasy to obtainthe necessarysupport from the bankingsystem. 4.5 The new Board would, throughits MarketingComiittee, establish marketingstrategies for quota and non-quotacoffee. It would auctionall quota coffeeplus the agreedamount and typesof non-quotacoffee that the auctionscan easilyhandle. These decisionswould be communicatedto exporters who would, therefore. know the tonnagesand typesof coffees likely to be sold through the auctionsand, therefore,could tradeagainst these. This they do not dare to do at present. The Board would charge PNCowith the developmentof non-quota markets for tho tosnages it has *llocated for direct sale. This would pJrmit PNCo to pursue a propoer marketing strategy rather than seling non- quota coffee on an ad hoc basis, as it happens at present. IF future crops do increase, it will be vital to start developing good contacts in non- quota markets now, not when the surplus has physically arrived and is clogging up the storage and transportation systems. PMCo would negotiate terms and conditions, which would be subject to agreement by the Board's Marketing Committee. In this way, TanSania would be able to pursue a proper marketing strategy for non-quota coffee and. at the same time, continue to run a proper auction system for its main export earners the quota coffee. Most exporters will welcome such an arrangement, although some may argue that they would like access to largenon-quota deals. If so, they would have to negotiatewith PMCo,which is proper, rather than directly with the Board, which is not acceptablo. Producers would have complete insight in the way non-quota deals are arrived at, and would do their utmost to extract the maximum possible values which, they say, is not the case at present - partly because such deals are mude direct by the Board without any producer supervision. Should there be any windfall profits on such deals, they would automatically accrue to RIo i.e. the producers. S S Y Mi) Now Coffee Boardto be controlled by Producers. The Board will have a strong Marketing Committee, which will set policy on the allocation and release of coffee to quota and noa-quota markets. WorkingPaper No. 10 Page 30 (ii) All quota coffeeto be auctioned.Auction programes to be announcedat the beginningof each seasonand to be adheredto. Should chbagesbe necessary,there shouldbe the earliestpossible warning to exporters. (iii) Exportersto form an Associationto ensureeasy liaisonwith the Board and other institutions,including Government. (iv) Some non-quotacoffee to be auctionedas well, dependingon the requirementsof marketsmore easilyserviced by individualexporters. (v) The Board'sExport Division to be administrativelyand physically hived off and formedinto a LimitedCompany (PMCo), whose shareswill be held by producers. PMCo would buy in auctionon the same conditionsas other exportersand would be the Board'schannel for no-quota sales,which cannot be accomodated by the auction system. 6 In BOA_RD'SPAYMT S_YS Mention has been made in Section A of the need to revise the present classification and gradingsystems. These form the heart of any producer payment system. which is based on quality. This means that any excercise to camputerize the Board's accounting system should ideally be timed to coincide with the introductionof new classification and pay out systems. It appearsthat both actionsmay requireTechnical Assistance but no action can be taken until the new Board is in situ, since it is up to producersto detemine what systemsthey wish to introduce. It is clear from discussionsheld with producersthat therewill be changes. 6.1 The underlying principle is tbat all producers should be treated equally when it comes to the sale of their produce. It is, therefore, necessary to even out price differences over the coffee year, since the crop has to be sold over a 12 month period, mainly due to quota restrictions;but. for example,also becauseit is physicallyimpossible to mill it all in a short period. A further principle is that producer payments should take into account the price differentials between the various qualities that are supplied. A final principle is that the advantages obtained from Tanzania's ICO quota allocation have to be divided equitably between all producers. Hence, the needs (i) for a Coffee Board, and (ii) for channeling all coffee through the auction. This, therefore, means individual Unions will not *bring coffee directly to the auction floor etc. Instead they will alwaysdo so through the medium of the Board; and as long as the Board is properly controlled and run, there is nothing wrong with this arrangement. The point has been made earlier that the product of individual producers should be auctioned under their own marks. WorkingPaper No. 10 Page 31 6.2 Auctionprices can be averagedfor the year on the basis of: (i) the accumulatedvalues realized in individualauctions. and (ii) their separationamongst a numberof agreedquality classes. The Boardwould maintaina recordof the classificationof each lot sold in auction,and thus averagesthe annualsales value for each individualclass. Whether these valuesare later adjustedinto a 'basickilo' systemor physically paid out per classificationis up to producersto determine. Sales valuesthus are averagedfor the entireyear by quantityand quality: producerswill be paid accordingly.Thus, the final paymentwill reflectthe price differentialbetween the variousclassifications. Should Unionsprefer to be paid on actualrealization of their coffeeonly (so no averagingover the year),one would have to ensurethat each and all qualitiesare sold over a twelve-month period,as otherwisethere would be endlessarguments that coffeefrom one Union was sold duringa periodof high prices and that of others when prices were low. This is impossible to achvieve and would be costly: for example, the Northern Highgrown Mllds are available and best sold early in the season, when prices for this type of coffee are normally best. In the writer'sview, there is no proper substitutes for the annual averaging of coffee pricesby origin (Robusta, Arabica,etc.) and classification. 6.3 Ideally, the first paymeat (into store price) would already reflect an assumed quality differential, which would be firmed up during the season as auctions progress and be finally settled with the last payment. This may complicate the administrative process too much, however. and lead to payment delay., whereas experience elsewhere has shown that overly complicated payment formulae lead to Unions and Societies witholding interim payments for example. The writer does believe, however, that it is unreasonable to set the same first paymnetfor all groupsof coffeeand, therefore,there shouldbe differentialsbased on theirmarket value as a group alreadyin the first payment. 6.4 The paymentsystem would, furthermore,have to cater for the price differences between sales to quota and non-quotamarkets. This writer believes that any system which continuously 'fiancess surplus stocks does not send the right signals to producers. Be does not believe in price stabilization funds for the same reason, whereas in practice such funds normally can never be retrieved once "invested." In the case of Tanzania. a stabilizationfund might perhaps be acceptable to producers if held under their directcontrol in a basketof foreignexchange, to avoid the ravages of currency depreciation. The payment formula would be the sales value of all coffee sold during the season divided by the total quantity received, split up between the variousgroups of coffeeand furthersplit up by quality. 6.5 The non-quotafactor needs to be added to this: WorkingPaper No. 10 Page 32 If, for comercial reasons,most Robustaswere sold to non-quota markets,it would be necessaryto calculatethe discountincurred from the quota price. This is not difficult. A formula could be agreed which would, for example,compare the value of BukobaRobusts with London Terminal Market quotations on the day a non-quota deal is struck; and the total price differencewould be sharedbetween all producers,thus increasingthe returnto Robust&growers. The Board would also need to formulateviews oanpenalizing inferiorqualities, in additionto the price penaltiesalready imposed by the market if surplusesbecome an embarrassment.This stagehas not yet been reachedin Tanzania. E. RECOMMENDATIONS 1. Tanze Coff oarketingaa Board - To be reconstituted leading to producer control with Government participation.Candidate-producer members to be electedat districtlevel - appointmentsto be made form amongst successful candidates by the responsible minister. Board management to be appointed by the Directors following a uormal selection process which means management may also be dismissed by the Directors. ACTION: Government. TIMINGs New Board to be in officeby the latest October 1, 1989, which means any necessary amendments to the Coffee Act are already overdue. 2. bfaketing Cessation of all forms of direct sale of quota coffee from October 1, 1989. This means the present syndicated sale agreement will not be renewed. TIMrNG: An announcement to be made no later than July 1, 1989, at either Ministerial or Presidential level to the effect that w.e.f. October1, 1989, all quota coffeewill be sold throughthe auctions. ACTION: Government. The present Export Division of TCMBto be reformed into a Limited Company with the Unions as shareholders. The now company to be totally (even physically)separate from the new Board. TIMINGs Division to cease tradingin quota coffeefrom October1. 1989. ACTION: IncomingBoard of Directors and Unions. 3. Ema Izhaa Retention Auction values plus those achieved through direct sale of non- quota coffee abroad to form the calculation basis for producer foreign exchange retention entitlements. Producer success to foreign exchange retentions and the timing thereof to be guaranteed by Government and the sank of Tanzania. TIMINGs Latest by October 1, 1989. ACTION: MLGCH, BOT, Unions and TCMI. 4. Peurmu ogf Inute WorkingPaMer No. 10 Page 33 The status quo of TCMB'sinput procurement progras in terms of supply coumitmentsand financesis to be audited. EnableUnions to obtain the financenecessary to executethe procurementof input. Unions to be consulted on all aspectsof inputprocurement still carried out by TCMB between now and October 1, 1989. New procurement arrangements to be agreed between Unions_ TIMING: to coxmence immediately- audit to be complete by July 1, 1989. ACTION: MLGCf,Unions and TCMB. 5. Statusof CoffeeMills All mills to be owned/operatedalong strictlycommercial lines by individualLimited Companies whose shareholderswill be the Unions. _, Autions - xiseting an WeWTQ13 Do not sell Bukoba kRbusta under description"Undergrade* and reviewwhy presentproduce cantot be calledFAQ instead. If so, the future productionof size gradedcoffeo should be called 'Standard'or Superior*. Do not bulk MLld Arabicasbefore auctioning other than lots which are too esmllto be printedindividually. Identify all lots by producerin the catalogue. Discuss the sale and transportation of coffee from the new Southern Ml11s with exporters well ahead of the coamencement of actual sales. 7. Classification. Grada and Paymett Sstem - New TOOl Simplify the present classification system - there are too many classes. Determinewhether the presentnumber of physicalgrades Ls necessary for Mild Arabicas. Why not combine and B into AB as was done in Kenya? Discuss with exporters. Following reduction in the number of classification standards, increase the differentials between then or revert to a system which pays producers the actual realization based on average annual values achieved by individual classes. In consultation with Exporters (who must be asked to form an Association), re-establish a practical Appeals System against Board classifications. S. Ascountn - mewT Workint Paper No. 10 Page 34 Initiate computerizationof Board accounts, specifically its classificationand payments system. 9e Techncal A_ssistance World Bank to offer Technical Assistance to assist with: (i) computerizationof the Board's accounting and payment systems; and (ii) to redefine grading. classification and payments systems. Durations For computerization-- 6 man months a For coffee technical work one season, i.e. up to one man year; NBs Computer expert to work with coffee specialist so to be in situ during last half of specialist's secondment. 10. Paymeat Delays in the Baukina System Introduction of a regular courier service for export documents to minimize delays. The reasons why export documents cannot be negotiated by NBC deserves investigation. The practice makes it impossible for exporters of any comodity to raise quick cash against export documents as soon as they become available. This may not be urgent in the present stage of curreacy depreciation, but is a uormal trade tool which should be available to those requiring it. Lack of ready finance affects competitivenessin auctions. If Governmwnt is to enter into yet another oil financing arrangement with foreign baokers, using for example export documents/proceeds, why could thls not be tendered out? The present arrangement appears to inflict unreasonable delays on the transfer of coffee export proceeds to Tanzania. F. LIST OF PERSONSMET NAIROBI Mr. 0. Kalidas, Managing Director, Cetco Ltd. (is Tchibo AG, Hamburg) Mr. S. Vohora, Director, Vohora Brothers Ltd. Messrs. A. and V. Vohora, Directors, Coffee Exporters Ltd. Mr. I.Z. Iruliani, Director, Taylor Winch Coffee Ltd. All these are exporters Interested (directlyor indirectly) in Tanzania Mr. NA. Valentine, Director, Kenya Coffee Auctions Ltd. Mr. C.J. Warnaars, UHEANairobi DAfte.s ... ~& Mr. O.K. de Mello, Director, Car and General Ltd. - Coffee Exporters NATIONALMARKETING DEVELOENT BUREAU Mr. P. Twyford-Jones SEC: Hess-rs.T. Clarke, M. Pennington,A.B.C. Grigor and Mr. A. Haukeland MI'EK:M Mr. R.M. Shirims, Principal Secretary Working Paper No. 10 Page 35 Mr. A.O. Farahani, Director. Marketing C.D.C.: Mr. N.C. Payne, Representative,Tanzania B.O.T.s Mr. D.J. Kamori, Director of Exchange Control I(OSHI T.C.M.B.: Mr. Werner R. Kapinga, Chairman Mr. J.S.P. Allute. Director of Marketing Mr. N. Ater&, Principal Marketing Officer Mr. A.A. Mkumbwa, Chief Accountant Mr. C.M. Shimo, Senior Marketing Officer (Stats) Mr. E.A. Makavia, Chief Liquorer TCCCos Mr. L.D. KiUars, General Manager mICU: Mr. M.M. Mushi, Chairman Mr. J.T.M. Tarimo, General Manager Mr. E.P. Whiteside, Production Manager Mazoa Ltd: Mr. M. Koehler, Director others Mr. A.Z. Nsilo Swai, Consultant (assistedin KNCU appointments) ARUSA Mr. L.I. Vohora, Director, Tanganyika Land Agency Ltd., Coffee Growers Mr. C.J. Bannister, M. Director ringa Estates Ltd., Coffee Growers Mr. Z.N. Mtei, Chairman, Tanganika Coffee Growers Association, TCGA Working Paver No. 11 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER IMPROVINGCOFFEE PRODUCTIONAND MARRETING Southern Africa Department AgricultureOperations Division Africa RegionalOffice Working Paper No. 11 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER IMPROVINGCOFFEE PRODUCTION AND MARKETING Table of Contents Page No. INTRODUCTION I I. COFiEE PRODUCTION IN TANZANIA 1 II. IMPLICATIONSFOR FUTURE FOREIGNEXCHANGE EARNINGS 4 III. TCMBIAUCTIONSYSTEM 4 IV. TCMB LIQUORINGDEPARTMENT 8 V. WORLDMARKET DEVELOPMENTS 13 VI. TANGA 14 VII. TCC COMPANY 15 VIII. SUMMARY 16 IX. RECOMMENDATIONS 16 LIST OF PEOPLEMET 18 TCMB, TERMS ANDCONDITIONS OF SALE BY AUCTION 19 Workint PaperNo. 11 Page 1 TANZANIA AGRICULTURALADJUSThENT PROGRAM WORKINGPAPER IMPROVINGCOFFEE PRODUCTIONAND MARKETING INTRODUCTION In July of this year the consultant travelled to Tanzania to examine and advise upon various aspects of its coffee industry with particular emphasis on analysing present grading standards and in recommending future grading standards to be used for the international marketing of Tanzanian coffee. Besides this the consultant analysed various other aspects of the coffee situation in Tanzania and his findings are included herebelow. I COFFEE PRODUCTION IN TANZANIA I. Although by no means the worst I have seen the state of coefee production in Tanzania is far from ideal and the fact that the farmers are able to produce a half way decent product at all under the present very trying conditions is a tribute to their resilience* and to the excellent climatological and ecological conditions prevailing in Tanzania. 1.2. Inputs are practically speaking not available and not one of the six plantations I visited was free of rust or insect attack. Husbandry in the north is on the whole good with some attention being paid to pruning and with the farmers fertilising as best as they can with cow dung and mulch. On one of the larger small holdings I visited at Leria I was shown a tree, which had allegedly been planted in 1922 by the farmer's fathor and was still going strong. I do not disbelieve the claim; with regular pruning and the application of fertiliser it should be possible to keep a tree going almost indefinitely. Threes are typically planted 2.7 mts apart. which is less dense (1.Smts) than is to be found in those countries where more modern techniques are used. i.2.A. There is meanwhile a small possibility of turning the lack of inputs, faute do mieux, into a virtue. In the major consuming countries there is a growing demand for "organic' produce. Health food shop8 at any rate in the U.K. and doubtless elsewhere in W.Europe, U.S.A. and Japan are selling organic vegetables, and even washing up liquids at 100X premia to 'non-organic' products. Even then they are unable to meet the demand. The consultant's own company, which supplies green coffee to small roasters and shops throughout the U.K. Is receiving daily request for 'organic' coffee. Certainly in terms of overall consumption the percentage of organic coffee is still very small but it is growing and while inputs are still not widely available in Tanzania it is definitely worth examining the possibilities of marketing 'organically' grown coffee. There is a niche for this. The consultant is not suggesting that inputs can be ignored or that Tanzania should go all out to become an 'organic' producer but certainly there are marketing possibilities for the sale of organic * A.J.C. Harper (Consultent), who also prepared this report. WorkinR Paper No. 11 Page 2 coffee while the shortage of inputs persists. 1.3. Another major problem for producers is the very low initial (and frequently the only) payment they receive for their coffee. T/-90 for a kilo of coffee is less than the cost of a kilo of sugar at T/-100 or a kilo of meat at T/-200. Given current auction prices for Tanzanian AB grade coffee it would not seem unreasonable that this initial payment should be raised immediately to T/-150 (USD 1.00/Kg). Thereafter the initial payment should be indexed linked to the rate of inflation/USD-T- exchange rate as well as reflecting a constant percentage -say 55% of the latest prices obtained at auction to be adjusted twice yearly. I.4. As far as production in the south is concerned I understand that a relative lack of water there compared to the north has led to the coffee boing peirly washed and consequently of patchy cup quality in spite of an impresive bean size and appearance. The case for installing central pulperies in those areas is strong. 1.5. in any event in order to achieve a more honogenous outturn of coffee the single most important thing to be done in the writer's opinion would be the installation in the main coffee growing areas of central pulperies/washing stations to which each district would bring its cherries. These would have to be installed near a fount of fresh water and ideally on a slope. Having spoken to several producers, however, it is clear that there is some resistence to this idea, which although expressed in terms of doubts about logistics, yields and losing control of their control derives largely from their overall lack of faith in the system. At the moment they mostly use home made pulping machines (se photo A) which although by no means ideal allow them to remain in control of their coffee up to the last minute. One of these machines costs T/-1.500 (or three weeks income or 155 Kgs. of coffee) The writer considers that were producers to recetve a fair initial price, followed in close order by a final price paid soon after auction, and it the price obtainel at auction rewarded them for producing good quality then before long you would see central pulperies being installed at primary society and cooperative level. In the meantime, howevor, their installation should be actively promoted and encouraged by the Tanzanian authorities. I.6. I am sure that although I only visited the northern district the complaints I heard and the obvious malaise felt by everyone I met involved in the Tanzanian coffoe industry, are symptomatic of what is happening in all the production areas.- The complaints, the malaise and the problems are by no means uniquely Tanzanian. Had I closed my eyes and switched languages I could have imagined myself to be in Peru in the late seventies following Velasco Alvarado's agrarian reforms or in Guinea in 1984 after twenty-five years of Sekou Toure. Workingt Paper No. 11 Page 3 Given the political will to make the necessary changes the situation is by no means irredeemable and the solutions are simple. Tanzania has an excellent product, which given the right presentation can hold its own with the best coffee in the world. With the recent break up of the I.C.A., disappearence of quotas and consequent free for all only those producing countries who have a quality coffee will be able to survive. The free market, however, also presents a challenge. The last time that quotas were lifted in 1986, while overall consumption in W. Germany (the largest european consumer) rose by only 0.5% the consumption of fine coffees (i.e. kenyas, colombias. c. americans. etc.) rose by 7%. Given the choice, the consumers are now sophisticated enough to buy better coffees. Tanzania thus has an excellent opportunity, untramelled by quotas, to in:rease its market share albeit in the teeth of ferocious competition from Colombia and the other milds. To maximise this opportunity, indeed not to throw it away , urgent reforms to the coffee industry are needed at once. At producer level: - There must be a far more direct, immediate and unimpeded correlation between what farmers produce and what they receive for producing it. I am entirely in agreement with my distinguished predecessors on this point and I would echo their suggestions. The producers (By 'producer' I mean Coops., primary societies or larger estates. not the individual smallholders) should retain control of and title to their coffee right up to the moment of sale. i.e. the time when payment is made. It should be a relatively easy matter to calculate what percentage of their proceeds in forex should be taken to cover their input and reinvestment requirements (perhaps somewhere in the region of 10-15%). They or rather their representatives should have direct entitlement to that forex, which could only be utilised to buy certain specific items. It would be unrealistic to expect B.O.T. under present conditions to retain or account for any forex deposits for more than a short time so ideally overseas accounts should be opened with two or throe signatures -including if necessary that of a representative of B.O.T.- In order to draw funds to pay for the import of what was needed when it was needed. - From the above follows the producers' ability to buy their inputs as and when needed from the most competitive suppl,er, be that TCMB or anyone else. Their husbandry (at least in the north) is excellent, as I have said, and very few of them will need much instruction as to application. - The marketing, ideally by means of a clear and all encompassing auction sy3tem should enable the producer to receiv-'the closest possible price to the real F.W.A price as soon as possible, after competitive deductions/commissions levied by T.C.M.B., T.C.C.CO., shippers etc. There is no reason why large producers or coops. should not eventually export themselves thereby increasing vertical integration but this is easier said than done and will take some time and several painful experiences if other countries who have tried it Working Paper No. 11 Page 4 are anything to go by. To summarise, I believe that within even a year of these changes being implemented one would see a dramatic improvement both in production and quality. In spite of being subjected to considerable frustration and discouragement, producers are as I have indicated doing a surprisingly good job and with the right incentives they will do much better. II Implications for Future Forex Earnints As far as calculating forex losses as a result of falling quality is concerned the consultant feels that the simplest way is to compare 2nd hand prices paid for Kenya coffees with similar grades of Tanzanian coffees on the world market. Upon doing this one typically finds a differential of S8.00/50 kgs. in Kenya's favour. Assuming that even if the qualities were equal the goodwill accruing to the name 'Kenya Coffee' would be worth $4.00/50 Kgs. then that still leaves $4.00/50 Kgs. (or $S80/MT)to be clawed back by Tanzania. An average improvement of $80.00/MT on 35.000 tons mild coffee would yield an extra USD 2,800,000 in forex earnings. The consultant would say that with the present rapid changes occurring in differentials on all coffees and given various other imponderables he does not pretend that the above figure is strictly accurate nor indeed that it is possible to arrive at a figure that Is. He does, however, believe that it Is a reasonablea figure, from which to depart. III TCMB/AUCTION SYSTEM III.1. Again I would say that given the constraintsand frustrations to which, in comoan with others in their industry,they are regularly subject the TCMB runs remarkablywell. Some of its staff are of a high calibre and have a clear Idea of the improvementsor changes they would like to see taking place in their industry. I do not think that what they would like to see would differ greatly from what various consultantshave been recommending. For this reason I believe that in the event of the suggestedchanges taking place not much 'reeducation'would bO necessary. III.2. In short the coffee to be auctioned Is submitted to TCMB by the coops via TCCCO in Moshi or ex Bukoba. TCMB's liquoringdept. classify the coffee, bulk similar grades (of which more anon) and catalogue it for the auction. Samples are also sent out for inspectionand liquoringto the shippers,who then come to the Working Paper No. 11 Page 5 auction knowing what they want to buy. I enclose a copy of the catalogue of sale TCMB/M/13, which I hope obviates the need for me to provide any further explanation. II.3. The auction system assuming that it is clear, properly run and not undermined by parallel deals is probably the best and fairest system so far devised. In the present context one obvious area open to abuse lies in the noting of bids for coffee that has failed to meet its reserve price but is then negotiated later outside the auction room. While individual exporters probably benefit more or less equally from this unusual system there is a clear conflict of interest inherent in the fact that the Board , which has fixed the reserve price is also competing as an exporter and thus has an unfair advantage. I was able to attend an auction and believe that from a procedural and technical point of view it appeared to work perfectly well and to achieve a satisfactory result. I would not rush to change that side of it although I would say that the conflict of interest referred to above ought to be removed. If as has been suggested the TCMB and Its export division are completely separated with the latter functioning and being treated just as any other independent exporter then this problem ought to disappear. III.4. Bulking. The arguments against bulking in that basically it encourages producers to go for quantity rather than quality have already been extensively covered and are difficult to disagree with. TCMB argues perhaps disingenously that they could not auction off individual 5 or 10 bag lots and that therefore they have to bulk (these bulkings are then split into lots of aprox. 100 bags and auctioned). They further argue that it is not fair to hold out the example of Kenya, where there are a few large producers sending their coffee for auction. Nobody is suggesting, however that they should sell S or 10 bag lots (they could in any case set a minimum lot size of say 50 bags) nor in fact do they receive in any quantity individual lots of coffee of the size. According to TCCCO the lots of coffee sent to them by individual coops/societies vary from 100 to 2000 bags and could therefore perfectly easily retain their Identity up to the time of sale. This would clearly Involve TCMB In extra work which they would not welcome (and If I was on their salaries neither would 1). Be that as it may there Is no question that If a higher quality of coffee is to be encouraged then the bulking system should go. Producers must be able to see for themselves the rewards or penalties directly resulting from producing good or bad coffee and this Is not possible as long as the present system of bulking continues. It Is of course perfectly in order for exporters, who wish to 'tailor make' specific blends for their customers, to do so once they have purchased the coffee at auction. This Is after all one of their functions. It should not however, be done by the Board prior to auction. Working Paper No. 11 Page 6 I.5. Another anomaly in the auction system which needs to be addressed is the ability of local exporters to pay for their coffee in T/- at the official rate prevailing at time of settlement. With the parallel rate standing at 70% over the official one the scope for exchange control scams is considerable quite aside from the unfair advantage it gives the local over the foreign exporter. A small illustrative example might be of some interest here: Let us assume that 'A' is an overseas buyer and 'B' is a local exporter, trusted by 'A' - 'A' sends 'B' or pays into 'B' overseas account say S100.000.00 - '8' purchases say T/-25,000,000 on the black market . - At the official rate these T/-25,000,000 would convert back to aprox. S 172,000.- - 'B' is then able to buy S 172,000.- in real S value of coffee at the auction using the official rate to pay for it. - 'B' officially sells the coffee to 'A' who opens his L/C for say S182,000.- which converts back to aprox. T/-26,400,000 or probably more if there has been an intervening devaluation. So how does 'A' get his money back? - He may not want to directly. He has enabled 'B' to buy 70% more coffee at auction than would otherwise have been possible thus increasing 'A' + '8''s throughput and profitability. - 'B' by prior agreement under invoices him either by dating their contract according to a dip In the market or by describing the quality of the coffee as being lower than it is. Over a few contracts using this method 'A' can recuperate his money quite easily. The above scenario, which also led me into the problem of under invoicing, is one of several permutations which will exist as long as the official T/- remains at an unrealistic level. In the meantime what can be done?. III.6.A. All exporters must pay for their coffee bought at auction in USD. Tanzanian exporters may argue that this makes life difficult for them as they do not have access to forex. They might therefore be permitted to retain forex proceeds from previous sales in a special account from which the money could only be used for the purchase and export of Tanzanian coffee. Alternatively they could doubtless arrange for preexport finance from their buyers, which would have to be correctly registered as such with B.O.T. They have after all up to sixty days (in any case excessive) to pay TCMB. of which the first seven are interest free and so would have ample time Working Paper No. 11 Page 7 in which to arrange for this. II1.6.B. All contracts must be registered with T.C.M.B. and B.O.T. within 24 hours of closing. T.C.M.B.'s function would be to confirm that the price was in line with the F.W.M. at the time, and to have the power to nullify a contract if the price was clearly too low. 111.6.C. Each lot bought at auction must carry an identifying number right through to export and besides that an independent surveyor such as S.G.S. or B.V. should sample the coffee and issue a weight + quality certificate to be lodged with T.C.M.8. at time of shipment. III.6.D. The above controls, although increasing the level of official interference in the flow of commerce will be necessary for as long as there is a built in incentive to abuse the system. Were the differentials between the offical rate and blackmarket T/- to be ironed out then measures such as these would become superfluous. rII.6.E. Another point worth considering Is whether or not there should be some requirement that shippers export their coffee within a minimum time (45 days?) of its purchase at auction. This should remove the temptation simply to purchase coffee and hold it as a currency hedge against the T/-. On balance, however, it is probably not fair to oblige shippers to export regardless of market conditions and in any case, were they to have bought the coffee in eSD in the first place the incentive to keep It as a speculation against the TI- would disappear. III.7. While the writer certainly feols that he must draw attention where he can to these several areas open to abuse and while not wishing to dilute his recomiendations It is possible that the abrupt removal of their 'perks' would disincentivize some of the shippers from continuing In the business thus weakening the Tanzanian coffee industry. This Is a difficult question -what level of abuse if any are the Tanzanian authorities prepared to tolerate in order not to diminish the floW of business? Would the business really be diminished If theso 'perks' were removed? In principle the answer is clear : everyone involved in the coffee industry should be motivated by a desire to produce and ship out a better quality coffee as quickly and efficiently as possible and not to be diverted from this by the attractions posed by currency speculation. In practice, however, unless the changes to the coffee Industry suggested by this and previous consultants are made the necessary motivation will not be there and the authorities may be obliged to continue to turn a blind eye to the unofficial 'perks' in order to maintain the flow of business. II.6. Given that the foregoing and other measures are going to require a continuous liaison between the shippers and T.C.M.B. this writer would echo the recommendations already made that an association of Tanzanian coffee exporters should be formed, with a Working Paper Nfo. 11 Page 8 permanent secretariat in order to represent the exporters vis a vis T.C.M.B. and G.O.T. III.9. In conclusion the writer would say that although in theory the auction system should achieve the best possible prices for Tanzanian coffee in practice this is probably not happening, at any rate in real hard currency terms. Indeed if you assume that the coffee at auction is being paid for largely in black market T/- then it is arguable that the real prices there achieved are considerably less even than those achieved under the much criticised C.B.C. syndicated deal. At least that would appear to have had the merit of paying for coffee purchased on the nail in hard currency (or by way of prefinance in oil supplies). AII.10. The auction should be open to all serious bidders foreign or Tanzanian, bidding directly to T.C.M.R. or via their own local chosen agents, shippers or subsidiaries. Payment should be prompt and made by L/C or cash In USD within seven days of closing. Only in this way will TCMB be able to maintain a speed of payment and hard currency cash flow sufficient to enable it properly to service its clients, the producers. In the meantime it is worth repeating again: most of the problems currently affecting the system can be attrtbuted to the fact that even though prices at auction are expressed in USDlrs. payment can still be made in T/-. IV T.C.M.B. Liaugrinr De2t. IV.1. Poorly equipped, under motivated, under paid. The problems common to the coffee and other industries, indeed to many walks of life in Tanzania are also In evidence in the liquoring departmemt. Again the consultant would say that those in tho liquoring department are doing the best they can under trying circumstances. The head eif the department knows his business but it must bQ very difficult to achieve a satisfactory result when such a large volume of coffee has to be roasted and cup tested on two worn our sample roasters. The roast on the samples does not appear to be uniform and under the far from ideal conditions in the liquoring room It must be difficult objectively to compare and evaluate the many different coffees, which are submitted. There are three obvious areas where improvements could be made. IV.2. The Immediate purchase of new roastlg equipment. In order to process the volume of coffee that It is required to, the liquoring department should have 10 Probat roasters type BRZ BEl with cyclone. The weighing and measuring equipment although old Is probably adequate as long as proper attention is paid by those weighing out and sorting the samples. Workint Paper No. 11 Page 9 IV.3. The training of staff. It is hard to make a liquorer out of just any one. There must already be a natural ability latent in any candidate for the job. TCMB complain that it is hard to find such people and even when they do, and even if they can half-way train them they move immediately to the private sector -e.g. exporters -where they are better paid. The salary