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TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY FILE COrY
Report No. 1929-TA
STAFF APPRAISAL REPORT
TANZANIA
MUFINDI PULP AND PAPER PROJECT
December 14, 1978
Industrial Projects Department
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
US$1 = Tanzanian Shillings (T Sh) 8.00T Sh 1 US$0.125T Sh 1,000 = US$125.00
WEIGHTS AND MEASURES
1 metric ton(t) 1,000 kilograms (kg) = 2,204 pounds (lb)1 meter (m) 3 39.37 inches
1 cubic meter (m ) = 35.31 cubic feet = 264 US gallons1 kilometer (km) = 0.621 mile1 hectare (ha) = 2.47 acres
ABBREVIATIONS AND ACRONYMS USED
ASSI - Aktiebolaget Statens Skogsindustrier, of SwedenBIS - BIS Marketing Research Limited, of the U.K.BOD - Biochemical Oxygen DemandCDC - Commonwealth 'Development CorporationCompany - Southern Paper Mills Company LimitedEDF - European Development FundFAO - Food and Agriculture Organization of the United NationsFD - Forest Division (of the Ministry of National Resources
and Tourism)KfW - Kreditanstalt fur WiederaufbauNDC - National Development CorporationNIB - Nordic Investment BankPoyry - Jaakko Poyry and Company, of FinlandSandwell - Sandwell Management Consultants Limited, of CanadaSIDA - Swedish International Development AuthoritySIDO - Small Industries Development OrganizationTAC - Tanzania Audit CorporationTANESCO - Tanzania Electric Supply CompanyTANZAM - Tanzania-Zambia HighwayTAZARA - Tanzania-Zambia Railway AuthorityTIB - Tanzania Investment BankTPA - Metric Tons Per AnnumTWICO - Tanzanian Wood Industry Corporation
FISCAL YEAR
Government July 1 - June 30
NDC and subsicliaries: January 1 - December 31
FOR OFFICIAL USE ONLY
TANZANIA
APPRAISAL OF MUFINDI PULP AND PAPER PROJECT
TABLE OF CONTENTS
Page No.
I. INTRODUCTION ................. ..................................... 1
II. THE INDUSTRIAL SECTOR . .............. . . ............. 2
A. Industrial Setting ................................................... 2
B. Performance and Problems 2.......................... 2
C. Basic Industrial Strategy and the Third
Five Year Plan (1977-81) ........... 3
D. Small-Scale Industry .. .............................. 4
E. Forest Resources and Industries .................... 4
III. THE SPONSOR AND THE COMPANY . .......... so* ................. . 5
A. National Development Corporation (NDC) ............. 5
B. Southern Paper Mills Company (the Company) ......... 8
IV. THE MARKET .............................................. 8
A. World Paper Markets ................................ 8
B. Past Paper Consumption Trends in Tanzania .......... 9
C. Export Markets ...... .............................. . 13
D. Prices .................... ..................................... 15
E. Organization of Marketing and Distribution ......... 18
V. THE PROJECT ............................................. 19
A. Project Concept and Choice of Technology .. ......... 19
B. Project Description . ........................ ...... 20
C. Infrastructure ..... . .............. *O.. ........... 24
D. Project Implementation and Management ............... 26
E. Employment and Training ............................ 30
VI. CAPITAL COSTS AND FINANCING PLAN ....................... 31
A. Capital Costs .................................... 31
B. Financing Plan ..................................... 33
C. Procurement ....... . . .................. .... ......... 35
D. Allocation and Disbursement of Bank Loan and IDA
Credit .......... ,... ..... ..... 36
This report was prepared by A. J. Ewing and P. Lietard of the Industrial
Projects Department and C.E. Keil of the Agriculture and Rural Development
Department.
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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Page No.
VII. FINANCIAL ANALYSIS ............ ............................ 36
A. Revenues .................................... o ................. .... 37B. Operating Costs . ................ ............... .. . 38.C. Financial Projections ..... .. .... .... .......... . . 39D. Financial Rate of Return ..... ....................... 42E. Auditing and Reporting ............................... 42
VIII. ECONOMIC ANALYSIS AND RISKS ..... .......................... 43
A. Adjusted Costs; and Revenues for Economic Evaluation .. 43B. Economic Rate of Return .............................. 44C. Other Benefits ................. .. .... ................. 46D. Risks ...................... ......................... 47
IX. AGREEMENTS ............ 48
ANNEXES
6-1 Plant Capital Cost Estimate6-2 Price Escalation Allowances6-3 Working Capital Estimate6-4 Tentative Disbursement Schedules for Bank Loan and IDA Credit6-5 Allocation of Finance
7-1 Assumptions used in Financial Projections7-2 Manufacturing Cost Estimate7-3 Depreciation and Amortization Allowances7-4 Projected Sales Volume and Revenue7-5 Projected Income Statement7-6 Projected Cash-Flow Statement7-7 Projected Balance Sheet7-8 Cash Flows for Financial Rate of Return
8-1 Development of Economic Stumpage Value8-2 Economic Rate of Return and Sensitivity Analysis
MAP
IBRD 13486 Mufindi Pulp and Paper Project
SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE
A. Reports and Studies on the Sector
Al. Draft Repcrt of the Tanzania Forestry Project (3 volumes). FAOQIBRD Cooperative Programme. Rome, June 1974.
A2. Report No. 1107-TA: Appraisal of the Sao Hill Forestry Project.
June 1976.
A3. Annual Reports of NDC for 1975 and 1976.
A4. Consolidated NDC Group Company Plan, 1975 to 1977.
B. Reports and Studies on the Project
Bl. Pulp and Paper Mill Feasibility Study (Main Report and 9 Annexes).Jaakko Poyry & Co., Helsinki, March 1976.
B2. Report on Project Concept Selected at Meeting on June 23, 1976.Jaakko Poyry & Co., Helsinki, July 1976.
B3. Comparison of Alternative Sites and Updated Investment Estimatefor Revised Project Concept. (Main Report and 1 volume of Annexes).Jaakko Poyry & Co., Helsinki, January 1977.
B4. The Mufindi Pulp and Paper Mills Water Supply and EnvironmentalImpact. AB Hydroconsult. Sweden, January 1977.
B5. Technical Considerations and Cost Estimates. Sandwell and Companywith Jaakko Poyry and Company. London, August 1978.
C. Selected Working Papers
Cl. Memorandum to Files: Mufindi Pulp and Paper Project Market Review.May 1976.
C2. Terms of Reference and Final Report: Opportunities for an IntegratedPulp and Paper Mill in Tanzania: BIS Marketing Research Limited.London, October 1977.
C3. A Note on Pulp and Paper Prices. February 1978.
C4. Staff Preappraisal Report: Mufindi Pulp and Paper Project.November 1976.
Industrial Projects DepartmentDecember 1978
I. INTRODUCTION
1.01 The Government of the United Republic of Tanzania has requestedthe Swedish International Development Authority (SIDA), the Kreditanstaltfur Wiederaufbau (KfW) of the Federal Republic of Germany, the Kuwait Fund,the Commonwealth Development Corporation (CDC), the OPEC Special Fund, theNordic Investment Bank (NIB) and the Bank to help finance a pulp and paperproject near Mufindi in South-central Tanzania (Map IBRD 13486). The totalfinancing required for the project is estimated at US$252 million, of whichabout US$194 million (or 77%) will be in foreign excharnge. A Bank loan ofUS$30 million and an IDA credit also of US$30 million are proposed. Addi-tionally, a SKr 200 million (US$45 million) grant, a DM 67 million (US$34million) grant, a KD 5 million (US$18 million) loan, a US$20 million equiv-alent loan, a US$10.5 million equivalent loan, and a US$12.5 million loanare being considered by SIDA, KfW, the Kuwait Fund, CDC, the OPEC SpecialFund and NIB respectively.
1.02 The project consists of a fully integrated puilp and paper mill toproduce 60,000 metric tons per annum of industrial papers, newsprint andcultural papers. The project would also supply about 1,400 tons of pulpannually to a small paper mill in Dar es Salaam. Bank involvement in theproject commenced in 1974 when the FAO/IBRD Cooperative Programme began thepreparation of the Sao Hill forestry project. Subsequently, the Bank approveda loan of US$7.0 million 1/ to finance industrial plant:ations at Sao Hill toprovide wood for sawmills and a pulp and paper plant. In late 1974 a studyof the pulp and paper mill project started under the auspices of the TanzaniaNational Development Corporation (NDC) with a grant from SIDA. The study wasexecuted by Jaakko Poyry and Company (Poyry), a well-known Finnish firm offorest industry consultants, with the technical support and assistance of theSwedish State Pulp and Paper Company (Aktiebolaget Statens Skogsindustrier -ASSI). Early in 1978, NDC entered into agreements withi Sandwell ManagementConsultants, Ltd. of Canada (Sandwell) to act as Project Managers, and withPoyry to act as Project Engineers. With overall guidance from ASSI theseorganizations have completed a detailed technical review of the project andprepared up-to-date capital cost estimates 2/.
