Tanzania: Selected Issues and Statistical Appendix

This Selected Issues paper reviews developments in Tanzania in the main fiscal indicators and related structural reforms to explain the success in fiscal management. The paper contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered. The paper concludes that the rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation.

Abstract

This Selected Issues paper reviews developments in Tanzania in the main fiscal indicators and related structural reforms to explain the success in fiscal management. The paper contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered. The paper concludes that the rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation.

V. Privatization and regulatory reform in Tanzania55

A. Introduction

124. A crucial element of the socialist policies pursued by Tanzania after independence was the establishment of public corporations that dominated virtually every sector of the economy. While in 1961 Tanzania had only 3 government-owned companies, by 1988 this figure had grown to 410 parastatals, accounting for two-thirds of employment in the formal sector. Many of these enterprises had been established through nationalization of existing private enterprises. In the late 1980s, signs began to emerge that the performance of these enterprises was unsustainable and dampening Tanzania’s growth prospects: with capacity utilization hovering at 25 percent, parastatals built up salary and tax arrears and failed to service their debt obligations. Increasingly, the budget had to subsidize parastatals in order to prevent their closure. Moreover, the population increasingly recognized the declining quality and quantity of goods and services produced by parastatals. Public enterprise reform and privatization were therefore important elements of the new policy agenda when in the early 1990s, Tanzania decided to abandon socialist policies and steer the economy toward market-oriented reforms. The objectives of privatization were to reduce budgetary costs, increase the efficiency of the productive sector, boost growth prospects, and facilitate the provision of affordable and accessible key services. As a result, the government also expected privatization to help reduce the costs of doing business, a critical objective in its efforts to make Tanzania a more attractive investment location.

125. As monopolies were transferred to the private sector or private operators entered sectors of the economy previously dominated by parastatals, Tanzania began to establish independent regulatory bodies, thereby separating the regulation from the operations of parastatals.

126. This paper reviews Tanzania’s privatization experience and discusses issues that have emerged in the process. While so far about two-thirds of the parastatals have been divested, large state-owned enterprises in the utilities and transportation sectors remain to be privatized. Furthermore, while the available preliminary evidence suggests that investment and productivity have picked up in privatized enterprises, indications are that growth and employment have not yet been affected, possibly because the largest enterprises are still to be privatized.

127. The first subsection of the paper describes the institutions established to implement the privatization process and the regulatory agencies currently in place. Subsequently, the paper reviews progress in privatization so far. The third subsection discusses problematic issues that have emerged in the process of privatization, particularly in regard to the largest state-owned enterprises. The fourth subsection concludes.

B. The Institutional Framework

Privatization

128. The key institution in charge of executing the government’s privatization agenda is the Parastatal Sector Reform Commission (PSRC). Liquidations of parastals and collection of bad loans are the responsibilities primarily of the Loans and Advances Realization Trust (LART). Both the PSRC and the LART receive significant technical and financial support from the World Bank.

The Parastatal Sector Reform Commission (PSRC)

129. In 1993, the government established the PSRC to coordinate and implement the privatization of parastatals in Tanzania. The PSRC’s wide-ranging tasks are enshrined in the Public Corporations Act, which was adopted in 1992. The PSRC’s mandate includes the following responsibilities: (i) to financially evaluate parastatal entities; (ii) to determine, on a case-by-case basis, the privatization method; (iii) to prepare entities for sale or liquidation; (iv) to implement the sale/liquidation; and (v) to provide policy advice to the government on privatization incentives, safety nets, and compensation packages for employees The PSRC’s initial mandate of five years was extended by another five years in 1998.

130. While the PSRC has wide-ranging powers to audit and evaluate parastatals, it has few decision-making powers and acts essentially as an executive agency of the government in implementing the privatization agenda. Decisions about the completion of transactions and positions on contentious issues are taken by the cabinet and prepared by the PSRC in consultation with the Ministry of Finance, the concerned line ministry, and other involved institutions, such as the Office of the President. Negotiations with workers about retrenchment packages and corporate debt restructurings are being conducted mainly by the Ministry of Finance. Although not formally codified, the PSRC also acts as an advisor to the government in all aspects of the privatization process.