problem is common to all the public sector in Tanzania and the solution/s (basically to employ fewer people and pay them more' are outside my brief and will certainly have been suggested to G.O.T. by other consultants. The problem of training can be solved relatively cheaply and simply. Assuning a reasonable selection process where candidates are attracted by the prospects of a decent career and salary T.C.M.B. would select suitable people, male or female, for further training. There are several international trade houses or roasters, who have strong liquoring departments and who are both prepared and equipped. to train liquorers. It is most important, however, that they should also be able to screen potential trainees before accepting them. A proper command of english Is a first prerequisite as well as evident motivation and potential ability on the part of any candidate. Many trade houses have sad tales to tell of trainees from producing countries arriving In their midst, speaking no known language and whose selection for training overseas appears to have been based on criteria having little to do with their ability or desire to learn the skill in question. When this happens it Is clearly a waste of tine and money. I am not in any way singling out Tanzania in making this point but am merely passing on a general complaint I have heard many times. For a relatively sall amount of money It should be possible to train 20 or so liquorers over the next year. They would learn not only about cupping Tanzanian coffees but also about other competing coffees and the various preferences of roasters and consumers. Upon their return they would constitute an invaluable human asset for their country. IV.4. Grading and Classification. The point has been made several times that grading and classification of Tanzanian coffee Is excessively complex. This leads to the liquorlng department of T.C.M.S. creating much unnecessary work for Itself In order to create dttferent gradations (17 different cups * 6 grades In the cup and quality on the coffee), which are In som cases barely distinguisable from each other and are of little relevance or Interest to the majority of Tanzania's buyers. TCMD argues that by providing such a vari*ty of coffee It is providing consumers with a greater choice (and a better service) at Workingt Paper No. 11 Page 10 no extra cost. Also that the system is one they are used to so why change it for something less 'complete'? The point has also been male that the exporters, by a judicious blending of various coffees are often able to up-grade lower quality coffees and thus make a little extra for themselves. Both arguments have some merit but having spoken with various buyers of Tanzanian coffee the writer feels that for the North Arabica coffees TCMB could well simplify the system by offering at auction AA, AB FAQ, PB, C, and TT. Similarly grading changes could be made for Amex. IV.S. The consultant brought back from Tanzania samples of the following grades of coffees supplied by the liquoring department. IV.5.a N. Arabica AA N. Arabica A N. Arabica B N. Arabica PB N. Arabica C N. Arabica TT N. Arabica F S. Arabica A S. Arabica B Bukoba Arabica Buboba Robusta These have been tested by the consultant who would make the following comments: N. Arabiga AA Cup: Acidy full bodied sweet 'biscuity* flavour lacking characteristic ioeya 'almond' flavour. Description: Good even green colour containing some apparently over fermented beans (sadly characteristic of all the coffee tested) as well as ears and even one grain of maize . You should not expect to see any of these defects on a properly prepared AA coffee. Also some pulper nipped beans. N. Aabica A Cup: Rather flatter than the AA. lighter bodied and weak flavour. Description: Some light over dried beans, pulper nipped and fermented beans. Cup: Better than the A. Some acidity, fuller flavour and more body. Working Paper No. 11 Page 11 Description: Same problems as others + one black bean but no brokens. N. Arabica PB Cup: Similar to B, perhaps a little better. Description: Better than the others, no brokens, blacks or fermented beans but uneven drying evident from colour variation. N. Arabica C Cup: As good as AA. Description: Uneven colour, not evenly dried, one 'stinker'. N. Arabica TT Cup: Not unpleasant. reasonable full bodied slightly fruity flavour resulting from defective beans. Description: Mainly good coffee but too many defects. If these were properly separated the good beans could well be mixed with A.B to make AB FAQ. N. Arabica F Cup: Similar but lighter bodied than TT, fruity flavour. Not bad for this style of coffee. Description: High proportion of broken beans * defects. S. Arabica A Cup: Dry, flat, not much flavour. Medium bodied. Description: Preparation suffers from same problems as Northern coffees. Coffee over dried with pulper nipped and over fermented beans. S. Arabica B Cup: 2/4 fermented cups. Otherwise similar to A. Description: Larger bean size than A would indicate that samples were wrongly marked. Same criticisms apply as to A. Bukoba Arai&ca Cup: Very winey 'rioy" flavour. Not nice but similar to Ethiopian Djimuah. Description: Mottled, many defects. Buboba Robusta Cup: Clean robusta flavour. Description: A good primary robusta but disappointing bean size. Working Paper No. 11 Page 12 General Comment Not as good as they used to be! There were stinkers or some fermented beans in every sample submitted. This indicates that the processing is far from satisfactory. It is clear that the washing is not being done correctly and that the fermentation tanks are not being properly cleaned out between washings. The farmer is producing a good bean which is often then being spoilt through careless processing. The consultant has already recommended the installation of central pulperies as one way of correcting this. The southern coffee had also been poorly processed and dried, giving it a patchy, faded appearance, consistent with the sample being old crop and badly dried. IV.S.b. As far as the quantity of grades is concerned on the basis of the samples examined and general comment in the trade the consultant would recommend that it should be reduced to the following in respect of the northern coffees: AA AS FAQ Ps TT - The present AA grade Is just adequate but could be much improved by better processing. - The AS FAQ, should be the amalgamation of A and B grades and the better beans of the present TT grade. - The PS grade should remain as It is but better processed. - The C grade should rminl as It Is but better processed. - The better beans from the TT grade should go into the AB FAQ mix and the TT would thus comprise the lower quality beans left after this selection together with those beans currently comprising the 'F' grade. - F grade should disappear. IV.S.c. As far as the Amex coffees are concerned the consultant suggests that the three following grades would be adequate. - A/AA - B/C (including 'elephants'). - Triage. Working Paper No. 11 Page 13 IV.5.d. The southern coffee grades can remain as they are but with much more attention paid to processing. IV.5.e. The Bukoba arabica coffees need more care and attention paid to the drying process while the robustas are satisfactory and would doubtless improve when the necessary repairs are made to the mill. The southern and Bukoba arabicas are in any case going to be harder to sell under present market conditions so the consultant considers that the top priority should be given to the improvements and changes suggested for the northern coffees. IV.6. Statistical Department. Within the general improvemnts that could be made to TCMB, the consultant considers it important not to neglect the statistical department. If proper management and planning decisions are to be made it Is most Important to have the latest statistical information available at any given moment. The TCMS's statistical department is doing sterling work but would greately benefit fromo: IV.6.A. Computerisation. A relatively simple system would remove the need for hours of simple arlthmtlcal calculations having to be done manually and would free the department to do more sophisticated work. IV.6.B. Increase staft: The consultant considers that given the Importance of correct statistical bases for the TCFM it could be beneficial if at least one assistant could be provided for the head of the section. IV.7. In Summary: - Requip TOID's laboratory and second a liquoring expert to Moshi for three months to set It up and establish correct working practices. - Establish a training/scholarship system for Tanzania liquorers to go abroad for tralning. - S2itty prosent grading and classification system as outline SIS1.4*5 above. - Computerize:and provide additlonal manpower for statistical department. v World Market Develonnta I havo already touched on the F.W.M. in section I.G. and do not have much to add. In this writer's opinion low prices levols are likely to continue at least for the medium term while Brazll and Colombia are prepared to 'WorkingPaper No. 11 Page 14 'punish' the ot'nermilds producers, whom they b' ane for the breac up of I.C.A., by ergaging in a price war. For the time being therefore there is no incentive for producers to carry over stocks and indeed the market is coming under severe pressure as some of them pursue an agressive sales policy. To these producers' way of thinking it is better to move coffee already produced off their inventories as fast as possible, whatever the price. The market is thus suffering from severe indigestion at present with quite large stocks still held both at origin and in the main free ports in destination countries. Once these are out of the way, which should take not more than three months, higher price producers may not feel inclined to reinvest in their industry and production should start to fall in the least efficient of them. Eventually, in a free market we will arrive at a rough balance between supply and demand and given changing consumer patterns and the fact that we are now In a buyers market only those pproducers with a high quality product can expect to maintain let alone improve their position. As a rough estimate I would say that Brazil may see its market share reduce to 25%, the robustas to 20X with Colombia and the O.M.'s rising to 55%. Quality will be of paramount importance and those producers able to give the consumers what they want will be able to command substancial premia for their coffees. Tanzania is a potential producer of very high quality coffee and should definitely be able to increase its market share even with its present quality but even more if it improves it. While not expecting the market to move very much lower from current levels and barring frost/drought in Brazil or some other catastrophe in another important producing country or countries, the consultant does not see values recovering to much better than cents 100/lb basis 1Y 'C' given the present stocks overhang and free for all. Although a new I.C.A. could technically be renegotiated at any time between now and September 1991 and while today there are many walking wounded In the coffee market, who would wish to see a rapid return to the quota system, thls writer sees the likelihood of this happening either soon or in two years time as being smll. As the realization sinks in that a F.W.M. is much simpler and cleaner to operate than the defunct two tier quota market which proceded it the pressures for a return to quotas should diminish. VI TANGA It is all very well to encourage better production, incentives, sales and marketing but it you cannot then efficiently export the coffee much of your effort will have been in vain. At the port of Tanga there is only one crane capable of loading WorkingPaper No. 1. Page 15 coffee/containers and more often than not it is broken down. The crane is worn out and spare parts are not available. When there is an interesting tonnage to be picked up shipowners have frequently had spares flown down from Europe at their own expense in order not lose a cargo. More often than not, however, shipments are interminably delayed in port while the crane is somehow patched together. On a falling market a missed shipment period can have serious consequences by giving buyers a valid technical reason for refusing to take up higher priced coffee. In the writer's opinion, the single most cost effective way of substantially improving Tanzania's coffee export capability in the immediate term would be the supply of one or preferably two new cranes to the port of Tanga. Many of the delays and bottlenecks to which coffee exports are currently subject would to a large extent disappear. VII T..Q.C.CO. At the time of the writers visit to Moshi, T.C.C.CO. was undergoing its annual overhaul so it was not possible to see the plant in operation. It was possible, however, to visit the plant and inspect the machines therein. The machines are on the whole very old, dating back to the late 40's and early SO's. They have, however, been painstakingly maintained and appear to be doing a reasonable job. Th, old Gordon hullers are apparently due shortly to be replaced by Swiss Buhler machines and doutless this wlll lead to better yields. With the recent installation, however, of new mills In the southern highlands, T.C.C.CO. in Moshi Is only going to have to process the northern coffees, which it has ample capacity to do. The techn1c1an to whom the writer spoke had a good working knowledge of his plant and claimed that there was no problem either in separati*itwr producing diffent qualities of coffee, nor, ergo in being able to trade and maintain the identity of different lots of coffee frowthe moment of entry to the mill to the moment of exit. For what It Is worth it would appear that C.D.C. may not have the same faith in T.C.C.CO.'s ability to keep separate individual lots of coffee. According to T.C.C.CO. they have been asked by C.D.C. to maintaia a separate line In the mill exclusively for their coffee. T.C.C.CO. do not believe that this is necossary and have for the moment r*jected the idea with some indignatton. From what the writer saw of the mill albeit non-operational, he would consider that under the circumstances it is satisfactorily run and Working Paper No. 11 Page 16 maintained and capable of providing adequate service to the coffee industry. This will of course be subject to reinvestment in the form of nrw equipment being made as and when appropiate. VIII The Tanzanian coffee industry should be able to bring about and to a large extent finance the suggested Improvements firstly by increasing and accelerating the inflow of hard currency resulting from sales of coffee which will permit it secondly to increase and accelerate payments to the producers. In this way, quite rapidly those involved in the industry will become committed to improving both the quality of the coffee and the speed and efficiency with which it is exported. This in its turn will require a strong and competent local banking. system, particularly at a documentary level. All the other suggested improvements will come to nothing if these two issues are not addressed. Tanzania has great potential as an exporter of quality coffee and now more that ever It must put its house in order if its coffee industry is to survive and to grow. Ix RECOWAENDATION A. Initial payments to producer to be raised to T/- 150 per Kg. B. At all levels speed of payments to producers to be accelerated. C. Producers to be able to buy inputs as and when necessary from most competitive supplier using their forex retentions to do this. D. Installation of central pulperies to be encouraged as a matter of urgency- 2. A. All coffe* purchbaed to be paid for within seven days in hard currency. B. Bulking by TCMB to be discouraged. Coffee at auction to be offered whenever possible ot stocklot basis from individual producers/coops/primary societies. C. TCMB marketing and export division to be separated. D. Controls to be implemented to prevent under invoicing and late shipment. WorkingPaoer No. 11 Page 17 3. TCMS Liauoring DeDartment A. Purchase of new machinery. B. Secondment of liquoring expert to TCMB for three months to help set up new department. C. Training of liquorers abroad. D. Simplify grading and classification as outlined. E. Strengthen statistical department. 4. World Market A. Prices likely to remain low for forseeable future in absence of quotas B. Imperative to improve quality of coffee. S. Tan" A. Supply new crane. 8. TCCgO Not working so unable to make any recommendations. Appears to be satisfactorily run. WorkingPaper No. 11 Page18 LIST OF PgOPLE MET Moshi: T.C.M.B.: Mr. Werner R.Kapinga, Chairman. Mr. Joram S.P.Allute, Director of Marketing. Mr. C.M.Shimo, Senior Marketing Officer (Statistics). Mr. E.A. Makawia, Chief Liquorer. Mr. John Mkamba, Extension officer. Mr. F.P.Malia, Extension Assistant. T.C.C.CO.: Mr. L.D.Kiwara, General Manager. Mr. Mushi, Chief Engineer. Lyamungu Research Station: Mr. K*ssy, Dihector. Kibo Plantation: Mr. A.Swai - General Manager. Volcafe Ltd.: Henry Volkart - Senior Trader. Casacorp Ltd.: S.K.Kotecha - Managing Director. Dar Es Salaam: World Bank: Alan Denness. Union Einkauts - Und Handelsgesollschaft M.B.H & Co.: Michael Lackner - Chief Buyer. East Africa& Acceptances,(Estate Management Division)- C.J.Prideaux. .e.. & ^ * ..w . - a SALE___ll; No. TCMB | 10 Page 19 THETANZANIA COFFEE. MARKETING.-OARD WUiL OFFIM BY AUCTION on Tha.ds, - ,1~ 1989 at 1230 p. (oram deo) .. AT EAHAWA HOUSE, tEOSW BAGS 8U0 IRM AND CONDMONS OF SALE 1. Lotsare sold on bescription/Sample. 2. Bids%noted in Auction will rmain fim withthe seller until 4p.m. on the day of the Sale or untilsuch tie as a counter offer is mde by the seller, whichever timeis the earlierand suchcounter offer will remainfir, with the bidder until V&° &l&aGUjw the auction. Bids will, be per So KSs.,jaUlu 3. On or before prompt date cheques sad.in favour of the Tanzania Coffee M4arketing Board (Marketing Account) to be handed to thoe 80ard, Bank Exchange forBuyer's Ac- count. Those buyers paying through accounts outside Moshi requiring im11diatt -rleaso of warTants must pay vy olegoraphicTransfer. Warrants,will only be relea- sod to buyers' after th satisfactory clearance of p4yment in Ioshi.. 4. Payments of coffee purchsed in auctions shall be made prOmptly within seven days. Failure shall attract interst according to prevailing Bank rates. If payment on' prompt date (i.e. seven days) as wella.s interest is not paid within sixty days after the auction, such coffees shall revert automatically to Tanzania Coffee Marketing Board for resale. If the said coffee shall not realise the same wrice as the previous*.sale then such previous buyer shall be required to reimburse -TM the difference. S. Unless otherwise stated 4 coffee is pakedin singje sisal/jute bags of 60 Kgs. nett. Tare 1.1 4s. 6. Warehousemen'scharges to be for accountof Buyers.. Rent frm prompt Date also for Buyer's Account. 7. Net weight to be according to warrant weights. All re-weighing within Prompt date or prior to payment whichever first occurs will be adjusted on invoices only in cases where the difference in weight exceeds 0.25% iither way.?Pe-weighing expens- es are to be for account of buyers. Where no re-weighing 4nstructions are given by the Buyers thenett warrantweights will be considerod as final. 8. All lots to be sold Ex-Godownsof-M essrs. Tanzania Coffee l?arketir boardTanga. 9. Coffee purchased from Tanzania Coffee Marketing Board shall be shipped in that releVant season but not later than 15th September of that year. Failure to do so shall cause TCNDto deny theexporter a licence in the following season.All coffee sold vide this Catalogue mustbe shipped through Tanzania Ports. 4 10. Coffee purchased by Buyers shall be moved from Tanzania Coffee fMrketing Board Tanga "Transit Godown"within 30 days of Prompt date. 11. For exports of coffee 1:0 Quota Markets the Certificate of Origin in Form 'U' must be validated by Coffee 1!xuort Stamos issued by TG'R Tonea. Working Paper No. 12 T.:qZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER CASHEW MARKETINGAND PROCESSING Southern Africa Department Agriculture OperationsDivision Africa Regional Office Workinx PaperNo. 12 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER CASHEWMARKETING AND PROCESSING Tableof Contents Page No. I. THE DOMESTICMARKETING SYSTEM 1 1.1 How It is Intended to Work ...... 1 1.2 Producer Prices ...... **.*.*...... 2 1.3 Losses in the MarketingSystem ...... 3 1.4 MarketingProposals and Their Impact on the Marketing System ...... 5 II. INTERNATIONALMARKETING 14 2.1 Background . 14 2.2 The Price of Tanzanian Raw Cashew Nuts ...... 15 2.3 Auction 16 2.4 CooperativeUnion's Role in International Marketingof Cashew .... 17 III. CASHEWPROCESSING 17 3.1 Background 17 3.2 ProcessingEfficiency 18 3.3 Indian Processing ...... 20 3.4 Futureof ProcessingFactories In Tanzania ..... 22 APPENDICES 1. CashewProcessing in India 2. CashewProcessing in China 3. Summaryof Lossesin the !-overnaentSystem TABLES Main Text 1. Revenuefor 1988/89Season 2. RelativePrices of Raw Nuts Computedby India 3. ExportValues of Raw Nuts and CashewKernels 4. Processing Efficiency of Factories in Tanzania FIGURES 1. WB ProposedMarketing Structure for Cashew Working Paper No. 12 Page 1 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER CASHEW MARKETING AND PROCESSING* I. THE DOMESTIC MARKETING SYSTEM 1.1 How It is Intended to Work The current marketing system is a single channel three tier marketing system it. In 1985 the Regional CooperativeUnions (RCUs)were reestablishedand made responsiblefor purchasing cashew nuts from Primary Cooperative Societies (PCSs) as well as coordinatingthe financing of the PCS' purchase of nuts from the ftrmers. The Tanzania Cashew Marketing Board (TCNB)was set up following the eliminationof CATA,essentiallywith CATA assets and personnel. TCMB is responsiblefor purchasing the nuts from the RCUs at purchasing points transports them to central godcwns and either processes the nuts or sells them on the internationalmarket. The current marketing system is supposed to work as follows. Each year before the cashew harvesting season the Tanzania Canhew Marketing Board (TCMB) and the ReRional CooperativeUnions meet to agree on the estimated costs of RCUs and PCSs of carrying out their respective functions. This is then combined with the producer price to establish an Interstore Price. At the time the crop is being harvested the RCUs make ar.:angements with National Bank of Commerce for overdraft facilitiesto cover initial.cropacquisitions. During the harvest the fawmers take their crop to their local Primary Cooperative Society (PCS) where the raw nuts are graded (902 are usually standard grade, lO under grade) and weighed and stored in the PCS godown. Farmers should be paid for nuts when they turn them over to the PCS. Hence cash should be sent in advance by the RCU to PCSs to pay for produce. The Primary CooperataiveSocieties are sendingweekly reports to the RCU regarding the acquisitionof the crop. By monitoring this information the RCU knows when to organize transport to move the crop from the primary society godowns to the TCMB receiving centres. When the RCU agents pick up the crop at the primary society godowns they should verify the weight of the load. At TCMB receivingcentres the loads are weighed and verified and payment is then authorized to the RCU. Payment usually takes two weeks. These periodic payments by TCMB allow further crop purchases by the RCU, cover operatingcosts for the RCU and PCSs, and pay for levies. * This paper was prepared by I. Duncan (consultant). 11 See Tanzania Cashew Nut Marketing, April, 1988, for a detailed descriptionof the marketing system. Working Paper No. 12 Page 2 TCMB must then make a decision as to whether the crop is to be sold as ray cashew nut (fob) or processedwith kernels and by-productssold. This decision is based on analysis undertaken by TCMB on respectiveraw nat, kernel prices and processing costs. TCMB is the government'scaretakerfor the factories. I; is responsiblefor operationand maintenance of all 12 processing factories. Currently, however, only _.hreefactories are operating: Likombe, Kibaha and Tanita I. In selling raw nuts or kernel on the internationalmarket TCMB holds closed auctions where only invited buyers are requestedto tender by telex for a lot offered. They are given 7 days to respond. The lot size is usually 2000 + tonnes raw nuts or 1 containerequal to 625 cartons of kernels. Raw nuts are in 80 kg bags, buyers must give a confirmed letter of credit 21 days before shipment. 1.2 Producer Prices Producer prices as I of export prices averaged 642 over the period 1970 to 75, but fell to 312 during the period 1985-882/.At present, farmers get approximately31? of the export crop value of cashew nuts they produce. And, at present the governmentand parastatal institutions responsible for cashew purchasing and trading receive 692 of the export crop value. This is contrary to government policy of 1984 that noted farmers should receive 602 to 702 of the export crop value. The Tanzania producer price of Tshs 40/kg raw nuts or US $ 0.31/kg is low by internationalstandards. In brazil the minimum producer price was 240 Cz/kg equivalent to US $0.50/kg for December 1988 (adjustedmonthly for inflation);However, the actual market price was higher. In India for the 1988 season the Kerala State Governmentpaid growers 11-13 rupees/kg raw nuts (about US$0.80). In Thailand the guaranteed minimum price at 12 baht/kg is about US $0.50. Financial analyses examining the return to farmer at various farm gate prices have indicated that a farm gate price of about Tshs 90/kg or 70? of the export crop value,(1988 prices) is required to give farmers a 192 IRR3/. Based on analysis of data collectedfrom farmer interviewsthis is the minimum incentive required by farmers to adopt this new innovation capable of increasing future production4/. This new technology involves sulphur treatment for Oidium. 2/ Source: MDB Review of Cashew, 1987 and Cashew and Coconut Marketing and Processing:Tanzania's Cashew and Coconut Tree Crops Project, AMIEC,Inc. November, 1988. 3/ See attachment one of CIP SAR for SulphurDusting Programe - Cost Assessment. 4/ See Farmer Response To Chemical Disease Control Prices Survey Results, CPIPP, 1988. Working Pape: No. 12 Page 3 The Government mandate in 1985 was that producers should receive 602 to 702 of the export crop value. However, the method of setting prices gives an in built bias againstproducers as the marketing institutions(RCU and TCMB) look to reimbursementof their costs as the first priority before producers are considered. Another factor contributingto low producer price, are the levies payable by the RCU to externalbodies i.e. district cess. As this adds to RCU costs and hence deducts from the producers share by virtue of the price settingmechanism - it is a defacto tax on producers (this is discussed under section 1.4.8). One must questionwhether the private individualwould be able or willing to exploit the farmer to the extent that the non profit government institutionshave in the last 5 years. 1.3 Losses in the Marketing System The marketing system is not operating as designed, and a number of inefficiencieshave been noted which could be viewed as losses to the system. The losses are felt most directly by farmersand the marketing institutions. The governmentis directly affected where losses by marketing institutionsrequire governmentball outs or the losses involve loss of crop and lower export earnings. 1.3.1 Cashew nut purchasingby the Primary CooperativeSociety is erratic dependingon the availabilityof cash, rather than on the availabilityof nuts. This representsa loss to the farmerswho must either wait for payment, or pay extra costs of transportingnuts to another primary societywhere cash is available. A survey of cashew crop procurementconducted in March 1987 covering a buying period between October,'86to March,'87 (21 weeks) revealed that in this period that the number of weeks that actual purchasingof raw nuts took place was four to sixteenweeks per society 5!. It is highly probable that every society would have nuts available for purchase every week during the peak purchasing season. 1.3.2 Nuts remain unpurchasedin the villages at the end of the purchasing season. The 1987 survey of cashew nut procurementin 16 PCSs (covering97 villages) found that a significantportion of the 1986/87 crop was not purchased. It was estimated that: Tonnes Total cashew nuts available for sale 18,427 100? Received by TCMB 15,667 85? Harvested but left in village 2,027 liZ Left in primary society godown(June87) 733 4? This representeda loss of foreign exchange of US $3.7M (2760x$1350- price in early 1987). 5/ Source: Tanzania Cashew Nut Marketing, CPIPP, April, 1988. Workins Paper No. 12 Page 4 The reasons for this loss were unclear. Investigationshad revealed that availabilityof transportwas not a limiting factor and the RCU indicated it had funds availableto pay for transport. This can be assumed to have been caused by inappropriatelogistical management. 1.3.3 Regional CooperativeUnions purchasingon credit from Primary Cooperative Society. The governmentmandate is that the farmer should be paid cash for his produce, however, evidence on credit purchases comes from the Cashew ProcurementSurvey, 1987. This showed that for every week in the period surveyed,there were more societiespurchasing nuts than were receiving cash. 'Whilesocieties could have had cash carry over from the previous week the scale of the imbalat.cesuggests that nuts were purchased on credit. Discussionswith TCMB and RCU officers confirmed that RCUs were buying on credit as the norm In the 1988 season. It has been suggested that the financial liquidityproblems within the RCJTsare mainly responsiblefor this problem. This turns into a loss in that RCUs are allowed to keep funds, i.e. bank interest,that is not used for its intended purpose because lons were not taken for the total crop purchases. 1.3.4 The InterstorePrice of raw cashew nuts includes costs that are not related to crop purchasesor marketingcosts. The Interstoreprice of raw cashew nutt is made up of producer price Tshs 40.kg and Tshs 17.25/kg allocationto the RCU!/. The RCU portion varies between Regions. The RCU allocat'onincludes both reimbursementof costs i.e. transport, gunny bags, etc... and other items of overhead. One item is bank interest Tshs 3.52Ikg or Tehs 38.6 million on the 1988/89 expected crop. In Mtwara Region The National Bank Of Conmerce gave the Mtwara RCU a Tshs 71 million overdraft facility at 242 pa interest for cashew crop purchases this year. It was reported that not all of the facility was used. Mtwara RCU convincedfaLmers to give produce to PCSs on credit which then allowed the RCU to sell t' TCMB and get a quick tt'rn around of ccsh. If we assume a 502 draw down for 6 month then rep yments at Tshs 39.4 million would be abojt equal to the bank interest allocation. However, we are also aware that Mtwara RCU has other debts of Tshs 270 million to National Bank of Commerce (approximately45 million pre 1984 and Tshs 225 million post 198471). It is establishedthat the interest bill on this debt (Tshs 64.8 million) is being met by the RCU. It is probable that the Mtwara RCU is using its allocationfor cashew development fund Tshs 2.726/kg or Tshs 38.6 million for the season and parts of other allocationspossibly society levy Tshs 21kg or Tshs 21.6 million for the season, intended for PCSs to cover their costs, as well as the Union Levy Tshs 41kg or Tshs 43.2 million for the season, to meet the interest bill. 6/ See Cashew and Coconut Harketing and Processing.Page 15. Nov 1988, Prepared during the staff appraisal for the Cashew and Coconut Tree Crops Project. 71 These figures come from discussionwith the Regional Director of the National Bank of Commerce,Mtwars. Working Paper No. 12 ?age 5 There is no evidence that the RCU has spent any money on casht4w developmentand we know in past years that it did not pay society levies. The issue is that the management of the RCU and its resulting poor financialposition now has an impact on producer price setting in general and the cashew industry in particular,because money Is taken from the crop value to pay for the debts. The above example is of the Mtwara RCU, it is understood that the position of other RCUs could be even worse. 1.3.5 Over reportingof produce at primary societies. Examination ox TCMB records of the cashew nut crop purchased from Htwara district between November '88 - February '89 revealed a loss of crop averaging 2.62 between the reported weight of nuts at time they are taken from the Primary CooperativeSociety and the weighing at the TCMB receivingcertre. The records show that of 47 shipments70Z had a shrinkageof 2? or less. However a number had discrepanciesup to 72 suggestinga possible over reportingof nuts shipped by PCS officials. The purpose of this over reporting could be for PCS officers to recoup their earnings and costs. Their official payment should come via the Tshs 2/kg society levy paid by the Regional CooperationUnions to PCS. However, there is evidence that in the past this levy was not paid - and this may well continue in some RCUs to day. over reporting is possible because the RCU agents who pick up the crop from the PCS godowns do not reveigh and verify bags - evidence 'rom discussionssuggested the RCU agents were often not even present when zi hired truck makes the pick up. 1.3.6 Shrinkage. Both the RCU and the TCMO have a 22 shrinkage allowance.Inthe RCUs' case it does not store nuts.it merely picks up at Primary CooperativeSociety godowGs and transportsto TCMB recieval cenrtres - a matter of a few hours. It would be difficult to argue that a physical shrinkageof 2? (loss of moisture) can occur in this time.A shrinkage allowance in the price setting mechanism reduces producer prices by Tshs 0.9/kg. The TCMO also has a shrinkageallowance of 22 but in this case it does store nuts,sometimesfor up to one year before utilisation.TCMB therefore have a much strongerarguement justifyingshrinkage. 1.4 Marketing Proposal and Their Impact on the Marketing System 1.4.1 The WB Proposal The World Bank proposal8l suggest changes be made in two stages to ultimately deconfinethe cashew trade and allow other parties in addition 8/ See Report On Cashew and Coconut Marketing and Processing:Tanzania's Cashew and Coconut Tree Crops Project for a presentationof the World Bank proposal. WorkingPaper No. 12 Page 6 to the RCU to purchase raw nuts from farmers or Primary Cooperative Societies. The system would have dual marketing channels - Institutionsi.e. Regional CooperativeUnions, Primary CooperativeSocieties. - Private traders. All purchasersof crop on the domestic market (private trades, institutionsetc) would be licenced by the TCB. A restructuredrcMB renamed Tanzania Cashew Board (TCB) would act only as a control and policy body of the cashew trade. The TCB would operate bonded warehousesat their existing nine receivingcentres and operate open auctions where buyers would bid for lots in foreign currency. Conventionalcredit would be available in branches to purchase on the domestic market upon submissionof a storage c;irtificateissued by TCB for crop stored in the bonded warehouse. The banks would have a mortgage on the inventoryof crop as security. Credit should be made availablegradually as the harvest season progresses. Currently the full amount of funds for crop purchasingare being made available to Regional CooperativeUnions leading to a loss of control over uses and misuses of funds. The TCB as operator of the auction system would monitor stock levels and call auctions in convenientlot sizes say 2000 tonnes. This auctionwould be similar to those currentlyoperating for coffee and tobacco In Tanzania - the grade of lots can be objectivelydetermined and certifiedby TCB and/or by an independentagency such as Society Generale de Surveillance(SGS) allowing auctions to be held at one location - Dar es Salaam. As the World Banks proposed marketing scheme involves some significantchanges it is suggested that it would be apprc.priate to achieve them in two stages. Stage 1 Season 1989190 (a) Allow licenced private traders to compete with Regional CooperativeUnions iz the purchase of crop. The Buyer retains ownershipof nuts. (b) RestructureTCMB into TCB, clear accounts from assets and liabilitiesnot related to new functions. tc) Establish system of storage warrants and ensur* National Bank of Comuerce staff and f'Acilitiesadequate to meet reqairements. Stage 2 Season 1990/91 (a) Allmw all licencedparties to purchase crop either at farm gate or from Primary CooperativeSocieties. Working Paper No. 12 Page 7 (b) Buyer retains ownershipand sells in TCB auction. 