1.03 The project was preappraised in August 1976 on the basis of afeasibility study by Poyry dated July 1976 (revised in January 1977).The project was appraised in October 1977 by a mission comprising repre-sentatives of the SIDA, KfW and the Bank. The Bank mission consisted ofMessrs. Andrew J. Ewing and Philippe Lietard of the Industrial ProjectsDepartment, and Mr. Christian E. Keil of the Agriculture and Rural Develop-ment Department. This Appraisal Report incorporates the results of the sub-sequent technical review and cost estimate update undertaken by Poyry andSandwell in mid-1978, which were reviewed by all of the potential financinginstitutions.
1/ Loan 1307-TA of July 12, 1976.
2/ This work was financed in part by an IDA Technical (Credit 601-TA),and in part by the Bank's Project Preparation Facility.
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II. THE INDUSTRIAL SECTOR
A. Industrial Setting
2.01 At independence in 1961, Tanzania had an extremely limited indus-trial sector dominated by private firms. Three major developments havecharacterized the sector 1/ since that time: rapid expansion, an impressivediversification in products, and a major shift in ownership from private topublic hands. The contribution of manufacturing to GDP had more than doubledby 1976 as the number of jobs in the industrial sector tripled. Furthermore,the limited range of products produced in 1961 has been significantly expandedas new plants producing a wide range of consumer goods and some intermediateand capital goods were completed. Finally, following the Arusha Declarationin 1967, the Government systematically transferred the control and ownershipof the large private and foreign-owned industrial enterprises to publicly-ownedparastatals. By 1974, the public sector accounted for about half of manufactur-ing value-added and employment. Presently, four ministries control 17 holdingcompanies which have a total of 97 subsidiaries in various productive sectors.It must, however, be noted that the private sector still remains an importantparticipant in industry (430 of 500 factories with over 10 employees are inprivate hands).
B. Performance and Problems
2.02 Aggregate manufacturing production grew rapidly between the mid-sixties and the onset of the economic crisis in 1974. The average annualreal growth of the manufacturing sector was 7.8% between 1964-75 comparedto an average growth rate of 4.8% for total GDP. While this record of in-creasing output would seem to indicate satisfactory industrial performance,a detailed analysis of Tanzania's manufacturing sector indicates that pro-ductivity has been low and output has been far less than warranted by thelevel of investment.
2.03 The problems underlying the suboptimal performance in the sectorare many. At the macro level, the Government has not yet developed the ad-ministrative capability to effectively monitor and coordinate the operationsof the control systems which iwere instituted along with the increased publicownership of manufacturing entLerprises. Important components of this controlsystem include centralized decision-making on investments, detailed alloca-tions of foreign exchange through import licensing, an extensive regime ofprice controls and rules of procedure operated by the National Pricing Com-mission, and wage-setting by the Permanent Labor Tribunal and the Government.
1/ For a more detailed analysis of the structure, performance, problems,and prospects of Tanzania's industrial sector, see the Bank's report:"Tanzania Industrial and Mining Sector Survey" No. 647-TA, March 31,1975, and "Tanzania Basic Economic Report: Annex V" entitled "Industry:Perspective and Strategic Choices", No. 1616-TA, December 1977.
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While the Government feels these controls are needed to achieve its develop-ment goals, their effect has largely been to insulate public enterprises fromthe discipline of market forces. At the micro level, two additional setsof problems operate. First, performance indicators consistent with themacro control systems and clear guidelines for evaluating performance arestill lacking. Managers and workers, therefore, have few motivating in-centives in Tanzania. Second, there is not only a scarcity of trainedmanagerial personnel and skilled labor, but also most enterprises have tolive with periodic shortages of other key inputs.
2.04 These issues have been raised in various Bank reports on theTanzanian industrial sector. The Government is well aware of them andconsiderable discussion has taken place among Tanzanian economic and enter-prise managers on possible solutions. The Bank Group has participatedin these discussions within the context of both general economic work andspecific projects in the industrial sector and the Government has recentlybegun pragmatically addressing these issues. In particular, it has insti-tuted a number of trial incentive schemes, reduced staff in overmannedparastatals, placed an 8% limit on allowable increases in overhead costsof manufacturing firms which approach the National Price Commission for priceincreases, and hired foreign consultant groups to advise on operational/mana-gerial improvements for the subsidiaries and associate firms of the majorindustrial holding company, the National Develoment Corporation (NDC). In amajor recent development the Government has welcomed private participation insmall and medium scale industry. There is already evidence that this move hasstimulated considerable interest in the sector.
C. Basic Industrial Strategy and the Third Five-Year Plan (1977-81)
2.05 Future development of the sector will be based on the BasicIndustrial Strategy adopted by the Government in 1974. The two main goalsof this strategy are structural transformation and self-reliance and its mainemphasis is on the use of domestic resources for domestic needs. This involvesgiving top priority in investment allocations to industries supplying (i) basicneeds of food, shelter, health, education and transport, and (ii) producergoods which contribute to production of a wide range of industrial products.However, as it has emerged, the strategy will also permit expansion of export-oriented production, especially that based on domestic raw materials (forexample cashew processing, sisal spinning, textile manufacture, and meat andleather processing). A potential problem with the Basic Industrial Strategyis that attempts to restructure the economy too quickly during this period ofresource stringency may ultimately frustrate both growth and structural change.A too rapid expansion of particular sectors may lead to excessive reliance onexternal finance, know-how and markets, and the massive investment coordinationrequired by the strategy may overburden the country's already weak planningcapacity. Moreover, effective implementation of the strategy will requirespecific changes in the macro policy framework toward a protection and tariffstructure which does not discriminate against backward linkage import substi-tution and does not discourage domestic production of capital goods or conferhigh and widely varying effective rates of protection to the producton ofconsumer goods.
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2.06 The Third Five-Year Plan (1977-81) envisages an investment programof about T Sh 23 billion, of which about 27% will go to manufacturing. 1/Projects earmarked for development and implementation under the Plan aremainly based on Tanzania's domestic resources. Among the sizeable publicsector industrial projects currently under implementation with Bank Groupsupport are the industrial complex at Morogoro, several cashewnut processingfactories, the textile mill expansion at Mwanza, and a new textile mill atMorogoro. In addition, NDC is presently implementing a number of other majorprojects, including a tannery, a canvas mill, a bicycle plant, a farm imple-ments factory, a detergents factory, and a pharmaceutical plant. The textileplant at Morogoro was recently approved for Bank/IDA financing. 2/
D. Small-Scale Industry
2.07 The overall responsibility for small-scale industry developmenthas been given to the Small Industries Development Organization (SIDO).SIDO's activities include providing technical and managerial consultancyservices, establishing industrial estates, conducting training programs,providing marketing services and supplying machinery on a hire-purchasebasis. SIDO's performance thus far has been mixed: in some areas impressivework has been done while in others little progress has been made. Specifically,while its project preparation skills are satisfactory, its impact on overcom-ing managerial and marketing problems is less so. One major issue which facesthe Government is the coordination of SIDO's work with other participants insmall-scale industry. The Bank Group has become involved in a pilot effort inthe sector under the Second National Sites and Services Project 3/ and anti-cipates working closely with the Government in attempting to address theseproblems.
E. Forest Resources and Industries
2.08 About one half of the total area of Tanzania, i.e., about 44.4million hectares (ha) is classified as natural forest, the greater part ofwhich is open woodland. There are 540 forest reserves totaling 13 millionha (or about 30% of the forest area) which serve as a source of wood andwood products, and as catchment areas. These forests, however, particularlythe savanna (niombo) woodlands, have a low stocking of merchantable timberand are so widely scattered that prospects for their economic utilizationand development are poor, except for small quantities of valuable hardwoodfor export of veneers and plywood and more significantly to meet the largedomestic demand for fuelwood.
2.09 In addition to the naltural forest, there are 42,000 ha of soft-wood exotic plantations and 6,000 ha of hardwood plantations. The pastplanting program has averaged 4,000 ha per year, and this is expected to
1/ Of the amount proposed for manufacturing investment, it is envisagedthat approximately 70% would be for large-scale projects.
2/ Loan No. 1607-TA, and Credit No. 833-TA, of July 28, 1978.3/ Credit No. 732-TA of November 3, 1977.