131. The PSRC Act foresees that privatization receipts are transferred to a special fund whose use is determined by the government. In practice, proceeds sent to this fund are used by the PSRC for the purpose of covering expenses that arise in connection with the privatization of enterprises, such as retrenchment costs, parastatal debt charges, and consultants’ fees. The balance of the amount has to be transferred to the budget upon request by the Minister for Finance. The PSRC’s accounts are audited once a year by an independent auditor. The audit reports are forwarded to the Minister for Finance, the Auditor General, and parliament. Since 1992, privatization proceeds have totaled about T Sh 180 billion, of which about half have been transferred to the budget. Proceeds from the largest transaction—the sale of a 35 percent share in a fixed-line telecommunications company—were used to boost the company’s capital and did not generate any privatization receipts by the budget or the PSRC Special Fund. Table V.1 shows how privatization receipts have been allocated.

Table V.1

Tanzania: Use of Privatization Receipts, 1993/94-2001/021/

(In billions of Tanzania shillings)

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Source: PSRC.

Fiscal year runs from July to June.

The Loans and Advances Realization Trust (LART)

132. The Loans and Advances Realization Trust (LART) was created in 1991 to deal with nonperforming assets of the state-owned banks and, later, of all financial institutions. LART holds on behalf of the government nonperforming loans of banks and financial institutions and tries to recover the outstanding amounts, including by restructuring and liquidating companies and seizing the owners’ accounts. Through end-April 2002, 61 accounts of owners of nonperforming assets had been closed, out of a total of 93 accounts, and the recovery of 13 had been completed. The recovery of 19 nonperforming assets is still in progress. In total, about T Sh 18 billion of a total of T Sh 27 billion in nonperforming assets have been collected which substantially exceeds the initially estimated recoverable amount of about T Sh 11 billion. To accelerate the recovery of loans, the government has established a Loan Recovery Tribunal, presided over by a high court judge, and following simplified procedural rules.

133. LART’s mandate also includes liquidating public enterprises that were never considered for privatization and acting as an agent for the PSRC in the liquidation of companies whose privatization failed. As of end-June 2002, 49 companies had been liquidated by LART.

Regulation

134. As in the process of privatization monopolies were either transferred to the private sector or private operators entered sectors previously dominated by parastatals, the role of the government changed from that of an economic actor to that of a regulator. This change in role necessitated the establishment of a modern regulatory framework that appropriately separated the policies, ownership and operations of monopolistic activities from regulation. The main purposes of market regulation are to ensure that (i) new entrants are properly licensed, based on objective safety and operational standards; (ii) compliance with such standards is monitored regularly; and (iii) changes in price structures are made with due consideration for public and commercial interests.

135. Table V.2 includes information on institutional arrangements for market regulation in each sector. Progress in establishing such agencies has been quite uneven. While in some sectors an independent regulatory agency has yet to be created (e.g., the railway sector) and the equivalent function is carried out by the line ministry, in several sectors (e.g., telecommunications and civil aviation), agencies and pertinent laws are in place that should in principle allow an independent regulation. Most regulatory institutions—with the exception of some agencies in the transport and electricity sectors—were established after the inception of the privatization program.

Table V.2.

Tanzania: Regulatory Agencies

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All regulatory agencies in this sector will be subsumed at the beginning of 2003 under a new multisector agency in charge of the transportation sector (SUMATRA).

All regulatory agencies in this sector will be subsumed at the beginning of 2003 under a new multisector agency in charge of the water and electricity sector (EWURA).

136. In addition to the sectoral agencies, two institutions have functions that transcend specific sectors: the Bureau of Standards and the Fair Competition Commission. The Bureau of Standards’ mission is to develop and promote standardization and quality assurance in industry and commerce. To this end, it establishes quality standards and provides for the testing of commodities to determine whether such commodities comply with the quality provisions. The Fair Competition Commission’s task is to investigate restrictive business practices in the economy, in particular, the misuse of monopoly power of firms and unnecessary concentrations of economic power through mergers and acquisitions.

137. While on paper the regulatory framework appears reasonably well developed, a recent report by an independent consulting firm for the PSRC suggests that in practice regulation is often performed in only a rudimentary fashion. In the road transportation sector, no effective control of the entry into the market of interregional and intraregional transportation exists Similarly, while compliance with safely standards by the railways and electricity and water companies is being monitored, environmental standards are not controlled. Also, while the Bureau of Standards has established quality standards for consumer products and services, its capacity to monitor these standards has been limited. The Tanzania Civil Aviation Authority is considered to have been effective in enforcing safety standards and investigating accidents, but it has yet to develop mechanisms for an economic regulation of the market for civil aviation.