1.4.2 Private Traders These are the key element in providing the necessary competitionto bid up the farm gate price and to achieve cost efficiency in the collection and the transportof the crap. There is concern in some circles that ethnic minorities especially Indians might come to dominate this if private trading in cashew was legitimized. There is thereforea case for the establishmentof a Marketing service to assist the developmentof indigenous traders in terms of identificationof candidates,liaison with banks, training in finance, stock and business management. However, discussionsin Mtwara with a number of people indicated that there are indigenousTanzanians who would want to participatein the trading of cashew if it was allowed. It was suggestedby one indigenous trader interviewed (who deals in building materials and agricultural commodities)that apart from himself he personally knew of at least three other indigenous businessmenin the Mtwara area who would welcome the opportunity to trade in cashew if it was allowed. It was indicated that these people would on averagehave the existing financialcapacity to purchase four separate seven tonne truck loads of nuts at any one time without recourse to bank finance. The purchases of cashew in Mtwara Region (60Z of National crop 1988/89)averages 665 tones per week over the November - February period. Assuming each trader requires two weeks to comipletea purchasingtrip it would require 19 traders to handle S02 of the crop. These numbers of suitable individualsmay or might not be iunediately available to undertakethis task, however, evidence from discussions suggested these numbers and more would be achieved perhaps with some assistance from a marketing service. The fact that our investigations revealed at least 4 indigenouscandidates suggest that they may well hold their own In competitionwith other ethnic traders. In terms of price our interviewee indicated that allowing for his finance, materials,handling,transport costs, and margins he would be willing to offer 701 of his final sale price (TCB auction) at the farm gate. At the current export prices this translates into a farm gate price of Tshs. 90/kg. From this it is clear that in an open market situationthe farmer would achieve a price commensuratewith the required incentives to adopt new technology and increase production. 1.4.3 Banks The banks also play a big role in the acquisition of the cashew crop. They currently give overdraft facilities to the Regional Cooperative Unions for crop purchases, and in the proposed marketing system the banks would Working Paper No. 12 Page 8 need to provide credit to other parties I.e. provide traders, Primary CooperativeSocieties. Discussionswere held with the National Bank of Commerce in Mtwara or the following issues: 1. The National Bank of Commerce has six branch offices in Mtwara Region. Currently Bank procedure is that lending limits for the branches is Tshs 2 million. This is clearly an inadequateamount to cover changes in the proposed warketing system. For example assuming one trader requested 50 finance of a seven tonne purchase of nuts (say Tshs 315,000) - this is 162 of the branch's lending limit. Limits could be seasonallyset to facilitatelarger cash demands during peak purchasingperiods. 4 The advice Was that branch lending limits could be increased without much troublewith approved from Dar es Salaam head office as It only involved a change in procedure and not national policy. To effectivelyfinance crop acquisitionsa branch office such as Newala would require a lift in limits to at least T_8s 10 Million. 2. The Bank requires security in advancinga loan, and bank policy regards houses as preferred security.This may cause some difficultyin getting the initial loans. In order to facilitatethe proposed marketing system it would be advantageousif the National Bank of Commercewould agree to accept storagewarrants issued by TCB for product stored in their bounded warehouse. This is currentlybeing done with other crops. 3. The proposed marketing system would increase the number of credit applicationsassociated with crop purchasing. The bank considers that it has the staff and the facilities to handle the likely extra number of credit applicantswitbout significantproblems. 1.4.4 Regional CooperativeUnions There is considerablepolitical support for the continued existence of the RCU in the role of serving their member societies. However, they are in a poor financial condition and probably not very efficient at their job. From available informationthe current financialposition of the Mtwara Regional CooperativeUnion is estimatedbelow:- We are aware from the National Bank if Commerce at Mtwara that the Mtvara RCU is looking to a modest surplus this year, but on current indicationsit is hard to see how it is going to clear its Tshs 270 million debt to the National Bank Of Commerce. Working Paper No. 12 Page 9 Table 1: Revenue for 1988/89 Season (Tshs.millions) 1. Union levy 43.2 2. Society levy 21.6 3. Bank interest 38.6 4. Develop,-entfund 29.4 5. District cess 2.2 6. Stamp duty 1.8 136.8 Million. Remainder are reimbursementof estimatedcosts of collecting and transportingcrop. Less Required payments 1. Society levy 21.6 2. District cess 2.2 3. Stamp duty 1.8 25.6 111.2 Less RCU FinancialObligations 1. Interest on Tshs 270M 64.8 Bank overdraft 2. Interest on say 502 of crop purchasingoverdraft facility of Tshs. 71M for 1988/89 39.4 104.2 7.00 Less Operating co0tS 1. 129 employeesI Tshs 50,000 6.5 Vehicles other say 5.0 12.5 (5.5) Other income 1. from - consumer goods 5.0 2. - agriculturalinputs 4.0 9.0 Surplus 3.50 It is suggestedthat by allowing the RCU to trade in cashews an. by exposure to competition it will strengthenthe institutionby allowing it to become more efficient, more profitableand financiallystable. The following is an estimate of the financialposition of the Mtwara RCU assuming it captures 502 of the cashew trade in this region: Working Paper No 12 Page 10 AssumRtions: - RCU pays farmers Tshs 90/kg for raw cashew nuts - RCU receives Tshs 130/kgat TCB auction - RCU operatingcosts as before even though they could be less - RCU captures 502 of crop in Mtwara region (ie 5400 tonnes) Revenue Tshs millions _ 5,400,000kg * Tshs 130 702 Expenses - 5,400,000 kg * Tshs 90 486 - salaries 6 - other administration 5 - saies tax (to cover levy for Cooperative Primary Society, District Cess) 12 - Stamp duty 1 510 Surplus 193 In Stage I there is need to recover funds sufficientto pay PCS levies and District cess. To cover this a sales tax of Tshs 2.45/kg is levied on sellers of raw nuts into TCB receivingcentres. In Stage II as the PCSs will be allowed to compete with RCUs and private traders in the purchase and selling of the crop so they will become self financing. Only Tshs 0.45/kg sales tax is necessary to pay District Cess. 1.4.5 Maintenanceof GovernmentMarketint InstitutionsVersus Farmer Income Internal review of marketing arrangementshave shown that the cooperativeunions in particularhave been operatingat a loss. Proposals to improve the system for marketing put forward by the governmentemphasize strategiesto improve the efficiencyof the current organizations.There is little attention given to the issue of whether the means are achieving the desired ends, i.e. improvingthe national production,as well as income and social welfare of the farmers, in this case, especiallycashew growers. By virtue of the emphasis placed on the maintenance and improvementof the existing system it is given higher priority then the issue of how well the system is servicing the clientele,i.e. the farmers. This conundrum or convolution of priorities is an outcome of the energy that has been put into market improvementefforts in the past 28 years since a single channel marketing system has been instituted. Clearly the governmentargument is that if the systemncan operate efficiently then the clienteleand society in general will be served well. However, in 28 years of operationwhere highly competent individualshave put in a great deal of effort to improve and maintain the system, there is no progress that can be seen in the use of the marketing system to improve the welfare of the rural population,especially cashew farmers. Working Paper No. 12 Page 11 It should be noted that a major reason for the decline of the cashew industry is the lack of production support institutionsin the 1970s, when technical factors were allowed to get out of control and irrevocablylower yields and production. Research supportwas nil, extension services deteriorated,input supply serviceswere nil, and there was no technical planning or monitoring unit to identifyproblems or facilitateresource allocation to address technical issues. If in the 1970s when production was sizable, a modest investmenthad been made in research,agricultural extension, input supply and monitoringit may have been possible to avert the current disaster. Now, Under CIP91, efforts are going into redress these shortcomingsin the industry. The current dilemma of the governmentis whether the price should be kept low to allow earnings from the crop to repay debts and maintain existing marketing institutions;or to raise prices and encouragegrowers to adopt new yield increasinginnovations. If existing institutionsand their debts continue to be subsidizedby low producer prices, production increaseswill be quite modest because growers will not be able to afford new innovations. On the other hand increasedproducer prices will increase potential profits and income and stimulategrowers to produce more, which will give the governmentmore revenue from increasedvolume of tradelO/. 1.4.6 CompetitionAmong Agents Involved in Crop Purchase In 28 years that the current single channel crop marketing system has been operating a principal feature of it has been the lack of competition among agents involved in marketing. In the past 28 years there have been numerous studies completed about the crop marketing system. A common feature or conclusion of the studies focusing on cashew nut marketing is that the lack of competitionamong tradersor agents involved with the purchase and trading of nuts has greatly contributedto the inefficiencyof the system and has resulted in a larger than necessarymarketing marginfll. In the World Bank proposal it is suggestedthat private individuals be allowed to participate,in the first instance,by buying nuts from primary societies and selling to TCHB. In large part this is a strategy that would facilitatecompetition with the regional cooperativeunion. Also private individualswould fill the gap where RCUs are not able to secure financingto purchases the crop, which has been the case in many of the regions. As a gap filling strategy it may not be necessarybecause TCMB has adequate financingto buy the crop from RCUs and the RCUs are buying produce from PCSs on credit. The farmers bear the burden with this, 9/ The Cashew ImprovementProgramme (CIP) is intended to take off at the beginning of the 1989/90 fiscal year, and a follow up on the Cashew Production ImprovementPilot Project. 10/ See analysis of internal rates of return, financial and economic,at various producer prices, Attachment 1: Sulphur Dusting Program - Cost Assessments,in the CIP SAR. 11/ See page 2 to 4, Cashew and CoconutMarketing and Processing. Tanzania's Cashew and Coconut Tree Crops Project, Nov., 1988. Workint Paper No. 12 Page 12 but it largely solves the financingproblem. The adoption of this measure would only be viable if farmers get a greater share of the export price from.traders than they currentlyget from RCUs, and if it speeds up crop purchasing- It may however result in no change for the farmer in terms of price if TCMB continued to claim a large share of the value of the crop. In a second stage of marketingdevelopment it is proposed to allow private individualsand Regional CooperativeUnions to be licensed by TCB (a revised TCMB) to buy nuts from individualfarmers and primary cooperativesocieties. In terms of competition,individuals would be competingat the village level to buy produce, and likely at a district or regional level where wholesalerswould buy nuts from smaller scale traders. There would be strong inducementson the part of any agent buying crops to pay farmers a good price or farmers could go to other buyers. In turn, agents buying and selling nuts would be induced to make their system or organizationas efficientas possible to enable them to pay more for crops, and maintain a good profit. The impact of this on the cooperativeunion and primary cooperativesocieties may be negative initiallybut nay be beneficial in the long term. For example, if a Primary CooperativeSociety can band members together to buy produce and make it availablefor internatlonalsale they may be able to increase the producer price or member profits and thereby improve the reason and motivation for joining the cooperative. Additionally,it may make financingavailable to support crop purchasingthat may otherwisenot be available. The proposal put forward has focused on the introductionand participationof the private individualin the marketing of crops as a means of achieving competition. Because of the political argument against the private individualit may not be possible in the near future to introducecompetition in the form of a private trader network. Does this however preclude the introductionof competitionamong government and parastatal organizationsin order to improve the efficiencyof crop marketing and improvedproducer prices? If a private trader network were introducedit is unclear who would pay the various taxes that are currentlypaid by the cooperativeunion, especially district council cess. In actual fact is may be a concern of the government and party that if private traders are allowed to participate in the crop marketing system that the source of revenue to sustain the councils and in turn the Party may be underminedllost. 1.4.7 Ownership of the Crop At present there is agreementbut discontentamong the organizations (governmentand parastatal)dealing with cashew nuts that structural reform is needed to impro"e the cashew marketivAgsystem. The main groups that would be affected,as noted earlier, are the TCMB and the Regional CooperativeUnions. Over the Past year there has been argument between these groups about the mandate of each organization. The principal area of disagreementis who should be the owner of the produce, and hence reap the benefit that is currentlybeing gained by the governmentinstitutions involved cnshew marketing. The regional cooperativeunions are focusing on this issue because they wish to use the proceeds to clear outstanding overdrafts. Once overdrafts are cleared (if they can be) it is unclear Working Paper No. 12 Page 13 what improvementsthat they would envisage to make in the cashew subsector. On the other hand, TCMB would like to retain ownershipusing the argument that they must pay for the constructionof the factoriesand cashew processingmust be paid for from the revenue of the marketing board. In fact TOM up to 16th march, 1989 has never paid treasury anything for the factories. The treasury is meeting the debt to the World Bank. However, on the 14th March, 1989 TCMB received a contract from Treasury proposing a repayment schedulewhich includes principal plus a 102 interest on unpaid balances to be paid in Tanzania Shillings to Treasuryby TCMB. Payments are scheduled to begin in August 1987, and would be made each subsequent August for Ten years. A common featureof the GOT proposal to improve cashew marketing and the YB proposal is that the individualor agency that is involved in purchase of nuts from the growers or societies of growers would be owners of the produce until sold on the internationalmarket. Practically,this mat mean that TCMB, if it is not allowed to buy nuts from growers, must get its revenue from fees or licensing. In both proposalsthe Regional CooperativeUnions would retain ownership of the produce they buy. The major differencebetween GOT and WB on this issue is that GOT would like RCUs to be the sole buyer, and hence owner, of nuts and WB would like to see competitionor other agents allowed to buy nuts. 1.4.8 The Debt Burden At present the TCMB has a major debt of US $50.197 million over ten years to repay for factories. And, the RCUs have run up large over drafts for which there are inadequateresources to repay them. If TCM is asked to pay for the factoriesthey must use revenue from the sale of nuts and kernels on the internationalmarket. This would prevent them from committing more to the producer price. If the CooperativeUnion uses revenue from sale of the nuts either on the internationalmarket or locally to TCMO to pay for overdrafts they will directingmoney to debt servicingas opposed to increasingproducer price. In both cases the debt burden is shifted to the growers. The implications are that the marketing agents can not afford to pay producers a reasonableprice for their crop. And, growers can not then afford to use the new inputs to increaseproduction. 1.4.9 Double Payments The governmentproposal for marketing adjustmentssuggests a double payment for growers. This is presumably proposed to facilitateprice changes on the internationalmarket as well as currency changes such as devaluation. It assumes that individual growers can be tracked and thorough accountingprocedures will facilitrte recovery. The 1987 Cashew Marketing Study reported survey results indicating that cashew nuts are frequently transported to primary societies away from the PCS where the farmer is residing. This Is the result of cashew chasing money. In other words the availability of cash was not adequate to Working Paper No. 12 Page 14 buy the nuts that farmerswanted to sell when they wanted to sell them. Given the current financialposition of the RCUs it is unlikely that large amounts of cash will be released to them and hence the problem of cash availabilitywill continue to plague the system. Hence the problem of tracking cashew sellers through threezlayers of institutionswill be difficult as farmers sell their produce to other PCS besides where they live. It will be necessary to institutea new accounting system to facilitatedouble payments,which would include a tracking system that currently does not exist. To finance this will require that funds come from the value of the crop, which are further reduction in producer prices, since they are supporting this. 1.4.10 District Council Cess Of the four taxes that are included in the interstore price for cashew the district council cess is the only one going to a group not directly incurringany cost for cashew marketing. It is also probably the most problematicof the taxes because it is used to directly fund quasi political organization. In the event that individualsare allowed to participate in the trading of cashew it will be necessary to find a way of guaranteeingfunding of the district council if the proposals are to get political support. In other words, the district council cess is used to support the CCM party activitiesat the village, division, district, regional, and national level and any interruptionof fundingwould not likely be acceptable to the party. The amount directed to this a approximately0.352 of the value of the crop and is not significantin terms of the total crop value. A sales tax may cover this. II. INTERNATIONALMARKETING 2.1 Background Tanzania has been a major exporter of raw cashew nuts for processing in India since the 1950s. During the early 1970s this trade reached a peak when Tanzania exported over 602 of world supplies. In recent years even though total volumes have declined significantlyTanzania still maintains a dominant in the Indian market, e.g. 50Z Indian supplies in 1986. Ahproximte Share of Imports By Origin for 1986 Tanzania 42 Guinea Bissau 11 Singapore 15 Ivory Coast 10 Note:It is likely that the majority of the raw nuts from Singapore originate from Tanzania. Working Paper No. 12 Page 15 Tanzania commenced kernel exports in the late 1960s, these reached a peak in 1987 with 6? of world supplies. Tanzania has remained as a relatively minor player in kernel exports with about 31 in 1985/86. The internationalmarketing of both raw nuts and kernels is handlea by the TCMB. Depending on prevailing circumstancesthey decide on the proportion of the crop that Is exported as raw nut or processed and sold as kernel. Export of Raw Nuts to India 1950-59 1960-69 1970-75 1976-80 (Av) (Av) (Av) (Av) Tonnes 19,000 60.750 100,400 39,800 ExDort of Kernels 1973 - 77 1978 - 62 1982 - 85 (Av) (Av) (Av) Tonnes 4,124 4,167 2,083 Note: For further informationon internationalmarketing refer to the Tanzania Cashew Marketing, April, 1988, CPIPP. 2.2 The Price of Tanzanian Raw Cashew Nuts As noted in the Cashew Marketing Study: International, Tanzania has consistentlyhad relativelyhigh prices for, especially,raw nuts. This is due to two major factors. First, the excess processing capacity of raw nuts in India, coupled with the inadequate supply of raw nuts from domestic production in India create a high demand for raw nuts. And, the high level of efficiency in the cashew processing industry in India allow them to offer good prices for raw nuts. Second, TCMBofficers knowledge of internationalmarkets and their skill at operating with brokers has resulted in good returns to the Government of Tanzania. In the immediate future it is likely that raw nut prices will continue to be relatively high. However, with production improvement that is being initiated in Tanzania,Brazil, Vietnam, Thailand, Indonesia, Australia, etc., it is likely that the supply of raw nuts will increase. The latter will develop slowly, with a major impact due in about 10 years. Working Paper No. 12 Page 16 Table 2: Relative Prices of Raw Nuts Imported by India (Price per tonne fob (Rupees) 1985 1986 GuineaBissau 10,473 15,018 Ivory Coast - 14,782 Indonesia 11,558 Kenya 10,409 - Madagascar 8,68 110,874 Nigeria 7,064 12,235 Philippines 8,500 11,972 t.ingapore 10,200 11.964 Thailand 9,548 11,336 Tanzania 11,392 14,652 Togo - 14,817 Vietnam 12,850 2.3 Auction It is proposed that an open auction be established to sell minimum size lots of raw cashew nuts. The auction would operate in foreign currency. As noted earlier this would be relatively easy to arrange from a TCBs point of view since it is only a slight modificationto the existing telex managed auction that forces brokers to bid into an opaque market. The principal benefits of maintaining an auction system for the sell of raw nuts includes (a) it would ensure that the current knowledge of an skill at participatingin the internationalmarket present and concentrated in TCMB is continued; (b) it would facilitate the participationof agents (private individuals,cooperative unions, etc.) with knowledge of domestic marketing systems but no knowledge of internationalsystems in cashew marketing; (c) It can help ensure Tanzaniawould continue to get good prices for raw nuts; and (d) it would ensure foreign exchange earnings from sale of raw cashew nuts is effectivelycontrolled. The introductionof an open auction managed by a TCB for a fee would provide a means for agents buying nuts from the farmer or primary society to retain ownership o';nuts until internationalsell. While this is particularlyattractive for agents at present, because of the low producer price, as producer prices rise it shifts some of the burden or risk for operating the system to the agents. At present the cashew producer Working Paper No. 12 Page 17 maintains the entire burden for the production of the crop and maintenance of the marketing system. The major costs for maintainingan auction vill be born by the TCB. The costs will include: market research to monitor world cashew prices, maintenanceof marketing staff and maintenanceof facilities. TCMB is currently providing these services. A larger budget for marketing research may be needed but no other build up costs would be needed. 2.4 CooverativeUnion's Role in InternationalMarketing of Cashew It is proposed by GOT that cooperativeUnions accept the main responsibilityof marketing of their produce. i.e. casiew, through agents of their choice. It seems very appropriatethat any individualor agency owning produce should accept responsibilityto market it. However, if each RCU makes its own arrangementfor foreignmarketing then the governmentmay find it more difficult to monitor and control foreign exchange earnings. Maintenance of an open auctionwill ensure competitionand facilitate governmentcontrol over foreign exchange earnings. 3.0 Cashew Processing 3.1 Backgrod In 1965 the first mechanicalprocessing factory was installedin Tanzania and since then the country has both exported raw nuts as well as processingkernel. The value of raw nuts exports reached a peak in 1974 (113,000tonnes) and has since declined in line with falls in production. Meanwhile a total of twelve mechanical processingfactories were constructedIf (eight Oltremare,four Cashco)with an installedcapacity of 113,000 tonnes p.a. However, only a fraction of this capacity has ever been utilized as by 1981 total productionhad already fallen to 56,000 tonnes and was continuing to decline. In 1986-87 all factorieswere closed and total productionwas exported for processing. However, for the 1988 season three factorieswere opened Tanita, Likonde and Kibaha and x tonnes will be processedout of an expected crop of nearly 18,000 tonnes. TCMBas the controllingbody of internationalmarketing and owner/operatorof the factorieshas been faced with a number of issues in the recent period. These include:- - When to process kernel and when to export raw nuts for processing overseas (mainly India). - The future of the factoriesgiven the likelihoodof utilizing the fall capacity. The TCMB method of deciding when to process involves an analysis of all the factoss. It is known that they possess a copy of a computer model Working Paper No. 12 Page 18 produced by CPIPP to resolve sale or process decisionsbut it is not made use of. Analysis of CPIPP has suggestedthat there has been a change in the relative added undue of processingversus exporting raw nuts over recent years. Table 3: Export Values of Raw Nuts & Cashew Kernels (CurrentS per tonne) Raw nuts Kernels Gross added value to 1972 183 270 processingone year lagged Value as S of raw nuts 1973 183 314 126 672 1974 214 403 220 120? 1975 247 374 133 55? 1976 236 568 321 1302 1977 284 406 170 721 1978 472 606 322 1132 1979 451 653 181 382 1980 739 1,198 747 166Z 1981 1.385 876 137 19X 1982 801 770 (615) -442 1983 658 753 (48) -61 1984 902 1,069 411 62Z 1985 770 825 (77) -91 1986 987 No processing 1987 1,142 No processing 1988 994 (158) -142 Source: Cashew and Coconut tree crops project 1988. Up to 1981 there was a positive value in processing,but the balance has changed towards exporting raw nuts since that time. There can be two basic contributingfactors 1. Processing efficiencyof the Tanzania factoriesmay have deteriorated over time leading to lower returns. 2. India processors have been prepared to bid higher prices in recent years. 3.2 ProcessingEfficiency Assuming the quality of the crop is relatively constant over the medium term, the processing efficiencyof the factoriesis a function of mechanical efficiency and management skill. There is no reason to believe the management of the factories has deteriorated, but we are aware that because of foreign exchange problems Working Paper No. 12 Page 19 necessary spare parts are often not availableand thereforenormal maintenance sometimesmay not be possible. To the extent that these factors have reduced X of wholes produced over the past four years then they have reduced any advantages of domestic processing over export of raw nuts During 1987/88 the Likombe and Kibaha factoriesaveraged 532 wholes, while the Tanits I factory achieved 63Z (one source threw some doubt about the validity of the Tanita figures). Reliable figures for previous years resultswere not available so this remains only as a hypothesis. We have evidence that Brazilian mechanical processing factoriesachieve 5 or better and we can assume there factoriesas a whole do not suffer similar spare parts problems as most Brazilian processingequipment is of domesticmanufacture. (Note a IZ improvementin recovery rates can mean a 4.5Z increase in revenue) The other problem for domestic processinghas been the escalationsin costs of certain required inputs i.e. tins, diesel etc in Tshs due to currency, devaluations. By raising the costs it-constitutesto the loss of added value of processing in recent years. WorkingPaRer No. 12 Page 20 Table 4: ProcessingEfficiency of Factoriesin Tanzania (Z of whOTesachievedat Likombeand Ribahafactories) Likombe Kibaha 1980181 611 661 1981182 60S 62a 1982/83 542 53? 1983/84 47Z 58? 1984/85 502 56X 1985/86 No processing 1986/87 No processing 1987/88 582 s1x 1988189 53? 522 1. Both factoriesare of Cashcodesign. 2. 1983/84 was a difficultyear for Likombefactory in termsof spare parts availabilitywhich contributedto the unusuallylow efficiency achieved. 3. SourcesTCMB. 3.3 IntianProcessing 12/ Manualprocessing in India is very cost efficient. Their advantage over mechanicalprocessing in Tanzaniais achievedbecause:- - 2 of wholes producedis 751 - 802 comparedto 501 - 501 in Tanzania. They may also producea smallerI of scorched and desertkernels. At currentprices this givesan estimated revenueadvantage of 102. - I recoveryis both nut qualityand processingefficiency related. In Tanzaniait was 211 to 232 in 1988. Indianprocessors may get slightlybetter rates dependingon the sourceof their inputsand efficiencyof manualprocessing. Some sourcessuch as GuineaBissau have a reputationfor higherrecovery Zs up to 261. On average Indianprocessors may achieve12 to 2S higherrecovery rates above what is achieved in Tanzania. TCMB figuressuggest that the variable costs of processing in Tanzaniaare about US $ 130 per tonne. Costs of processingin Tamil Nadu are similarwhile it is more expensive in Kerala. Soweveras raw nuts are 12/ See Appendix1: CashewProcessing in India. Working Paper No. 12 Page 21 at least 80S of processing costs and India has a revenue advantage of 152 - 20S, then Indian processorswill have greater margins There are a number of factors why the Indiansmay be using their margins and bidding higher_pricesfor raw nuts in the past few years. These are :- 1. The utilizationof processing capacity hes been reduced significantlysince the mid 1970s. For many years the Indians relied on major imports from East Africa. In the 1965-75 period there imports covered over 702 of the total output. However, when the East Africa crop declined the Indiansmade concerted efforts to increase their domestic production but it has no way compensated for the loss from East Africa. In addition the number of factories in India also increased in the 1965-75 period of high utilizationin the industry. Utilizgtionof capacitywhich was running at 752 - 802 in the 1960s has fallen to 402 today. Under these circumstancesit is clear that Indian processorsmay lead higher prices to keep their labour and their factoriesoperating. Cashew processing in Southern India forms a large proportionof the economy and a major source of employment,state Government as well as processing companies are under politicalpressure to maintain employment. EstimatedUtilization of Indian ProcessingCapacity Average p.a. (tornes raw nuts) 1965-70 1971-75 1976-80 1981-85 Domestic crop 61,000 70,000 112,000 117,000 imported 172,000 169,000 40,000 14,000 233,000 239,000 152,000 131,000 Estimated 300.000 350,000 325,0no 325,000 capacity 2 utilization 782 682 472 402 Source: Gill and Duffut and private estimates. 2. The purchasing system in India has changed. From 1970-81 all imports of raw nuts for processingin India was handled by the Cashew Corporationof India which had monopoly purchasing power. After purchasingthe corporationmade allocationsto the different factories. After 1981 individualprocessors in India were free to make their own arrangementsregarding the imports of raw nuts for processing. It is quite possible that in the environmentof declining plant utilization,the greater competitionof Indian buyers since 1981 has put an upward pressure on raw nut prices. WorkingPaper No. 12 Page 22 The outlookfor the Indianprocessing industry is for no significant change. The underutilization of capacityis likelyto continuefor some years. The Indianscontinue to try and increasetheir domesticcrop but they have problemsin shortagesof land and competitionfrom other crops e.g. rubberwhich has givengreater returns to the cashew. While Indiacontinues to try and increasepurchases overseas and some countrieshave from plans no increaseproduction i.e. Thailand,Vietnam thereis not likelyto be significantquantities available in the next 10 years. 3.4 Futureof Processin Factories in Tanzania The followingfacts are pertinent; - Even if all domesticproduction is processedit is unlikelyto requiremore than 50s of processingcapacity before year 2000. - The trendsin the Indianprocessing industry suggest that they might continueto bid competitivelyfor raw nuts. There is therefore little possibilitythat all factories will be utilisedin the forseeablefuture. The currentbase of productionis 20,000tons of raw nuts.Thismay flutuate slightlywith environmentalfactors. Estimated production in Tanzania show that a maximum of 63,000 tons could be expectedby year 2000. EstimatedProduction (+ or - 10?) Year Tonnes 1989 20,000 1990 22,670 1991 24,628 1992 27,002 1993 28,670 1994 29,827 1995 30,888 1996 35,747 1997 2,762 1998 52,234 1999 63,130 SourcetCIP ProjectPrepation Report, PPMG, 1988. Workins Paper No. 12 Page 23 Production is greatest in Mtwara Region (currentlyproducing 60? of the total production for the 1988/89 season). At 751 capacity it would take two factories to process the entire cashew crop of Mtwara Region. At present there is no single area (Region)besides Mtwara producing enough nuts to support a factory by itself. However, jointly there is enough produced to run one additional factory. Because of logisticaldifficulties it may be necessary to have one factory in the North, and an additional factory in the South. In the Northern Regions (Pwani,Tanga, and Dar Es Salaam) there was a total of 8,033 tonnes raw nuts purchased in 1987/88; and in 1988/89 to date there has been 4,500 tons of raw nuts purchased. By itself it is not enough to supply one factorywith raw nuts. However, there are two factories in the North operating:Kibaha and Tanits I. A suggested strategy is to keep four of strategicallylocated factories and declare the remainirgsuperfluous. The four factories shculd be put on a care and maintenancebasis and be available for use at short notice. The retentionof this capacity will effectivelyput a floor price under the raw nuts exports in the event of unforseen circumstancesin India. An additional complicationis the debt outstandingto the World Bank for the constructionof the factories. This debt is at 31/8/87 were US $ 33.46M. This consists of US $ 20.251M at 8.52 p.a. and US $ 13.211M at 1O0 p.a.). The principal and interest repaymentsof US $6.39M for 1987 were met by Treasury. However TCMB has been advised that in future it will have to meet future repayments. The repayments schedule is 1988 US $ 6.08M 1989 US $ 5.78M 1990 US $ 5.48M 1991 US $ 5.17M, 1992 US $ 4.87M 1993 US $ 4.56M 1994 US $ 4.26M 1995 US $ 3.95M 1996 US $ 3.65M TCMBhas built up net current asset of Tshs. 1 billion (US$7.7M), this is increasedfrom Tshs 225 million in 1987. TCMB, financialposition has been greatly strengthenedby windfall gains it has made during the recent devaluations.For example producer prices for 1988/89were fixed at Tahs 40/kg when the exchange rate was US $1 - Tshs 105. Followingthe devaluationof 242 the producer and interstoreprices were maintained at the old levels but TCMB revenue in Tshs was increasedby 242. Working Paper No. 12 Page 24 If TCMB has been asked to meet future loan repayments from 1988 it is necessary to question their capacity to meet their obligations. TCMB earnings before expenses. i.e. sales minus interstoreprice, is Tsho 1,310 million. Allowing for sales expenses (Tshs 90 million) and coporate taxes (Tshs 200 million) this reduces the amount to Tshs 1,015 million. If TCMB has to repay Treasury for the factories,as requested. from 1987, i.e. Tshs 790 million, this is double their annual surplus ifter operating expenses. There is clearly a conflict between raising producer prices to Tshs 901kg and requiringTCMB to meet repaymentsfor the factories. Working Paper No. 12 Apendix 1 Page 1 Cashew Processingin India 1.1 Background The initial developmentof the Indian cashew processing industrywas around Quilon in the State of Kerala in the 1920s and 1930s. The procedureswere based on manual shelling peeling and grading and the (mainly)women in Kerala developed skills in processingwhich even today have not been duplicatedelsewhere in India or overseas. The processing industryin India has now grown to employ over 200,000 people with a nominal processingcapacity of 350,000 - 400,000 tonnes raw nuts. Up to 1965 India processed over 90a of the world crop, and even with the recent installationof mechanical factoriesin Africa and elsewhere they still process over 502. In the 1960s India was importing large quantitiesof raw nuts and its factorieswere working at perhaps 802 of capacity. However in more recent times with the fall in the East African crop and despite efforts in India to increase the domestic supplies the amount available for processinghas fallen and the industry is operatingat perhaps 40X capacity. 1.2 Volume of Raw Nuts Processed In India INDIA 1963 1964 1965 1985 1986 1987 Imported 164400 166900 175600 27700 44200 45500 Domestic 59000 65000 60000 135000 120000 125000 crop 223400 231900 235600 162700 164200 170500 The operation of factoriesat reduced capacity has meant workers only having about 4-5 months work per annum in areas that are heavily dependent on the cashew industry. It is a sensitive political issue and in May 1988 in Quilon these were street demonstrationsby processingworkers demanding work. The success of the Indian processing industry has been due to - Low costs Labour costs similar to Tanzania but possibly lower in Tamil Nadu State.Lowcapital costs. - Efficiency 75? - 802 wholes 502 - 55X in Africa. Working Paper No. 12 Appe"dix 1 Page 2 It has been estimatedthat because of cost and efficiency factors an Indian processor can afford to pay US $200 - $250 more per tonne of raw product then his competitorsin Africa and Brazil and still make money. 