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increase to 5,600 ha per year during the 1975-80 period. The plantationscover a very small area of the country, but in the future are expected tosupply most of the timber required for forest industriLes. These plantationareas, located along the recently built TanZam highway, have come withinrelatively easy reach of the country's main consumer centers and the mainport of Dar es Salaam.
2.10 Total wood consumption3 estimated as 34 milLion 3 in 1973, isexpected to rise to 37 million m in 1980 and 48 million m by the year 2000.More than 95% of this total wood consumption comprises fuelwood. The demandfor industrial wood and wood-basid material (mainly for sawnwood and paper andpaperboard), currently 500,000 m , is expected to almost double by 1980 andto reach 3 million m by the year 2000.
2.11 Tanzania has not yet developed a sizeable forest industry. Inaddition to pit-sawing which is still fairly widespread, ther are over150 small and ill-equipped sawmills producing about 160,000 m per yelr.The largest mill's annual output Intil 1976 was approximately 5,000 m and only25 mills produced more than 500 m per year each. The Norwegian financed millcompleted in 1976 by Tanzanian Wood Industry Corporation (TWICO) at gao Hillis the country's most important and currently produces some 12,000 m peryear. In addition to the sawmills, there are 2 plywood mills, a particleboard factory and a fiberboard mill in operation, as well as a few small paperconversion plants. Kibo Paper Industries, Limited, an NDC subsidiary, com-menced operating a small 10 ton-per-day plant using waste paper near Dar esSalaam in June, 1978. This plant is now operating well but all of the otherpaper and paperboard requirements of the country must be imported.
III. THE SPONSOR AND THE COMPANY
A. National Development Corporation (NDC)
3.01 The National Development Corporation, which is sponsoring theproject, was established in 1964 with its headquarters in Dar es Salaam. Itis Tanzania's largest parastatal holding company, with its plants effectivelyoperating as separate legal and financial entities, and the country's principalinstrument for industrial investment. The Southern Paper Mills Company hasbeen established (para 3.07) as an NDC subsidiary to build and operate theproject and will be the ultimate beneficiary of the proposed loan and credit.Because of NDC's overall responsibility for project implementation, theoperational influence on its subsidiaries, and its position in the industrialsector (including paper), the organization, activities and financial situationare presented briefly below. 1/
1/ A complete presentation of NDC's policies and operations was made in theAppraisal Report of the Morogoro Industrial Complex (Report No. 1213-TAof March 3, 1977).
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3.02 NDC's nine-man Board of Directors functions as a policy making andcontrolling body as well as a liaison and coordinating group between NDC andthe Government. The influence of the Government on financial and investmentplanning is strong, although there is little interference in day-to-day oper-ational matters. In 1977, Mr. A.B.S. Kilewo, former Chairman of the EastAfrican Airlines, replaced Mr. E.A. Mulokozi as NDC's Managing Director andChairman of the Board. NDC's staff (excluding the employees in subsidiarycompanies) totals 247 of which 108 are professionals (including 19 expatriates)serving in five operating departments: (i) Planning and Finance; (ii) Account-ing; (iii) Manpower Development; (iv) Administration; (v) Industrial Develop-ment. The Industrial Development Department, which prepares and implementsprojects for NDC as well as monitoring existing operations, is organized intofive Divisions. Each Division is responsible for a specific group of sectorsof NDC's activities; the Pulp, Paper and Printing Division will handle theMufindi project.
3.03 NDC holds shares in 23 operating companies of which 18 are clas-sified as subsidiaries (over 50% NDC shareholding) and 5 are associatecompanies (50% or less NDC shareholding). Its total portfolio is currentlyT Sh 264.4 million. The 23 companies operate in the following fields: metalworking (7); tobacco and beverage (4); paper converting, printing and publish-ing (4); chemicals and allied products (4); leather tanning and processing (4);together, they employ about 12,000 people. Through its four subsidiaries inthe printing, publishing and packaging sector, NDC converts about 50% of thepresent paper consumption in Tanzania, representing a sales value of aboutT Sh 107 million per year.
3.04 The consolidated operations of the NDC Group companies have beenprofitable every year since 1968, though some companies (in the fertilizer andrubber industries) experienced losses in 1975 and 1976. The overall capitaliza-tion of the NDC Group is sound with a debt/equity ratio of 12/88. NDC's finan-cial statements for the years 1971 through 1977 are presented on the followingpage.
3.05 Total head office administrative expenses increased to 81% ofincome in 1974, and had become a cause of concern. However, they were heldconstant in absolute terms over the 1975-77 period and as a result decreasedto 32% of income in 1977, reflecting much improved organization and co-ordination of NDC's work at headquarters.
3.06 In March 1977 the Barik approved a loan of US$23.0 million 1/ toNDC for the Morogoro industrial complex, including the development of a 65 haindustrial estate and the implementation of a canvas mill, a shoe factory anda leather goods factory. Project implementation is proceeding satisfactorilyand in spite of some critical delays in the appointment of consultants and inthe commencement of procurement, the project is expected to be completed inJuly 1982 as scheduled.
1/ Loan No. 1386-TA of April 6, 1977.
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NDC FINANCIAL STATEMENTSt/(T Sh Million)
NDC Group Companies - Sales and Profits1971 1972 1973 1974 1975 1976 1977
SalesGross Sales 1,062.1 1,427.5 1,734.3 1,582.2 1,981.1 2,243.7 2,663.0Profits (before taxes) 114.0 144.0 102.6 125.7 152.7 203.1 231.3Profits as Z of ales 10.7% 10.1% 5.9% 7.9% 7.7% 9.1% 8.7%NDC Investmentsb7 429.7 450.8 336.5 281.1 341.2 428.8 287.7Number of NDC Subsidiaryand Associate Companies 42 43 31 18 23 23 23
Income NDC Income Statement
Income Subsidiaries, associateand other Companies 22.0 28.4 24.1 17.3 28.5 52.4 57.0
From ST Deposits and BridgeFinancing 2.4 2.8 2.8 1.3 2.2 2.7 3.0
Other misc. Income (net) 2.5 7.8 8.6 7.3 9.2 3.0 3.4Profit (Loss) in Sale of
Fixed Assets - - - - 0.1 - -
Sub-total 26.9 39.0 35.5 25.9 40.0 58.1 63.4
ExpendituresHead Office AdministrativeExpense 12.2 10.8 11.1 11.5 12.2 12.4 13.6
Financial Charges 7.2 11.2 9.4 8.4 9.7 9.6 3.7Depreciation 0.8 1.0 1.1 1.0 1.0 0.8 1.0Other - 0.1 1.2 - 0.7 1.8 -
Sub-total 20.2 23.1 22.8 20.9 23.6 24.6 20.2
Operating Surplus 6.7 15.9 12.7 5.0 16.4 33.5 43.2
Expenditure as % of Income 75.1% 59.2% 64.2% 80.7% 59.0% 42.3% 31.9
NDC Balance Sheet
AssetsCurrent 83.4 84.6 49.5 37.2 102.4 109.5 110.5Fixed 14.9 15.7 15.1 14.5 13.6 13.0 13.1Investments & Loans (net) 393.2 414.3 356.4 266.5 323.9 407.1 486.0
Total 491.5 514.6 421.0 318.2 439.9 529.6 609.6
LiabilitiesCurrent 70.5 53.4 36.7 42.0 56.2 86.8 100.7Long-term Debt 151.6 172.9 136.1 129.9 138.1 129.6 56.2
Capital and ReservesShare Capital 170.8 173.7 149.6 92.1 183.9 230.7 294.7General Reserves 98.6 114.6 98.6 54.2 61.7 82.5 158.0
Total 491.5 514.6 421.0 318.2 439.9 529.6 609.6
Current Ratio 1.2 1.6 1.3 0.9 1.8 1.3 1.1LT Debt/Equity Ratio 36/64 37/63 35/65 47/53 36/64 29/71 12/88
a/ Audited accounts for years ended December 31.b/ Investments in subsidiaries, associate and other companies, plus loans.
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B. Southern Paper Mills Company (the Company)
3.07 The Southern Paper Mills Company has been formed as a limitedliability company under Tanzanian industrial and commercial laws. Itsinitial authorized share capital of T Sh 10 million (US$1.2 million) willbe increased to provide for ad[ditional equity subscriptions as execution ofthe project proceeds. While NDC will own all the Company's shares, plant,sales and accounting management will be autonomous. The total staff of theCompany, after the start of operations, is planned to reach about 1,500people. The Company's functions during implementation and operations ofthe project are described in more detail in Chapter V.