138. In order to overcome the deficiencies of the present regulatory framework, a World Bank supported program is assisting the Tanzanian authorities in establishing two new multisectoral agencies: (i) the Energy and Water Utilities Regulatory Authority (EWURA); and (ii) the Surface and Marine Transport Regulatory Authority (SUMATRA). Laws establishing these two agencies were approved by parliament in 2001 but are being reviewed, with a view to strengthening the independence of the regulatory agencies from interventions by the line ministries. Examples of provisions that might conflict with the independence of the regulatory process include the right of the Minister of Industry and Commerce to give directions to the agency on issues unrelated to the discharge of the regulatory function, and his influence in determining financial rewards or penalties for agency staff. In addition, the laws currently do not foresee full-time leadership at the two agencies and envisage cumbersome processes for making decisions and hearing appeals. The new agencies are expected to become functional by the beginning of 2003.56 Plans also exist to form a Mass Communications Regulatory Authority that would regulate telecommunications, electronic broadcasting, postal services, and the allocation and management of the range of radio frequencies.

C. Progress of the Privatization Process and Remaining Agenda

139. Since 1992, the government of Tanzania has made substantial progress with the privatization program, although the current privatization of large strategic enterprises is proceeding more slowly than anticipated. At the end of June 2002, 258 units had been divested, of which 49 had been placed under LART’s receivership for the purpose of liquidation. This means that the privatization of two-thirds of all units slated for divestiture had been completed by end-June 2002. These enterprises account, however, for only a small portion of total employment, as large strategic enterprises, such as the electricity utility TANESCO, the water utility DAWASA, and the railways remain state owned.

140. The methods of divestiture included share or asset sale (including joint ventures); lease; liquidation or closure: performance or management contracts; restructuring and receivership. Table V.3 shows the distribution by divestiture method in every year since 1992. While during the initial years liquidations by the PSRC or through LART were the most common method, sales of shares or assets became the dominant divestiture method in subsequent years. Liquidations were more prevalent in the initial stage of the privatization program, because, as a number of companies had virtually ceased operations in the early 1990s, closure was the only option.

Table V.3.

Tanzania: Parastatal Divestiture by Type of Divestiture, 1992-2001/02 1/

(Number of units)

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Source: PSRC, Annual Reports.

Fiscal year runs from July to June.

This category includes assets such as buildings, pieces of land, and tractors.

141. Several transactions should be highlighted that used less common methods of divestiture:

  • Two agencies were restructured: the Tanzania Tobacco Board was transformed into an administrative unit, and the Tanzania Central Freight Bureau was turned into a regulatory agency.

  • In 1998, the government sold 26 percent of the shares of Tanzania Breweries Ltd. through the newly established Dar es Salaam Stock Exchange This was the only privatization carried out entirely through the stock market, notwithstanding the PSRC’s intention stated at end-1998, to privatize six more companies through the stock market. In 2000, a cigarette company was partially privatized through the stock exchange.

  • In three cases, debt-swap operations were carried out: the privatization of two hotels and of one farm involved a debt swap with the debt of other countries (China and Libya).

  • One company was denationalized and returned to the previous owner in 1993. This form of divestiture was used to a limited extent, as nationalizations that had taken place at the beginning of the 1960s had often been accompanied by the payment of appropriate compensations to the former owners.

142. Data on the sectoral distribution of divested companies indicate that most divested companies were in the industry and trade sectors, followed by the agriculture and tourism sectors. More than 60 percent of divested companies were sold to local investors, with the balance sold to foreign investors and turned into joint ventures.

143. While most privatizations involved small and medium-sized companies, divestitures since 1999 have focused increasingly on large strategic enterprises. Three transactions stand out: a lease of the Tanzania Harbor Authority’s (THA) container terminal to an Asian investor; the sale of the National Bank of Commerce (NBC) to a South African Bank; and divestiture of 35 percent of the equity in the telecommunications company (TTCL) to a Dutch-German conglomerate. The current efforts to privatize strategic enterprises are encountering difficulties, however. Table V.4 summarizes the status of the privatization of each of these companies and notes the remaining problems.

Table V.4.

Tanzania: Status of Preparation for the Privatization of Large, Government-Owned Monopolies

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Source: Parastatal Sector Reform Commission.

144. What was the impact of privatization? A study by an independent auditing firm for the PSRC compares indicators for companies before and after privatization, based on the results of a survey at the end of 1998. The study concludes that (i) after privatization companies show an increase in net cash flow to the treasury57, (ii) there is a decline in employment after privatization; and (iii) privatized companies are more productive and invest more.