4.1.4 Structureof Indian Industrs There are 104 processing companiesregistered with the Cashew Export Promotion Council. Between them they operate 330 processing units. These processing units may vary in size, but the larger more efficient ones employ about 800 workers and process between 45 and 50 tons of raw nuts per six day week. The largest processingcompanies are:- ProcessingUnit. Kerala State Cashew Development Corporation (a State Governmentbody) 34 V. J. Laksmi Cashews 24 Britannia Industries 18 Unis Cashew Industries 15 Jupiter Cashews 10 Kerala Nut Food 10 These six organizationsbetween them probably account for 602 of the processing capacity in India. (It should be noted that many different processing companiesare linked through family relationships). As the great majority of the Indian cashew growing & processing industry is located in Kerala, the Kerala State Government has from time to time deemed it fit to get deeply involved in regulating the industry. Between 1977 and 1982 the State Governmenthad a monopoly procurement position on cashews within the State, it set up a body - The Kerala State CorporateMarketing Federationwhich had exclusivebuying powers of cashew from the growers and distributionrights to the processors. This system was dismantled in 1982 and for the next six years there was a free market in Kerala for the buying and selling of cashews. During this free market period the system operated as followss- Agents or middle men would visit growers and buy raw nuts at a given price, they would move these nuts to regulatedmarkets where the processors agents would purchase and transport them to the factories for processing. A certain I of the crop finds its way to the processorwithout passing throujh these Government regulatedmarkets. This free market was terminated in early 1988 when the Kerala Government set up the Co-operative Processing Society to regulate the cashew industry. This government agency now hass- 1. The monopoly on the purchase from growers and distributionto processor of all cashews in Kerala. 2. It sets prices for growers and processors. Working Paper No. 12 Appendix 1 Page 3 Under this pricing policy for the 1988 season the Government was paying growers 11 to 13 rupees per kg for raw nuts and selling these nuts to processors for 13 to 14.5 rupees per kg. There are indicationsthe these prices are to be raised for the 1989 season. (15 Rupees - US $1) The private processing companies have reactednegatively to the Kerala Governmentsnew regulations- many of them refused to take up their allocated quota of crop arguing that at the governmentsset prices it was impossible for them to make money. The Kerala Government them respondedby taking over some of the private factoriesto force their continued operation - a move that is currentlybeing challenged in the high court. The situation in Kerala remains in some disarray and it is uncertain what is in store during the 1989 harvest season. The Kerala Governmenthas also long maintained a strict policy on the prohibitionof movement of cashews grown in Kerala to other states. They have done this to try to prevent processors from moving their productive capacity from Kerala to other states especiallyTamil Nadu because of the significantlylower labour costs in that state. (No minimum wage or other benefits in Tamil Nadu). This policy has not been a success and the smuggling of raw cashew over the border for processing in Tamil Nadu remains big business, one estimate suggests that up to 40t of the crop grown in Kerala is smuggled over the border to be processed in that State. The recent policy of compulsory procurementin Kerala will clearly lead to an increase of this smuggling. 1.4 ImDorts of Raw Nuts for Processina It should be noted that there are no restrictionson the importation of raw cashews for processing in India. However, between 1970 and 1981 the import of raw cashew into India was regulatedby a central government body, the Cashew Corporationof India. This body had monopoly purchasing powers and resold raw nuts to processorsat a given price. This situationwas terminated in 1981 and since then there has been a free market in the import of raw cashew nuts for processing. Private processors or individualsin India may import raw cashew for processing,the only requirementis that the contract is approved by the cashew Corporationof India, which is usually a formality. Working Paper No. 12 appendix 2 Page 1 Cashewnut ProcessingIn China Apart from cashew plantingson Hainan Island in the 1970s the change have developedprocessing facilitiesnear Gaungzhow (Canton) These factoriesmainly use manual and semi-mechnisedmethods although it is known that Peabody Sturtevant,UKdelivered a plant with a capacity of 1500 + pa to China in the early 1980s. The Chinese have been in the market for rawnuts for some years in competitionwith India, but little is known of their current processing capacity. One Philippinesexporter rated their processing capacity at 60,000 tonnes pa raw nuts. The Chinese remain a possible alternativeto selling raw nuts to India. Working Paper No. 12 Appendix 3 Page 1 Sumary of Losses Type of Loss Loss to Producerl Loss to National Economy Harketing System 1. Inefficiencyin crop Farmer deprived of purchasesleads to losses apportunityto sell by growers. availablecrop. Interest of primary cooperative cost is T.Shs 0.20/kglweek societiessurveyed only or T.Shs 16 per normal 442 purchasedcrop every farmer sale of 80 kg week because of lack of Regional CooperativeUnion cash but crop was losses interest factor of available. Tshs. 603 per 7 tonne load. 2. Nuts Remain Unpurchased Loss of T.Shs 108M revenue In 1988/89would be loss A survey revealed 15Z of to farmers collectively of US $ 2.7M if sold as crop unpurchasedat end of equal to T.Shs 6/kg for rawnuts. season. crop they sold. Loss of Tshs 10.8 million in Union Levies. Loss of Tshs 5.4 million in Society Levies. Loss of Tshs 1.2 million in District Cess. 3. Purchase of crop on Loss to farmersof T.Shs credit. 0.20/kglveekor T.Shs 16 A survey showed a greater per normal 80kg sale/ number of societies week. purchasingnuts that receivingcash on weekly basis. 4. Levies Is a tax on farmers of District cess T.Shs T.Shs 0.451kg via the 0.45/kg. price mechanism for setting producer prices. WorkingPaper No. 12 Appendix3 Page 2 5. Debt burden In Mtvararegion loss MtwaraRegional equivalentto T.Shs.6/kg cooperativeUnion has for producers. T.Shs 270M debt. annual interestpayments T.Shs 64.8M.If Union did not have this debt more money would be availablefor producerprice. Liabilityto pay T.Shs. TCMB has T.Shs 1 billion 717M to World Bank of this net currentasstets T.Shs.282M is interest howevermay have to pay payments equal to T.Shs. World Bank repaymentson 15.7/kg rawnut. T.Shs factories. 435 M is repaymentof principle , equal to T.Shs 24/kg rawnuts. This is 312 of totalexport revenueof salesof cashews. 6. High overheadcost for Non marketingactivities unnecessaryexpenditure of union equivalentto RegionalCooperative T.Shs 8/kg rawnuts. Some Unions marketing non marketing changes are organisations are paid in effect taxes collected much more than is via RCU i.e. District necessaryto carry out cess, stampduty. theirjob. An average522 of what Union receivesis for marketingwork, remaining482 is for non marketingactivities. TCMB surplusis T.Shs 397M equivalentto T.Shs.221kg TCMB recovers much more rawnuts. If we discount than requires to perform cost of operating its task of shortage, factories surplus would be processingand selling T.Shs 864H or equal to cashewon. T.Shs 48/kg. 7. Over reportingby Loss of Tshs 26.7 million PrimaryCooperative in interstorepayments to Societies. RCUs equivalentTshs 1.5, Surveyshowed average kg of crop they delivered overreportingof 2.62 of to TCMB. crop betweenPrimary CooperativeSociety godown RCUs probablyrecouped and TCMB receivedcentre. this loss by non payment of all or part of tit societylevies of Tims 36 million. Working Paper No. 12 Appendix 3 Page 3 8. Shrinkage 2Z shrinkageallowance to RCU gets 2Z allowance for RCU lovers producer price shrinkagebut it only by T.Shs 0.91kg. handles produce for a few hours - much natural shrinkageis unlikely. TCMB also has 2? shrinkage allowancebut as it may store rawnuts for longer periods its position has greater justfication. Working Paper No. 12 Figure . WB ProposedMarketing StructureFor Cashew Stage One Farmer |Primary ISocietyl [Private [ Reg:ional | | Tradetl ~~~~~~Unionl LI~ I state Two |Farmer 1 Private _Primary RCU Trader Society. TCB. Working Paper No. 13 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER EXPORTMARKETING OF TOBACCO Southern Africa Department Agriculture OperationsDivision Africa Regional Office Working Paper No. 13 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER EXPORT MARRETING OF TOBACCO Table of Contents Page No. PRESENT STRUCTURE 1 Tobacco Prices ...... 2 Final Sales ...... 3 Production and Marketing Credit ...... 3 Weaknesses of the Existing Marketing Structure ...... 5 PROPOSED MARKETING STRUCTURE 7 Tobacco Grading ...... 10 Producer Prices for Tobacco ...... 11 Financing Tobacco Purchases and Marketing ...... 12 Reconstitution of the Tanzania Tobacco Processing and Marketing Board ...... 12 SUMMARY OF RECOMMENDED ACTIONS 14 Annex Table 1: TTPMB's Sales of Tobacco Annex Table 2: Into-Store Price of Tobacco, 1986/87 Annex Table 3: TTPMB's Financial Performance WorkingPaper No. 13 Page 1 TANZANIA AGRICULTURALADJUSTENMT PROGRAM WORKINGPAPER EXPORTMARRETING OF TOBACCO* PresentStructure Since 1985 the Tanzania Tobacco Processing and Marketing Board (TTPMB)and the cooperative unions have been responsiblefor marketingand processingall Tanzanian tobacco. Tobacco farmers in Tanzania prepare their cured tobacco leaves for marketingby sortingthem into 12-16 gradesor qualitygroupings. These grades dependprimarily on the leafposition on the tobaccoplant, the visualappearance of the leaf (especiallycolor) and the physicalcoudition of the leaf. Each grade is baled separatelyby wrappingthe contentssecurely in hessiancloth. This grading and baling takes place at village baling sheds operated by the primary societies. Two controllers are responsiblo for the supervision of grading and baling activities, i.e. an extonsion worker and a primary society member. The primarjw society sells the tobacco on behalf of the farmersto the cooperative union at the Governoent announced producer price. The cooperative union arrange transport for the tobacco to their assigned regionalmarketing center, one of six operatedby the TanzaniaTobacco Processing and Marketing Board. Karketing Board graders regrade the tobacco by internationally recognized standards cordsisting of 84 grades. This grade determinesthe price at wbich TIlPf ourchasesthe tobaccofrom the cooperative unlons. TTPIBtransports the tobacco from the mrketing centers to their godowns at Morogoro. When approximately1,000 tons of tobaccohave been accumulatedat Morogoro,it is displayedon the marketingfloor for sale to domesticand export buyers. Currently Tanzanian tobacco is sold to four buyers or agents. Two * This paper was prepared by M. Elton Thigpen,International Commodity Marketing Division,International Department, World Bank. Workint Paper No. 13 Page 2 domestic cigarette manufacturers--Tanzania Cigarette Company at Dar es Salaam and Tabia Njema at Zanzibar--havebought an average of 4,057 tons of tobacco during each of the last five years. Two agents of internationaltrading firms - - Trans-ContinentalLeaf Tobacco Corporatior (a member of the Standard Group of Tobacco Companies)and UniversalLeaf--purchase Tanzanian tobacco for export on behalf of more than 20 final buyers. Export sales have averaged 6,160 tons during the last five years (Annex Table 1). Each export agent and buyer for local cigarettemanufacturers is alternativelyallocated one or two days per week to examine the bales of tobacco on the marketing floor and make a preliminary purchase of selected bales at the predeterminedprices for the grades chosen. Tobacco chosen by the first buyer is removed from the marketing floor and replaced with unsold bales before another buyer is permitted sequentially, on his appointed day, to select tobacco for preliminary purchase. Tobacco Prices - The process of setting producer prices for tobacco for the upcoming season begins with a substantial market study by the Market Development Bureau. Its analysis covers factors-in the domestic and international markets that have a bearing on production and demand prospects for Tanzanian tobacco. Its conclusions become the basis for a recommendation to the Government of Tanzania (GOT) for the average producer price level. The final average producer price is determirodby the GOT. On the basis of this, the TTPMB sets the price for each of the 84 grades. The cooperative unions buy tobacco from farmers through the primary societies at GOT announced producer prices. TTPMB pays the unions "into-storev prices for the tobacco which includes the producer prices and agreed costs for transportingtobacco from the village baling center to the marketing center (Annex Table 2). Working Paper No, 13 Page 3 Flnal-Sales- TTPMB negotiatesprices for Tanzania tobacco,by grade, with the buying agents at the beginning of each marketing season. These prices take into account current market trends in Malawi and Zimbabwe and remain in effect for the entire marketing season.The negotiatedprice for each green leaf grade is only a preliminarydeterminant of the final cost of a batch of tobacco selected by an agent. Since the agent selects bales of different grades to achieve a mix to suit a final buyers specificationfor a particular end-use, he reserves the right to reject the mix after the selected bales are blended and processed by TTPMB. The rational for this is that the selected bales may contain undecected lower quality leaves hidden beneath better quality ones or that the quality of processingmay be inadequateor untimely.When an agint rejects a mix, the TTPMB is in a very weak negotiating position due to the difficulty of finding an alternate buyer for the particular mix. In practice, the cost of the rejected mix is usually renegotiated with the agent. The final cost basis is f.o.b. Dar as Salaam whether sold to exporters or domestic manufacturers. TTPMB arranges transport to the port at Dar es Salaam for tobacco destined for export. Local manufacturers pay the f.o.b. price plus 201 for their purchases and take delivery of flue-cured tobacco f.o.r. Morogoro. The premium paid by local manufacturers is said to be needed to offset some of TTPKWs losses. All fire-cured tobacco is used for local manufacturing,and it is sold from TTPMB's threshing plant in Songea. The cigarette company does its own blending of fire-cured tobacco for the two brands of dark cigarettes it produces. Burley tobacco is produced in such small quantities in only one region that it is accumulated for two seasons before it is offered for sale. Production and Harketing Credit - The 65,000 families who grow about 16-20,000 WorkingPaper No. 13 Page 4 hectaresof tobaccoannually receive production inputs through a creditaccount with their primarysociety. The inputsare purchasedby the cooperativeunion with creditobtained from the Cooperativeand Rural DevelopmentBank (CRDB)and deliveredto the primarysociety. The CRDB creditto the cooperativesalso covers theirrequirements for purchasingand handlingthe crop untildelivered to TTPMB. Inputsrequiring foreign exchangeare purchasedby TTPMB and deliveredto the cooperativeunions. TTPMB receivescredit from the NationalBank of Commerceto cover its operatingcosts includingthe cost of purchasingtobacco from the cooperativeunions. The dual sourceof creditfor producingand marketingtobacco has led to highercredit costs than necessary.This ariseswhen there is a delay between the sale of tobaccoto TTPMB and paymentsto the cooperativesor a delay in the cooperativesclearing their overdraftwith CRDB.This is said to occursometimes due to administrativedelays at the primary societiesin updating farmers accountsand payingthem for theircrop. The paymentto farmersis the net value of their crop after deductingthe inputcredit received, their shareof primary societycosts and levy and their share of cooperativeunion costs and levy. The presenttobacco marketing system operates inefficiently due to a lack of controland coordinationof functionsand pricingdecisions that lead to hugh financiallosses for the cooperativesand the TTPMB.The consistentfinancial losses accumulated by TTPMBindicate a sizable discrepancy between what it pays for tobacco plus the cost of services it provides and the value of products sold. There are Indications that the problem aieasinclude over-grading of lower qualitiesof tobacco,inadequate discounting in the price structure for lower qualitieswhen theaverage producer price is translatedinto specific prices over the full qualityrange, and the lack of controlover the elementsof the into- Working Paper No. 13 Page 5 store prices paid to the cooperatives.Duplicate financing of the crop without a mechanism to credit payments by TTPMB to the cooperatives'overdraft delays unnecessarilythe clearanceof outstandingcredit and raises finance costs. This contributes to the marketing systems financial losses. Weaknessesof the ExistingMarketing Structure - The present st.cture of tobacco marketing in Tanzania has several shortcomingswhich contribute substantially to its inefficientoperation. The operationalchanges made during 1984/85 when TTPMB and the cooperativeunions were created did not correct those problems. The major shortcomingscontributing to marketing inefficienciesare as follows: (i) Tobacco quality has many variations and its proper maintenance requirescareful handling and storage.Industry experts estimate that the value of Tanzaniantobacco exports can be increasedby 25 percent through improved quality control measure alone. The problems currently encountered with mixed qualities in bales indicates inadequate quality classification and supervision. (iis Post-harvestcrop losses or spoilage are as high as 30 percent. This is normally due to improper curing; poor storage conditions on farms, at baling centers and at transportterminals; improper conditioning for packing and inadequate presses. This represents large losses in farmer income and foreign exchange earnings. (iii) The existing "cost plus' price structure has inadequate incentive for cost containment. Neither TTPMB nor the parent ministry scrutinize the costing proposed by the cooperativesnor does anyone scrutinize TTPMB's. This, combined with lack of farmer incentives for producinghigh quality tobaccoresults in high-cost, inefficient workingPaper No. 13 PAge 6 utilizationof the marketing system infrastructurewith the unfavorableresults having a negativeimpac.-t on the nationalbudget as TTP.IB'sfinancial losses are ultimatelycovered by the government (AnnexTable 3). (vi) Tobaccofor export is sold by 'PrivateTreaty" for lack of enough volumeto attractsufficient buyers to operatea more open auction system.Prices are determinedwell in advanceof actualsales and theyprevail for the entire marketingseason. With only two agents representingmany foreigntobacco manufacturers, TTPMB is in a weak bargainingposition with regard to disputesover leaf qualityor processingand blendingresults. The introductionof a more viable open sales arrangementmust be precededby the correctionof other factorsthat limit the quantityof productionfor export. (v) The two domesticcigarette manufacturers pay a 20 percentpremium above exportprices for the tobaccothey use. This limitstheir competitivenessin export:markets for cigarettesat a timewhen their utilizationof existing plant capacity is very low (56X). (vi) The transportation of tobacco from the buying centers to Morogoro and from there to the port for export has been a continuing problem. Railwaywagons have been in short supply and road transport is costly due to inadequateplanning and poor road conditions.Thus tobacco strandedin inadequatetransit stozage suffers quality loss. (vii)TTPMB has little incentiveto control operating costs through efficiencymeasures. Consequently TTPMB has accumulatedlosses exceedingTshs. 1,800 million mainly due to its inabilityto control the costs of transport and processing, and the regrading losses. Working PaPer No. 13 Page 7 Consequently,the government is compelled to write-off the losses. The above shortcomingsneed to be addressed in a meaningful way to free the Tanzanian tobacco industry from its problems with poor quality, inefficient operations and high cost marketing and processing.A new marketing structure is urgently needed to overcomeexisting shortcomingsand eliminategovernment costs for tobacco by improved efficiency in handling tobacco products. Proposed Marketing Structure The United Republic of Tanzania Task Force Report on Export Crop Marketing Efficiency - Tobacco proposed major changes in the organizationalstructure of tobacco marketing.The role of the cooperativeunions would be greatly expanded while that of the TTPHB would be reduced. The cooperativeunions would continue their usual function of procuringcrop inputs, delivering inputs to the primary societies and procuring the crop from them. In addition, they would retain ownership of the tobacco until final sale to domestic and foreign buyers beginning in April 1989 with the opening of the 1989/90 marketing season.This entails making arrangements for classing, baling, financing, transporting, storing and selling tobacco.The TTPMB would no longer purchase tobacco from the cooperative unions, but it would organize and manage sales procedures at the Morogoro market on behalf of the cooperative unions for a fee. Although the cooperativeunions would sell tobacco to domesticmanufacturers without an agent, they could contract with an agent/brokerto handle sales for export. The TTPMB could be such an-agent,but it would compete with other agents/brokersavailable to the cooperativesfor this task. The Task Force expected the TTPMB to continue to operate the processing factory on a fee basis, but a conflict of opinion on selling tobacco at the green leaf stage while continuing the present processing Working Paper No. 13 Page 8 arrangementmakes a changein the processingplant managementdesirable. The proposedchanges are not all possiblebecause of : (i) the cooperative unionscapabilities; (ii) loss of leaf identitythrough blending and export agentsrequirement for guaranteedprocessing results to acceptpoint of sale at green leaf stage and (iii) the technicalcomplexity of tobacco. These considerationsnecessitate additional changes to resolvethe conflictsbetween the marketparticipants. (i) The proposedresponsibilities are clearlybeyond the capabilitiesof the presentstaff of the cooperativeunions. They shouldcontract for some of thoseservices with agentsor brokers,including the TTPMBwhich has considerable technicalexpertise in tobacco.It is anticipatedthat, at least initially,the majorityof the cooperatives,especially those with a small interestin tobacco relative to their total operation, will contractwith TTPMB to provide classificationservices at baling and marketingcenters, organize and manage sales proceduresat Morogoroand act as a marketingagent. The responsibility of the cooperativeunions to representfarmer interest should result in their close monitoringof marketingservice costs duringcont:-act negotiations. (ii)The need to identifyeach growerstobacco at finalsale, makes it necessary to change the point of sale to the green leaf stage (cured leaf before processing).This is necessaryso producersare assuredof the incentiveof being paid on the basis of the qualityand quantityof tobaccothey produce. This would not be possibleif finalsales continued at the post-processingstage where the identityof producer'sbales have been lost in the blendingof variousqualities to meet specificmarket (buyer)requirements. Moreover, this changein point of sale will enablethe introductionof auctionsales with fewer changeswhen the necessaryvolume of productionto supportit is achieved. The acceptanceby Working Paper No. 13 Page 9 the buyers of a shift in the point of final sale to the green leaf stage requires assurances to buyers that their processingrequirements will be met technically and in a timely manner.Their previous experiencewith quality deteriorationand damage during processing makes the risk of buying at the green leaf stage unacceptablyhigh without processing assurances.This, in turn would require a management contract to be negotiated with a specialized firm to manage the processing plant from May 1989. The expanded role of the cooperativeunions in the tobacco industry makes it necessary for them to retain foreign exchange from export sales. This retention must be sufficient to cover the cost of importing inputs required for production and marketing a highly specialized crop. These inputs include special formulations of fertilizer and chemicals as well as equipment for curing, packaging and handling tobacco. (iii) Most of the cooperativeunions are multi-croporganizations, but the technical complexity of tobacco production, quality control and processing requires specialized attention which. the cooperative unions cannot provide. Each cooperativeunion involved in tobacco should, therefore, organize some sort of a tobaccogrowers' associationamong its members as a marketing branch to handle tobaccomarketing on the cooperative's account. The tobacco growers association should be organized and prepared to fulfill their marketing functions at the beginning of the 1990/91 marketing season. Flue-cured and burley tobaccos have been sold to final buyers exclusively at Morogoro after processing and blending. Fire-cured leaf, on the other hand, is deliveredby the cooperativeunion to TTPMB at its threshing plant in Songea. TTPMB buys the fire-cured leaf and subsequentlysells it to and processes it for the Tanzania Cigarette Company. TCC manufactures two brands of cigarettes Working Paper No. 13 Page 10 exclusivelyfrom this dark leaf tobacco.Under the new marketingprocedures, the cooperativeswould be allowed to sell all tobacco types directly to domestic manufacturers and exporters at the green leaf stage. The manufacturers would arrangefor processingand blending to their specificationson their own account. Since the Songea threshingplant is in a poor state of repair and the processing factory at Morogoro is so seriouslyunderutilized (currently using about 25% of capacity), considerationshould be given to the feasibility of closing the Songea threshing plant and processing the fire-curedcrop at Morogoro. Tobacco Grading - Tobacco grading in Tanzania is based on generally recognized internationalgrade standards, but the application of those standards in the marke:ing system is inadequate.The focus of recommendedchanges is, therefore, on correcting the shortcomingsof grade determinationand its supervisionwhich have resulted in substantialrejections of bales and processedblends for quality defaults. Two actions are needed to overcome the present inadequacy in tobacco grading: (i) graders need better technical training and (ii) supervisionquality needs to be improved. These needs should be addressed by enrolling selected Tanzanian tobacco graders in technical training courses in neighboring tobacco producing countries, Malawi or Zimbabwe.The first chosen traineesshould be prepared to hold local training courses before the 1990/91 marketing season for graders not to be sent abroad for training. Financing of this training could be provided under the Tanzania Agricultural Adjustment Credit. TTPMB should prepare a program for training tobacco graders. Arrangements should be made immediatelyfor places in the training courses for key Tanzanian Working Paper No. 13 Page 11 traineesat the end of March 1989. Those trained graders should be placed in key positions for installing the better disciplined grading system beginning with the 1989/90crop. If this scheduleproves to be unattainable,the training should begin as soon as possible after the close of the 1989/90 marketing season. Producer Prices for Tobacco - A problem has been observed in the setting of prices for various qualities of tobacco. Purchase prices for the lower grades have tended to be higher than the realized sales prices. This, and the tendency to over-grade tobacco received at the market centers have contributed significantly to TTPMNB,and eventually to GOT, losses on tobacco. It is imperativethat the overpric ng of lower grade tobacco be corrected. This would also transmitthe approprie i incentiveprice signal to farmers to encouragethem to make stronger efforts to deliver better quality tobacco. This will reduce or eliminate an important source of financial losses to the marketing system and to the government of Tanzania. The two-tiersystem for paying tobaccoproducers proposed by the Task Force to overcome some of the problems discussedabove is a positive step. Some initial resistanceand dislocation,however, should be expected.For the proposedpayment system to be viable, the initial payment to producers will have to be set below the anticipatedexport price minus marketing costs. This is necessary to provide a safeguard against a decline in market prices, which if severe, could result in a trading deficit even before the second-tierpayment is scheduled to be made to producers. Announcement of the first-tier payment for 1990/91 crop significantly below the previous season'8 producer price will be received negativelyby producers,particularly those who anticipate little or no second- tier payment due to past experience of extended delays in receiving the single payment.Moreover, when the total paymentshave been received, those growers that WorkinxPaper No. 13 Page 12 receive less than in previous years due to more realistic discounting for poor quality may react by either improving their efforts to produce better quality, assuming better production, handling and storage practices are known, or by reducing or giving up tobacco groving altogether. Educational efforts by the cooperativeand extensionstaffs will be needed to minimize negative effects and the number of growers who opt to give up tobacco growing. Financing Tobacco Purchasesand Marketing - The cooperativeunions should begin buying tobacco from farmers in April 1989. They are also to maintain ownership of the crop until its final sale to exporters or domestic manufacturers.Since the related marketing services will be provided under agency contracts,it will be necessary to begin negotiating those agreements immediatelyso the services will be in place by April 1989. Reconstitutionof the Tanzania Tobacco Processing and Marketing Board - The responsibilitiesof the TTPMBwould be substantiallyreduced under the Task Force proposal. Its ownership of the processingfactory, however, makes the impact of its reorganizationless drastic than for the marketing boards handling other crops. During the reorganization it is important that the management and technicalexpertise in TTPMB be utilized and not lost to the industry. Consistent with the Task Force proposal for the cooperative unions to maintain ownership of the crop until final sale, the ownership and operation of the marketing centers should be passed to the cooperativeunions. The cooperatives'interest in maintainingleaf qualityuntil final sale in order to obtain the maximum price provides the incentive for providing suitable storage and handling facilities at the baling sheds and marketing centers. The marketing board's responsibilitiesat baling sheds and marketing centers will be discharged by Working Paper No. 13 Page 13 service or agency contractswith the cooperatives.Presumably this will include classing services but could also include arranging handling and transport services. TTPMB would organize and manage sales procedures on the sales floor at Morogoro under an agency contract with the cooperativesfor an agreed fee. This should not prevent cooperativesfrom making direct sales to buyers, particularly those representingdomestic manufacturers. The marketingboard would also become oiie of several sales agents for the cooperativeswith a small interest in tobacco. TTPMIB'sresponsibilities in tobacco processing would be substantially reduced.As owner of the processingfactory, it would continue to be responsible for its maintenance,upkeep and upgrading as required to assure the technical integrity of the processing operation. It would, however, have to negotiate a management contract with a specialized firm to manage the operation of the processing plant. It must assure itself that the management firm is highly competentso that the confidenceof the buyers in the integrityof the processing and blending of Tanzanian tobacco is fully maintained. The present rehabilitation of the processing plant at Morogoro is an important step towards helping Tanzanian tobacco meet changing market requirements for soft threshing to produce larger and more uniform leaf particles. The rehabilitated presses will upgrade the packaging of processed leaf to meet efficient transport requirementsby doubling the density of shipping packages.The presses at baling sheds and market centers also require upgrading to improve the efficiencyof internaltobacco transport.With improvedpackaging a seven-ton truck would be able to carry 4.5 tons of tobacco compared to the current load of 2-2.5 tons. This improvementcould potentially reduce the truck Working Paper No. 13 Page 14 trips needed to transport the crop to nearly one-half present requirements. Summarv of RecommendedActions I. Actions Needed Regardlessof Whether Policies Chan"e (i) TTPMB initiate program of training for tobacco graders in Malawi or Zimbabwe. (ii) TTPMB organize local training program for tobacco graders not to be sent abroad for training. (iii)TTPMBto use better trained tobacco graders to strengthen supervisionand assure a better disciplinedgrading system. (iv) Carry-out upgrading of curing barns and adopt improved curing methods to reduce fuelwood requirementsand preserve leaf quality. (V) Rehabilitateor replace tobacco presses at baling sheds and other market facilitiesas needed to improve tobacco packaging for quality preservationand efficient transport. II. Actions Crucial to PglicX Chane (vi) GOT decide to adopt the new tobacco marketing structure and the two-tier system for paying producers. (vii) MLGCM obtain agreement of buying agents to changing the point of sale to green leaf stage and make decision on management contract for operating the tobacco processing plant. (viii)TTPNBnegotiate management contract with competent firm to operate the tobaccoprocessing plant and assure buyers of the quality of processing results. III. Other Actions to Follow Policy Change Working Paper No. 13 Page 15 (ix) HLGCM designate CUs to retain ownership of the crop until final sale. (x) Restructure CUs finances as necessary to accommodate expanded marketing functions, including authority to retain forex needed to purchase inputs and spares. (xi) TTPMB transfer ownership of market centers and related properties to CUs. (xii)TTPMB's financialrestructuring with past overdraftscleared by agreement between Treasury and National Bank of Commerce. (xiii) TTPMB draft agent contract for services to CUs. (xiv) TTPMB determine the proper relative price differences for all grades of tobacco, based on sales price experience, and apply those differences to the initialpayments to producersin 1989. TTPMJBalso to continue negotiatingexport sales prices by grade with buying agents until a more open auction system becomes feasible. (xv) C! approve cost reductionplans for CUs and TTPHB. (xvi) CUs implementcost reductions-pproved by MILCE. (xvii) TTPMB implement cost reductionsapproved by MLGCN. (xviii) CUs negotiate necessarymarketing service contracts with TTPMB or other agents. (xix) CUs organizemarketing branch to handle tobaccomarketing on CUs account. TOBACCO (April Ist - March 31) FOR IMMEDIATE ACTION BEFORE JUNE 1989 BEFORE APRIL 1990 License for tobacco growers Tobacco graders to be trained not to be re-established in Malawi or Zimbabwe (Contrary to TASK FORCE) (financing to be provided by ______W__ WorldBank if need be) PRE-CONDITION FOR POLrCY CHANGE Tob-accopoint of sale to be green leaf stage (before pro- cessing); processing to be done on buyer's account. Management contract with specialized firm to manage processing factory. Specialized firm to be retained to supervise grading at the baling shed level and to regrade before sale. CU's to retain ownership of leaves Each CU to organize until final sale to domestic and a tobacco growers foreign buyers. CU's to sell green associationamong its leaves to domestic cigarette producers members to handle on their own; price, quality to be tobacco marketingon Draft agent contract freely negotiated. CU's to sell the CU's account and to be prepared by through sales procedures organized and as a CU's marketing TTPHB. managed by TTPMB. CU's to retain branch. foreign exchange. TTPMB to become TTPMB past overdrafts . non-monopolistic agent for smaller The two-tier price cleared. cooperatives (smaller from tobacco introduced. point of view). p WorkingPaper No. 13 Annex Tlable I TTPoIS SALS OF TOBACCO FLUE-CURgO FIRE-CURED BURLEY TOTAL QUANtITY tINTONNES 4arketfing Export Domestic Totel Export Domestic Total Export 8xport Domestc Total Year 1977/78 8064 *901 10965 1346 1001 2347 40 94S0 3902 13352 1978/79 7657 3254 10911 1090 1012 2103 20 8767 4266 13033 1979180 5094 2829 7923 690 1197 1887 18 5802 40.6 9828 1980/81 o307 2981 9288 1537 958 2495 - 7844 3939 11783 1981/82 9286 351S 12801 1918 685 2603 19 11223 4200 15423 1982/83 6229 4048 10277 2350 462 2812 29 8608 4510 13118 [983/84 4290 1565 7855 1830 582 2412 68 6188 4147 1033S 1i84/85 4696 4413 9109 505 337 842 - 5201 4750 9951 1985/86 5072 2302 7374 1224 281 1505 - 6296 2583 8879 I986/87 4302 4040 8342 183 256 439 22 4507 4296 8803 1987/88* 9240 3960 3200 1050 450 1500 13 10303 4410 14713 VALUE IN BMLLIONSNILLINGS larketing Esxport Dometic Total Export Domestic Total Exprt Export Domestic Total Year 1977/78 166.8 46.8 213.6 34.1 12.7 46.8 0.6 201.4 59.4 260.8 1978/79 163.6 54.9 218.5 20.3 13.9 34.2 0.2 184.1 68.7 252.8 1979/80 117.3 51.8 169.1 12.3 19.2 31.5 0.2 129.8 71.1 200.9 1980/81 84.8 57.7 142.5 16.7 13.4 30.1 - 101.5 71.0 172.5 1981/82 145.1 61.6 206.7 29.2 10.8 40.0 0.3 174.6 72.4 247.0 1982/83 110.7 09.8 209.7 59.0 13.1 72.1 0.8 170.6 112.1 282.7 1983/84 111.7 114.5 226.2 66.9 19.3 86.2 1.1 179.7 133.8 313.5 1984/85 161.8 179.5 341.3 12.0 13.2 26.2 - 173.8 192.7 366.5 1985/86 150.6 126.3 276.9 33.7 13.8 47.5 - 184.3 140.1 324.4 M986/87 324.6 444.3 768.9 6.9 32.5 39.4 1.6 333.1 476.8 809.9 1987/68* 1108.8 570.2 1679.0 126.0 64.8 190.8 1.0 1235.8 835.0 1870.8 AVERAGESALES PRiCE 111 SWUtLIS Marketing Exwprt Domastic Weghted Export somatic Ileghce4 Export Expart DOsmtic Ieighted Year AVrae Average Av5eir 1977/78 20.68 16.12 19.47 25.32 12.68 19.13 14.13 21.32 15.23 19.54 1978/79 21.36 16.86 20.02 18.64 13.70 16.27 12.40 21.00 16.11 19.40 1979/80 23.02 18.32 21.34 17.67 16.06 16.73 11.89 22.37 17.65 20."4 1980/81 13.44 19.34 15.33 10.65 13.97 12.tS - 12.93 18.04 14.64 1981/82 15.62 17.63 16.14 15.21 15.77 15.36 16.16 15.55 17.24 16.01 1982/83 17.78 24.46 20.41 25.13 28.42 25.67 29.14 19.82 24.86 21.55 1983/74 26.04 32.13 28.80 36.57 33.12 35.74 16.13 29.04 32.27 30.34 1984/85 34.45 40.67 37.46 23.75 39.16 29.13 - 33.41 40.56 36.82 1985/86 29.69 54.67 39.55 27.53 49.11 31.56 _ 29.27 54.24 36.53 1966/87 75.45 109.98 92.17 37.70 126.95 89.75 72.73 73.91 110.99 92.00 1987/88* 120.00 143.99 127.10 120.00 144.00 127.20 76.92 119.95 143.99 127.16 * 845.t Estlates euclvdiug sele of previos 7arac stocks. Sorce: TrPHB Workinl Paper No. 13 Annex Table 2 TANZANIA - INTO-STORE PRICE OF TOBACCO 1986/87 MBEYA RUVUMA KAGERA IRINGA TABORA KYELA SINGDA ------(TSR/KG) ------ PRODUCER PRICE 30.30 26.40 49.25 49.25 49.25 49.25 SOCIETY LEVY 1.28 1.12 2.08 2.08 2.08 2.08 UNION LEVY 2.56 2.23 4.17 4.17 4.17 4.17 SHRINKAGE 0.30 HANDLING 0.10 0.10 0.10 0.10 0.10 0.10 CASH INSURANCE 0.38 0.33 0.62 0.62 0.62 0.62 CROP INSURANCE 0.20 0.17 0.33 0.33 0.33 0.33 INTEREST-O.D. 0.34 0.30 0.55 0.55 0.55 0.55 GUNNYBAGS 1.13 1.13 1.13 1.13 1.13 1.13 JUTE 0.06 0.06 0.06 0.06 0.06 0.06 FUMIGATION 0.03 0.03 0.03 0.03 0.03 0.03 PROCESSING 10.50 CASH TRANSPORT 0.24 0.05 0.23 0.13 CROP TRANSPORT LOCAL 0.60 1.73 1.77 1.73 !KT. TO FACTORY 1.38 INTO-STORE PRICE 49.40 3187 60.10 60.32 60.18 58.32 &TRANSPORT &TRANSPORT WorkingPaper Fo. 13 Annex Table3 TTPMB'SFINANCIAL PERFORMANCE 1981 1982 1983 1984 1985 1986 ------(MIL.TSH) ------ - SALES 152.9 248.1 281.4 308.2 372.4 308.9 COST OF SALES 222.1 286.4 292.3 268.2 375.5 600.8 ------__---- - GROSS PROFIT (LOSS) (69.2) (38.3) (10.9) 40.0 (3.1) (291.9) FINANCE CHARGE (24.3) (36.6) (47.4) (49.3) (61-9) (40.5) OTHER OVERHEAD (31.3) (52.9) (34.7) (31.3) (49.0) (41.3) (MARKETING COSTS) OTHER INCOME 2.4 2.6 3.3 3.1 7.2 6.7 …------__ NET PROFIT (LOSS) (122.4) (125.2) (89.7) (37.5) (106.8) (367.0) ------…------Working Paper No. 14 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER SUPPLY AND DISTRIBUTIONOF AGRICULTURALINPUTS Southern Africa Department Agriculture OperationsDivision Africa Regional Office Working Paper No. 14 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER SUPPLY AND DISTRIBUTION OF AGRICULTURALINPUTS Table of Contents Page No. A. FERTILIZER SUPPLIES,DISTRIBUTION AND PRICING 1 I. Consumption...... * *...... 