IV. THE MARKET
A. World Paper Markets
4.01 The industrialized countries produce and consume about 95% ofthe world's pulp and paper. With few exceptions, countries of the developingworld rely on producers in Europe and North America for the bulk of theirpaper supplies. Although long-run prices are generally related to the long-rundevelopment of production costs, short-term supply and demand imbalances havea marked influence on prices, particularly for the smaller consuming countriessuch as Tanzania. During the last period of short supply (1974-75), pricesin Tanzania rose sharply, and supplies of some grades could not be obtainedat any price. At the present time, international markets (particularly inEurope and Japan) remain somewhat depressed following the recent world reces-sion and although prices are now beginning to firm up again, they had fallento an extent and are still at levels that investments in new capacity onpresent prices are difficult tc, justify anywhere in the world.
4.02 Recent forecasts by FAO and other international agencies suggestthat by the early 1980's, shortages will once again begin to be felt forcertain grades as the current slow rate of new capacity additions will notkeep pace with increasing demand. At that time, rather sharp increasesin prices may once again be expected. A handicap for a newcomer in thepulp and paper industry is that world market prices for paper reflect thefact that capital costs for building pulp and paper plants were considerablylower in the past than they are at present. While the cost of installingpaper capacity in traditional producing countries in the past 15 years hasaveraged about US$550 per annual ton, this cost today has risen to betweenUS$1,000 and US$1,800 per ton, depending on the type of paper to be produced.Since earlier installed capacity has an economic life of at least 20 years,such low cost capacity is still in operation and will have a depressing effecton world paper prices for some ltime to come. While the long-establishedcompanies in traditional producing countries can overcome this problem byaveraging the return they obtain on their various plants installed at dif-ferent times, a new producer, such as Tanzania, cannot.
B. Past Paper Consumption Trends in Tanzania
4.03 Consumption of paper in Tanzania has averaged about 25,000 tonsannually, over the past several years, all of which has been imported at avalue of about US$15 million per annum. The use of paper is widely dis-tributed through all sectors of the economy with main consumers being news-papers, publishers of school text books, and the packaging industry. Packag-ing grades are used for goods for domestic consumption such as cement, sugar,milled products, fertilizer, and consumer goods, and for exported productssuch as sisal. Tanzania's printing and converting industry, while relativelynew, has expanded rapidly in the past few years (para 4.05).
4.04 The following table shows imports of paper into Tanzania over thepast decade. All types of paper and paperboard are included in thesefigures, including converted products and printed material.
Tanzania - Paper and Paperboard Imports(Tons)
Year Amount Year Amount
1965 10,600 1971 21,4001966 14,200 1972 25.2001967 14,300 1973 26,2001968 19,300 1974 25,7001969 16,900 1975 25,9001970 23,100 1976 23,400
1977 22,700
Sources: East Africa Customs and Excise Department, Annual Trade Reports(1965-76).BIS Marketing Research Limited (1977).
Growth in consumption averaged about 13% annually from 1965 to 1971, butonly about 3% from 1971 to 1977. Over the entire period (1965-77), con-sumption increased by about 7% per annum. The sharp increase in 1972 followedby a period with relatively little change in imports is due to a combinationof inventory adjustments and a general slowing down of the economy in 1974and the following years. Although some of the country's paper imports fromSweden are financed through SIDA's grant program in Tanzania, consumption hasbeen somewhat constrained by import restrictions due to foreign exchangeshortages in recent years. The price to the final consumer is unaffected bythe character of SIDA's support and is closely in line with world marketprices.
4.05 The past decade has seen not only growth in paper consumption, buta marked shift in the type of imports. In 1970, almost 50% of imports werein the form of converted products or printed material, much of which came fromthe well-developed converting industry in Kenya. Duaring the past few years,however, Tanzania has been rapidly expanding its own converting operations.
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By 1974, imported converted products were down to 25% of all -paper and paper-board imports; in 1977 they are estimated to have accounted for less than 10%,comprising mainly printed material and sophisticated manufactures from WesternEurope.
4.06 The following breakdown of paper and paperboard consumption intomajor grade groups is based on several market studies undertaken in recentyears (para. 4.08).
Tanzania - Grade Distribution of Paperand Papierboard Imports 1974-1977
Grade Average Annual Amount(Tons) (%)
Cultural Papers- Newsprint 3,800 15.8- Printing and writing paper 6,600 27.5- Printed matter 1,000 4.2
Total 11,400 47.5
Industrial Papers a/- Kraft packaging grades 7,700 32.1- Boxboard 1,600 6.7- Tissue 200 0.8- Other grades 3,100 12.9
Total 12,600 52.5
Grand Total 24,000 100.0
a! Includes converted products.
4.07 Although there are aL large number of ultimate end-users ofpaper in Tanzania, approximately 80% of all paper and paperboard broughtinto the country is imported by one of six organizations, namely: threeconverters of industrial paper and board 1/, two major printing establish-ments 2/, and one Government importing agency 3/. The converting operationssupply paper bags, paper sacks, corrugated cartons, and other boxes andwrappers to a wide range of industries. The two major printing establish-ments each produce a daily newspaper and a number of other periodicals,and carry out general printing of school and other books. Elimu Supplies
1/ Kibo Paper Industries Ltd, Mifuko Ltd, and Kwiga Paper Industries,all located in Dar es Salaam. Kibo is an NDC subsidiary.
2/ Printpak Ltd., and National Printing Company Ltd. Both are NDCsubsidiaries located in Dar es Salaam.
3/ Elimu Supplies Ltd.
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Ltd. supplies paper for education purposes, and to most of the 60 or so smalland middle-sized printing companies. The remaining 20% of paper consumed isimported by the user either directly, or through a small number of commercialimporting agencies. The present system of importing and distributing paperappears to be satisfactory.
4.08 Forecasts of paper demand in Tanzania have been made in severalstudies: (i) two studies by Poyry, undertaken in 1974 and 1976; (ii) a Bankstudy carried out in 1976, which projected paper consumption on two bases:an end-use analysis and by using statistical techni,ques (correlating incomeand paper consumption in Tanzania and other African countries); and (iii) astudy by BIS Marketing Research Limited (BIS) of the U.K., carried out inmid-1977 with a subsequent review in 1978. A graphical presentation of thoseprojections is shown below.
CONSUJMPTION AND PRODUCTION OF PAFPER140
/ ,
120 / /
//
U. S
.'. . / / 44 ,/ t.-' :92 /MUFINDIo / -'> *... - ' ,NEX P ANIO N'0 ___ X _____
r~~~~~~~~ - --. -l iO
0
muriNDI
PRODUCTIION
0 _ _ KXBO) __65 70 75 80 85 90 95
YEAR
ACTUAL FOR ECAST
World Bank - 18337
- 12 -
4.09 The following table shows comparative projected data for 1980, 1985and 1990.
Tanzania - Comparison of Various Demand Projections forPaper and Paperboard
(Tons)
1977Projections (Estimate) 1980 1985 1990
Poyry (Finland)- 1974 27,800 58,000 89,000 135,000- 1976 27,800 50,000 75,000 110,000Bank Analysis- end-use (1976) 27,800 47,000 66,000 93,000- statistical (1976) 27,800 42,000 60,000 85,000BIS (U.K.)- 1977 27,800 46,500 61,000 76,000- 1978 22,700 a/ - 58,800 75,600
a/ Actual
For the period until 1985, BIS's 1978 projection of total paper/paperboard de-mand based on a detailed analysis of end-use factors, although the lowest ofthese five estimates, is considered to be the most realistic. It is reason-ably consistent with the Bank's own statistical projection and any substan-tially higher projection would imply either a per capita paper consumption inTanzania above that in other countries at a similar stage of development, ora rate of real growth of the Tanzanian economy substantially more than the 5%annual rate expected over the next decade. In the longer term, end-useanalysis is not so useful for estimating demand. The BIS projection from 1985to 1990, suggesting an average annual growth in demand of 5.2% annually, wouldappear to be overly conservative in view of the past growth rates and theanticipated future economic performance of Tanzania. For the period beyond1985, therefore, it has been assumed that a growth rate of at least 7% couldbe achieved leading to a total demand for paper and paperboard of 82,500 tonsin 1990. If, in fact, a lower rate of growth in the domestic market is achievedthis would require a higher level of exports and the impact of this on the pro-ject's financial and economic rates of return is examined in the sensitivityanalyses in Chapters VII and VIII. In terms of the major grades groups, basedon the end-use analysis of BIS, the demand forecast is broken down belowbetween "basic grades", which t:he proposed MIufindi mill can produce, and"other grades", which it cannot easily produce and hence does not intend tomake under the proposed project.