145. Useful evidence on the positive impact of privatization can also be found in the improvements of operations of several recently divested companies: in the case of the brewery and tobacco company, the quantity and quality of goods sold has increased markedly leading to higher export sales and tax returns. The private investor in the telecommunications company (TTCL) has launched a large-scale investment program in both the fixed and the mobile phone networks, which should substantially enhance the reliability and accessibility of the telecommunication services. Also, the efficiency of the harbor terminal, a crucial element in Tanzania’s transportation infrastructure, has improved significantly, as measured by the turnaround time and the overall volume handled by the facility.58

D. Problematic Issues Affecting Privatization

146. Although progress has been made, the privatization experience so far points to the presence of several factors that have been complicating or delaying the completion of the divestiture agenda, in particular with respect to large enterprises.

Retrenchment costs

147. The treatment of workers who will be retrenched in the process of privatization has been the cause of significant resistance to the divestiture of parastatals and is likely to become more prominent in the ongoing privatization of large parastatals (see Box V.I on TANESCO). While the official policy established by the government in 1973 foresees that retrenched workers should receive only statutory benefits (one month salary plus annual leave and relocation to home town), in practice substantial exgratia payments ranging from US$ 8,000 to US$ 14,000 have been made by large companies.59 In contrast, retrenched workers of companies that were liquidated are entitled, according to the bankruptcy law to only T Sh 4000 (currently about US$ 4), however, the budget has frequently intervened in these cases to realign the benefits of these workers with those of other retrenched workers60

148. This ad hoc system has led to widely varying retrenchment payments, that do not reflect economic and social costs and have stirred up social unrest and opposition by some labor unions and parliamentarians. Furthermore, the payment of retrenchment costs at the upper end of this spectrum would lead to a heavy and potentially unsustainable fiscal burden. The uncertainties surrounding the policy of retrenchment payments are also reflected in the estimates of contingent liabilities due to retrenchment costs, which range from T Sh 43 billion to over T Sh 80 billion.

149. To address this issue, the PSRC commissioned in 1999 a study to review retrenchment policy. The study recommended a scheme under which the severance package paid to an individual worker, above the statutory minimum, would be based on the probable losses that the worker would face due to retrenchment. Those workers more likely to have difficulty finding other work would be paid a proportionately larger sum (e.g., older, less-well-educated staff) than those who would likely find employment quite rapidly. This new policy was rejected by the government. Accordingly, the latest PSRC report continues to state that the government’s policy for retrenchment benefits is to pay statutory benefits, with exceptions made for companies in stronger financial positions.

Retrenchments: The TANESCO Experience

The importance of agreements on the retrenchment of workers became particularly evident in the context of a management contract for the electricity utility, TANESCO, in May 2002 Arguing that the management contract represented a de facto change in ownership, workers prevented the members of the new management team from entering their offices, pending an agreement on a generous retrenchment package with the government that would have cost the equivalent of more than 1 percent of GDP. Although the management team eventually took over the management of the company, no agreement between the government and the workers on a retrenchment package has so far been reached. Meanwhile, under the new management, the financial performance of the company seems to have improved.

Parastatal debt

150. Debt obligations can negatively affect the privatization of parastatals when the precise amount and status of the debt are uncertain; in this situation, the investor does not know the cost of servicing the liability when formulating his estimate of the future profitability of the company. In Tanzania, many parastatals carry large debt obligations on their balance sheets: in a recent stocktaking of parastatal debt, the PSRC estimated the volume and composition of debt with fiscal implications at end-June 2001 as follows:

Table V.5.

Tanzania Parastatal Debt at June 2001

(in billions of Tanzania Shillings)

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151. The recently approved National Debt Strategy suggests an approach that focuses on systematically identifying debt that is uncertain and reducing such debt on a selective basis. This approach is supposed to replace the previous piecemeal case-by-case approach of dealing with company debt, which involved the partial transfer of enterprise liabilities to the government. In practice, however, no systematic effort has yet been made to review and reduce debt obligations.61

152. Another issue that has been delaying privatizations is investors’ uncertainty about payments from government agencies. Investors are concerned that, for political reasons, the interruption of services to certain government agencies (such as the military, prisons etc.) will not be possible thus opening the possibilities that, these agencies will not meet their payment obligations. These concerns, although prominent in the ongoing negotiations of the DAW AS A concession, were mitigated somewhat when TANESCO’s new management was able to cut off services to politically sensitive agencies that were running arrears.