1 II. Supplies ...... *#...... O-*...... I III. Procurementand Distribution ...... 3 IV. Pricing and Subsidies .*. .... *...... 4 V. Recormendations ...... 6 VI. AssistanceRequired ...... 8 B. SEED PRODUCTIONAND SUPPLY 9 I. Background ...... * 9 II. The Problem *************...... 9 III. Remedies ...... 4...... lO Iv. AssistanceRequired ...... 11 C. AGRO-CHEMICALS 12 I. Supplies and Distribution...... 12 II. ProcurementConstraints ...... 14 III. Prices ...... t...... 15 IV. Recommendations...... 15 V. Assistance Required ...... 16 ANNEXES 1. Fertilizer TransportCosts 2. The Economics of FertilizerUse 3. Intended FAO Programme/UNDP (Table of Contents Continued) TABLES Main Text 1. Fertilizer Supply Commitmentsfor 1988-89 2. Seed Supplies and Distribution 3. Supplies of Agro-chemicals 4. Pesticides Supplied and Distributedin 1987-88 5. Fertilizer Offtake Total Product and Nutrient Basis 6. Fertilizer Offtake Product Based 7. Regional Offtake Top Ten Regions 8. Imports and Local Production ANNEX TABLES ANNEX 2 Table 1: Fertilizer Prices, Real Costs and Official Prices in June 1988 Working Paper No. 14 Page 1 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKING PAPER SUPPLY AND DISTRIBUTIONOF AGRICULTURALINPUTS I. Consumption 1. From the preliminarydata available, it appears that offtake of fertilizersduring the cropping season1987-88 (April 1-May31) reached 133,000 tons of product (46,500tons of NPK nutrients),which representsan increaseof about 8% over the previousyear. The volumeof sales in the food crop sectorincreased from 97,500to 112,000tons of product(142 increase),but sales of compoundfertilziers, which are mainlyused on cash crops,fell from 26,000to 21,000tons, a declineof some 192. 2. The shift in the patternof regionaLofftake from the Northto the Southernparts of the countrycontinues. In the 3 main foodcropgrowing regionsof the SouthernHighLands, i.e. Iringa,Mbeya and Ruvuma,almost 84,000tons were taken off during1987-88 which is over 64% of the NationaL totaL. 3. No noticeableshift,in the patternof fertiLizergrades couLd be detected. Low to mediumanaLysis fertiLizer stiLL constitutes over half of National sales. 4. Fertitizeruse is expectedto increase,as pLannedat an annual growthrate of between5 and 8% to reachsome 140,0G tons in 1988-89and 150,000tons by the end of the 1989-90cropping season. Whetherthis target wilL be achievedwiLL dependmainly on sufficientsuppLies being made availabte by donorsand the amountof Loanswhich Governmentis willingto make available to the CooperativeUnions to financetheir seasonalinput credit schemes (see SectionIV : Pricingand Subsidies). II. Supplies 5. Totalsupplies of fertilizersduring 1987-88 amounted to 118,700 tons, (stockpositions not beingtaken into account)of which 19,300tons derivedfrom tocalproduction, the baLancei.e. 99,400 tons, from donations. 6. Suppliesfrom domesticproduction fell shortof expectations. Againsta plannedproduction of 44,000tons, the factoryat Tanga delivered only 19,300tons during1987-88, due to a combinationof reasons, the main being: (i) the delapidatedmechanicaL state of the productionfacilities and Lack of spare parts; (ii) shortagesof suppLiesof feed stock such as ammoniadue to Forexconstraints and raw materiaLssuch as rock phosphate from the Ninjingumine becauseof persistentunavaiLabiLity of rai transport(engines and raiL cars)on the NorthernTRC Line; * This paper was prepared by van Dierendonk (Consultant). Working PaPer No. 14 Page 2 (iii) the qualtiy of the local rock phosphate,which as a result of its high Siliceous content and its low rate of beneficiation (25% P205), poses serious technologicatproblems in processing it to phosphoricacid and subsequent TSP. The locally produced TSP is not only of low analysis (maximum37% P205), but aLso of poor physical quaLity. 7. The difference between the quantities distributedin 1987-88 and supplies,i.e. 15,000 tons, was covered by withdrawalsfrom buffer stocks, which came down from a Level of about 60,000 tons in 1987, to 45,000 tons by mid-1988. 8. As the factory at Tanga has just been shut down again for a period of 12 to 13 months for overhauL and repair, no more than 13,100 tons of domestic production wiltLbe avaiLable for the coming cropping season. Most of the requirementsfor next season has thereforeto be procured through imports from abraod. Donor commitmentsfor the 1988-89 cropping season amount to a totaL of 122,000 tons, valued at USS24.5 million, which seems sufficient to cover anticipatedsales, if present stock positions are taken into account: Table 1: Fertilizer Supply Commitments for 1988-89 Product Quantities (tons) Value (USS Mill) Donor Countries SA <21% N) 22,400 4.5 Japan CAN 926.61N) 34,000 5.4 Sweden, Netherlands, EEC Urea (46% N) 26,000 4.5 Netherlands, Norway,EEC TSP (46% P205) 22,000 5.9 Denmark Compounds 17,S00 4.2 Norway, Sweden Total Commitments: 121,900 24.5 Domestic Production: 13,100 Total Supplies: 135,000 9. Tanzania'sdonors have provided the country in the-past with a considerableamount of leewayin the form of fertilizers as a balanceof paymentsupport. They are likelyto continuein meetingthe country'sfuture fertilizerrequirements as they have indicated their wilLingness in doing so on.a mutti-yearcommitment basis. Now that the TFC pLant at TangawilL be shut down for a prolongedperiod for repairs,it is of imminentimportance that the countryinsist on suppliesof high analysisfertilizers only, such as Urea, TSP and high grade compounds,so as to cut down on distribution costs and subsidies(see Section IV : Pricingand Subsidies). Working Paper No. 14 Page 3 III. Procurementand Distribution 10. Sufficientsupplies of fertiLizerswere made availableby donor countriesduring 198J-88to meet requirements,white the aLLocationof funds for the procurementof those supplies had been adequateLyadvanced by most of the donors to ensure a time-wise improvementin the scheduLingof most shipmentsweLL in advanceof the season of demand. However, stilL half of the quantitiessuppLied consistedof Low to medium anaLysis products, while the prices of fertiLizersuppLied by donors, who do not practise procurement by tender, were weLL above internationaLmarket quotations (see Annex 2, (i)). Neverthetess,TFC still experiencedsome Logisticconstraints in the performanceof its primary distributiontask during 1987-88due to late deLiveries (Urea,CAN) and arrivaLs shortLy before and during the period of port congestionand heavy demand on locaL means of transport (August- October). Primary Distribution 11. Orders exceeding140,000 tons were received Last year by TFC from the various channeLs of retaiL distributionfor delivery prior or during the 1987-88 season. 12. The orders pLaced by the CooperativeUnions and financed by the CRBD under the seasonaL input credit scheme amounted to 105,000 tons or 75% of the National total. 13. Actuat deliveriesby TFC have fallen short of the tonnages ordered, by about 5,000 to 7,000 tons, an improvementof significance,as compared to preceding seasons, when those shortages exceeded 15,000 tons. Nonethetess, the late ordering by the CooperativeUnions, which usually does not take place earLier than August,due to complex and cumbersomeprocedures to be followed under the existing seasonaL input credit scheme, continues to pose serious logisticalproblems regardingtimely distribution. It usuaLLy takes between two and three months to deliver an average shipment of 10,000 tons from the port to farmerst In order to ensure timely and adequate supplies to farmers, it leaves TFC no other alternativebut to accumulate excessive stocks at the regional level and in Dar-es-Salaam(DSM),well in advanceof the cropping season, which starts in November. As a result, transit storage facilities at Dar-es-Salaamwere over-stockedwhite rail capacity on the Tazara Line could not be used during mid-1987 and 1988 since godowns in the Southern Highlandswere stocked to capacity by the middle of the year. Theconstructionof planned storage facilities at Songea, Makambako, Mbeya, Sumba Wanga and DSM (each of 10,000 tons capacity) has been delayed due to financingprobLems. Some 25 to 30X less storage and transportcapacity would be required if the high votume of:low to medium grade fertiLizers,which stilL represents50% of the total tonnages handied annualLy, was replaced by Urea, TSP and high analysis compounds. SecondaryDistribution 14. Over 75Z of the fertilizerdistributed to farmers dur;ng 1987-88 was channeLedthrough the CooperativeUnions and their primary societies. The share of retaiLerssuch as TFA, AISCO and others has falLen to about 101 of the total. Working Paper No. 14 Page 4 15. Offtakeby the CooperativeUnions does not refLectreal demand. The very natureof the existingseasonal input credit scheme sets limits on suppLieswhich are directlydetermined by the amountof Loanswhich the CR8D annuallymakes available to the differentCooperative Unions. 16. The Loansextended in 1987-88to fertiLizerinputs are estimated at T.Shs.800 million,Less than halfof whichhas been repaidby the primary societiesto theirunions.To enforce repayment and to escapeinsolvency, the CRBD intendsto provideonly new loansfor farm inputsin the forthcoming croppingseason to the extentdefaulting Union, pay back theiroutstanding debts. It is doubtful,however, whether such a drasticpolicy wilL ever be implemented. 17. The presentseasonal input credit system continues to pose multiple probLemsto the developmentof an economicallyjustified use of fertilizers. Takinginto accountthat some.!X gf the farmersba& nnuadaxv.the means to financetheir seasonaL inouts, it becomestime to introducethe possibility of casn satesand to scalethe existingsystem down to realisticproportions reflectinggenuine credit needs. 18. Besides,such a changein the systemwouLd produce the following positiveeffects. It would: M) Bringabout a greatfinancial reLief to the CRBD and the BOT; (ii) Ensurethe treasurya substantiallyimproved revenue from fertilizerdonations, providing themuch needed budget support; (iii) EnabLeCR8D to betterorganize, supervise and controLits creditextension operations Leading to an improvementon ratesof Loan repayments; (iv) ResoLveLogistic constraints on the primaryLeveL of fertiLizer distributionand bring abouta substantialreduction in distributioncosts (Lowerstock positionsand Less storage requirements); (v) Offer scopefor the deveLopmentof complementarychanneLs of retaiLdistribution as they are in a betterposition to offer discountson cash purchasesduring the off seasonwhen farmers have the meansto pay for their farm inputs (May-October). IV. Pricing and Subsidies 19. In reviewing the price situation for the 1987-88cropping season, the Governmentdecided in August 1987, to increase the selling price for all kinds of fertilizers by a fLat 30X. These prices are still valid today and no longercover the full cost of fertilizeras a resultof the consecutivedepreciations of the TanzanianShilling. The differencesbetween real cost and actualselLing prices, as set by the Government,are significant.They are calculatedfor the main typesof fertilizerproducts in use and shownin Annex2, Table *.- Fertiliier.Prices.FertiLizer prices are officiallyfixed at two LeveLs: on a CIF Landedex-factory Level, and on a Pan-TerritorialRftional RetaiL Level, ex-TFC codowns. Working Paper No. 14 Page 5 20. TFC has been accordedan amountof T. shs. 3,500per ton to cover distributioncosts, i.e. transportfrom the port of OSM/ex-factoryto the gowdownsit maintainsin the differentregions, storage/handling and administrativeoverheads. 21. The actualcosts of transport,as calculatedon a weightedaverage basis,are for the SouthernHighlands region about T. Shs. 2,210per ton and for the CentralRegions T. Shs. 2.237per ton (seeAnnex 1 : Transport Costs). The differencebetween the amountof distributioncharges officially accordedto TFC and actualtransport costs, would leave a sufficientmargin to eitherreduce the Pan-Territorialretail prices or provideretaiLers attractiverebates for their servicesby makingthem compatiblewith prevailingrates of interest(30%). From the caLcuLationsit appearsthat at presentSA (21XN), Urea (46XN) CAN (26XN) and TSP (46%P 205) are subsidizedup to 36, 41, 52.6 and 471 respectively,if comparedwith actuaL internationalprices 0nverted onto T. ShilLingsat currentrates of exchange (USSI= T.Shs.95) and the actualcost of distributionat the primaryLeveL as accordedto TFC. The amountof money involvedin both economic(loss of revenuedue to lowerexchange rates) and financiaLsubsidies (distribution costs) by selLingsome 135,000tons of fertilizersduring the forthcoming croppingseason at currentprice levelswill be not Lessthan T. Shs. 1,000 (USS10.5milLion). A furtherloss in reIenuesestimated at T. Shs. 700 million is anticipatedif repaymentby farmersremains at 50X. The mode of financing the fiscaldeficit and the durationto phaseout the pricedifferentials betweenreaL costsand officialprices, which is pLannedto take 4 years, are stillsubjects of discussionbetween the concernedMinistries.. 22. The priceswhich farmershave to pay nowadaysfor the different typesof nitrogenousfertiLizers differ significantly when calcuLatedon a nutrientbasis and this despitesubsidies! The calculationsgiven in Annex 2 : I and 3 (i, ii) show that nitrogeninsubsidized SA is at present 901, and in subsidizedCAN 451 more expensivethan nitrogensuppLied in the form of subsidizedUrea. 23. The above imptiesthat the economicreturns which a farmerobtains from the use of fertilizerheavily depends on the type of producthe receives. 24. A comparisonbetween the economicreturns to be obtainedfrom the differentkinds of productsshows that subsidizedSA will not give any return at all, whetherpurchased on a cash or creditbasis (Annex2 : 3 (iii)), whiLe the returnsfrom the use of subsidizedCAN are unattractiveas evidenced by the vaLue cost ratios(VCR) which are below 2. The only nitrogenous fertiLizerwhich would give the averagemaize groweran adequatereturn on his investmentat the prevaiLingrates of subsidy,is Urea, as VCR's are between 1.8 and 2.1, dependingon whetherhe pays on creditor in cash. 25. The same table also shows that economicreturns to fertiliseruse would doublewhen fertilizersare used in combinationwith improvedvarieties of maizeand to such extent:thatUrea suppliedon a real cost basis would give a returnremunerative enough to foregothe need for subsidizingit. Working Paper No. 14 Page 6 26. It is obviousthat despitesubsidies, and a recent30% increase in the producer'sprice for maize,the use of fertilizeron food crops has, since 1987,become economically unattractive to farmersas a resultof the subsequentdepreciations of the TanzanianShilLing and the low effectswhich fertilizerhas on yieLdsof locaLvarieties of maize and other food crops. Unlesshigh-yieLding varieties, of maize in particuLar,are being introduced on a Largerscale, the efficiencyof fertilizeruse in the countrywill remainlow. 27. The above supportsthe view that the rate of repaymentof the Loans under which inputsare being supplied wilL furtherdecline in the forthcomingseason(s) and that it will becomealmost impossible for the Governmentto pbaseout subsidiesover a periodof 4 years,as planned,without provokinga backLashin fertilizeruse. 28. By and Large it appearsthat fertilizerpricing in the country is not formuLatedin a scientificmanner and that it lacksa systematicand consistentapproach by not takinginto accountyield effects and the grade/ price which the differentproducts have on the cost of distribution/procurement and on economic returns to farmers. V. Recommendations. 29. The suppliesand use of low to mediumgrade fertilizerproducts shouldgradualLy be phasedout and replacedby high analysisproducts, which may be manufacturedLocally in due course. Additionally,supplies and the use of nitrogenous-versus-phosphaticfertilizers should become more balanced. 30. Pricingof fertilizersshould be formulatedon a nutrient-cost ratherthan on a product-costbasis, and be finelytuned to pricesof crops,expected yield-increase effects and nationaltargets of crop production/ 31. High-yieLdingvarieties of maize and other food crops should suibstitutefor the Locallyused low-yieLdingvarieties at an acceLerated pace to improveon fertilizeruse efficientlyand to phase out subsidies. 32. The cost of fertiLizerdistribution shouLd be reducedby: (i) The procurementand suppliesof a propermix of high anilysis fertilizers,i.e. Urea, TSPIDAP; (ii) Monthlymonitoring of fertili2ermovements on the basis of a detailedLogistic plan for the distributionof suppLies to the variousregions, tonnage, time and cost-wise,to be preparedannuaLLy in advanceof the season,and to schedule procurementsand shipmentsaccordingly. 33. To ease the problemsreLated to the Logisticsof suppliesand their internaldistribution at all LeveLs,it is icerative that the current unbaLancedpattern of orderingat the retailtevel be improved,by taking measuresdirected at: Working Paper No. 14 (i) Encouragingcooperatives to promotecash salesthrough incentives for cash purchasesby farmersin the off seasonand at the time of crop marketing; (ii) SubjectingseasonaL input credit to a greatermeasure of scrutiny and selectivenessin regardto farmers'actuaL needs and credit- worthiness(CRBD/Primary Societies); (iii) SimpLifyingand streamLiningprocedures for estabLishing annuaLinput requirementsand Loanapptications (Cooperatives) and uLtimate Loan approvaL(CRDB); (iv) Improvingthe Logisticplanning and organizationof crop marketing and inputsuppLy distribution (Cooperative Unions); (v) Diversifyingand enLargingthe infrastructureof retaiLingthrough the openingof channeLsof distributionparaLLeL and compLementary to thoseof the Cooperatives; (vi) ExpandingfertiLizer suppLies on aconsignmentbasis and offering retaiLersappropriate rebates for buLk and off-seasonpurchases in accordancewith the prevailingrates of interest(TFC); (vii) Passingon discountrebates for purchasesin the off-seasonto the end user (retailers); (viii) To providefor more competition,more baLancedordering and efficiencyin retaiLopLejajtions, and a betterservice to farmers,it is advisablefor the Localauthorities to encourageexisting farm inputretail organizations, private merchants and otherparties, to open new outletseither whotly-owned, co-owned or on a franchise basisat districtand/or divisiooal Level, by providingthem with the requiredLicences and equitabletreatment in mattersof pricing, creditfacilities and marketingof crops.; (ix) The processof;collecting and monitoringdata and information on suppLies,movements, offtake, stock positions and actual consumptionon the district,regional and nationaLLevel shouLd be furtherimproved, better coordinated and centraLized,so as to providea reliabLebasis for makingaccurate product demand estimatesper region,crop and season,and to furnishqualified and appropriatefeedback information to alL partiesinvoLved in agriculturalinput activities; (x) Sinceinformation on the economicsof fertilizeruse and effects in the differentagro-ecological zones is stiLLinadequate, Kilimo, throughthe FAO FertitizerProgramme, shoutd undertake alL efforts to have relevantinformation regularly avaiLabLe, to provideprice settingauthorities with the basicdata for estabLishingremunerative crop/fertilizerprice retationships; WorkingPaper No. 14 Page 8 (xi) Last,but not Least,to enhancethe scopeof fertilizerdonations in contributingmore effectivelyto the much neededtreasury income and budgetsupport, it is imperativathat the concernedauthorities undertakegreater efforss in enforcingthe repaymentof outstanding seasonaLoans, promoting cash saLes,reducing distribution costs, procuring high analysisfertiLizers andhiqhyielding crop varieties from abroad,and in phasingoui farm inputsubsidies. VI. AssistanceRequired 34. Sincethe presentdonor countries have indicatedtheir willingness to continueto increasetheir fertilizer supplies in accordancewith the country'srequirements on a mutti-yearcommitment basis, and suppliesfor the comingseason are eithercommitted or firmLypLedged, there seems little need of additionafunding for comptementaryimports in the comingyears. 35. The scopeof assistancelies therefore mainlyin the fieldof investmentsfor infrastructuralimprovements and in fertilizerproduction facilities,such as: Xi) RevampingTFC's factory at Tanga into a TSP plant exclusivelybased on the use of localrock phosphateal a raw material; (ii) Wagonsand enginesfor the NorthernTRC rail lineto facilitate distribution of fertilizers to the Northern parts of the country; (iii) MuLti-purposestorage faciLities at the viLLageand district Level whenever justified and viable; (iv) Constructionof civilworks for farm servicecentres at district/villagelevel wherever feasible and economicalLy justified. 36. Additionally, technical and policy support may be given to Kilimo for strengtheningthe functionsof the inputsection in collecting,monitoring and evaLuating information and data concerning fertilizers and other agriculturalinputs, and to the CooperativeUnions to improveand rationalize the pLanning, organization and managementof theirprimary input supply and crop marketingfunctions. 37. PreLiminary studies should be undertaken: Item 1: To establishthe appropriatecapacity and technologiesto be -~ adoptedto justifyeconomically and financiallysound operations and to ascertain the measure and techniques required to upgrade the Mijingu phosphate rock to an industrial grade; Item 2: To establish the scope, location, product range for expanding the numberof farm seriicecentres as well as the criteriafor turnover and managementto justifyviable retail operations. Working Paper No. 14 Page 9 B. Seed Productionand Supply I. Background 1. Good quaLityseed is not onLy a vitalmeans of improvingyields but it is equallyessential to obtainthe maximumefficiency of otherinputs, in particuLarfertiLizers. 2. ResuLtsof experimentsconducted in the countryprovide ample evidence that with propermanagement, hybrid maize wilL yieldnot Less than 15 kg of additionaLgrain per kilogrammeot appLiednutrient (NIP 20 ) againstonly 6 to 8 kg for the traditionalvarieties and 10 to 12 kg for i;provedlines of composites(OP). 3. Yet, while the use of fertilizerhas spreadto anythingbetween 15 and 20% of the cuLtivatedarea, certifiedseeds cover tess than 5% of the food crop acreage.As a matterof fact,effectime demand for locally producedseeds supplied by TANSEEDhas declinedover the last 10 years and the majorityof farmersapparently prefer to sow theirown home-grownseeds. Table 2: Seed Suppliesand Distribution Year ProductionImports (Hybrid Maize) Total ActuaL Variation AvaiLab.Distrib. (UnsoLdCarry-Over by TANSEED Stocks) 5...... Tons...... 1976-77 7,160 14 7,174 5,224 1,950 1980-81 6,106 1,820 7,926 5,609 2,317 1985-86 5,324 1,300 6,624 -5,834 781 1986r87 5,196 1,600 6,796 4,544 2,252 1987-88 5,252 1,885 7,137 4,604 2,533 (Preliminary) 4. 5iththe quantitiesof,fertitizer presently being used, maize- yieLdscould easily be doubledby the use of properseeds, hybrid and/or OP. Consequently,if improvedvarieties would substitutefor the traditionat ones, the impacton fertilizeruse efficiencyin-particuLar, and on agriculturaL productivityin generat,woutd be very significant. 5. On the basis of 100% acreagecoverage, the potentialdemand for certified hylbridseeds of maizecould be theoretically100,C00 tons. Effective demandfor both hybrids and improved composites (OP) shoutd be anything between 10,000 and 20,000 tons per-year taking-into account that 15 to20X of the maizeacreage is receiving fertkitfers.;regu(arly by now. IS. The Probtem 6. The main reasons for the tow and declining demandfor, and w pplies of, improved seeds are: Working PaperNo. 14 Page 10 7. Certifiedseeds supplied by TANSEE0from Localproduction are, in general,not of desiredquality and performtess than satisfactorilydue to: Mi) Apparentgenetic deterioration of old stockof breedingmaterial; (ii) Low purityand germinationratings because of poor quality of existingfacilities for seed processing,drying and storage; (iii) Inadequatequality control and enforcementof the seed regulationstandard act. 8. Lack of sufficientdiversified breeder seed materialand shortages of linesof high performancevarieties adapted to the specificrequirements of the main agro-ecologicaLzones. 9. The presentorganizational structure of seed productionand distribution,which constrains the developmentof an active,viabLe and efficientseed industryin the country. 10. Limitationson importsof qualifiedseeds from abroaddue to Forexconstraints. UII. Remedies 11. To createa demandfor seed it is imperativeto ensurethe availabilityof high-yieLdingquality seeds either through imports or Locat suppliesto be producedsystematically through breeder, foundation and certifiedstages. To improvethe presentsituation the followingpolicy decisionshave to be taken: (i) Increasingsupplies of qualityseeds from abroadthrough the Liberalizationof imports,deregulation of pricing and marketingof certifiedseed to build-upa market; (ii) Re-enforcingthe Seed ReguLationAct by strengtheningthe quality controlcapability and operationsof TOSCA to maintain high qualityseed standards; (iii) PrivatizationofTANSEED by expandingits capitalbase and transforming it from a parastatalinto a privateholding corporation with equityparticipation of both local 'TTANWAT,NAFCO, State FoundationalFarms) and foreignseed industriesto functionas a major producerof foundationand supplierof certifiedseeds at strategicallysituated Locations close to the marketand at competitiveprices. Working Paper No. 14 Page 11 Medium Term BreedingRequirements (iv) EstabLishan inventoryof available Lines of crop varieties with a proven record of performancefor propagationin distinct agro-ecoLogicaLzones; (v) Complementthe inventoryof breedermaterial throughvarietal importation,evaluation and maintenanceof cuLtivarsof high geneticand suitablequaLity to buiLd-upan adequatestock of new and diversifiedbreeder seed; (vi) Strengthenthe operationsand performanceof existingbreeder stationsby rehabiLitatingand upgradingtheir facilities and by trainingtheir staff. IV. AssistanceRequired 12, Fundingimports of certifiedseeds of hybrid maize and other food crops from abroad: Quantitiesinvolved: 10,000 tons valued at US$10 mitlion. 13. Technicalsupport to assist the Governmentin formulatinga clear policy in regard to seed research,production and marketing. 14. financiaLand technicalsupport to strengthenTOSCA in exercisingstricter control on seed quality and in enforcingthe seed law. (This item is aLready coveredunder the FAO/UNDPProject URT 86/015/01/12 : December 1987 : "Developmentof NationalSeed Production: UNDP input: USS2.93 miLlion - see Annex 3). 15. Financialand technicalsupport to a selectednumber of research and breeding stationsto improvetheir resourcesand facilities. (This item wilt be coveradby: FAO/UNDPProject : DeveLopmentof NationalSeed ProductionaTanzania - Canada Wheat Programme) CIAT/IRRIAssistance; EEC Tentat'ivePLans for Assistancein Rehabilitationand Training: Valued at ECU : 2.3 million; as proposed in a study prepared for the EEC by AGRAR ConsuLting,Germany, entitled: "TanzaniaSeed Industry Study". 16. Financialsupport to upgrade and rehabilitatethe quality of seed processing,drying, testing and storage facilitiesat selected Locations (alreadycovered by the FAO/UNDPProject and anticipatedEEC funding). 17. Funds to assist in the financingof the developmentof a private seed industry in the country. Working Paper No. 14 Page 12 C. Agro-Chemicats i.W The deregutationpolicy for agro-chemicals,initiated in 1987, - has so far not generatedthe proper impetusto freeopen marketoperations and expansion,as anticipated,due to muLtipLereasons. 4 *9. The main constraintsstill are: Limitationson the issuanceof importLicences due to persistentshortages in Forex,the amountand cost of cash advancepayments, delays in the openingof Lettersof Credit(L/C's), creditceilings and the Linesof creditopen to privateimporters/distributers estabLishedin Tanzania,which are tied to productsfrom the donatingcountries. SuopLiesand Distribution 3 20. SuppLiesof agro-chemicalsin 1987-88remained at the LeveLof averageimports during 1985-87. They fell shortof requirementsparticuLarly in the food crop sector,due to shortagesof Forex. Againscan originaL outLayof US$30million, of whichUSS16 miLlion were supposedto be made avaiLableby the SOT from the country'sown resources,agro-chemicaLs worth USS22.5mitLion were importedduring the wholeof 1987-88,of whichUSS1.4 throughlicences issued by SOT, USS5.75miLlion from retentionaccounts (CottonMarketing Board) and USS5.27miLLion under tied importsupport arrangementsfrom donorcountries. Supties of Agro-chemicils Year Insecticides Fungicides Herbicides TotaL Estimated LiquidsPowder LiquidsPowder LiquidsPowder LiquidPowder Imports - ZTGF V O - (os V'00T (tons) (tons) Value * rT)5 -tOT.) -) -. ) (USS HiLL.) 1985-86 2,190 319 150 4,685 896 - 3,236 5,004 1986-87 1,600 - 171 2,404 69 - 1,840 2,404 19.6 1987-88 2,127 818 780 2,321 390 32 2,69? 3,171 22.5 DemandForecast 1988-89 3,726 1,017 690 6,277 2,304 292 6,721 7,587 47 1989-90 3,915 1,160 724 6,591 2,422 307 7,062 8,058 51 34. ALLocationsfor Forexfor Pesticidesupplies had becomerestricted in the courseof the year due to a sh4ft in prioritiesregarding the spending of avaitableresources and partLyaLso as a resultof Late aLiocationof funds for generalaimport supportby severaLinternational finance organizations. Neither the coffee nor the tobacco board held procurementtenders during 1987-88. -Theftrequirements were coveredby suppLies from Late arrivals of ordersplaced in 1986,8?. The CottonMarketing Board is an exception, becaug'eit receivesits annualsupoties directLy under a standingarrangement With.the fore 4in.buyers of cotton. 32. None of the .prnvate.channels of trade received Licences to fmport Pesticides in 1987-88 ove^.and anove the vugr'titles accorded to the'by donor Countries' on'atied creditt.aasis.; Working Paper No. 14 Page 13 Table 4: Pesticides SuPpLied and Distributed in 1987-88 Categories of ities Value of Inports (US Mill) Pesticides LiQuii Fwer Coffee Cotton htners Total WT- Retention Tied Credit en Lit) ITaT) -Acc t -Contt Insecticides SLvpLied: 2,163 818 2.90 5.6 - 8.51 1.74 5.6 1,17 Distributed: 2,127 832 Rxicides SrvLped: a180 2,321 11.82 - - 11.82 7.7 - 4.1 Distributed: 180 2,321 Herbicides SuppLied: 390 32 0.57 0.41 1.17 2.15 2.0 0.15 - Distributed: 354 32 ISM 60 1.17 2. 11.44 5.75 5.27 6. The requirements as officialLy established for 1988-89 are the foLlowing: Insecticides: 3,726,000 Litres + 1,017 tons of powder; Fungicides: 960,000 Litres + 6,278 tons of powder; Herbicides: 2,305,000 Litres + 292 tons of powder. Distributed according to crops and institutions they are as folLows: Coffee; ... cottnx. &SarcwteandI ccw NPCAISCD. Kitimo LiqA ibFowiqneFiri LiqAl Poibr LIq isEr Li9AZ7ds wder TM-tIt) 71TlT) (OUM ' t -?iTars t'C Lit) (WLti (T Lit) 1T T uecticides 937 80 2,423 - 11 460 277 270 76 MD ,Vicides 690 6,O= - - - - - 164 - 23 erbicides 493 25S 83D 26 .2 9.8 11 - - )taL: 2,120 6,170 2,487 255 841 48 1,195 645 76 223 .The totaL vaLue-of the.above.equirements.is estimated at USS47 miLLion for which import support is being solicited bj the Government. Some20X of thts_mount is ;upposed stobe,provided by.the traditionaL donor. citries on a tied credit basis. Working Paper No. 14 Page 14 II. ProcurementConstraints 7 The requirementto cash deposit with the Treasury the entire counter-valueof the import licencein Local currencyprior to the establishmentof the relevantLetter of Credit (L/C) is stilL the rule. 8. It stretchesthe financialability of many an importer to the maximim nowadaysas: (i) The amount of cash depositshas increasedby at Least 75Z since Last year as a result of the successive depreciationsof the TanzanianshitLing; (ii) The Bank rates on overdraftfacilities have increased from 22 to 30%; (iii) The time lapse between the openingof the L/C and the arrival of goods is still anythingbetween 3 and 6 months dependingon forex availabilityand clearanceby the SOT; (iv) Import licencesare still being reLievedonty twice a year. 9g Althoughthe Treasuryhas lately been somewhat more flexible regardingthe reschedulingof the cash advance payment from the time of the L/C untiL the time of the arrivalof goods, and import Licencesare issued more regulartyover the year, these facilitiesare only negotiabLeon a case-to-casebasis and seem to have been grantedmainly to public and parastatalorganizations having obtained import Licences. In addition,the ceilings imposedon overdraftfacilities have not been modified since Last year and adjusted in correspondencewith the significantdevaluations of the Tanzanianshilling. 10. However,the system has become somewhat more relaxed lately, and any borrower is now entitted to take up new loans up to the set Limit, any time old debts are being repaid. for companieswhich manage their sales and scheduLetheir cash ftows efficiently,the ceilingon credit is no Longer the major constraintto their operations. 11. Nevertheless,the nationalcredit ceilingas agreed upon with the IMF is for about 80% absorbedby the parastatalmarketing boards. The mobility and recyclingof their loans is low because it lies frozen,in the form of unsoad commoditiesin their warehouses. This severely reduces the amount of credit availabLeto the private sector throughout.most;of the financialyear. 12. A further constraintconcerns the tied characterof credit opened by donor countriesin favour of the establishedprivate distributors of agro-chemicats. These Lines of credit are being tied to purchasesof specific products from the donor country'sindustries. The deregulation policy has enabLed other foreignsuppliers to enter the tender market with a variety of differentproducts againstwhich the estabtishedcompanies, not being abLe to bring in the products they wanted, find it difficultto compete. Working Paper No. 14 Page 15 III. Prices 13. Listed whoLesale prices have gone up by 80 to 100X since last year correspondiL8g to the rate of depreciation of the Tanzanian shilling. In a few cases these prices have gone up by even higher percentages refLecting shortages of supplies for certain products in the market. On the other hand, considerable rebates on wholesale prices of standard products seem to be given nowadays, as competition among supptiers has become fierce. 