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Tanzania - Paper Demand Projections by Grades(Tons)
1974-77 1982 1985 1990 a/
Basic Grades:- Newsprint 3,800 4,100 4,500 6,300- Printing & writing paper 6,600 16,500 18,700 26,200- Kraft linerboard 2,900 2,000 3,100 4,300- Kraft paper 5,700 16,200 16,500 23,100
- Total 19,000 38,800 42,800 59,900
Other Grades b/ 5,000 13,800 16,000 22,600
Total 24,000 52,600 58,800 82,500
a/ Projected at 7% annual growth rates from 1985 levels.
b/ Included in the "other grades" category are test liner, fluting, box-board, tissue, etc., as well as specialty kraft and cultural gradeswhich could not easily be made in the Mufindi mill. Some of thesegrades are produced in the 3,000 TPA waste paper based mill recentlyconstructed by Kibo Paper Industries Ltd, an NDC subsidiary, in Dar esSalaam. As its own production expands, Kibo will require about 1,400TPA of pulp to supplement its waste paper and this will be supplied bythe Mufindi mill.
C. Export Markets
4.10 The proposed paper mill is designed to operate with an averageoutput (depending on the paper grades produced) of 60,000 tons annually(together with 1,400 tons of pulp for the Kibo mill) and by 1987 is expectedto be technically capable of producing at this level. As can be seenfrom the above table, the Tanzanian demand for the type of paper the Mufindimill will be producing initially will not approach 60,000 tons per year until1990, and thus for several years the mill will have some excess productioncapacity. It is anticipated that this surplus will be exported, although atthe same time Tanzania will be importing other types of paper thereby remain-ing a net importer of paper and paper products in most years. Quantities ofdomestic production, imports, domestic demand and exportable surplus areshown in the following table.
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Tanzania - Paper Production and Trade, 1982-1990(Thousand tons)
a/Year Production Domestic Exportable Net
Kibo b/ Mufindi Total Imports Demand Surplus c/ Import
1982 7.4 3.7 11.1 41.5 52.6 - 41.51983 7.6 30.0 3,7.6 17.0 54.6 - 17.01984 7.7 42.0 49.7 9.9 56.7 2.9 7.01985 7.9 50.0 5-7.9 8.1 58.8 7.2 0.91986 8.1 56.0 64.1 8.9 62.9 10.1 (1.2)1987 8.3 60.0 68.3 10.0 67.3 11.0 (1.0)1988 8.5 60.0 68.5 11.1 72.0 7.6 3.51989 8.7 60.0 68.7 12.6 77.1 4.2 8.41990 8.9 60.0 68.9 16.2 82.5 2.6 13.61991 9.1 60.0 691.1 19.7 88.3 0.5 19.21992 9.3 60.0 69.3 25.2 94.5 - 25.2
a/ A number of small operations to produce hand-made paper are being consideredbut the total output from these plants would not exceed 200 tons annually.
b/ In June 1978, Kibo commenced operation of a 10 ton per day wastepaper-basedmill in Dar es Salaam producing various grades of industrial board for con-sumption in Kibo's own operations. The grades produced complement theMufindi production.
c/ From Mufindi.
4.11 In view of the relatively small volume and short-term nature ofthe anticipated exports, no detailed survey of possible export markets forpaper from Tanzania has been undertaken. However, in 1974, the potential wasbriefly reviewed by Poyry who identified Zambia, Malawi, Uganda, Mozambique,Burundi and Rwanda as likely markets. BIS also examined the Zambian andMalawian markets in somewhat more detail in 1977. Import, production, andconsumption figures for these countries in 1976 are tabulated below:
Paper Production and Trade in PotentialExport Market Countries (1976)
(Tons)
ApparentCountry Imports Production Consumption
Zambia 29,000 29,000Malawi 14,000 - 14,000Uganda 24,000 1,500 25,500Mozambique 25,000 6,000 31,000Burundi 200 - 200Rwanda 1,000 1,000
Source: Poyry and BIS studies.
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4.12 Consumption in these countries is growing aLt between 5 and 10%
annually. Apart from a possible export pulp mill in Malawi, which would noLaffect that country's demand for imported paper, the only known pulp and paper
project planned in this region is a 40,000 TPA mill for Zambia, tentatively
scheduled to come on stream in about 1984. If consunmption does increase at 5%annually, and the Zambian project becomes operational as now scheduled, thecombined supply gap in these countries in 1985 will amount to approximately
130,000 tons of paper. The maximum expected Tanzanian exports of about 11,000tons in 1987 will represent less than 10% of the total supply to these countriesand there can be little doubt that the relatively modest export tonnages will
be marketable in this area.
4.13 Although there is a very small wastepaper-based mill in Uganda and
another in Kenya, the only paper mill of consequence now operating in East
Africa is that of Panafrican Paper Mills at Webuye in Kenya, which startedoperations at the end of 1974. This mill, financed in part by IFC, is now
operating at close to its production capacity of 45,000 tons annually, and iscurrently selling about 36,000 tons of this in Kenya. The balance is exportedto neighboring countries, and to Asia and the Middle East.
4.14 The Kenyan mill has been considered as a possible source of supply
to the Tanzanian market, particularly as it is currently planning an expansionto 60,000 tons annual capacity. While on the face of it this possibilitywould seem to have some merit in the near term, Tanzanian importers see the
Kenyan exports as relatively shortlived until the domestic market in thatcountry reaches the Panafrican mill's output; they are therefore reluctantto break established ties with traditional suppliers. In fact, it is pro-jected that by the late 1980's all of Panafrican's production will be utilized
in Kenya and Tanzania would have to continue (or resume) its imports fromScandinavia and elsewhere.
D. Prices
4.15 As noted above, actual prices paid by Tanzanian consumers correspondclosely to the international prices for the various paper grades, with suit-able allowances for delivery to Dar es Salaam, and iLmport duties 1/ levied onsome grades. However, the basis of the analysis presented in this report is
that when the Mufindi mill comes on stream, mill-nelt prices will be such thatthe delivered prices to the customer will still be in line with world marketprices, exclusive of duty. Typical recent CIF prices of paper in Dar esSalaam are as follows:
1/ With the exception of woodfree printing paper, which is admittedduty-free, all paper imports carry a 20% duty. However, sack kraft,linerboard and fluting have been allowed duty-free entry for twoyears to assist Tanzania's new packaging industry.
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Recent Actual Paper Prices, CIF Dar es Salaam a/(T Sh/ton, in current terms)
1974 1975 1976 1977
Newsprint 2,800 - 3,500 3,500 4,100 3,600 - 3,700
Printing & writing 6,500 - 9,900 3,500 5,400 4,500 - 4,700
Kraft linerboard 2,700 - 4,500 3,100 - 3,900 2,900 3,300 - 3,500Kraft Paper 4,300 - 7,000 4,700 - 6,500 4,000 - 4,800 4,200 - 5,500
a! Excluding duty. Information supplied by consuming companies.
4.16 These prices are some T Sh 600-900/ton (US$72-108/ton) above domesticWestern European prices for the same paper grades, primarily because of trans-portation and handling costs. Prices in Western Europe rose very sharply frommid-1972 until early in 1975, when world demand dropped significantly. Sub-sequently prices in that market: have eased for some grades by as much as30% but prices are already beginning to firm for certain types of paper andincreases for most grades are expected within the next 12 months. As istypical in small and relatively distant markets, the prices in Tanzania roseto greater levels at the high point, and for some grades have subsequentlydeclined further than those in Western Europe. Prices are now beginning toshow signs of increasing in Tanzania reflecting the market situation in otherregions. The variations in the CIF prices at Tanzania, and with them the FOBprices of the exporting countries, have been of such magnitude that to selectan international price for project analysis on the basis of present or recentpast prices alone is difficult.
4.17 To overcome this difficulty, the Bank has recently undertaken astudy aimed at arriving at prices which would allow efficient producers intraditional paper producing areas (Scandinavia, Canada and the U.S.) to addnew capacity and continue to achieve customary profit levels on their invest-ment. 1/ While this study will require continuing additional data input andupdating, the resulting "Computed 1977 Prices" as shown in the following tableare generally within the range of prices actually encountered in Tanzania overthe past several years.
Computed 1977 Paper Prices FOB/CIF Dar es Salaam andActual Import Prices (CIF) in 1974-77
Computed 1977Price FOB Freight andProducing Insurance to CIF Dar es Salaam Price
Grade Country Dar es Salaam Computed 1977 Actual 1974-77(US$/ton) (US$/ton) (US$/ton) (T Sh/ton) (T Sh/ton)
Newsprint 430 110 540 4,320 2,800 - 4,100Printing & Writing 630 110 740 5,920 4,500 - 9,900Kraft Linerboard 400 110 510 4,080 2,700 - 4,500Kraft Paper 470 110 580 4,640 4,000 - 7,000
1/ A Note on Pulp and Paper Prices. Industrial Projects Department, February1978 (Project File, ref. C3).