Investment climate

153. Privatizations have also been held up by lack of interest on the part of investors. In spite of Tanzania’s progress in implementing market-based reforms, investor interest has been hampered by Tanzania’s poor infrastructure, the inadequate skill structure of the labor force, uncertain property rights (stemming partly from an ineffective judicial system), and bureaucratic and administrative obstacles to private sector activity, including in the area of tax administration. These problems have been compounded by occasionally voiced views that companies should remain Tanzanian owned, a situation that has discouraged foreign investors.

154. Importantly, several initiatives that have recently been launched aim at improving the investment climate. These include the creation of the Tanzania National Business Council as a forum for exchange between the government and the local business community, the International Investors’ Roundtable, which brings together chief executives of large multinational corporations investing in Africa and senior government officials, and the “Business Environment Strengthening for Tanzania” (BEST) initiative, which is a program developed by bilateral donors, the government, and the private sector to improve the business regulatory environment (in particular as regards licensing, property rights, and land ownership and promotion).

E. Conclusions

32. Tanzania’s progress on the privatization front is evident: two-thirds of the companies slated for privatization have been divested, including a few strategic enterprises. A 1999 study by an independent consulting firm showed that privatization had generally had a positive impact on the efficiency of companies. Furthermore, the recent approval of laws establishing new multisectoral regulatory agencies is an important step toward a modern regulatory framework. Nonetheless, Tanzania’s privatization program will be put to the test by the ongoing divestiture of large transportation and utility companies. An important factor in this regard will be the improvement of the investment climate. The recent launching of an investors’ roundtable, where investors and the government convene at the highest level to discuss investors’ concerns, could be an important step toward addressing such issues more effectively. Furthermore, the establishment and implementation of an affordable and equitable policy on the retrenchment of employees and the coherent treatment of parastatal debt will be essential to maintain public support for the privatization process until its conclusion.

STATISTICAL APPENDIX

Table 1.

Tanzania: Gross Domestic Product at Constant 1992 Prices, 1995–2001 1/

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Source: Tanzanian authorities.

The data reflect recent revisions to the national accounts by the Bureau of Statistics

Table 2.

Tanzania: Gross Domestic Product al Current Prices. 1995-2001 1/

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Source: Tanzanian authorities.

The data reflect recent revisions to the national accounts by the Bureau of Statistics.

Table 3.

Tanzania: Gross Domestic Product and Expenditure at Constant 1992 Prices, 1995-2001 1/

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Sources: Tanzanian authorities; and Fund staff estimates.

The data reflect recent revisions to the national accounts by the Bureau of Statistics.

Includes goods and nonfactor services.

Includes unrecorded trade and statistical discrepancy.

Table 4.

Tanzania: Gross Domestic Product and Expenditure at Current Prices, 1995–2001 1/

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Sources: Tanzanian authorities; and Fund staff estimates.

The data reflect recent revisions to the national accounts by the Bureau of Statistics.

Includes goods and nonfactor services.

Includes unrecorded trade and statistical discrepancy.

Table 5.

Tanzania: Production of Major Food Crops and Purchases of Principal Exports, 1997/98-2001/02 1/

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Source: Tanzanian authorities.

Crop years vary.

Table 6.

Tanzania: Production of Selected Manufactured Commodities, 1995-2001

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Source: National Bureau of Statistics (NBS).
Table 7.

Tanzania: Gross Capital Formation by Public and Private Sectors, 1995-2001 1/

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Source: Tanzanian authorities.

Fiscal years run from July to June.

Includes nonprofit organizations.

Includes rural noncommercial construction.

Includes only livestock.

Table 8.

Tanzania: Analysis of the Savings-Investment Relalionship,1995-2001

(At current prices)

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Sources: National Bureau of Statistics; and Fund staff estimates.

Includes nonprofit organizations.

Includes rural noncommercial construction.

Table 9.

Tanzania Analysis of the Savings-Investment Relationship, 1995-2001

(At Constant 1992 prices)

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Source: Tanzanian authorities.

Includes nonprofit organizations.

Investment deflated by GDP deflator.

Table 10.

Tanzania: Average Producer Prices for Selected Export Crops, 1995/96-2001/02 1/

(In Tanzania shillings per kilogram, unless otherwise indicated)

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Source: Ministry of Agriculture.

Crop years vary.

U.S. dollars per ton.