14. Demand for agro-chemicaLs, particuLarly in the food crop sector, is in spite of huge price increase in Local currency and fluctuations in the absence of a stable rate of exchange, stilt very strong and not covered by adequate supplies, in particular herbicides. Yet buyers seem to have become more critical in their purchases and more conscious about quality and effectiveness of products. Categories of Agro-Chemicals WhoLesale Prices (T.Shstkg or Litre) 1986 - 87 1987 - 88 Insecticides Fenitrothion 50% EX. 340 710 Methidathion 15/35Z ULV 240 385 EndosuLfan 35% E.C. 250 450 Herbicides Gramoxone 20% (paraquat) 460 770 Gesaprim (Atrazine) 250 1,000 Stam f-34, 36% E.C. (propanil) 250 540 Fungicides No information avaitable for 1987-88 in the absence of tender market quotations. IV. Recommendations 15. The recommendations formuLated in a previous working paper "Input Supply and Credit Pre-Identification Mission - July 198?" are stilt valid, but priority consideration shoutd be given to the following policy issues: (i) EquitabLe treatment between parastatals and private firms in the access toaimport-ticences; (ii) Equitable treatment to atl import licence holders regarding. the time-of cash advance payments which shouLd be postponed.-' untilthe arrivadtofgoods, and the issuanceof import 'icences -hich4should be an a cont4nucusbasis throughout. the year,. (iii) -Adjustment 6t the ceilingan-overdraft facilities. 14 adoraance wuj; the rates of devaluationof the Tananlat - *.ahtuting; Working Paper No. 14 Page 16 (iv) Lines of tied credit by donor countriesshould be modifiedto the extent that importers/distributorsare free to use the funds for products the market requires. V. AssistanceRequired 16. Fundingimport support for promotingpesticide use in the food crop sector through lines of credit to the private sector witting to agree on the type ofpesticidesto be importedand to procure their requirements jointlyby internationaltendering. Total amount involved:USS8-10 miLlion. TANZANIA fertlimr OfftakeTotal ProdLctard t&rient Easis Year Totat Procijt (t (P205) 0(VO) MC Total 2 Ratio ~~~~~~~~~To...... __. 1972 53,883 8,888 5,365 3,337 17,590 32.6 2.7 : 1.6 1 1973 66,370 - 1975 95,541 - - _ _ _ _ 1980 lU,G091 19,243 10,259 3,652 33,154 30.9 5.3 : 2.8 1 1981-82 96,569 - - - - 1982-83 - - 82,475 16,455 5,191 3,096 24,742 29.9 5.3: 1.7? 1983-4 1 89,874 17,03? 6,644 3,502 27,183 30.2 4.9 : 1.9 19M8S : 1 99,474 20,767 8,88? 3,692 33,346 33.5 6.6 : 2.6 : 1 195-86 118,069 26,20S 11,518 3,789 41,512 35.2 7.4 1986-8? : 3.2 1 123,446 27,141 12,34S 3,755 43,241 35.0 7.7 : 198?d8 3.2 : 1 Preltiminary 133,389 3D,867 12,425 3,154 46,446 34.8 9.8 : 3.9: 1 G6wth Rates: l972;87 9.QX 6.3X .X7C 198-8? .13.CK 14.6X 5.2% 13.5 Souei: Irputs Section: Ministry of Agriculture *.a _ 01b TANLAMA Eertitizer OfftakePromdt Based Yesa AS CAN Urea TSP SOP Total Straight % Total CUiZds % ~~~~~~~~Tom.... O...... ) (TOM)MM 1972 19,332 4,2C0 1,973 3,21? 1,456 30,178 63 17,742 3? 1980 47,769 19,725 3,412 13,501 1,294 85,M71 8 21,390 20 19182-3 39,282 14,212 3,819 4,820 1,57 63,703 7? 18,774 23 1985 35,615 12,014 15,75 11,239 593 75,215 75.6 24,259 24.4 1995-86 24,26? 28074 23,1O 17,425 1,116 93,92 79.7 24,07? 20.3 1986-8 26,842 28,465 24,043 18,080 144 97,574 80 25,872 20 16-8? a 21.? 23.1 19.5 14.6 0.1 80.0 20.0 1987-88Preliminary 29,121 33,211 30,116 19,511 416 112,375 84.2 21,014 15.8 % 21.8% 24.9% 22.6X 14.6Z 0.3 84.2X 15.g S_: Irpts Sectic: Ministry of Agriculture r: 0 0S- we Oe Q% 4~~~~~~~ TAheANIA RegiontOft-take Top Ten Regic -1 (in Tons) #bg1cns1987-B88 % t92k,87__X 1985 X 1980 % 1975 X irinps 38,789 29.6 35,79M 27.5 25,233 21.4 22,248 20.8 17,625 18.8 Pbeya 23,580 18.0 25,055 19.3 27,232 23.2 16,085 15.0 7,875 8.4 &AAA3 21,374 16.3 20,743 15.9 22,655 19.2 17,675 16.5 6,891 7.4 Tdwora 14,416 11.0 15,546 11.9 13,217 11.2 12,234 11.4 17,767 19.0 KiLiaujaro 4,542 3.5 7,163 5.5 7,982 6.8 5,901 5.5 4,645 5.0 RAiW 8,317 6.4 9,976 7.? 4,393 3.? 6,540 6.2 (2,258) - Pbrugor 3,554 2.7 1,556 1.2 2,902 2.5 4,653 4.3 2,831 3.0 Anrshia 3,164 2.4 3,652 2.0 2,553 2.2 2,75l 2.6 7,113 7.6 Tawgs 1,556 1.2 (1,26B2 - 2,317 1.9 3,929 3.7 (2,303) - Kipgi 3,399 2.6 (763) - 2,033 1.7 (1,661) - 3,427 3.7 Shirianga 3,136 2.4 1,951 1.5 (1,112) - 2,606 2.4 (2,207) - Mbra 1,228 0.9 (72?) - (715) - 2,840 3.0 (727) - ewnza 2,582 2.0 3,O86 2.4 (1,642) - (2,923) - 5,859 6.3 12,637 - 99.0 124,52- 95.7 110,517 93.6 94,622 88.4 76,83 87.2 TotaL offtake: 131,059 100.0 130,124 10D.0 118,069 100.0 107,Og1 100.0 93,541 100.0 Itncudirg uwxeuted or*rs. S9ari: frp.ts Section : Mnistry of Agricutture fb0 0 TAIUNMA lvports xr,l Lot Proiticai (in TOM) P,wgts 1975 19E 1981 1982 1983 Crtpping SeasoA *Nggorts 198(-85 1985-06 1988 1987-88 AS 29,700 31,832 29,684 33,333 25,533 23,150 14,463 13,000 9,900 CAN 7,S00 26,0 12,00 25,000 15,00 13,560 26,09 37,9 32,m Uta 6,460 10,89 4,465 12,450 40 24,940 36,344 21,435 36,22? SP - a - a - 12,540 12,000 6A0 12,10 PFt@s 4,4X - 8,300 12,000 10,00 10,000 15,002 8,40 8,$,c SOP 8,552 - - 2,000 6,000 3,000 2,400 - 1,00 TOTAL: 56,612 68,641 54,449 85,8 57,433 87,190 106,278 66,765 99,427 Grmts: 6,8W 63,141 44,"S ,783 51,433 83,390 106,278 86,765 99,427 LocaLlPfttim AS 17,954 19,48 24,922 6,839 14,808 23,4%9 12,714 19,035 9,813 TSP 19,71? 12,313 14,504 2,943 7,098 9,662 7,398 3,537 470 MI's 21,90 19,071 29,40 3,880 9,331 24,332 13,88 25,185 9,012 TOTAL: S9,511 50,852 69,031 13,662 31,23? 57,480 33,962 47,757 19,295 GM tOTALSLF..1ES: 116,183 119,493 123,40D 99,44S 88,670 144,670 140,240 134,522 118,722 Sarce: TFC,Statistics hwts Section: Ministry of AgriwAtture 0 tb 0 Working Paper No. 14 Annex 1 Page 1 TANZANIA * fertilizerTransport Costs (a) Distancesin Km: Rail Road Total DSM - f4orogoro 250 - 250 - Dodoma 480 - 480 - Tabora 1,050 - 1,050 - Kigoma 1,540 - 1,540 - Rukwa 851 420 1,270 - Mbeya 850 - 850 - Iringa 500 - 500 - Ruvuma 674 300 974 (b) FertitizersDistributed in 1987-88 (tons) CentraL Zone Morogoro I 3,554 Dodoma 437 Tabora 14,416 Kigoma 3,399 Rukwa 8,317 Total.: 30,123 231 of the NationaLtotal. Southern HighlandsMlbeya 23,580 tringa 38,789 Ruvuma ?1,374 Tbtal: 83,743 = 64Z of the NationaltotaL. Northern Zone Tanga 1,556 Arusha 3,164 Nwanza 2,582 Nara 1,228 Kagara 12 Shinyanga 3,136 Total: 11,678 = 91 of the Nationaltotat. Coastal Zone 5,456 = 41 of the Nationaltotal. (c) Tariffs: Rail TRC Central Line: T.Shs. 1.5 per ton/km Rail Tazara TFC Mode of Transport: Some 151 or 18,000 tons of the fertilizershandled by TFC are transportedby road; the balanceby rail. For both rail and road transportTFC enjoys rebateson the above tariffs of which the size depends on the tonnages to be moved and the season of transport. Working Paper No. 14 Annex 1 Page Z (d) Average Cost of Transport to CentraL Zone 1. TotaL distance travetled by rail along Central Line: DSf - forogoro : 3,554 tons x 250 km = 888,500 km - Dodoma : 437 tons x 480 km E 209,760 km - Tabora : 14,416 tons x 1,050 km = 15,136,800km - Kigoma 3,399 tons x 1,540 km = 5,234,460 km TotaL: 21,806 tons 21,469,520 km Average distance travetled per ton by Rail (CentraL Line): 9 1 km 2. Distance travelledby rail along Southern Tazara Line: OSM - Rukwa : 8,317 tons x 851 km 7,077,767 km By Road 8,317 tons x 420 km 3,493,140 km 3. Total Rail Costs: Central Line: 21,469,520 x 1.5 = T.Shs. 32,204,280 Tatara Line: 7,077,767 x 2.5 = T.Shs. 17,694,417 Road Costs: 3,493,140 x 7.87 T.Shs. 27,491,011 Total: T.Shs. 67,389,708 4. weighted Average Transport Cost Central Zone: T.Shs. 2,23? per ton Actual cost to Kigoma: T.Shs. 2,310 per ton Tabora T.Shs. 1,575 per ton Rukwa T.Shs. 5,433 per ton (e) Average Cost of Transport to Southemn Highlands 1. Total distance by rait along Tatara Line: DSN - Pbeya : 23,580 tons x 850 km 20,043,000 km - Irings: 38,789 tons x 50 km 19,394,500 km - Ruvuma: 21,374 tons x 6?4 km 14,406,076 km TotaL- 83,743 tons 53,843,576 km By road: Ruvuma: 21,374 tons x 300 km 6,412,200 km Average distance travelLed per ton by rail: 643 km = 2. Total Rai. Costs: 53,843,576 x 2.5 T.Shs. 134,608,940 Total Road Costs: 6,412,200 x 7.87 T.Shs. 50,46X,014 Total Costs: T.Shs. 185,072,954 3. Weighted Average Cost of transport to SouthehnHighLands: T.Shs. 2,210 per ton atv4 Actual Cost to Ruvuma.: T.Shs. 4,064 per ton Working Paper No. 14 Annex 2 Page I TANZANIA The Economics of Fertilizer Use 1. FertiLizer Prices Comparison between ReaL Costs and Officiat Prices (SEE TABLE 1) 2. Amount of Money InvoLved in Distributing Subsidized SuppLies of Straight FertiLizers During 1988-89 SA: 22,400 tons x T.Shs. 5,793 = T.Shs. 129,763,200 Urea: 26,000 tons x T.Shs. 8,293 = T.Shs. 215,618,000 CAN: 34,000 tons x T.Shs.10,63L2= T.Shs. 361,488,000 TSP: 22,000tons x T.Shs.12,215= T.Shs.269,522,000 IZZWtons T.Shs. 976,39-1,2U of which: Loss in Revenue (EconomicSudsidy)T.Shs. 601,126,400 = 62: Distribution Casts (FinanciaL Subsidy) T.Shs.375,264,800 = 38, 3. FertiLizer Price CalcuLation on a Nutrient Basis Ci) Imports Product Basis SA Urea CAN TSP WorLd market:(S/ton) 115 155 158 215 Donors prices(VSton) 204 160-170 150-180 267 - Nutrient Eisis WorldMarket:(S/ton)548 337 608 467 T.Shs./ton.:... :52,000 32,000 57,800 44,400 Exchange rate: USS I u T.Shs. 95 (ii) End-User Prices ReaL cost basis; cash(T.Shs./kg Nutrient) 77.0 43.6 77.8 56.3 Subsidizedcost basis; cash 49.4 25.6 36.9 29.6 Subsidizedcost basis; credit 57.5 29.7 42.6 34.4 Working Paper No. 14 Annex 2 Page 2 (iii) Economic Returns to End-User Growing Locat Varieties of Maize (and Improved Seeds) Average Value Cost Ratios (VCR) Reat Cost Basis Subsidized Cost Basis Cash Credit Cash N - Urea 1.24 (2.47) 1.82 (3.6) 2.11 (4.2). N - CAN Negative (1.40) 1.27 Q.5) 1A6 (2.9) N - SA Negative (1.40) Negative (1.F,8) 1.09 (2.2) OfficiaL Producers' price for Maize: T.Shs. 9 per kg Average response to 1 Kg of Nutrient Local variety: 6 Kg of Maize, value: T.Shs.54 Average response to 1 Kg of Nutrient Improved variety: 12 Kg of Maize, value: T.Shs.108 VCR = Vatue Increase .in Production Cost of FertiLizer.Nutrient Between Brackets VCR applicabLe to use of fertilizer onimproved Varieties of Maize TAI~NIA Fertilizer Prices : Co"arlson 8eteen Real Costs and Offical Prices as at Jine 1988 (46Xk) Price evakdiin 9u lphte of Ammia (SA21X tO Urea ctualCost -Opis /11OffiiaLLZ Fixed Actual Costs / OfficialLy Fixed W3rLd Atrkat 93A-781978MIncrease W b rld rarket Actual 198-B Ierease Sl/to-nSiFAto Tsh7ton Noun I $/tonTIshton u Tshitcon T 7Tton 14,725 10,032 5,354 87 1. CIF/MD 115 10,925 8,719 4,390 100 155 3tF -1W 2,286 2. Rimawyblstribitien Chargs IFC 30s0 250 3. Pw-TerrtowiaLPrice 17SI2M 9,932 7W 'K 4. Seca'IhayDistribJtion Charges 1,846 1,846 1,420 (Oocp. thi1) - 7 1,750 1,360 1Z071 11,718 9,00 s S. EMWerMree CashBsis - TIM -0 1,460 ,. Interst Oharges(2M _ 1,7OD 1,70D 1,2B80 1,89 1,898 10,520 30 7. bdwer PriceCredit Basis 17,875 12,082 9,280 30 21,969 13,676 kwvJLItts % hts % Ssd acnCash Bsis (5) 1988 ExchangeRate 6iffremnce 2,206 4,693 8. 0 Primtry Distribion 3 587 3= 37~~36 8M = 41 Oueal toss of Rrue S Repayment Buis (198 6,041 6,838 IT = 66 15-,131 68 -~~~~~~~~~~~~~~~ 0 11 Actualt bdars vatid otficial prites. F0_000 0 Working Paper NQo. 14 Annex 2 Table I Page @01~~~~~~2'i''1IXMI ffi 0 . oe - -R |! nil U I1t@b 01 gp P P "U I° 1- IO-tNS 1 *st - _ at IKZ Xai __ai *1Zi}t# S ___ 8~~ d 1 - I WorkinR Paper No. 14 Annex 3 Page 1 TANZANIA Intended FAO Programme/UNDP Titte: Developmentof NationalSeed Production Duration: 4 years UNDP Input: US$2,291,680 GovernmentInput: T.Sh. 20,956,000 Implementation: Tentative1988 FAO Advance Action: 1987 - on site Key Components (Objectives) Extract from UNDP ProjectDocument Patt 2 The Project Part 3.2: fAO/UNDP Inputs Should this projectbe impLementedas indicated,there wouLd be an overlap with the consultant'sproposal in the folLowingareas: PlantBreeding; fS productionon fS Farms; Seed Certification PART 2: The Project 2.1 ImmedisteObjectives The primary objectiveof the Project is to assist the Government'sdeveLopment effort in the field of quality seed productionof improved;cropvarieties of cereals,vegetables and other crops, within the Ministry of Agriculture and LivestockDeveLopment, under the Seed ProductionDivision and in fulL collaborationwith other institutions(TANSEED, TARO, TANWAT, AgricuLturaL and HorticulturalResearch Stations). A timeLy and efficientinput should aim to meet the national requirementsof certifiedand commercialseeds by 1991. Working Paper No. 14 Annex 3 Page 2 To supportthis objectivethe project has the followingtargets: 2.1.1. Strengtheningof Seed/HorticulturalDivision of Ministryof AgricuLtureand LivestockDeveLopment, to plan, coordinateand implement vegetableseed produCtionprogramme at agreed Locations,namely Sokoine Universityof AgricuLture,Mborogoro for tropicalvegetabLes: TANWAT (Njombe) and HorticulturalResearch and Training Institute,Tengeru (Arusha)for temperatevegetable crops and UyoLe AgricultureCentre (Mbeya)for sub-tropicaL crops. 2.1.2. Developmentof a systematicseed productionprogramme to be fulLy operationalby 1990 by: - varietal evaluation of local and imported cultivars and selectionof suitablegenetypes; - maintenanceof improvedand selectedcultivars, to build-up breederseed; - productionof Foundationseed. 2.1.3. Provisionof necessaryprocessing and storageequipment for handling seeds, including: - seed threshing,extraction equipment; - processingequipment, including scaperators, air cleaners,. indent cylinderand matching gravity separatorand processing chains; - conditionedstorage and drying facilitiesas required; - provision of spares to enable Foundation Seed Farms to increase output of foundation seeds to meet national requirements by 1991. 2.1.4. Assist TOSCAto develop timely field inspections and to define quality standardsfor such inspectionsas well as improvingquality of laboratory assessmentsfor seed testing. 2.1.5. Developtechnical skill of national staff in seed productionby: - in-servicetraining; - overseastraining. The project,on comptetionwill supply sufficientquantities of breeders foundation.aidcertifiedseed of all main crops to meet the Government's developmentobjective of self-sufficiencyin seed suppliesand improving the nutritionalstatus of its populationas well as improvingnet incomes. The foundationseed generatedunder the project will be utiLized for certified seed production through contract growers such as TANWATand Foundation Seed Farms as welL as suitably seLectedand supervisedprivate growers and farmers. .4. Working Paper No. 14 Annex 3 Page 3 The whole will be coordinatedbetween the Seed Division 3.2 FAO/UAMPIncuts 3.2.1 Persnnel Services Curation - One Tom Jeadier/So T1 :om1Aist 48 umths - Oce Sad PooWssingaid StorageiaZ hddine bq ert 36 muiths - ane Vegetabe f a e 2n/Sd beft 36 aorsi - Oe Sead Qiality Co*zo ote.rt forC and Seed Ttizq 24 nmths - One Plant Bremier 24 u,nths - One UN Vobunteer for S5 ftuZ1ctir, Procsing, SeCed ind Testinq at Kiziubii (Zazibar) 36 months - R.eviJ isslofl 2 x 3 ekcs 3.2.2 Fell lships SO m in the fieds of: - Sad PMctin and PzMMing 4 x 6 hm - Fm adiry 3 x 6 nm - Seed Certiicatim and Tetng 2 x 4 m 3.2.3. EQuipment - Twocomplete sets of seed processing plants of 1 ton/hour capacity for Foundation Seed Farm at babaga and Kizimbani (Zanzibar) with spare parts; fare machinery conprising six tractors .(WO0 h p) with. traiers and four sets of implements1incLuding.planters- foY-foundation Seed Farm at Arushao, Sabga,b simba and sambe (Zanzibar) W Working Paler No. 14 Annex 3 Page 4 Spare parts for existingmachinery and processingplants; Four slurry/liquidseed dressers,eight bag ctosers,thread cones and spare parts; Five vehicLes: * Two Land Crusiers - generaLconveyance and difficultfietd inspections; * Four pick-upvans (4WD) for seed testing Laboratoriesand produce transport; * Ten motor-cycLesfor UNV and FieLd Inspectors. Six sets of air conditionersand dehumidifiersfor conditioned storagefor breeder/foundationseeds; equipmentfor estabLishemntof two need seed testing Laboratories at Njombe and Kizimbani(Zanzibar); Seed TestingEquipment to suppLementexisting equipmentat Tengeru. 3.2.3.1. Equipmentspecifications for Tomato Seed Extractioncost of one pLant: USS (a) Elevators,storage tanks, conveyorbelts and sprinkers: 11-1M (b) Fruit cuttersand pulpers 15,000 (c) Seed separators,cleaning unit and fitter baskets 15,000 P.I.F. 9,000 Total: 50,000. (d) Final seed rinsingequipment of local construction p.m. (e) Drjing tables and floors of LocaL construction p.m. The total foreigncurrency component is USS50,000. Local component Ce) and (f) pLus 3 phase eLectricpower and water supply with dischargeunit. Suitablehousing for the pLants and a alrge concretefloor outside to store containersand fruit. Note: Waste.puLpand juice can be furtherprocessed for juice, puree etc. 3.2.3.2. Specificationsfor Onion Seed ExtractionPlant: USS (a) Threshingmachine Type 08 2001 25,000 Local component: a 75 cm high wooden frame to reach the inlet at 1.5 ih.:eight (b) Ventilationand CycLone 10,000 LocaL component: Waste disposal (c) Indented cylinderfor cleaning i11,000 46,000 P.I.F. 12,000 total: 58,000 = Working Paper No. 14 Annex 3 Page 5 Total foreign currency component is US$58,000. Local component: a suitabLe buiLding to house machinery, plus storage space for seeds and concrete floor outside to receive raw materiaLs. A drying unit wilt be,required, preferabLy adapted to burn crop residues for heat generation on wet days. The seed heads must be absoLuteLy dry prior to threshing. 3.2.4. Other Equipment s- Air Screen CLeaner 350 - 400 kg/hour with indent cleaner; - Gravity separator with matching capacity of 350-400 kg/hour; - Clipper for-removaL of trash, Light-weight seeds and seed grading, DAMAS Laboratory type clipper and blower - one unit already available at Tengeru but one extra unit for UyoLe; 3.2.5. Import of Germplasm, basic seeds, required chemicaLs for seed and fieLd use, including weedicides and nematocides. Working Paper No. 15 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER INPUT SUPPLY AND DISTRIBUTION Southern Africa Department AgricultureOperations Division Africa Regional Office Working Paper No. 15 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER INPUT SUPPLY AND DISTRIBUTION Table of Contents Pane No. OVERVIEWOF MAJORISSUES 1 I. INPUTS IN GENERAL 3 Overview and Issues...... 0...... 3 Recent Developments...... 8 .*...... 8 II. FERTILIZERS 10 Overview ...... a...... 10 Major Issues and Recommendations...... 13 DomesticProduction 13 FertilizerSupply and Distribution...... 16 OrganizationalAspects ...... 21 Pricing ...... 23 FertilizerSubsidies ...... 26 Liberalizationof FertilizerTrade ... 30 WorkingPaper No. 15 Page 1 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER INPUT SUPPLY AND DISTRIBUTION OVERVIEWOF MAJORISSUES a 1. In line with Tanzania'soverall policy orientation, the sector specificinstruments and institutionalarrangements chosen to intervenein the agriculturalsector have been,until recently, state control of input and outputtrade. In the specificcase of inputs,the stateintervention has sought,through ppice controlsand subsidies,and measuresaffecting procurementand distribution,to speed-upthe uptakeof modern inputs, reduceproduction and marketingcosts, and to increaseand stabilizefarm incomes. Althoughthere have been importantincreases in the uptakeof inputs (particularlyfertilizers), overall result of thesepolicies have been disappointing as these have resulted in a strong anti-private sector bias. Heavy reliance in direct state intervention through inefficient parastatals and quasi parastatals (Cooperative Unions - CUs) explicitly excluded private sector participation in input marketing through legal and economic measures (pan-territorial pricing, subsidies, inadequate marketing margins and the like). The limited policy making capabilities and a conflictingmix of economic and social objectives, resulted in low producer incentives.poor supply responses, generalized scarcities,and important fiscaldeficits. Radicalreforms to the approachutilized to date have been initiated under Tanzania's Economic Reform Program (ERP) * This report wss prepared by G. Rioseco (AFTAG). WorkingPaver No. 15 Page 2 2. Attainmentof the full benefitsof the changesinitiated under the EP is heavilydependent now on the removalof major bottlenecks delayingthe impactof the programat the farm level. Major issues(well identifiedin severalreports) broadly relate to the need for (i) increasingcoverage of the distributionsystem. (ii) increasing efficiency,and particularlyreducing costs of the distributionsystem, and (iii) removing formal and proceduralconstrains affecting timely procurement and distribution of inputs. 3. This reportpresents a smuary review of major issues affecting supplyand distributionof inputs. The firstsection provides an overview of issuesaffecting supply and distributionwhich are commonto all major inputsanv summarizesstatus and next steps. Generally,no specificaction is required at this stage for agrochemicalsas measures already taken (full deconfinement)are consideredadequate. Satisfactoryagreement.s have been reachedby CDCIEECwlth GOT regardingaction, and timetable,ior a review of issues affecting the seed subsector; the role of IDA regardingseeds appearsone of coordinatingclosely with these agenciestaking the lead role for reformsin the seed subsector.Much remainsto be done and IDA is activelyinvolved on the reviewof problemsaffecting fertilizer supply and distribution.Agreement has been reached,and draftterms of reference prepared,for the establishmentof a Task Force to reviewmajor fertilizer subsectorissues. WorkingLa2er No. 15 Page 3 4. The secondsection of the reportcenters on major area problems affectingfertilizer supply and distributionand it is intendedto provide focus for the activitiesto be undertakenby the Task Force dealingwith thesematters. I. INPUTSIN GENERAL Overviewand Issues 5. Since 1984. supplyof agriculturalinputs to the rural sector has been largelyentrusted to the cooperativesystem. Procurementand distributionby CooperativeUnions (CUs)in 1987188was equivalentto about 75Z of all fertilizers,36Zof certifiedseeds and, on behalfof the crop marketing boards, som 962 of all pesticides. The Cooperative system operates largely on an annual basis as CUs lack of financial resources and infrastructure to ensure continuity of operations throughout the year. 6. Other retailers such as Tangayika Farmers Association (TFA, private) and Agricultural and Industrial Supply Corporation (AISCO, parastatal) operate largely from their regional branches and are totally absent from villages;the RegionalTrading Corporations (RTC, parastatal), a very importantretailer in rural areas,do not currentlyparticipate in distributionof agriculturalinputs. Thus the numberof outletsfor inputs WorkinmPaDer No. 15 Page 4 at the region/ldistrictlevel is limLted,and thereare not outletsin 9 out of the 20 mainland regions of Tanzania(Table 1). Attemptsby Xilimoto increaseaccess of farmersto inputsand equipment resultedin the establishment of some 20 Farmers Service Centers (FSCs) within reach of villages. The FSCs,managed by differert agencies (TFA, AISCO, CUs and PS9),are stillin a pilotphase and operationalresults to date are generallypoor. 7. Tanzania'scurrent input import bill amountsto about US$50.0million of which about SO is representedby fertilizers,46Z by agrochemicalsand the remainderby seeds. The volumeof inputsimplicit in the abovefigure closelv reflects the currentdemand for fertilizers and agrochemicals,but it is not consideredrepresentative for seeds. Efficientuse of scarceresources would requirea rapidIncrease in supply of improvedseeds to cover at leastan area greaterthan the maize area currently being fertilized (estimated at 152 to 20? of the total area planted). This ca. be accomplished in the short run only through imports, increasing forex requitements for this purpose from US$1.8million to about US$7.0million. WorkingPaper No. 15 Page 5 Total importvalue (1987188) (US$million) Fertilizers 24.5 Seeds 1.8 Agrochemicals 22.8 Total imports 49.1 S. Major institutionaland operationalproblems affecting input distributionrefer to the opportunityof supply (essentiallyrelated to a shortageof financialresources, physical infrastructure constraints, pricing issues in the case of seeds and fertilizersand to the limited coverageof the distributionsystem. To removethese constraints,emphasis shouldbe placedin measuresto increases(a) smallholdercoverage and range of goods offeredthrough the existingmarketing outlets in rural areas (AISCO,RTC, TFA, cooperatives,farmers' service centers, etc), and Cb) range of pruductsoffered (to includeinputs) by traderscurrently operatingat the villagelevel. Meaauresthat would fosterdevelopment and operationof additionalsales outletsshould also be adopted. Procurement and distribution problems are closelyinterlinked with those affecting the CRDB/cooperativecredit system (para. 9). These linkages need to be Workinig Paser No. 15 Page 6 carefullyassessed in any action programaimed to improveefficiency of the inputprocurement and distributionsystem. 9. Given the overallresource constraints, status of development of the inputmarketing system, and limitednumber of agentsparticipating in it at the villagelevel, specific interventions are requiredto support the developmentof an effectivemulti-channel development system. In this context,in additionto the removalof perceivedconstraints, specific actionsshould be implementedto facilitatealternative input marketing arrangements which would rapidlyincrease competitiveness of the distribution system and expand coverage at the villagelevel. Concurrently, commercial legislation governing trade at the village level would need to be reviewed to remove constraints for established/new traders to participate in input trade, and to establish direct linkages between Primary Societies (PSs) and input wholesalers. 10. There appears to be ample room for increasing cash and off-season sales of inputs. In particular, Incentives for farmers to buy, and for traders to stock, Inputs off-season and to pay cash for these shouldbe increased.Price discountsare currentlygiven by wholesalersto retallers. However,discounts are inadequateto compensatethe additional expendituresin terms of capitaland storagecosts. Further,discounts do not reach the farmersas these are requestedto pay the full price for their inputsregardless of the time of purchaseand the form of payment. WorkinxPaper No. 15 Page 7 11. The ptovisionof inputsto Tanzania'ssmallholders cannot be teadilyseparated from the operationof She creditsystem, as generally inputs only reach farmersthrough CRDB credit.Overall operation of the system is not satisfactory as (i) bureaucraticdelays in the process hamper procurementand distributionof inputsfrom CUs to PSs, effectively decreasingaggregate demandt (ii) arrearsof the cooperativesystem with CRDB continueto increaserapidly; (iii) inequity is built into the systsm by penalizingall primarysocieties/villages under a given CU in case this one has arrearswith CRDB: and (iv) there is practicallyno interaction betweenCBRD and end creditusers, and CRDB has littlecontrc over funds use. 12. Availabilityof qualityseeds remainsas a major constraint for increasing productivity of Tanzanian agriculture. In particular, the supply of improved seeds (particularly of maize) should be increased quicklyto increaseefficiency of use of fertilizerand other inputs alreadyutilized by the sector. Major issuesregarding availability and distributionof seedsare closelylinked to the institutionaland organizationalaspects of TANSEED. Solvingthe perceivedconstraints in this subsector will require substantial changes of TiJSEED's role, legal status and operations. In the process, alternatives to change corporate structure, reducing NAFCOmajority shareholding through expansion- WorkinaPaper No. 15 P-^ge8 incorporationof new shareholders(seed producers, farmers organizations and/orcomercial concerns),should be explicitlyconsidered. RecentDevelopments 13. (a) Atrochemicals.Foreign and local tradeof agrochemicalshas been liberalizedand currentlyproducers pay full price for theirrequirements. Impact of the deconfinementprocess, however, is slow in materializing as problems related to Ci) issuanceof importlicenses and delayedaccess to forex; and (ii) cash advance payment (the totalvalue of the intendedimport costs has to be depositedat the time the importer submits the licence application); and (iii) delays in clearing the licence request, result in limited availability, affect opportunity of supply, and increase substantially the cost of agrochemicals. Operational and procedural improvements in the 00L facilityshould remove these bottlenecks. (b) Seeds. Although not liberalized, prices for all seeds have been substantially increased from previous levels. Next steps to liberalizeseed productionand tradewould follow the on-goingEECICDC review of alternativesto transform TANSEEDinto an independent, coumercially oriented, corporate Wgrkina Paper No. 15 Page 9 organizationwhich, in addition of the corporate aspects, would include a redefinitionof TANSEED*s role, financial structureand operations. Action on the institutionaland operationalproblems affectingproduction, distribution and technical aspects of the seed industry are being considered in a Seed Strategy Paper under preparationby KILIMO. IDA should coordinate closely with CDC and EEC. lead agencies in dialogue with GOT. (c) Credit. Revised credit procedures and institutional arrangementsto bring CRDB closer to farmers, and to increase overall accountabilityof the cooperativecredit system will be tested under a Pilot Credit Project to be implementedby CRDB under the Tree Crop project. Among others, alternatives to de-link the CaDBICU'U marketing credit from production credit and to eliminate the sales-on-credit monopoly of the CUs system would be explored (d) Fertiliuers. Fertilizer Imports (which are 1002 donations) and primary distribution (CIF/ex-factory to Regions) continues, to be the sole responsibilityof TFC; distribution from TFC's regional depots to farmers has been liberalizedto allow for participation of retailers operating in rural areas. Effectiveness of fertilizer deconfinement, however, is Workint Paper No. 15 Page 10 not satisfactoryas procedures, access to financial resources, pricing problems, and the de-facto monopoly of sales-on-creditof the CUs, severely limit private traders, participation. A review of major issues will be carried out by a Task Force to be appointedby GOT. vhich would be made responsiblefor submittingspecific recommendationsto address major fertilizerproduction and marketing issues. (SuggestedTerms-of-Reference attached.) II. FERTILIZERS Overview 14. Annual fertilizer sales for the period 1984-1987,increasing at an annual rate of 112. averaged some 120,000a ton (139,000m ton in 1987188); during the same period local production averaged 39,000 a ton p... (18,000m ton in 1987188) with a very sharp decreasingtrend. Fertilizer imports have increased from 68,000 m ton in 1980 to approximately122.000 a ton in 1988189. Total sales are projectedto increaseat an annualrate of 6S to 82 to reach 179,000a ton by 1990/91. 15. Mayor trendsobserved during the period1984/87 point first to a rapid increase in total fertilizersales (122 p.a.). Large part of this growth is explained in terms of increases in sales of single nutrient WorkintPapor No. 15 Page 11 fertilizers(15S p.a.) accompaniedby a very modestincrease in salesof compoundfertilizers (12 p.a.). Second,there is a smallbut noticeable shift in total fertilizersales to the main food producingareas of the Southern Ighlands(particularly to Iringa,mbey* and Ruvuma)which increasedtheir share of total sales from 592 (1980183)to 632 (1984187) reflectinga greateruse of fertilizersfor food crop production.And third,in spite of the very rapidincrease (211 p.a.) in salesof mediumto high contentfertilizers (i.e. Urea and TSP), totalvolume sold of these fertilizersis equivalentto only one fourthof total,single nutrient, fertilizersales. This pattern,however reflects principal:y supply and distributionaspects rather than farmerspreferences. 16. Fertilizeris estimatedto be appliedto about 151 to 202 of area p)anted to maize, vhereas only about 51 of the area under maize is sawn with improved seeds. Average response (incremntal production of maize per kg of N), has been estimted at 6 kg for local varieties, 12 kg for improvedvarieties, and 16 kg for hybrids. At currentproducer prices, TSh 9/kg, the financialrewards of applying fertilizerto localvarieties appears marginal to negative, underscoring the need for a rapid increase in the availabilityof improvedseeds (para.10(b)). 17. Althoughfertilizers have been incorporatedto the list of liberalizedimports, procurement, and distributionof fertilizersto the regions,continues to be a monopolyof TFC. The natureof imports WorkinaPaper No. 15 Page 12 (donations)and pricingissues (price subsidies and marketingmargins) make it unlikelyprivate trade participation in fertilizersimports other than actingas agentsfor the Government.Some 752 to 80S of fertilizersis currentlysold ex-depotsof TFC at regionallevel largelythrough the CUs (withcredit from CRDS);about 101 of total is sold throughagents with retailoutlets in the farmingareas: TPA (private)and AISCO (parastatal), and by a small group of small entrepreneurs.The balance,10X-152, is purchaseddirectly from TFC by estateoperations and marketingboards. Because CUs's generalizedpoor repaymentperformance, CRDB's credit is being rationedto better-managedCUs, thus importantlyreducing total supplyas CUs distributethe bulk of fertiliLers.To compensatefor the reductionof creditsales effortsare beingmade by TFC to increasethe numberof availablecash-sale outlets through licensingof private distributionagents. Similarly,CRDB is testingprocedures to provide productioncredit directly to PSs bypassingthe CU8 channel,and to derelop alternativesources of supplyfor PSs purchasingfertilizer on crodit (para.11(c)). WorkingPaper No. 15 Page 13 M(ior Issuesand Recommendations A. DomesticProduction 18. The Tanga fertilizerplant startedoperations in 1972 with an initialcapacity of 105,000m.ton p.a., l/ consistingof 25,000m ton of AS, 25,000m ton of TSP, 45,000M ton of NPX (threetypes of compounds)and 15,000a ton of DAP. Capacitywas later increasedto 150,000m ton, and a bulk blending unit was added. The bulk plant utilizes imported urea and AN, and local, granulated PK for the production of mixed fertilizers 21. 19. Poor performance has characterized factory operation since inception due to mauagement problems and to inadequate supply of raw materials and spares, compounded with road and rail transport problems from the Minjingu mine to the factory. Because cf poor maintenance, the sulfuric acid plant (85,000 m ton), key unit for the factory, is uriafe to work and the plant operation is currently a source of environmental problems in the Tanga area. As a result, the factory has resulted in disappointing levels of production. Peak production,57.000 a ton, 11 A jointventure between GOT (NDC 602) and M/s Klockner(West Germany, 40Z). M/s Klockner shareholding stands now at 42 with this firm managing plant operations. 21 AS, AummoniumSulphate; TSP. TripleSuperphosphate; DAP, Diavmoniun Phosphate;and AN, AmmoniumNitrate. Workin±Paper No. 15 Page 14 equivalentto about402 of plant capacity,was reachedin 1982. Since then productionhas been decreasing to a low of 17,noo a ton in 1987,whereas, break-evenpoint is estimatedat 502 of p'ant capacity. The plant broke down and closedin 1988. Major raw materialsof the factoryare rock phosphate(local) and sulphur,liquid amnonia, sulphate of potash,urea, awonium ni.trateand borax (imported).Cost effectiveness,managerial and technicalissues -- icw concentrationand technicaldifficulties to process the local phosphate-- are the main reasonsfor the generalreluctance of donorsto provideimported raw materialas opposedto finishedfertilizers. Shortagesof rail rollingstock and road accessfrom the mine to rail head hampers transportation of rock phosphate. Mine road access is being improved with Italian assistance(works are to be completedduring 1989); also, some 40 hopper wagons for rock phosphate transport to be deliver scsm to TRC. 20. A study (carried out by a consortium of two firms including Mis Ilockner) estimates total rehabilitation costs of the Tanga factoryat about US$ 20 million. These firms are in conversations with the GOTto participate in financing it and supplying machinery and equipment. The above study does not addressmajor issuesaffecting domestic production, namelys (a) the cost of productionof the rehabilitatedfactory, not includingrelated costs of repairsof road and rail infrastructure WorkingPaver N". 15 Page 15 and of developingnew mining sites (para.19), would stillbe well above the CI? cost of imported fertilizers;and (b) productionafter rehabilitation would be in excessof projected demand (1993);some 17,000m ton of TSP and 15,300m ton of NPKs would need to be exported. Acceptanceof Tanzania'sfertilizers by neighboringstates is problematic,not only in termsof cost, but also becausethe blendedproducts segregate during transportation(a long standingsource of complaintsby local farmers). Solvingthis problemwould requireadditional investments, not includedin the plant'srehabilitation study. 