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4.18 The graph below compares historical paper price ranges during1974-77 of the weighted average of all grades to be produced by the Mufindimill (CIF Dar es Salaam and adjusted to 1977 terms) with the average weightedprice for Mufindi's products as used in this appraisal. From the above tableit can be seen that the computed prices, except for newsprint, are within therange of current term prices experienced in recent years (and thLs in constantprices were still lower than these actual prices). Furthermore the graphshows that while in 1976 and 1977 actual weighted import prices (CIF Dar esSalaam) were about 11% and 17% respectively below the weighted price assumedin the appraisal, actual import prices in the two preceeding years were abovethe appraisal price, in 1974 by as much as 28%. Also since internationalpaper prices do not necessarily move in parallel for individual paper grades(see also table in para 4.15) and since the pulp and paper industry in tradi-tional producing countries is arguing that present prices are inadequateto attract new investment in the industry, it is believed that the assumedcomputed price (CIF Dar es Salaam, 1977 terms) used in the appraisal re-presents a realistic estimate of longer range international prices of paper.
HISTORICAL PAPER PRICES-CIF DARESSALAAM(ADJUSTED TO 1977 VALUES)
Weighted average for all grades in the Mufindi project9,000
8.000 _
0
< 7,000 -4)
r 6.000U-'
.____-- -- _______ _' --- Price used in appraisal
5,000 -
4,000 -
1974 1975 1976 1977
World Bank - 18670
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4.19 For exports it has been assumed that one-half of the tonnage avail-able for export would be shipped to adjacent countries such as Zambia, where
Tanzania has a trading and freight advantage. In these cases, mill revenues
have been estimated on the assumption that Tanzanian paper would be sold at
a discount of 10% below the delivered price of competing sources of supply.
The remaining exports would be shipped through Dar es Salaam to other ports
of Africa at 20% below the assumed CIF Dar es Salaam price, reflecting stronger
competition in these markets. Overall, therefore, an average 15% discount
from CIF prices has been assumed for all export sales. While this substantialdiscount makes exports of larger tonnages relatively unattractive, the exports
are small in absolute amounts (together some 46,000 tons over eight years
(para 4.10)), and represent on average only some 10% of Mufindi's total pro-duction during this period. These sales more than cover production costs
and are welcome in that they allow full technically available capacityutilization.
E. Organization of Marketing and Distribution
4.20 At the present time, the 5 or 6 major consumers of paper in Tanzania
(who account for as much as 75% of paper consumed) import directly from theproducing countries, while most of the smaller consumers are supplied by ElimuPaper Supplies, the Government agency, which imports and warehouses a wide
range of grades of paper. These arrangements are considered to be satis-factory for domestic sales from the proposed new operation, and their con-tinuation would facilitate the change-over from imported to domestic paper
supply. Thus it is envisaged that the project will employ a small sales staff
who will deal directly with the major paper consumers in the country, anddirectly through Elimu Paper Supplies with the smaller consumers. In arriving
at expected mill-net sales revenues, a deduction of 3% of the gross salesrevenue has been made to allow for the project's share of the cost of theseoperations.
4.21 For export sales, two alternative marketing methods are being con-
sidered. In the first, the sales staff of the Company would be augmentedto handle export sales directly, selling to consumers in the importingcountries. In the second, the Company would sell to existing paper importerswho would in turn deal with the ultimate consumers. The second method islikely to be more attractive, as it involves dealing with fewer customers andmoreover with customers alreadly experienced in importing paper from a widevariety of sources. In any event, the costs of the two methods are likely tobe similar, and 5% of the expected gross selling price in export markets hasbeen allowed to recover those costs.
4.22 In the Agreement between NDC and ASSI (para 5.28), the latter hasundertaken to review marketing and distribution aspects of the project and toassist NDC to devise and implement an appropriate organization well in advance
of the projected start-up date. Particular attention will be paid to ensuringa smooth transition from imported to domestically-produced paper. The Company
has agreed to submit to the Bank not later than December 31, 1980 detailedmarketing and distribution programs for both the domestic and the exportmarkets.
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V. THE PROJECT
5.01 The project consists of the establishment of an integrated pulpand paper mill with the capacity to sustain a production of 61,400 TPA ofa combination of various grades of pulp, paper and board. Facilities to beprovided include: logging roads and equipment, a chemical pulp mill with ableach plant, a mechanical pulp mill, two paper machines with associated stockpreparation and paper finishing equipment, steam and power generation equip-ment, a chlorine and caustic soda plant, related pollution abatement equip-ment, and some supporting infrastructure. At full production the mill willproduce annually about 22,000 tons of kraft paper, 23,000 tons of printing andwriting paper, 7,000 tons of newsprint, 8,000 tons of kraft linerboard, and1,400 tons of market pulp. The principal project facilities will also incor-porate spare capacity eventually enabling a total of 75,000 tons of paper andboard annually to be produced at minimal additional cost. The mill will belocated about 15 km south of Mufindi in South-central Tanzania, some 590 kmfrom its major market of Dar es Salaam. The site has good road and railconnections with Dar es Salaam and with other parts of the country.
A. Project Concept and Choice of Technology
5.02 The project will have the capability of supplying a substantialproportion of the paper needs of Tanzania. Of necessity, this has meantthat diverse and sometimes complex processes have been included. Moreover,the cost of chemicals, most of which will need to be imported, and environ-mental considerations, have required that the mill be equipped with fullchemical recovery and effluent treatment facilities. This has led to a millconcept which is expensive in relation to the econoimy of the country, and tothe scale of production.
5.03 Throughout the period of project preparation this problem hasbeen recognized and simpler and less versatile mill concepts aiming at theproduction of fewer grades have been evaluated in an attempt to reduce projectcosts. Other technologies, such as mechanical pulping, semi-chemical pulpingand the pulping of sisal or bagasse, have also been examined. In generalthese alternatives have necessitated consideration of smaller-sized plantsas the decreased versatility has reduced the potential market volume. Sig-nificant reductions in plant capital costs could be achieved in some casesbut there is little scope for corresponding reductions in the cost of infra-structure and related items (para 5.20). The overall effect has been asharp loss in economies of scale and economic rates of return which did notexceed 5%. Another alternative examined has been a phased approach wherecertain of the facilities would be added only at a later date. If thisapproach were to be followed, a very large proportion of the ultimate ex-penditures would be required in the first phase and although training andstart-up would be simplified, the adverse financial and economic implicationsof high initial expenditures for delayed benefits are severe. The projectconcept now being proposed represents a reasonable compromise betwenproject cost and complexity on the one hand, and economic benefits onthe other.
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5.04 Within this basic concept, there remained a number of technicalchoices with respect to the degree to which labor is substituted for capi-tal, and the extent to which the mill is appropriate to Tanzanian condi-tions. Although the designs proposed by Poyry in the original feasibilitystudy did not fully reflect a commitment to appropriate technology, NDC andthe Bank (together with the other co-financing agencies) have consistentlyrecognized the importance of such an approach. During the past severalmonths, Poyry and Sandwell have been involved in developing the final designconcepts for the project and each company has brought to this activity itsrespective experience in similar projects in other developing countries.The outcome of this work is a technical package which is somewhat lesscomplex than that originally envisaged, without compromising product qualityor environmental acceptability. The concept was reviewed in detail by tech-nical representatives of the potential financing institutions at meetings heldin Helsinki in July 1978 and in London in August 1978. General agreement wasreached that the concept and technology were appropriate to Tanzanian condi-tions.
B. Project Description
1. The Mill
5.05 As noted previously, the mill will produce pulp, newsprint, print-ing and writing paper, kraft linerboard, and kraft paper. Fiber furnishesfor these grades will comprise mechanical and chemical pulp in the case ofnewsprint and for some types of printing and writing paper, and chemical pulpfor all other grades. Chemical pulp will be produced using the standard sul-phate process which will provide maximum strength properties together withthe economies and pollution abatement benefits to be obtained from chemicalrecovery.