21. A recent study carried out by IFDC indicates that the rock phosphate reserves at the Minjingu mine are only 200,000 a ton as compared with a projected requirement of 100,000 m ton p.a., i.e. enough for only two years of operation. The State Mining CoFporatioan has initiated an exploratory survey to determine the exact level of reserves and to explore scattered potential sites near the current mine. Results of the survey shouldbe availableby February1989. Recomendation The Tanga fertilizer plant has provento be highly inefficient. with high cost of productionper unit of fertilizerand requiring WorkingP!.,er No. 15 Page 16 continuedGovernment subsidyand cross-subsidizationwith the much cheaperimports. The tinancialaud economicviability of the Tanga fertilizerplant has been subjectof concernfor quitesome time;in particular,a Bank reportindicates that it is not economicallyviable 31. Therefore,decisions regarding rehabilitatingthe Tangafactory should be held in abeyance pendingresults nf an independentand comprehensivereassessment of the economicand financialviability of fertilizerproduction in Tanzaniaand completion of the ongoingmining survey. B. Fertilizer Supply and Distribution 22. Donors in one form or other finance (with grant resources) all fertilizerimported by Tanzania. Prompted by the lack of a policy framework,donors are becomingincreasingly involved In domesticfertilizer supplymatters. A case in point is representedby EEC direct imports and distributionto regionsin 1988, bypassingthe TFC channel;this operation, althoughensuring meeting the donors'regional distribution targets, created additional logistical and coordinationproblems. Availabilityand timelinessof supplyof fertilizersto Tanzania has benefitted substantiallywith the institutionalizationof annual donors' coordinating meetingsand the establishmentof the Input Sectionwithin LILIMD (responsiblefor policyrecommendation overall policy guidance, inter- 31 Tanzania: An Agendafor IndustrialRecovery (Report No. 6357-TA). WorkinaPaper No. 15 Page 17 agency/ministerialcoordination and centralplanning on agriculturalinputs matters). TIC'sresponsibilities related to imports,distribution and storage at regional level appear satisfactorilyimplemented in spite of overallconstraints faced by the agency. £ 23. TFC's regionaldistribution programs are based largelyon ordersreceived/expected. Approximately 75Z to 801 of total TFC demand comes from the cooperativesystem through a complicatedand lengthybottom- up programmingprocess of dubiousvalidity (whereby individual demands, aggregatedat the PS levelare submitted,for verificationand approval,to the relevantCU. The aggregatedemand of all PSs under a given CU is then submitted to the CUs' General Assembly before official submission to CRDB). As a result,credit allocations are usuallymade late (May/June)and credit made availableto CUs and firm ordersplaced with TIC about July to September each year. which is too late for any meaningful change in distribution programs. 24. Inadequate, and non-operative, price margins at regional level provide little incentives for dealers to participate in input trade. Advance payment requirement(full payment on-order) increases importantly the cost of the distribution process, and discountsfor off-season purchasesdo not reflectthe currentcost of capitalnor the savings accruingto TFC from a shorterstorage period. Thus distributorswhich could place early ordersare effectivelydiscouraged from doing so. WorkintPaper No. 15 Page 18 25. Storagecapacity at the primarydistribution system appears more than adequate(112,500 m tons)as it exceedscapacity required for the volumeof fertilizercurrently handled by TFC. However,because of distributionand transportationconstraints, available capacity is not used efficiently.Additional storage is being made availablewith Dutch assistance. a 26. Farmersat the villagelevel have accessto fertilizers largelythrough the inefficientCUs marketingchannel; delayed credit approvallimits availabilityand resultsin late distribution.inefficient transportuse and high distributioncosts. Effectivedemand is also limitedbecause deficient coordination and absence of ciear cut operational pxJceduresfor the CUs-PSsoperation (i.e. PSs are not opportunelyinformed of their finalcredit allocation, which is customarilyknown by the time the fertilizerdistribution is completed,not allowingfor alternative procurementarranvments)* Farmers'access to fertilizerspurchased on cash basis is limitedby the reducednumber of retailersin ruralareas. The de-factosales-on-credit monopoly and the volumehantdled by CUs (75Z of totalvolume sold) inhibitsthe developmentof privatetrade. Working Paper N4. 15 Page 19 Develogment of a Multi-channelDistribution System 27. Procedural aspects and trading regulationsappears today as the main constraintsto the developmentof a multi-channeldistribution system for inputs. However, once these problems are eased-off financial resourceswould become the major constraint for private traders to participatemarketing of inputs. Rural trade generally has not had an opportunity to develop and private trade of inputs, except for TFA, is limited and a recent development. Capital accumulationby existing traders follows the same, limited. developmentpattern of trade itself; moreover, as a result of the ongoing adjustmentprocess capital requirements, measured in terms of thw official price for fertilizers (which includes an estimated 68S subsidy) has more than doubled since 1986. Increasesof other components of trade (transportation,storage and handling) largely exceed the former overstretchingfinancial resourcesallocated to CRDB and capital available in the private sector 41. The flow of capital from urban based activities to rural trade of inputs appears highly unlikely as there are ample opportunitiesfor investingscarce resources in urban areas and non-controlledsectors of the economy. It is estimated that a line of credit of about US$10.0 million would be required,over a two-year period, for the private sector assume some 50Z of trade currently handled by CUs. 4/ A case in point, the average cost of transportationfor fertilizersin the Ruvuma region increased from TS}i60 to TSh 136 (1272) between 1987188 to 1988/89 crop years. Working Paper No. 15 Page Z0 The line should provide resources for agencies and traders to participate on input distributionactivities facilitatingthe expansion of the system through the removal of the capital constraint. Primary objective of the line would be to foster the developmentof a multi-channeldistribution system with active participationof private traders, farmers groups, cooperatives,and other agencies willing to participate in supply and distribution of inputs with particular emphasis in the expansion of these activities to the village level. Under this line resources should be made available to finance procurement and distributionof inputs (short-term) and for investmentsin physical and infrastructureand transport equipment (medium-term). Recommendations - Ensure early procurement and distribution. Moving forward the cooperative credit approval cycle, based on individual CU or PS, appears as one of the best options to increase overall efficiency of the fertilizer distribution system and to enhance the development of efficient cooperatives. In particular, there is little rationale for delaying until May-June of each year firming-up credit requirements for the cooperative system, or for that matter, to await for the CUs general assembly to consolidate individual CUs credit requirementsand approval. Intra-year changes in fertilizerdemand are at best marginal, and risks of WorkingPaper No. 15 Page 21 operatingwithin an earlyauthorization of say 602 of normalyear demandwith tligiblecooperatives are probablyminimal. On the otherhand, benefitsto the economyin termsof savings accruing from increasedefficiency of transport,stock rotationand greater uptake of inputs, appear rather large. - Delinkfarm productioncredit from marketingand distribution creditthrough CU8; PSs shouldreceive production credit directly form CRDB and be given the optionto buy their requirementsfrom any establisheddealer licensed to operatewithin the new system includingthe CtTs.Encourage opening of new outletsand stocking of fertilizersby tradersin ruralareas; review/simplify the processof licensingnewcomers wishing to participatein agriculturalinput trade; and,make availableresources for investment and working capital to eligible traders wishing to participate in Input trade. C. Organizational Aspects 28. Bulking fertilizer distribution through efficiently managed CUs, PSs or similar formal or informal farmers organizations would be the best option for a cost effective distributionsystem at regionallevel. By and large,however, the organizationalconstraints, and limitedmanagerial and administrativecapabilities of the CUs, combinedwith pricingproblems WorkinaPaer No. 15 Page 22 resultsin a highlyinefficient, high cost operationand the systemis generally operating at a loss. PSs, on the other hand, because of their reducedvolume of operations,do not generateenough resources to cover their operationalrequirements. The PSs operationalcosts, to be financed with proceedsof a levy based on the amountof producechanneled through the CUs, are currentlyfinanced (at a loss) by the CUs therebyincreasing the total deficitof these. The impactof theseproblems will be greatly increasedby a recentGOT decisionto transformevery village in to an independentPS. This measure,justified only in politicalgrounds (as an attemptto dismantleemerging centers of localpower) 5/ will multiply severaltimes the managerialconstraints. Moreover, the systemutilized to financeoperational expenditures will continueto loosevalidity with the processof marketingliberalization. Recomendations - Review with GOT the decision to transform every village in a PSs. - Support increased training efforts at the PSs level and other measures to increase overall efficiency of PSs managementstaff. - Explore options to base farmers' contributions to the PS on alternatives such as area controlled by individual members, 4alue 51 In spite of the reformsin process,the politicalunderpinnings of this decisionappear to be the same that led to dismantlingof the cooperative movementin 1976. Working Paper No. 15 Page 23 of inputs handled, etc. to finance PSs operationalexpenditures in the future. Pricing 29. Fertilizer prices are administrativelydetermined at two levels; a pan-regionalone set by the central authoritiesand intra- regional ones which are loosely determined by the regional authorities starting from the pan-regionalprice. The pan-regi_ialfertilizer price, set by the National Price Commission (NPC), reflect primarily the policy makers' subjective judgments regarding financial impact on farmers income and impact of prices on fertilizerdemand. The methodology currently utilized incorporatess(i) the ex-factoryllandedprice as reported by TFC, agency now solely distributorand wholesaler acting in behalf of Government,the high cost of locally produced fertilizersis cross- subsidized through averagingout the local costs with cheaper imported fertilizer; (ii) TFS's handling costs; (iii) the weighted average transportationcosts as derived from the projected regional distribution pattern (currentlyTSh 3,500/m. ton); and (iv) a markup of 15X for locally produced fertilizersand of lOZ for imported fertilizers. This markup is applied over total costs excluding transportation. Independentlyof the desirabilityof administeredprices major problems arise from the absence of well defined sectoral objectives of fertilizer pricing policies (such as rural incomes, fertilizeruse and level of subsidy) and the lack of clear WorkinufPaper No. 15 Page 24 cut methodologyfor the establishmentof the pan-regionalprices. In this contextfirst, the opportunityof price settingdoes ont followa well- definedseasonal pattern and, at times fertilizerprices are not adjusted from one seasonto the next. This practicedisrupts the procurementand distributionprocess, results in real price declinesover time and increasesthe magnitude,and resistanceto, futureprice changes. Second, price determination does not follow technical parameters resulting in unwarranted price differentials per kg of nutrient depending of the fertilizer supplied/received by individual farmers. And third, because of the lack of well-definadsectoral objectives prices, as finallyannounced, may or may not reflect,or follow,the statedpricing methodology. Thus, fertilizerprices for the 1987/88season were finallydetermined by adjustingprevious year pricesby 30 and no price adjustmentwas made for the 1988189season (Table 2). 30. At regional level, the Regional Price CouLsssion authorizes the CUs, AISCO,and TFA (thelast two dealingexclusively on cash sales) additionalcharges to cover handlingand transportationcosts to the point of sale on a case by case basis. Further,a cash price includingthree monthsof interestcharges, and a creditprice includingnine months of interestcharges is authorizedfor the CUuIPS.channel. Pricingof fertilizersat TFC depotsincludes the "distributorsmargin of 7.5 and a graduatedseasonal discount for early ordering ranging from 2.51 WorkinasPaper No. 15 Page 25 to 7.5Z 6J from TFC base regionalprice. Pricingmargins, discounts for early ordering and the payment system to TFC are unwieldy particularly from CUs (there is no early ordering or anticipated payment from CUs but, because procedural inefficiencies,there are long delays in payment to TFC), and the cash-on-order requirement from commercial customersdoes not lend itselfto the developmentof secondarydistribution channels (casb requirementsand financialcosts are substantiallyincreased as there are long delaysbetween ordering and actualdelivery of fertilizers).In the final analysis,price discountsare largelynon-operational as approximately95X of the fertilizeris sold in the duringthe non- preferentialmonths (July-December). 31. The additionalcosts at the secondarydistribution level are passedon to end users. However,as (i) policydecisions regarding deconfinementat regionallevel are not widelypublished nor apparently enforcedfrom the center,and (ii) there are no standardizedcriteria for arriving at regional prices. wide inter-regional differences are observed regarding both the nature of deconfinement and the criteria utilized for price determination. This is particularly critical for farmers purchavang throughCUs as prices paid through this channel embodythe organizaticnal inefficiencies of the cooperativesystem. Thus, substantialgains ari to be made from increasing cash purchases and from the expansion of a multi- channelmarketing network. Spottydata available indicatesthat pricesto 6/ January-Pebruary,752; March-April,5.02; and, Hay-June, 2.52. WorkinitPager No. 15 Page 26 farmerspurchasing (cash) their requirements throughAISCO or TFA are approximately42 to 62 higherthan the wholesaleprice ex-TFCdepot. Cash pricespaid to distributorsdelivering fertilizer to the PSs/villagelevel are about 122 to 202 higherthan the ex-TFCdepot price;on the same basis, pricespaid by PSs throughthe CUs channelare about 352 (cashpurchases) and 602 (creditpurchases) above the ex-TFCdepot prices. On the other hand, due to the absence,ofappropriate pricing methodology, prices paid throughthe CUs channelvaries considerable among comparableregions. The cost of fertilizerspurchased through the CUs and the fact that a large percentage of this input is applied to local maize varieties with marginal B:C ratios (para. 14) has important implicationsregarding efficiency of fertilizersuse and creditrecovery. FertilizerSubsidies 32. At the onset,to avoid ambiguitywith the analysisand recommendations Included in the following paragraphs, first the fertilizer subsidy in Tanzania. defined as the price differential between costs and prices paid by farmers, does not have a direct fiscal implication normally associated with subsidies as all imported fertilizer is received by the country as-donations. In this context, it represents a revenue loss rather tha additional budgetary allocations to the sector. Second, notwithstanding the inefficiencies of domestic production (para.19), the high cost locallyproduced fertilizers appears incorporated in the base WorkingPaper No. 15 Page 27 price by averagingthese with lower cost imports(para. 29). And third, eliminationof the subsidy,even if the countrywere to utilizeits own resourcesfor fertilizerimports, it is not considereda realistic objectivefor Tanzania.atthe moment. Other countriesexperience and recentcase studieson maize,cotton and coffeeresponses to fertilizersin Tanzania,support this position 71. Therefore,it wouldbe counterproductiveas the impactmay be politicallyunacceptable to attempt these changesuntil productivityof fertilizeruse is increasedand overall efficiencyof the marketingsystem improved. Also, furtherstudies on the economicsof fertilizeruse are requiredbefore the issue of increasing fertilizer prices can be tackled. Implicit in this section's recommendations is the notion that productivity of the policy dialogue in the near-term would be greatly enhanced by focuassing attention in measures and alternatives to gradually reduce subsidy through increased use of high analysis fertilizers, improved seeds and improvements in Tanzania's capabilities to manage the fertilizer pricing scheme. 33. In 1984185 subsidies to fertilizers were removed and full costs passed to producers (US$lmTShl9). Prices, however, have not been adjusted upwardsfor subsequentdevaluations of the TSh (637Zas of Dec. 1988) as price increasesfor fertilizerwere 102 to 411 in 1986/87,30Z in 1987188,and 0 in 1988/89(Table 2). The combinedimpact of devaluation in the CIP price,the generalprice increaseson internalcosts, and the 7/ See Back-to-OfficeReport of Hr. S.J. Carr (AFTAG)dated March 22, 1989. WorkingPaver No. 15 Page 28 lack of priceadjustment during the 1988/89crop year has resultedin substantialsubsidy. Data availableindicates that the levelof subsidy for urea ranges between 64? and 662 of the economic price of fertilizer (Table3). Overallaverage for all fertilizers,excluding subsidies to the local industry,would be equivalentto aboutTSh 2,370million (US$19.7 mlIlion). This representsan importantrevenue loss to GOT as all fertilizersare importedwith grant resources;the implicitsubsidy level appears unwarranted and it would be unsustainableunder different procurement arrangements. 34. Suming up. procedures for determining fertilizer prices at national and regional level need to be defined and uniformly applied as findings indicate important criterion differentials between regions. Seasonal price discounts and price margins need to be revised to foster pre-season purchases and cash sales, to ensure that discounts are actually passedon to end users and, to foster private trade; also, simple proceduresneed to be put in place to facilitatecash purchases by farmers at PSa. Recomm endations - Review the economics of fertilizeruse, and cost effectivenessof the implicitsubidy; prepare an actionplan, including priorities and and timetablesto reducethe fertilizerprice subsidyand Working Paper No. 12 Page 29 compatibilizethis with the agriculturalsector development strategy. - Review methodology for setting fertilizerprices and price margins at national and regional level, standardizeprocedures and provide a clear set of directives for "eir implementationin all regions uniformly; ensure adequate incentives for traders to participate in fertilizerdistribution. - Rationalizeof the price discount structure to ensure that cost savings associated to off-seasonand cash sales are effectively passed on to retailers and farmers. - Eliminatethe full pgymenton order system currently utilized by TIC, cash on delivery or credit provided by CRDB or wholesalers should be the rule. - Define operationalprocedures for CUsIPSs which would facilitate cash purchases by beneficiariesat the village level. Workingt Pa?erNo. 15 Page 30 Liberalizationof FertilizerTrade 35. Full deconfinementof the intraregional trade (fromTFC depots to farmers) in fertilizersappears as a straightforwardproposition to be implementedthe soonest. However,the implementationof policy changesto deconfineImports and distributionto regionsshould be assigned secondpriority, as its needs furtherpreparation. Implementation of fertilizerdeconfinemeat should follow a well definedand phasedapproach. First,the reformsto the fertilizerpricing methodology (price level, structureand margins) and changes to the secondary distributionchannels shouldbe developed,firmly in place and fullyoperationil. Although various organizations participate in fertilizer distribution at regional level,basically the-secondary distribution network is weak and of reduced coverage. Therefore, tha development and expansion of the secondary market should be given priority as such development is critical for increasing efficiency of the process and availability of fertilizers (and other inputs) at the farm level. Second,the deconfinementof importand primary distribution does not appears critical at this sta8e as impact of this reforms are difficult to asses in absenceof the regionalchanges referred to previously. Also, the pan-regional pricinb and the price subsidy scheme in place, infrastructure constraints and the expectation thats (a) Tanzania'sfertilizer requirement will continueto be suppliedin the near-termthrough donations; (b) full elfiminationof the subsidyis a long WorkingPaser No. 15 Page 31 term proposition,makes it advisableto leave,for the time being. fertilizerImports and regionaldistribution in the handsof TFC which,in spiteot overallconstraints, appears performing these functionsreasonably well. Notwithstanding,policy dialogue on this matter shouldfocus on the reductionof the subsidyto manageablelevels; issues related to domestic fertilizerproduction; and TFC's futurerole (currentlyimporter, producer and distributor). In the process, and until the pricing system makes it possiblefor the privatesector to participate,alternative measures to increaseefficiency of the process,such as decentralizingdistribution and handlingof stocks,should also be considered. Working Paper No. 16 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER A STRATEGICASSESSMENT OF THE FERTILIZER INDUSTRY IN THE SADCCCOUNTRIES Southern Africa Department Agriculture Operations Division Africa Regional Office Workina Parer Igo.16 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKING PAPER A STRATEGIC ASSESSMENT OF THE FERTILIZER INDUSTRY IN THE SADCC COUNTRIES Table of Contents Paae No. Introduction ...... 1 Institutional Arrangements ...... 2 Current and Historic Fertilizer Consumption ...... 3 Regional Consumption Patterns .... 6 Product Procurement and Supply . . . 7 Domestic Resource Potential for Fertilizer Manufacture . . 14 Future Demand and Supply/Demand Balance . . . 17 Related Issues for Fertilizer Supply ...... 18 Strategy Options ...... 22 TABLES MAIN TEXT 1. Fertilizer Consumption, 1987 2. Historical Consumption of Fertilizer, 1974-87 3. Regional Fertilizer Consumption, 1987 4. Historic Fertilizer Supply 5. Historical Production of Fertilizers at TFC Plant, 1972-87 6. Comparison of Fertilizer Costs, 1987 7. Forecast Fertilizer Consumption, 1988-92 8. Comparison of CIF and Official Prices ANNEX TABLES ANNEX 1 Table 1: Fertilizer Demand and Supply Balance, 1981-86 ANNEX 2 Table 1: Fertilizer Transport and Distribution Costs Table-2: Fertilizer Prices: Comparison of Real Costs and Official Prices Table 3: Total Subsidies for Distributing Supplies of Straight Fertilizers During 1988-89 WorkingPaper No. 16 Page 1 TANZANIA AGRICULTURALADJUSTMENT PROGRAM WORKINGPAPER A STRATEGICASSESSMENT OF THE FERTILIZER INDUSTRY IN THE SAPCC COUNTRIES* . 1. Tanzania is composed of a mainland and several islands in the Indian Ocean off its east coast with a total land area of 945 sq. km. Kenya and Uganda bound the country to the north, Mozambique, Malawi and Zambia to the south, and Zaire, Burundi and Rwanda to the west. 2. At the current population of 24.6 million and rate of population growth of 3.42 p.a., the area of arable land per capita is expected to decrease from 2.59 ha to 1.68 ha by the year 2000. The agriculture sector employs over 80S of the population. Annual contributionof the sector to GDP is between 50X to 60X (58X in 1985). Agriculturalexport earnings amounted to US$ 182.3 million in 1985. Coffee, the principal cash crop, alone accounted for 54.62 of total export earnings in 1987. Other export crops, in order of importance,include cotton, tea, tobacco, cashew nuts and sisal. More than 6.1 million ha were devoted to production of food crops in 1987, includingmaize (1.65 million ha), beans (875,100 ha), cassava (795,800 ha), millet (716,600 ha) and sorghum (671,500 ha). 3. Food and export crops traditionally tore grown in five north-central regions: Arusha, Mara, Mwanza, Shinyanga and Kigoma. To relieve pressure on productive lands in these areas, the Government has encouraged production of maize in the Southern Highlands.i/ As a result, three regions of the Southern Highlands -- Iringa, Kbeya and Ruvuma -- are now the majorfood crop growing regions. The shift of agricultural production to the south-central regions has implications for the type of fertilizers which can be used (para. 11, 14) and the availability of a sufficient supply infrastructure (para. 23). 4. Both the Southern and Northern Highlands have high, stable rainfall (above 1500 m), a factor of great importance in a country where agriculture is primarily rainfed. The lower population density of the Southern Highlands could pose problems for further intensification of agricultural production, however. Poorly maintained and insufficient transport facilities in the region (and throughout the country) also present constraints to intensification. By contrast, tho combination of high population density and hlgh agricultural potential of the Northern Highlands and the Lake Victoria Basin offer more favorable opportunities for increased agricultural production and intensified fertilizer use, despite bottlenecks in the transportation infrastructure. In addition, since the soils in these two areas are more responsive to fertilizers and the per capita arable land available already is less than one hectare, any intensification efforts would be timely. * This paper was prepared by The World Bank, May 1990. 1/ This effort was accompaniedby macroeconomicdistortions and the politics of regional imbalance. WorkingPaper No. 16 Page 2 5. Government'sagriculture policy now is to encourageproduction by small individualfarmers; villagisation policies introduced in the late 1960swhich emphasizedcommunal holdings have largelybeen abandoned. Smallholdersproduce most food and exportcrops, with the exceptionof tobacco,where 60S of productionis by large-scalefarmers. Large farmers also grow tea, althoughsmall holdersaccount for the majorityshare of production.Coffee is producedby large estatesand smallholders, while cottonis grownentirely by smallholders.In the area of food crops,over 100,000metric ton of sugarare producedby four large estates,and the NationalFood Corporation(NAFCO) operates estates which producemaize, paddy and wheat to augmentproduction by smallholders.The Government makes no distinctionbetween small and large farmersin its policies. Thus producerprices and subsidies,terms for credit,and inputduties apply equallyto both. 6. Tanzania'sagriculture sector has been plaguedby institutional instabilityand lack of coordinationfor well over a decade. From the late 1960suntil 1974,the TanzanianRural DevelopmentBank (TRDB)and the CooperativeUnions had primaryresponsibility for financingand supplyof agriculturalinputs and marketingof outputs. Inefficienciesrelated to the rapid growthof the cooperativemovement led to the dismantling of the CooperativeUnions in 1974 and the establishmentof parastatalCrop Authorities,which purchasedoutput together with villagecooperatives. Unfortunately,the lines of responsibilitybetween the Authorities,the villagecooperatives, and the TRDB were not clearlydrawn, and the resulting lack of coordination aong these institutions led to price uncertainty and poor reliability in both fertilizer supply and output markets. As a result,the credit and fertilizer distributionsystem stagnated and by 1982, only 13 retail outlets remained throughout the entire country. In order to stem the growth of parallel markets for rural production and to temper Lnter-institutional disputes, the Government re- establlshed the Cooperative Unions in 1984 and adopted a policy for increased private sector particLiption. 7. SLnce 1988, the MinLstry of Local GovernmentsCooperatives and Marketing (MLGCM)is fully responsible for agricultural output marketing, including pricing mechanisms for purchases from the Cooperatives by the Marketing Boards. The KMnistry of Agriculture and Livestock Development (MALD), which previously supervised output marketing through the Crop Authorities, retains the parastatals responsible for crop development and recommendations for producer prices payable to farmrs V as well as for t Most output is purchased from the Cooperatives by the Marketing Boards for marketing. Exceptions to this policy: Delicate crops are purchased directly, without intermediary of the Cooperatives. Also, the Sugar Development Corporation (SUDECO)markets all sugarproduced by the four sugar estates. WorkingPaper No. 16 Page 3 production.-MALD also providesextension services, which were recentralizedunder the TanzaniaNational Agricultural Policy (March1983) to enhancetechnical support to field staff at regional,district and villagelevels. Researchservices are now coordinatedby the Comissioner of Research and Training. 8. Inputs-- fertilizers,seeds, pesticides/weedkillers and farm implements -- are procured and transportedby the twenty-nineregional Cooperative Unionson behalfof theirprimary cooperative societies. The primarysocieties in turn re-distribute and sell to individualsociety members,which includeboth large and small farmers. The Tanganyika FarmersAssociation (TFA) and two parastatals,Agricultural and Industrial SuppliesCompany (AISCO) and RegionalTrading Company (RTC) also stock inputsat selectedareas for cash sales,mainly to medium-and large-scale farmers. 9. The CooperativeUnions extend credit to the primarysocieties and individual farmers under a seasonal input credit scheme financed by the Cooperative and Rural Development Bank (CRDB),the main source of agriculturalcredit. The CRDBalso extends credit to individual farmers, large and small; the former also are granted crodit by commercial banks. CRDB loans at presentcarry an average 25X interest, compared with 30S to 311 in commercial banks, and are organized so that the primary societies receive the inputs rather than cash. Lengthy loan application procedures have led to frequent delays in delivery of inputs (para. 41). Loans are reimbursedby deductinga portionof the production at Cooperative buying posts. As the level of defaults is high -- production is deviated to parallel markets to avoid loan repayment and ultimately less than half the loans are repaid by primary societies -- Government policy is being reoriented to emphasize cash sales to compensate for losses under this system (para. 42). 10. Fertilizer consmption in Tan2ania is calculated on the basis of orders filled by the Tanzania Fertilizer Company (TFC) and distributed through Cooperative Unions. According to government flgures, just over 126,000 ton of fertiliLer products were distributed during 1987. Currently, about 112 of the orders received by TFC are not filled, suggesting a discrepancy between potential demand and actual consumption V These include the National Coconut Develpuent Corporation (NCDP), which isdaveloping coconut production for oil and copra along the coastal belt; the National Killing Corporation (NUC), which purchases grains for the National Grain Reserve; SUDECO, whieh markets sugar produced by the four sugar estates; and NAFCO(para. 3). WorkingPaper No. 16 Page 4 (Attachment1). The totalquantity distributed for the 1987/88cropping season(April 1987 to March 1988)was 133,400ton (about46,500 ton of NPK nutrients),against 150,000 ton orderedby the CooperativeUnions. The fertilizersused for selectedcrops, along with the recommended fertilizationrates, are givenin Annex 3. Comparisonof recommendedrates with the actualtotal consumption indicates just how severelyfertilizer productsare underutilized.Indeed, Tanzania's fertilizer consumption per hectareof arableland and permanentcrops was only 7.8 kg of NPK%/hain 1986. 11. A varietyof straightand compoundproducts are used for cash crops and food crops. Low analysisnitrogen fertilizers, namely Ammonium Sulphate(SA * 21XN) and CalciumAmmonium Nitrate (CAN - 26ZN),together accountfor over half of all productconsumption (Table 1). These products,especially SA, traditionallywere favoredsources for nitrogen, which represents74Z of the nutrientcontent. Since 1983, low analysisSA has ben replacedby high analysisurea (46XN)in an effortto offset rising transport costs and the share of urea in total volume distributed (22.62) is now equivalent to the share of SA. Substitution of SA by urea may will have to be monitored carefully in the:low-sulphur soils of the Southern Highlands to assure that the benefits from transport cost savings are not offset by sulphur deficiencies once SA use is discontinued. 187 Total ~ - Cttm OtS- e tL - ' - ~(to) (Z) se") 04) M=) OM) _l S4bat"() 2a_18 U.n 6m 6M 6024 Cololin m1in U_txa (CAR) 40617 31.06 200 104 Ut. a_00 a." 13150 1310 nE-: a2:s:S 256 242 an0 2 23 e3? 230:20S: 454 3." so 490 4" 1s" 6:20:10 23 1.5 eU 235 216 53 bLpla oqlupne bshs am ism0 13.40 am 6s6" 53*at.u of 1.6mb OMP 222 0.1? us6 360 1M6 3m: mD. 12. Past consumption is summarized in Uble Total product tonnage increased at an average annual rate of just over 72 from 1983 to 1987. Demand has remained highly inelastic with respect to price: although some pricing subsidies were eliminated in 1984, causing prices to rise by 250X, volume increased by nearly 19X that year. The volume of straight product doubled between 1982 and 1987, primarily due to large increases in urea consumptionin 1984 and 1985. Total urea consumption has grown tenfold since 1983. However, consumption of compound products, which are used WorkingPaper No. 16 Page 5 mainlyon cash crops fell by 19X in 1987 after severalyears of low growth (althoughthe volumeof sales in the food crop sectorrose by 142). In addition,consumption of CAN has doubledsince 1983;hence the combined shareof low analysisSA and CAN remainshigh. As a result,the nutrient contenthas stagnatedat around351 of totalvolume for the past three years. 13. In fact,despite the steadygrowth in volumeof fertilizer products,Tanzania has shownpoor growthin the consumptionof fertilizer (NPK)nutrients. Between1974 and 1987, the averagegrowth rate for nutrientswas only 2.92/yr,although the rate in the past five years has been considerably higher (8.82/yr). Sluggish growth can be partially accounted for by the predominance of low analysis fertilizers in the product mix. Still, Tanzania has been subject to an unfortunate combination of macroeconomic, sectoral, institutional, and technological factors -- currency overvaluation, explicit and implicit subsidies and output taxation, foreign exchange restrictions, institutional instability, credit availability, input import licensing restrictions, crop response to fertilizer, and domestic marketing systems *- which all have hindered consumption of fertilizers. SM _ t I _ a 20taL * x of z_th MM13 h.*st 9tN =L I I S W To TL Bte" MW 55.4 2.S t6.4 U.3 U.3 U.5 4.7 4.5 .S3 34.62 9.32 1s 6.0 25.5 U.S -24.n 4. A. 4.5 1s 31.1 23.3 -27.62 16 6.3 2.1 76.4 24.42 2.0 0.1 1.5 6.1 22.5 22Z 20.35 17 63.9 84.6 67.5 -.0. 14.4 10.0 4.1 0.1 2. 33.5S -0.63 1976 59.0 23.2 82.3 13.6 14.2 8.7 3.0 *.0 21.6 32.63 2a.35 137 1.6 23.6 Y.7 18. 17.1 6. 4.2 0.1 0.1 22.22 12.23 13 66.7 2.4 11.1 -0.n 1.3 1.6 3.7 1.7 3.W 36.53 -11.3 1o61 2.3 18.0 10.3 -17.89 17.6 3.2 3.1 1A. 0.0 o29.n-117.3 1I63 02.7 1.8. .3. 0.6 10.9 5.6 3.1 0.7 24.6 21.63 22.6 16 36.? .a .0 1.n 1:. 1.7 3.s 0.s 27.0 50.6 21.21 84 75.2 .3 .5 18. 210.8 0. 3.7 .7 3.3 33.51 34.53 15 3.6 24.1 18.1 4. 21.3 11.S 3.e6.0 41.5 35.22 4.22 166 7.6 25.6 1.4 2.33 27.1 2.3 3.6 .S 43.2 3S.02 -a.1 17 U1.1 6.2 12.8 21.3 0.l0 1.0 0.6 43.3 33.53 - 8-a~ 6a -~ 1674 - 137S 3.1 a.s 1977 - 17: 3.4 3.2 18.3 - 133: 7.6 0.6. .,wa . RUA , W Do -atm Working Paper No. 16 Page 6 .D.. IinmuCau 1aln 14. The three regions of the Southern Highlands -- tringa, Hbeya and Ruvuma -- account for nearly 70S of total fertilizerconsumption. Nearly 80X of all TSP (45X P20,) is consumed in Iringa and Mbeya, where the soils are deficient in phosphate. Consumptionof low analysis SA in the Southern Highlands ls rapidly being replaced by high analysis urea in an effort to contain transport costs; soil response must be monitored for possible side effects due to discontinuingthe addition of sulphur found in SA (para. 11). The fourth largest consuming region, Tabora, located in the central zone, consumes 11 of the national total. The northern and coastal zones account for only 11.11 and 2.4S of the national total, respectively. 15. The pattern of regional consumption reflects the shift in the emphasis of fertilizeruse from export crops (produced in the Northeast Highlands and the Lake Victoria basin) to food crops produced in the South. Although nearly 311 of the population is found in the Northeat Highlands and the Lake Victoria basin, their share of the total fertilizers distributedhas declined from 221 in 1975 to less than lOXin 1986/87. The food crop production areas of the south-centralregions now account for 751 of total distribution,although they have only 17.61 of the population. The transport system is even less well- developed and maintained in the south-centralregions (with low population density) than in the traditional growing regions of the Northeast and Lake Victoria basin, even though the latter suffer from severe transportbottlenecks (para. 40). The regional consumption of fertilizers in the country is shown in Table 3 below. workingtPaper No. 16 Page 7 ?abl* 3. ?