5.06 A suitable mill-site area has been located and secured below theescarpment south of the town of Mufindi, on the Kigogo-Ruaha river. TheTanzania-Zambia railway (TAZARA) passes through this area and a road isplanned up the escarpment to link with the main highway to Zambia (Map IBRD13486). The average 3 waterflow in the Kigogo-Ruaha river is about 5 cubicmeters per second (m Is) whiSh , while well in excess of the projected millprocess requirement of 0.2 m Is, may give rise to some concern with regardsto effluent dilution. However, appropriate effluent treatment facilities areplanned (paras. 5.17-5.19) which are designed to minimize downstream effectseven during periods of low flow. Below the mill-site, the Kigogo-Ruahaflows through rugged and virtually uninhabited country for approximately 49 kmwhere it joins the Mnyera river whose minimum flow is of the order of 30 m /s.
5.07 Detailed technical descriptions of the processes and equipment pro-posed are contained in the various consultants' studies. The pulp mill willbe of conventional design, utilizing batch digesters. A four-stage bleachplant will use chlorine, caustic soda and hypochlorite produced at the millsite using Tanzanian salt and a diaphragm-cell electrolytic process.
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5.08 The paper mill will comprise two paper machines of the same sizeand basic design. Linerboard and kraft paper will generally be produced onone machine, while the second will generally produce newsprint and othergrades of printing and writing paper. The paper mill will include stockpreparation systems, an additives preparation plant and a finishing depart-ment. It is anticipated that about one-half of the printing and writingpaper, and smaller quantities of other grades will be delivered in sheets.Equipment for sheeting, sorting and packing has therefore been incorporatedin the proposed plant design.
5.09 Services within the mill will include a waLter treatment system,process steam and power supply systems, and maintenance and technical sup-port services. Water will be pumped from the adjacent Kigogo-Ruaha andscreened mechanically. After screening the water will be suitable for someprocess purposes but for more critical uses, further treatment with chemicalflocculation and filtration is envisaged. Steam will be generated within theplant in the chemical recovery furnace and in a combination wood, coal andoil fired boiler. The Tanzania Electric Supply Company (TANESCO) will ex-tend its national power grid system into south-western Tanzania (para 5.25)and the mill will therefore utilize a combination of approximately equalproportions of TANESCO power, and power generated oni-site with a back pressuresteam turbo-generator. Maintenance shops and equipment will be designedkeeping in mind the isolation of the mill from any back-up facility.
2. Raw Material Supplies
5.10 Wood: When the project reaches noj5mal operating capacity in 1987the total wood requirement will be 262,000 m annually. This wood will besupplied as follows:
Sources of Pulpwood
Average DistanceType Source R Amount to Paper Mill
(m /annum) l<%) (km)
Softwood: Sao Hill Pine Plantation 196,000 75 50TWICO Sawmill Waste 15,000 6 60
Hardwood: Eucalyptus Plantations 21,000 8 90Wattle Plantations 30,000 1i 170
262,000 1(0
Samples of wood from each of these sources have been tested for their pulpingand paper making properties and found satisfactory for the grades to be pro-duced at Mufindi (Project File, ref. B1).
5.11 The Sao Hill pine plantations currently cover some 10,600 ha ofsuccessfully established stands. An additional 14,000 ha, financed by the
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Bank under the Sao Hill Forestry Project will be established during the period
1978-1981. The area required for this additional planting is available within
the existing Forest Reserve. The land is open and without tree cover, requir-
ing only minimal preparation prior to planting. The main species which has
been planted successfully at Sao Hill in the past and is also to be planted in
the future is Pinus patula. However, to avoid dependence on a single species,
others like Pinus elliottii andl Eucalyptus grandis/saligna will continue to be
planted. Eucalyptus is known to grow well over an 8-year rotation at Sao Hill
although so far no pulpwood stands with eucalyptus have been established in
the Forest Reserve. Nevertheless, there is eucalyptus available from otherplantations in the region and this will ensure an adequate supply of this
species in the first 2-3 years of mill operation.
5.12 Based on the growth rates which have actually been achieved, and
with a generous 30% allowance for losses, the total pulpwood plantation arearequired to support the mill is 15,000 ha of which 10,600 ha have alreadybeen successfully established. This is only about 70% of the 22,100 ha of
pulpwood plantations which are scheduled to be established by 1981. Neverthe-less, some such margin of safety is essential, particularly in view of the
high proportion of poor stocking and failures in the 1975 through 1977 plant-
ings, affecting about 50% of area inputs in those years. The Government hasrecognized the serious implications of this performance and has taken steps
to strengthen the Forestry Project both in staff and equipment. The results
of this strengthening has already positively affected the success rate of the
plantings made in 1978.
5.13 An additional resource exists in the form of a 4,000 ha pine planta-
tion in the region of Mbeya, some 240 km by rail from the Mufindi site andadditional wood could be obtained from this area if required. The Government
has agreed that the existing and planned Sao Hill plantations, the Mbeyaplantations, and also any waste wood generated at the TWICO sawmill at SaoHill, will be made available to the extent required for use by the project.
5.14 The pulp mill represents an obvious and potentially profitable out-let for over-mature wattle from the Tanganyika Wattle Company some 170 km
from the mill-site and NDC has already had a positive response to its pre-liminary enquiries concerning wattle supply. NDC has agreed to enter into
a suitable long-term arrangement for the supply of this material.
5.15 Coal: Although coal is not currently mined on a large scale in
Tanzania, the Government has given assurances that coal from the large coal-fields near Mbeya will be available in the quantities required by the project.
The coal will be transported by TAZARA to the Mufundi mill over a distance ofabout 260 km. To ensure the availability of coal for mill start-up, the State
Mining Corporation is planning to expand production and stockpile from an
existing small mine while the larger fields are being developed. Should the
full requirement of coal not be available on time, the mill would have to use
fuel oil which is available from the refinery near Dar es Salaam. This alter-native would, however, have rather serious cost implications as the equivalentprice of coal, in calorific terms, is only about one half that of oil. Even
when coal is available as the main fuel source, some fuel oil will be requiredfor starting burners and for the lime kiln.
- 23 -
5.16 Other Materials and Chemicals: Limestone for the project is avail-able from several alternative locations in the project area and the StateMining Corporation is currently sampling and conducting chemical analyses todetermine the most economic source for full-scale exploitation. Salt for themill's chlorine and caustic soda plant is available on the coast and will beshipped by rail to the plant. Other chemical raw materials will, at leastinitially, have to be imported through Dar es Salaanm.
3. Environmental Impact and Protection
5.17 At the present time there are a few scattered and unplanned settle-ments in the area. A Ujamaa village is proposed nearby but its exact locationwill not be selected until the mill location is finalized. Although a fullenvironmental impact study has not yet been carried out, the facilities pro-posed have been designed with a view to minimizing the undesirable environmen-tal aspects of a sulphate pulp and paper mill and no undue disturbance toresidents in the area is anticipated.
5.18 There are as yet no Tanzanian standards for pollution control. Inthe project, however, provision has been made to keep the discharge of solid,liquid and gaseous wastes within internationally acceptable limits. Effluentsfrom the mill if untreated would contain small amounts of toxic organicsulphur compounds, biochemical oxygen demand (BOD), suspended fiber and otherparticulates, color and odor. Treatments will include the stripping of con-taminated condensates with steam to remove organic sulphur compounds, thesettling out of particulates by clarification, and secondary treatment of alleffluent to reduce BOD by as much as 90%. With the proposed treatment system,Poyry has projected that the impact on the Kigogo-Ruaha will be approximatelyas follows:
Effects of Paper Mill Discharge onRiver Water Characteristics
Characteristic Normal River Flow Low River Flow
BOD + 1.0 ppm + 2.5 ppmSusp. Solids + 1.7 ppm + 4.2 ppmColor + 40 units + 100 units
The water is already characteristically greyish in ccolor although at lowwater flow the addition of the pulp mill effluent may produce an observablechange towards brown. Suspended solids' information for the river water isnot available but natural turbidity levels range from 10-70 ppm. The waterwill not be toxic to the aquatic ecosystem but during periods of low riverflow, it is possible that slight but characteristic taste and smell phenomenawill occur. As mentioned, about 40 km downstream from the proposed mill site,the Kigogo-Ruaha joins the larger Mnyera river, and no undesirable phenomenacould persist beyond this point. The projected discharge characteristics areconsidered to be satisfactory and a monitoring program to verify this isplanned. If necessary, additional facilities could be added to the mill tofurther improve the effluent.