=*ad - Reaimina lWOWlp C ~.18 Si Co On 25:5:5 20:10:10 TV 5:20:2 Potash VOUU 2 3 p Ka S 022.M amzpi 221 137 1637 - 2in 63 41 - 3232 2.32 10a0 56 20 231 1439 2.71 Osim ~~~155149 - - - - a - 306 0.22 71 0 0 37 109 0.21 ?abwa 3140 2232 2946 - - 385 71L65 - 1556 11.2 2887 1611 229 754 6541 12.01 noom S5U 1147 610 - 58637 65 - 3420 2.51 704 390 12 235 1339 2.s: 3nk"u 2125 224 2034 - 35 529 1460 - 6917 6.41 215 545 270 630 3601 6.61 SWbOtAL 71.40 5679 72I7 0 18 163 8753 0 31450 2262 6OM 2611 152 1847 13029 24.01 NM" ~4081U"535 3690 350 1619 2744 1551 40 2911 20.92 6966 1752 479 970 10178 18.71 Iziu.s 125 14295 6357 1462 230 1236 250 no0 36567 28.42 7661 OM8 700 301 125051 27.71 bum 8040 1760 a2n 17 131 1714 - 937 2.61 6229 86 32 2146 6403 15.51 SubtotLal 14276 31090 19255 182 2641 15225 422 170 87914 6.22 20756 SW2 I.2 3426 33632 61.91 linus ~~360 6 1 70 to7 147 6a 15 UN5 1.11 314 138 76 86 614 1.1Z iabad 1724 5SW 251 - 465 455 123 - 3520 2.51 722 278 67 414 1471 3.71 HMO" NO0 267 106 20 - 530 - - 1741 1.223 2 240 1 104 737 1.41 Ibi 520 260370 - 150 60 - 12370 1.02 351 86 US22 572 1. 11 ligaga ------0.02 0 S 0 0 0 0.01 hmuasea 139 479 - - - 750 50 - 3225 2.X3 446 445 90 335 1319 2.41 SubWotL 480 132 72 m 652 2051 735 13 12322 0.12 160 1056 210 IM6 409 7.51 a I 1jaz. 970 122.0 2224 s0 2250 71 50 - 5744 4.22 17M 171 1.37 233 2327 4.31 003aIam/Coset 286 314 164 14 so i23 as 3 2846 0.62 337 80 23 60 409 0.81 "boma145 37 30 - 232IN 57 - 070.32 60 76 12 35 176 0.3Z SiagAd. 300 - 23 - - - 67 - an2 .72 200 234 221 n 436 0.62 LAIN 205 45 35 - in22 7 - 414 0.3 71 57 1 49 179 0.31 Zmlhag ------24 140a.0 0 0 22 0 3220.01 3m*toteL 1907 152s 2465 64 2I29 444 070 2a 662 6.2 3286 522 306 456 3539 6.51 AW ICL 21866 4001 25566 2067 4964 N0M8 14563 22U 23920 100.012 3189 12400 3287 679 15429 100.01 0: ow WAD, Ibid .0smtusA. 16. The TFC holds the monopolyon fertilizersupply to the country, and thereforeis responsiblefor all productproduction, imports and distributionto major regionalcenters. Workingwith the InputsSection of the Einistryof Agricultureand LivestockDevelopment (HAMD), TFC estimates fertilizerrequirements for a five year periodand comparesthem with projectionsfor domesticproduction. TFC then requestsfrom the Central Bank the foreignexchange needed to importfinished products to meet demand and/orrequests are made for fertilizerimports procured through grant aid programs. 17. Almostall importedfinished fertilizers have originatedfrom grantssince 1980; smallquantities of fertilizernutrient are imported commerciallyfor use as feedstockat the TFC's plant in Tanga. Lack of WorkingPaper No. 16 Page8a foreignexchange needed to procurefeedstock in a timelymanner and the need for major rehabilitationof the Tango plant limiteddomestic productionto only 19,300ton in 1987. Thus total importsin 1987 -- 118,900ton in grantsand 700 ton of SOP importedcommercially for feedstock-- were up sharplyfrom 66,700ton in the previousyear. abl. 4: tanzania - Nistoric Fertitiset Supply By Source and nutr~ient Content (000o ton) Datum UTILIJS TMC1'ROPIJCrOU Straight C~o.mod Growth TOTALAs I of Straight Compound Glrowth TOTALAs I ot Year Product Iaeodms.tTOTLAl.Roe a PM0 go 3 WKSaTot Vol Product. Product TOTAL Raeta Ms12 KM a2 Nl.ot.mm Vol 1973 28.7 5.5 34.2 22.4 7.7 0.5 0.0 4.0 9.1 20.43 16.9 11.2 30.1 96. 12 1.8 8.8 0.2 1.1 1974 29.5 12.53 41.0 35.1 9.2 0.0 0.0 5.9 10.9 26.12 6.0 29.11 1975 40.0 16.2 59.0 0.92 4.1 1S.9 3.3 3.7 23.2 39.42 52.2 4.4 56.6 -24.01 12.3 0.3 4.3 6.3 16.0 29.01 37.7 21.9 i976 34.2 8.5 59.6 -30.21 4.7 14.1 3.8 4.3 22.8 36.22 42.7 -1ASt 0%.4 0.7 2.9 4.4 13.0 30.32 32.1 9. 5 41.6 -11.32 5.4 6.5 1977 32.0 4.5 36.5 50.82 8.8 0.4 1.7 4.4 15.6 37.61 0.4 3.6 0.5 26.12 24.1 12.6 36.9 20.62 4.0 7.1 2.3 3.7 13.5S 35.5St 1973 48.7 8.7 56.3 -53.02 10.6 0.7 6.7 8.0 i90. 30.02 24.2 1979 27.4 20.3 44.5 3.22 4.6 5.7 3.6 3.9 17.0 38.22 0.0 27.4 150.42 7.2 0.0 1.5 1.5 0.7 1.2 28.6 17.3 43.9 10.81 1950 00.6 0.0 66.0 -26.72 16.4 7.6 4.5 2.0 5.9 14.3 31.22 0.0 0.0 7.6 16.4 26.2 31.0 19.1 50.9 3S.72 6.2 9.4 2.8 4.7 18.4 1901 54.5, 0.0 54.5 57.52t 11.4 0.0 4.2 0.6 15.6 26.62 36.12 1902 39.4 29.6 69.0 -80.2t 9.5 11.5S 3.7 6.0 24.7 3S.72 72.8 13.0 85.0 -33.01230.6 2.0 2.9 0.4 25.7 30.01 9.6 3.6 13.7 128.61 1983 46.9 10.5s57.4 2.3 1.6 0.3 1.6 4.2 31.11 11.62 10.0 3.3 4.0 7.2 17.a 29.91 21.9 9.3 31.2 65.12 5.0 4.2 1964 54.1I 10.0 "4.1 07.22 17.0 2.8 0.8 3.6 10.0 32.0t 2.8 4.1 21.8 34.02 31.3 20.2 51.6 -18.72 6.2 6.7 2.2 5.4 17.1 33.22 1985 111.4 15.0 126.4 -47.2X 32.2 11.5 3.5 2.0 47.2 37.32 23.5 1988 58.3 0.4 17.9 41.4 13.62 6.4 6.0 1.7 3.8 14.2 34.22 66.7 70.32 10.6 4.4 1.5 1.0 24.5 36.62 22.9 24.2 47.0 -59.02 7.3 5.8 1967 110.0 0.0 110. 28. 1 9.0 3.2 4.6 16.3 34.71 1.4 5.5 38.4 33.22 9.3 10.0 19.3 2.6 2.6 1.7 2.1 8.9 35.62 straigt" Cempom Growth 1OtAL As 2 ot Straight Compound Year Produc t Podct. tOtAL late a total Total 120 120 5 " ll ot Vol product product. Prod lutrienta 1973 47.6 16.7 64. 3 5.92 9.5 7.3 1.0 5.9 17.0 2a7.72f 1974 70.3 30.7 166.9 15.12 13.3 16.0 4.1 0.6 34.2 33.02 1913 - 1975 89.9 26.3 118.2 1987 6.41 0.51 5.22 6.61 -27.52 17.0 14.4 8.3 12.0 39.7 34.22 1977 - 1007 7.22 1976 86.3 10.0 84.3 -12.92 14.8 0.32 S.92t 6. 61 9.2 4.6 $.0 20.6 33.92 1983 - 1967 M1.6 -1.92 9.32 11.32 1977 56.1 17.3 73.4 40.12 12.8 7.5 2.7 7.3 23.0 31.32 1970 73.0 29.0 102.6 -28.729 15.2 0.4 10.3 12.0 34.9 34.02 1979 56.0 17.3 73.3 63.02 14.9 4.5 3.5 7.4 23.0 31.42 ' 1960 100.4 10.1 119.5 3.32 24.6 9.4 2.6 12.3 36.6 30.62 1991 93.9 29.6 123.5 -19.52 26.0 11.5 7.9 14.6 40.2 32.62 1962 82.6 16.9 So. 4 -10.02 23.1 3.7 3.2 10.0 30.0 30.12 1903 66. 19.8 69.7 30.42 15.9 6.5 4.6 10.8 27,2 30.61 Pt 1994 05.4 30.2 115.7 45.12 25.1 9.5 4.2 9.5 38.0 33.62 a, 1995 134.9 32.0 167.6 -32.22 30. 17.5 5.2 6.6 61.4 36.61 1906 81.1 32.6 113.7 21.52 25.8 10.2 4.0 5.6 40.0 35.92 1997 120.2 19.0 138.2 30.7 12.4 3.2 7.6 46.3 33.52tv ' C 00* Source: Inputs Section, 19*1D.9PAO; World Dank est.imatea. Working Paper No. 16 Page 10 18. DOmgstic Production. The parastatal TFC originally was incorporatedunder the National Development Corporationas a joint venture in 1968 between Klockner INA (West Germany) and the Tanzanian Government. Since commissioningin 1972, more local shareholders have been introduced. Participantsnow include: National Chemical Industries (86.7X), Tanzania Cotton Authority (5.4X). National Bank of Commerce (3.6X) and Klockner INA (4.3x), for a total share capital of TSh 0.277 million. Klolckner continues to provide technical assistance. 19. Initial facilities consisted of: (i) a sulfuric acid plane based on iAported sulfur with capacity of 265 ton per day (tpd), equivalent to 85,000 ton per annum (tpa); (ii) a phosphoric acid plant based on imported Moroccan rock of 82.5 tpd of 301 P20. acid capacity; (iii) a TSP plant of 240 tpd capacity; (iv) an ammonium sulfate plant of 120 tpd (20,000 tpa) capacity based on imported ammonia; (v) an NPK/TSP granulation plant of 265 5:pd(85,000 tpa) capacity; and (vi) matched utilities and infrastrtcture facilities. In 1978, the capacity of the ammonia sulfate plant was doubled to 120 tpd (40,000 tpa) capacity, and a new bulk blending plant of 130 tpd capacity was installed. Besides the above, the facilities also include three bagging units, one each for amonium sulfate, granular TSP, and NPK bulk blends. Imported phosrock for the phosacid plant was substitutedby domestic Minjingu phosrock from 1983. 20. The production history of TFC is shown in TabJe 5 below, which reflects the poor capacity utilization fo the facilities. Maximum capacity utilization was achieved in 1975 with 57X (105,000 tpa capacity) and 1981 with 551 (125,000 tpa capacity). Production in 1987 dropped to 151 of capacity, against a planned production of 44,000 ton (351 of capacity). Major factors influencing the low rate of utilization of existing capacity in recent years are: Workina Paper No. 16 Page 11 Table 5: Tanzania -Hifsorical Production of Fertilizars at TFC Plant, 1972-1987 ('000 ton) Ammonium Year Sulfate TSP DAP Blends Total 1972 -- 6.6 2.0 6.2 14.8 1973 4.7 9.9 -- 17.0 31.6 1974 15.4 24.9 0.5 18.3 59.1 1975 18.0 19.7 -- 1.6 59.3 1976 18.3 7.2 6.6 4.0 36.1 1977 15.7 8.3 12.8 36.3 1978 16.1 8.2 -- 20.1 44.4 1979 25.4 4.5 -- 17.3 46.7 1980 19.5 12.3 -- 19.1 50.9 1981 24.9 14.5 -- 29.6 69.0 1982 6.8 2.9 4.0 13.7 1983 14.8 7.1 -- 9.3 31.2 1984 22.6 8.8 20.2 51.6 1985 15.2 8.2 -- 18.0 41.4 1986 19.3 3.5 -* 24.2 47.0 1987 8.8 0.5 -- 10.0 19.3 Sourj: TFC. (a) insuffLicent supply of spare parts and deterioration of production fcillities due to aging; (b) shortages in the supplies of feedstock such as avmonia due to foreign exchange constraints; (c) shortages in the supply of indigenous rock phosphate from the Miniiga mine because of insufficient capacity for rail transport from Ausha to Tanga; ai (d) the quality of the rock phosphate which, as a result of its high siliceous content and its low rate of boneficiation (252 PIO), poses serious technological problem in processing it into phosphoric acid and subsoquent TSP. The locally produced TSP is not only of low analysis (maimum 372 Pj0.), but also of poor physical quality. WorkingPaper No. 16 Page 12 21. Currently,the physicalfacilities are in extremelydilapidated conditionto the point of beinga safetyhazard and environmentally polluting. The main reasonfor allowingthe facilitiesto run to seed is neglectedplant maintenancecaused in part by lack of adequatesystems and skills,and more importantlyby wholly inadequateallocations of foreign exchangefor sparesimports. The secondreason is that althoughthe pricing formula allows TFC to cover all z8s costs of production plus 10% profits,the actualex-plant prices allowed to TFC in recentyears are but an averageof 40X of formulaprice due to GOT requiringTFC to bear most of the fertilizerprice subsidies.The financialsituation of TFC has deterioratedto the point that its cumulativelosses as of end 1987 exceed its net worth,with no outstandingson debt serviceand havingwritten off the originalfixed assests. TFC, however,maintains its liquiditythrough tradingof importedfertilizers. The thirdpossible reason is that most of the country's fertilizer requirementsin recent years are supplied through grant-in-aidby variousdonors (para.25), which provideslittle incentive to maximize domestic production. In recent months, GOT has provided foreign exchange for import of aost essential spares, as well as agreed to consider TFC's claims on making good past losses due to lower allowed ex-factory prices. The TFC plant is currently.shut down for major maintenance and some replacements. This would enable somewhat higher capacity utilization for some time. However, these measuresconstitute a short-term solution to permit the plant to limpo along, and are insufficient to put it back in condition to ensure dependable, efficient production. 22. A comparison of world market prices, domestic TFC production costs, and regulated TFC selling prices are shown in InakLa. below. Working Pager No. 16 Page 13 TAble 6! TArWzpnaL- Comnarison of Fertilizer Costs. 1987 (US$/ton) SA Urea CAN TSP World Market Price 115 155 158 215 (CIF Dar-es-Salaam) TFC Production Cost 168 237 218 277 (ex-godown) TFC Selling Price 84 97 77 115 - Juce: MALD; TFC; FAO. 23. The possibilitiesof rehabilitating/revampingthe existing TFC production facilitieshave been studied by TFC technical staff and Klockner, and by Garbato, Italy, the latter concentratingprimarily on the sulfuric acid plant. The proposed rehabilitationwould include: (i) scrapping the existing 265 tpd sulfuric acid plant, and installing a new 400 tpd plant based on modern double-absorption technology; (ii) carrying out major revamp of existing phosacid plant and equipment additions to handle the high-silica content Minjinga phosrock, without increasing the original design capacity; (iii) increasing the bulk blending plant capacity from 130 tpd capacity to 300 tpd capacity, providing flexibility to feed the granulationplant or produce all blends in bulk-blend form; (iv) increasing bagging capacity to 370 tpd capacity; (v) installing a new aluminum sulfate plant of 19,500 tpa capacity; (vi) replacing/modifying worn out equipment and systems in amonLum sulfate plant withough ineres ing its current design capacity of 40,000 tpa; and (vii) rehabilitating key utilities/infrastructure/workshop facilities. The total investment costs are estimated at about US$17.4 million (1987), and the liZ has been estimated at 12.81. The TFC/Klolckner rehabilitation study points out that the capital cost estimates do not include other concomitant investments, among them for: (i) additional trucks required to transport phos concentrate from Ninj ingu mines to Arusha; (ii) some 24 additional rail wagons for transport of concentrates from Arusha to Tanga; (liL) revamping bulk raw materials (sulfur, amonia) receiving jetty and handling equipment; (iv) additional barges for transporting/discharging bagged raw materials; (v) additional coastal vessels to transport products to Dar-es-Salaam for onward transport to the main fertilizer markets in the south; and (vi) rehabilitating KIPCO's Kinjingu mine facilities. The rehabilitation capital costs are thus seriously under estimated making the marginally economic justification quite invalid. WorkingPaper No. 16 Page 14 24. The TFC plantrehabilitation proposal envisages supply of about 97,500tpa rock phosphateconcentrate feedstock at full capacityof fertilizerplants. As discussedin para. 31, recentassessment of phosrock availabilityat Minjinguplaces the remainingrecoverable reserves at under 300,000tons. Althoughadditional deposits in the form of hard rock have been discoveredsince long,the extentof recoverablereserves and costs have not been studied. It is, therefore,most unlikelythat the TFC rehabilitationproject can be economicallyjustified, as plant capacity wouldbe constrainedby shortageof the main inputphosphate rock. 25. For the future,the possibleset of strategyelements would consistof: (i) using Minjinguconcentrate for straightapplication; (ii) relocatethe granulation/bulkblending plant to a suitablelocation near Dar-es-Salaamand carryout revampof theseplants for blending importedstraight fertilizers; and (iii)close down presentTFC production facilitiesat Tanga. 26. IpMortsand Grants. For the past decade,Tanzania has been almosttotally dependent on grant fertilizersto bridge the gap between domestic production and demand. The donors have indicated their willingnessto continuemeeting the country'sfuture fertilizer requirementson a multi-yearcommitment basis, thus alleviatingsome of the uncertainty inherent in relying on grant aid. Such a comitment will be iaportantin the short term while the Tangaplant is undergoing rehabilitation.Fertilizer supply commitments for 1988-89total 121.900 ton, valuedat US$24.5million. Donor comitments,plus stocks(about 4,000 ton) and domestic production will allow TFC to cover anticipated sales. 27. Allocationof fundsfor procuringsupplies now has been adequately advanced by most donors to ensure scheduling of shipments in advance of season demand. However, several problems remin. Over half the quantities of fertilizer supplied through grants still consist of low to medium analysis products. In addLtion, some donors do not use competitive bidding to procure the grant fertiliters, *and as a result, the prices of the qwrntities thoy supply are well above International market prices. 28. Pho toheteRock.t/ Phosphate rock deposits were discovered near the Minj1inu in the northeast area of the country in the late 1960s. Subsequent geological studie established deposits Li the Minjingu hills, mainly in three beds located about 30 meter below ground and oriented fi 5Qrgm: Macro- and MLero-Economic Study of the Minjingu Phosphate co., Ltd., Tanzania, by CSK Consulting OY, Finland, and IFDC, USA, August 1988. Vnrking Paper No. 16 Page 15 generally in the N-S direction. The relatively more friable, soft variety of ore are better developed in the north side of the hills, whereas the hard type occur predominantlyin the south side. Estimation of reserves of both types of rocks was carried out in 1960 by New ConsolidatedGold Fields (NCGF) and placed at about 10 million ton, followed by Klolckner's (FRG) estimates in 1970, at about 4.3 million ton. Estimates made by other agencies pertain to soft rock deposits only, the most recent of which (Mwambete, 1987) places the remaining reserves at about 690,000 ton (232 P.O.content). Taking into account the combined mining and beneficiation recover at 422, the estimate of remaining rcoverable concentrate at 302 P20. is placed at slightly under 300 thousand ton. There have been no recent re-estimatesof the hard rock reserves capping the soft rock deposits in the north and mainly in the south side of the hills, nor estimates of recovery,mining and beneficiationmethods, and costs. 29. In the late 1970s, the parastatalState $iningCorporation (STAMICO) selected KONEOY (Finland) to develop engineering, supply, construction and commissioning of an ore mining and beneficiation project. The total facilities, with production capacity of 100,000 tpa 302 P2o0 concentrate, were commissioned in January 1983. The product was to be transported to the TFC's facilities to substitute imported phophate rock. Operation of the facilities was vested with the Minjingu Phosphate Company (KIPCO), a wholly- owned GOT company incorporated in September 1982. MIPCO's facilities include mechanical, dry beneficiation of run-of-the-mine ore to 30X P.0Oconcentrate. Capacity utilization during 1983-88 averaged under 202 due to several factors, including: (i) TFC's own fertilizer plant problems resulting in low offtake of phosrock; (ii) transport bottlenecks between Kinjingu facilities and the Arusha railbead, caused by bad roads and lack of trucks. as well as between Arusha and 'Tanga railheads, caused by inadequaciesin track, locos, and wagons; and (iii) suboptimal cost efficiencies of operations and deteriorating financial situation of NIPCO. Certain measures have been initiated to redr *s the deficLencies at (i1) and (LiL) above. However, the inte..related issues of appropriate exploitation of remaining reserves and TFC's future operations remain to be addressed fully. TFC's current situation and future prospects/options are discuwssed ln pars. 21-23, which conclude that it is very doubtful the rehabilitation of TFC facilities could be shown to be economically justified. 30. The possibilities of direct application of Minjingu concentrate have been studied by the University of Solokolne, the Uyole Agricultural Centre at Mbeya and the Agricultural Research Institute at Taro-Klinganro. The effectiveness of direct application have been found to approach that of TSP in many of the agricultural areas in the country (which typically have high soil acidity and low initial soil phosphate content) due to high solubility, and presence of alkaline calcium/magnesium compounds in the MinJ Digu concentrate. Direct application of finjingu concentrate is one major option for supplementing/substituting phospate fertilizers in the short- to medium-tera. The extent of such substitution will depend upon transport infrastructure to carry the concentrate to the main agricultural areas in the south. WorkinsPaper No. 16 Page 16 31. Furtherstudies need to be carriedout to establishadditional reservesof phosphateand costs of commercialexploitation. The presently knownexploitable reserves of 300,000ton wouldbe too small to justifyan economic-sizednew plant to producephosphoric acid/phosphatic fertilizers in the countryor even to sustainthe currentphosphoric acid plant at Tanga at its full capacityfor more than threeyears. For purposesof this study,therefore, the phosphaterock reservesare consideredrelevant only to the extentof substitutingpart of the phosphatesrequirement by direct phosrock application. Of course, the model would permit assessment of alternate situations on cost of fertilizer supply when it is demonstrated by futurestudies that domestic manufacture of phosphatic fertilizerswould be economical. 32. ha=PaJlSaa.Significant gas reservesand additionalprospective areas have been identifiedsince the late 1960s,when an exploration licensewas grantedto AGIP/AMOCO.Of the first four explorationwells drilled, the one at Songo-Songo resulted in gas discovery,and subsequently six wells were drilled to delineate the field. Gas has also been discovered at tzani Bay farther south of Songo-Songo, and in Kimbiji near Dar-es-Salaam. 33. Exploration Consultants Ltd. (ECL), USA, have assessed gas reservesin the Songo- Songo field based on data from nine wells that had been drilledas of early 1988. two of which are onshore,and the others in shallowoffshore waters. Estlmatesof gas-initially-in-place (GIIP), based on averagedspatial extent and reservoirproperties, are placedat 1,513billion cubic feet (BCF).of which 1,077 BCF is consideredas proven, and the rest considered as probable or possiblo. Taking into account a part of probable reserves (totalling 1,281 BCF of proven plus possible reserves), the recoverable gas is estimated at 871 JCF at a conservative 68X recovery, which could increase to 1,025 8CF at 801 recovery. There is no production history of gas from the Songo-Songo fiold. Estimates of the production rate from two onshor vells ts placed at 9 million cubic feet per day (mcfd). Besides three offshore wells already drilled, it is estimated by SIAM (Italy) that three additional production wells would need to be drilled to ensure a total production rate of 100 mefd from the field. 34. The prospects of establishing a 1,500 tpd ammonia/1,750 tpd urea plant bav been ivestigated since 1983 by Kellogg (as a potential investor), and by SAK Progetti. CDC, Inc., USA have carried out a study for the Tanzania Petroleum Development Corporation (TIOC) on utilization of gs for power generation, industrial or domestic uses as vall as use of CNG as transport fuel in the Dar-ea-Salaa are. From the point of view of total gas availability and quality, there would be no problems of supply to the proposed fertilizor plant and fuel markets for 20-year operations. Particularly in regard to the fertilizer plants, the total requirement (at 65 mcfd for 20 years) of 430 8CF is about half of the estimated recoverable reserves from the Songo-Songo fields, and thus gas availability is not an issue. However, the issue of export marketability of surplus urea, future price evolution, capital costs, financing plan, and the economic/financial WorkingPaper No. 16 Page 17 rates of returnhave not been fullyresolved. It would take four to six years to implementgrass-roots facilities, and for purposesof this report, it is consideredthat Tanzaniawill not be a producerof nitrogen fertilizerfor supplyto the domesticmarket or for exportto other SADCC countries. 35. Other la Materials. No depositsof potassiumores/brines have been locatedin the country. Some preliminaryexploration work on pyrites depositsat Samenahave been carriedout in the recentpast and the prospectsof this projectdeveloping into a sulfur/sulfuricacid production resourcein the medium-termdo not appearbright. _ , f f...... 36. In the courseof designingits rehabilitationproject, the TFC estimatedfertilizer consumption for the next five years. The resultsare given in JAiLl_Zbelow. Demandfor ammonium sulphate is assumed to be constant; otherwise, due to the relativeinelasticity of consumptionwith respectto pricesand the high potentialdemand for fertilizers (para. 9), TFC has adoptedannual growth rates of: between.5% and 8S. Working Paper No. 16 Page 18 Table 7: Tzania - Forecast Fertilizer Consumption (metric ton) 1988 1989 1990 1991 1992 AmmoniumSulphate 30,000 30,000 30,000 30,000 30,000 CalciumAmmon Nitrate 30,500 32,000 34,000 37,000 41,000 Urea 35,000 37,000 40,000 43,000 47,000 NW,: 25:5:5 7,000 7,200 8,000 8,500 9,000 20:10:10 6,200 6,500 7,000 7,500 8,000 6:20:18 18,000 19,000 20,000 21,500 23,500 Triple Super Phosphate 20,000 20,.00 21,500 23,000 24,000 Sulphate of Potash 1,300 1,300 1,500 1,500 1,500 TOTAL 148,000 153,000 162,000 17,2000 184,000 S=c: TPC. 37. No more than 13,100 ton of domestic production can be anticipated during the 1988/89 cropping seasonwhile the facilities at Tanga are shut dow for nt c (para.21). Once this work is completed,TFC is expected to operateat only 402 of capacity (justunder 91,000 tons/yr) during 1989/90 and 1990/91. The balaneo of supply will have to be made up from stocks and Lmports. 38. Narkatimg and Distrb=Lon lASUL%Le. The regional Cooperative UnLons account for 70S to 752 of fertilizer distribution. The remaining share (13.5Z in 1986/87) is carried by preferential retail traders who maintain retail outlets in major townships (para. 8). Although fortilizers have been targeted in the recent liberalization efforts, increased private WorkinsPaper No. 16 Page 19 sectorparticipation has been constrainedby the inabilityto obtaintrade licensesfrom local authorities. 39. Timelydistribution of productis hinderedinadequate transport infrastructureat the primarydistribution level (para.40) and an overly complicatedcredit scheme at the secondarylevel (para. 41). Both problems resultin accumulationof excessivestocks at the regionallevel and in Dar-es-Salaam,thus forcingTFC to maintainexcess storage capacity so that inputs are available at the beginning of the cropping season (para. 41). About 25X to 30X less storage and transport capacity would be required if low to medium grade fertilizers, which still represent501 of the total tonnage,were replacedby high analysisurea, TSP and NPK compounds. Simplificationof proceduresfor orderinglnput supply,obtaining credit and obtainingtrade licenses also would reducethe time lag betweendemand and supply,thus obviatingthe need for stockingfertilizers during the off-season. 40. Z=s t _ . At the primarylevel (fromTFC to the CooperativeUnions) the weak and deterioratingtransport infrastructure represent a pervasive weakness in the distributionsystem, and also limits the availibilityof domesticraw materialsfor fertilizermanufacture (para.29). This problemis criticalfor Tanzania: Shifting tho areasof agriculturalproduction to the SouthernHighlands has alteredthe traditionalpattern -- the populationengaged in crop productionresides on the perimetersof the country,while the naturalmarkets and accessto ports are in neighboringcountries -- thus makingheavy demnds on the transportationnetwork. ShortagesLi spareparts and railroadwagons, poor roads and institutionalweaknesses (para. 6) are the major factors compounding the situation. The stat, of transport infrastructure combined with large internal distances results in transport costs of about US$124/ton, or more than half the landed price of fertilizer(US$52/ton CIF). In addition, transport bottlnecks affect the actual deliveries by the TFC, which fall short of the to*nages ordered by about 5,000 to 7,000 ton; in previous seasons, the shortages exceeded 15,000 ton (para. 10; Attachment 1). Unfortunately, public investment in transportation has dropped radically since the 1970., leaving no resources to finance needed reinforcemnts to the transport infrastructure. 41. Sra . Lengthy loan application procedures under the existing credit scheme pose serious logistical problems for secondary dlstribution by the cooperatives: Orders are place so late in the season (usually no earlier than August) that TFC must by necessity maintain excessive stocks at the port (Dar-es-Salam) and at regional levels to ensure adquate supplies at the beginning of the cropping season (November). TFC rents or owns about 70,000 ton of storage capaelty at the regional level, and another 6,000 ton in Dar-es- Salasm. Construction of nwa storage facilities in Songa. Makambako, Mbaya, Sumba Wanga and Dar-es-Salam (each with 10,000 ton capaeLty) has been delayed due to financing problems. 42. Offtake by the Cooperative Unions reflects the limitations of the seasonal input credit scheme rather than actual demand. The amount of WorkingPaper No. 16 Page 20 loansmade availableto differentCooperative Unions amounted to TSh 800 millionin 1987/88,less than half of whichwas repaidby the primary societies to theirunions. Given thesedifficulties and the fact that almost651 of farmerspresently have the means to financetheir seasonal inputs,the Governmentis reorientingits policyto introducecash sales. The existingsystem would be reducedto reflectgenuine credit needs. A reformedand reducedcredit program would have many advantages. 43. Eiins And Subsidies.Until 1984,explicit subsidies on fertilizerprices amounted to abouthalf the procurementcosts. A substantialimplicit subsidy was also providedthrough currency overvaluation.Subsidies were eliminated in 1984, causingprices to Jump by more than 200X but with littleeffect on consumption.Implicit subsidies remain due to the exchange rate overvaluation and the fact that fertilizer is not priced at full cost to farmers. A price increase in August1987 raised the retail pricesof all productprices by a flat 302. This price scheduleis stillin affect(Annex 4), but no longercovers the full cost of fertilizeras a resultof consecutivecurrency depreciations. 44. FAO has estimatedthe differencesbetween economic costs and selling prices; Attachment 2 gives FAO's estimates of actualtransport costs used in these calculations. Working Paper No. 16 Page 21 Tabla 8: Tanzania - Comgarion of CIE a&d Ogficial Prices (TSh/ton) Ogficial Price Product Economic Costs June 1988 &/ 1987/88 SA (21XN) CIF 10,925 8,719 4,390 Distribution ,3.tQ - 87 2.250 Pan-Territory 14,425 8,632 6,640 Urea (46%N) CIF 14,725 10,032 5,354 Distribution .3.50Q -_100 2286 Pan-Territory 18,225 9,932 7,640 CAN (26X N) CIF 15,010 7,958 3,976 Distribution 3.500 - so 2.084 Pan-Territory 18,510 7,878 6,060 TSP (46% P20s) CIF 20,425 11,792 6,543 Distribution 3.50Q - 118 2.4.7 Pan-Territory 23,925 11,674 8,980 A Official price as converted at the June 1988 exchange rate. Sogrcg: PAO, Attachment 4. 45. FAO estimtes that the combined economic (loss of revenue due to lower exchange rates) and financial subsidies (distributioncosts) of selling some 135,000 ton of fortilizersduring the 1988/89 cropping season will be at least TSh 1,000 aillion (US$10.5 million). A further loss of TSh 700 million is anticipated if loan repayments remain at 501. Officials are prop6sing to phase out the price differentials between real costs and official prices over a four year period; the mods of financing the fiscal deficit and the actual duration of the phase out are still subjects of discussion. WorkingPaper No. 16 Page 22 L._ 46. Prospectsfor continueddomestic supply in Tanzaniaare limited. The costs of producingfertilizers at Tanga are significantlyhigher chan the opportunitycosts of importing(para. 21-22: Table 6) due to the delapidatedstate of the facilities.Roview of the proposalsto rehabilitate/revampthe productionfacilities indicate that it is unlikely that a rehabilitationproject can be econeticallyjustified, due to constraintsin phosphaterock supply. In addition,complications due to bottlenecksin coastaltranportation limit furtherthe likelihoodof developingan economicallyviable project. 47. At present,the most viableoption for futuresupply would be to close the Tanga plant and to base supplyon importsof basic materials. Fertilizernutrients could be importedthrough the Dar-es-Sala..port. The granulationand blendingfacilities at Tanga could be salvaged, transplanted to a location near the port, retrofitted and expanded for bulk blending. Distribution of the blended fertilizors would be facilitated by improved rail facilities from Dar-es-Salaam to principal markets. 48. The feasibility of using Songo-Songo gas for production of nitrogenousfortilizers should be recommendedcritically to establish whether and under what conditions such manufacture will be economically justified. The aspect of massive investment requirements, and the impact on skilled and managerial personnel required should be taken inco account. . Working Paper No. 16 Annex 1 Table 1 TANZANIA- VKE;ILXZER DEMAID AND SUPPLY BALANCE. 1981-1986 (metric ton) 1981 1982 1983 1.984 1985 1986 Quantity Ordered 130000 107750 109913 126702 144525 156746 from TFC Quantity Supplied 96569 82475 89874 99474 118069 123439 by TFC Orders Not Filled 33431 25275 20039 27228 26456 33307 (as percentage 25.72X 23.46X 18,23S 21.49X 18.311 21.25X of total orders) SA A/ 6101 12447 9149 11857 7834 CAN 4126 3920 9587 5460 14792 Urea 290 638 3574 4299 5706 '25:5:5 1282 1259 906 1763 901 '20:10:10 2/ 4254 31 882 158 2285 6:25:18/6:20:18 723 583 698 1490 800 TSP 6635 891 1722 1407 908 SOP 1864 269 710 22 81 a/ Breakdown into fertilizer types not available for 1981. b/ Order in 1983 was for 23:23:0 blend. Source: KALD, World Bank estimtes. Working Paper No. 16 Annex 2 Table 1 Page 1 UAUMNI - FEXTLIZ~ZERThNSOR AN DXSTRIUTXON CUSTS A/ I. Distancg in Km: Rad Iot1 DSM - Morogoro 250 -- 250 - Dodoma 480 -- 480 - Tabora 1050 1050 - Kigoma 1540 -- 1540 * Rukwa 851 420 1270 - Mbeya 850 -- 850 - Iringa 500 ,, 500 - RuvuMa 674 300 974 II. Xalj>Ej: Rail TRC Central Line: T.Sh. 1.5 per ton/km Rail Tazara Line: T.Sh. 2.5 per ton/km (Southern) Road Main highways: T.Sh. 7.87 per ton/km III. TIC Node of Trenort: About 15 or 18,000 tons of the fertilizers handled by TWC are transported by road: the balance by raLl. For both rail and road erasuport TPC receives tariff discounts which ar. based on the tonnages to be moved and the season of transport. IV. ranp Cst oa Ttort o Central 2one A. Along the Central Line: TQnnas 21tance Ton-k DSM * Morogoro: 3,554 250 688,500 - Dodoa: 437 480 209,760 - Tabora: 14,416 1,050 15,136,800 - Kigous: .3L,92 1. = -2341460 Average distance travelled per ton (rail): 985 km J/ FAO: Working Paper on Agricultural Inputs Supply and Distribution, 1988. WorkinaPaper No. 16 Annex 2 Table 1 Pase 2 B. Along the Tazara (southern) Line: ZDMIa Distance Ton- DSM - Rukwa: 8,317 851 7,077,767 By road: 8,317 420 3,493,140 C. Total Costs TQD:km Tariff Cose (T.Sh.) By Rail: CentralLine: 21,469,520 1.5 32,204,280 Tazara Line: 7,077,767 2.5 17,694,417 By Road: 3,493,140 7.87 27.421.011 TOTAL: 67,389,708 WEIGHTEDAVERAGE TRANSPORT COST - CENTRALZONE: T.Sh. 223L6/eon Actualcost to Kigoma: T.Sh. 2,310/ton Tabora: T.Sh. 1,575/ton Rukwa: T.Sh. 5,433/ton V. Avera e Cost of Transpsortto Sothern Highlands A. Along TazaraLine (rail): Tonnagf &StaUM Ton-km DS* - Mbeya: 23,580 850 20,043,000 I Iringa: 38,789 500 19,394,500 R.uvuma: 2L 37 614 1Lk.g6Z07i TOTAL: 83.743 53,843,576 Averagedistance trawvlled per ton (rail): 643 km S. By Road: to Ruvuma: 21,374 300 6,412,200 C. Total Costs: (T.Sh.) Rail Costs 53,843,576 2.5 134,608,940 Road Costs 6,412,200 7.87 S0.464.014 TOTAL 185,072,954 WEIGHTEDAVERAGE COST OF TRANSPORT TO SOUTHE HIGHLANDS T.Sh. 2h1sn ActualCost ot Ruvuma: T.Sh. 4,064/ton VS. WSM30833133 wa5L:M cNIa1sooo ow0 6011 COs?0 AM OFFICIAL esOcsO .& uwml*ot of atels& io& at%si t UWA33446% 333 S*001 Cas *O*i *$- I.s38 15664 333*flw& Coat 0*lS 1---- rea...asC`t*o ---- 0166d4 $0asholk &ettl 311,061 Iatge. us3-audebwht ao.t*a 800)100 3ogso.e. ae,s..* *?b. 4t0 . I8 3 #$,t38/t) i98/toe4 il:tObfal 3t91/te.l too 3ID3 C. its3 we,*is 0.,3 4.200 300 351 10125$Ml a0,0)3 C25 0 8. t*ly SsatShS00 2,100 0 8,20 SII2,100 3300 12.36 Ckowg.. Ine -o - - il ------S. i.. $$*.t.i*-.i33,gas 0.638 0,460 to gil 30.3, 0.032 1.a40 so '11 0. U.edoo4 a 08e1b.t*.e 5.13 3.110to 60 111 3.46 .0406 5,410 11. 8.dees #glea Cool 0..8* 30.53 30.2 0*,See 30 535 tO,011 35.110 0.0o0 30 0. tabeoes - b@g~-beo. 82304 3.100 1,10 . 3,30 33us 0 3.000- 3.460 *. 36-0. OvA. 0141 01011 1.0 .0 00 300 3.1 010 eebe&"g se*. s*8t.es,0e 6,30 4 0..w, P8.853.43. 2.0 313§* 11,600 ,aftme,,_ 6 ,g_,_*6b 1.10) 3 80 i 064141SIA3.... .63...... 50 S.%p.WWW...0tS..S0-6640 0.063 31 003 32.0)6 111 31.335 $ w.4 FJbe,".s ,F,.* ,, X0J**X le*, ~~~~IlagIx e"eee~ ~ ~~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~o~ ai II.vmsuss ossog.. Z s*" of *SAI IV"0t* am OrfICI BtRicO .ol po6w. 0.t -- l..S. 3 l ---- 53I3et. Cool oo ---- oI#8.8.88,Steed ---- aIt m0iswol ca.8es W03*8 $uslitsw 410 431 01 4eh.e 41Le.. gIoS,,Ce.J.gu/. ¢*0I III g6It.o 610kto., 413k/tool t*,tooS 633 £66 a. w.oep ,. i.e.. g,s. lilt£16 11"-psovpatooCo0 so*& M6.31C MSw.8 3,300 63308 3.fll 6ob... ON0 V60t#0 so... &$.*I$dMabo A.t...8 8001160 to'.. C_- 8,40 boW"-01,464 l*X^ F.o - 11 Z¢|-- b - se .2.111- l*ttlts0 - 3. B.-4OSS*SOll-l Uweo 80.330 1.0,, 6.,0 *0 30l tZ9l 8.0^7 0* 0 30 sea-am*# Ceodso#et*& at, _ Ise bleess , &*isso so 111I 28,64S Mose s 4. 0eo.d.. *ftee*bC 3.18 8.186 a.fl0 .99 1§058. 8.i 1,306 3.34-e. 9.8.. coo o.oaao *.s so 6, __ 384)_ 13 4. _ - 0. teseve es ^- g¢b.o o.1.3 *236 303al 8.403 8.8 10 **9 *-~ 3.380 8.100 * ~ *,a,I-fi°e- -- | -** -. -, -s , -,oao 1. S.d- os 16*.. C..d8 33,*00 83.0)0 5.1g030 3056 16.003 13.03 33.30 *0 a.. I' Ii 0 . 0ub~ sCeo¢b OeeSos * ,63)£ 80.033 _19 33.1St Ma#o3 ...... 10 *ppmmt*.S-S0 3.338a 61£ 1.081 o*,^^ >- "* *t." *.-.--*e X,^~~~- l a,o 96.910~~~~~~~~~~~~~~ 8t4.,l0 998 30.800 fIt .. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, . 4-'1QB ./*.et.. p.SCee Je.. .. t 8030. jjUl goIt Ie Workina Paper No. 16 Annex 2 Table 3 VII. lgtal Subsiaies for DistributineSupnles of Straight Fertilizers During 198fi-B9 Product; Tonnage Subsidy Total (TSh/ton) (TSh) SA 22,400 5,793 129,763,200 Urea 26,000 8,293 215,618,000 CAN 34,000 10,632 361,488,000 TSP 2_Q9° 12,215 26.2L5.2000 TOTAL 104,400 tons TSh 976,391,200 Of Which: Loss in revenue (economicsubsidy) TS1h601,126,400 Distributioncosts (financialsubsidy) TSh 375,264,800 Fertilizer Price Calculations: Produce and NutrLent Basis (US$/ton) Import Product Basis World Market 115 155 158 215 Donor Prices 204 160-170 150-180 267 Nutrient BAsis World Market 548 337 608 467 (in TSh/ton) A 52,000 32,000 57,800 44,400 END USER.PRICES Ntript Basis Real Cost 77.0 43.6 77.8 56.3 Subsidized Cost 49.4 25.6 36.9 29.6 (cash) Subsidized Cost 57.5 29.7 42.6 34.4 (credit) S/ Exchange Rate: US$1.00 - TSh 95