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5.19 Air emissions in a pulp and paper mill are primarily from the digest-ing system, the chemical recovery system and the lime kiln. In the case ofthe proposed Mufindi mill there will also be a potential for particulate andsulphurous emissions from the coal-burning power boiler. Process emissionsare generally sulphur compounds (such as hydrogen sulphide, methyl mercaptanand others) and particulates. To reduce particulate emissions the mill designallows for an electrostatic precipitator on the recovery boiler, a recirculat-ing wet scrubber on the lime kiln, and multiple cyclones on the power boiler.To reduce odors, digester exhaust gases will be condensed, and the recoveryboiler has been designed with an over-sized furnace. Some of the more recentadvances in odor reduction technology (such as collection and incineration ofnon-condensible gases) which have been incorporated in the designs of largemodern mills have not been proposed for the Mufindi mill as the size does notwarrant such treatment and the mill's relative isolation should ensure thatany nuisance effects remain minimal. NDC has agreed that the necessary anti-pollution measures as broadly described above will be installed in the milland will be properly operated and monitored.
C. Infrastructure
5.20 A number of infrastructural developments are required to supportthe project. The following table summarizes the estimated capital cost andtentative sources of financing for these developments:
Infrastructure - Capital Requirement(T Sh Million)
Financed by Financed OutsideItem the Project the Project Total
Power Line - 150.0 a/ 150.0Railway Spur 16.8 9.0 b/ 25.8Township and Forest Villages 12.8 97.2 c/ 110.0 d/Escarpment Road - 101.3 e/ 101.3
Total 29.6 357.5 387.1In US$ Million 3.7 44.7 48.4
a/ Finance to be arranged by TANESCO.b/ Portion financed by TAZARA.c/ Portion financed by the Government of Tanzania.d/ First phase of township development. This would eventually develop
into a town for 6,000 inhabitants, at an estimated total cost ofT Sh 240 million.
e/ Financed by the European Development Fund.
5.21 Although it is proposed that about 90% of the infrastructural re-quirements be financed outside the project, the cost of such developments,amounting to more than 15% of the project cost, is an economic cost which mustbe considered in reviewing the economic rate of return of the project. Thisburden, together with the technical assistance package proposed, has the over-all effect of increasing the cost of the Tanzanian project by about 30% over
- 25 -
and above what might be expected for a similar project in a country where theinfrastructure and technology are already in place. 1/
5.22 Railway Spur: The TAZARA railway passes within about 8 km of theproposed mill site, requiring a spur which will be partly financed under theproject. Following its usual practice, TAZARA will engineer, construct andmaintain the spur but would only finance the "recoverables" in the initialcosts, such as the railway line and ties as well as the station which isneeded at the access point of the spur at the main line. The remainingcosts involved, including a bridge over the Kigogo-Ruaha, have been estimatedon the basis of information provided by TAZARA and are included in the projectcost estimates.
5.23 Township and Forest Villages: The project's capital cost estimateincludes allowances for 20 houses for senior staff and a 20-room guest house.Furthermore, it has been estimated by the project sponsor that an additional540 houses and other township facilities will be required for mill operatingstaff as well as several villages for forest workers. These will be financedseparately by the Government and are thus not included in the project costestimate. Nevertheless in evaluating the financial and economic returns ofthe project, housing costs have been included as an annual charge.
5.24 Escarpment Road: This 40 km road will provide a valuable transporta-tion link for the country giving ready access from tlhe whole Iringa region tothe TAZARA railway. Although the road is essential to the project, it willalso have far-reaching additional benefits. Agreement has been reachedbetween the Government and the European Development Fund to finance construc-tion of this road. The cost of the road has therefore not been included inestimates of project cost and total financing required.
5.25 Power Line: A transmission line into South-western Tanzania is apart of the proposed extension of the national grid. Without the pulp andpaper mill load, this extension would not likely take place until the early1990's, but TANESCO has concluded that the mill load justifies immediate con-struction of the line. TANESCO is currently engaged in calling tenders fordetailed engineering and is investigating possible sources of finance.
5.26 The Government has confirmed that arrangements for financing theinfrastructure elements are well advanced and that the railway spur, the town-ship, the escarpment road and the power line will be implemented in a timelymanner as required by the project. NDC has agreed to submit to the Bankquarterly reports describing physical progress of inf'rastructure implementa-tion. An implementation schedule for each of the above infrastructure invest-ments is included in the overall project schedule on page 30.
1/ In industrialized countries, costs of this type are often financedentirely by government. For an isolated mill now under construction inCanada, where the total investment is expected to be about US$300 mil-lion, grants and soft loans totalling US$80 million have been made bythe Provincial and Federal Governments.
- 26 -
D. Project Implementation and Management
5.27 An organization has been developed for project implementation andoperation which includes: (i) the Company's Project Team; (ii) the ProjectAdvisers, ASSI; (iii) the Project Managers, Sandwell, and (iv) the ProjectEngineers, Poyry. The main functions of each of these groups, and an organi-ation chart for project implementation, are shown in the two charts on thefollowing pages. The Project 'eam which will eventually comprise a staff of7-10 Tanzanian professionals has already been established within NDC and willbe transferred to the Company when it (the Company) is formed. The present
chief adviser to the Team, Mr. S. I. Husain, has been with NDC for severalyears and was formerly the Gen(eral Manager of Packages, Ltd., a successfulpulp and paper company in Pakistan in which IFC has invested. He will bejoined shortly by a Tanzanian Project Team Chief (not yet appointed) who isexpected to become the Company's General Manager and who will contribute tocontinuity during the transition from project execution to operations.
5.28 NDC does not have any previous experience in constructing and oper-ating a pulp and paper mill of this size. To strengthen the Company's (andthe Project Team's) technical capabilities to supervise the Project Managersand Project Engineers, and the commissioning and initial plant operations,NDC has appointed ASSI as Project Advisers. Under the assistance agreementnegotiated between NDC and ASSI, ASSI will advise NDC on all technical mattersrelating to the engineering, design, equipment procurement and plant commis-sioning and operation. In addition, ASSI will organize for NDC the trainingof Tanzanian technicians and managing personnel. The major impact of ASSI'srole will be in ensuring that the organization functions efficiently and eco-
nomically and that qualified personnel will be available quickly when requiredto perform functions not being handled by others. The initial contract is fora term of 5 years from the time financing is secured for the project, withprovisions for extensions on terms to be agreed. ASSI will be paid a royaltyof US$225,000 per year, and the cost (including overhead, travel and livingexpenses) for managerial and technical personnel provided by ASSI to the pro-ject is estimated at US$6,250 per man-month. This assistance package and itscost have been approved by the Government and have been found satisfactory bythe Bank.
5.29 ASSI was formed by the Swedish Government in the 1930's with theobjective of fostering development in the more remote parts of northernSweden where private corporations were reluctant to go. Today the companyis one of Sweden's largest forest industrial enterprises with 17 productionplants in the country, and is Sweden's largest producer of packaging gradesof paper and paperboard. Other ASSI operations include converting plants inthe U.K., Denmark and Switzerland, and sales outlets in many countries inWestern Europe. ASSI has been generally profitable, although in 1976 and1977, financial performance declined in parallel with that of other major
Swedish companies in the paper industry.
-27-
RESPONSIBILITIES FOR PROJECT IMPLEMENTATION
NAVNSAL DEVEli PIll T COKFPRATJON
Proje,t Sl-onsor on behalofof the C-ernnCtof Taneania and owner of the Southern PaPerIill. Coep.ny Limited.
* SupervtIson of a11 oper-tio-l
o Lisbon jIth Cove--nant 1).partwonts ed local _ _
' *iCr_ Ion oi cetr .t..5. oppli,rr. and theC.7nCh icell of COnttOCtS
o i'rr'ie Otcron of Pr-greOs iep trr no theC ovenfLent mod to .he finan.ri-o.
PRO.,eCT ADVISERS
PiLfJECT jW..AGE,iiS (ASS!)
(SAiIIIIIELL) ' Advis.e NDC on all aspect. of project developeent* Advioe on org-niationaS structure of the
* tepre ... t NIlC in the Compant.ygaiztisend op-erviOlon of the project during a t o ol
implenentatLwn * Advire on s m...f.cturslg *nd proc .. 1II proposls
* Prepare end -iai.tain project ioaple.eetation end syst.monschedule a X-In. *nd ppr- p.cifl, fo
iovitati... to teoder and r-nie bids t.oth* Develop a projeCt reporting sy.tn and report techoicily and --oreioljy
regularly On pr-jeet progress - -1.- - er mllt ie ih enttantot and
,Ppare and ,rlnt.s work plaic. pr..renntiers and Onriut ii wIjt eLenpla. aed hudigets bntrpo.rurpra okpao rcrsn
* Prepare and operAte coet control epetem plan., budget. _nd cot control
W ' ork with the Prcject togineerc in coeiolog
desigog gnd hbo. Iding asil hl hIch i utalee I tdi' .tsi.con and -Inpanogeti thiteeninfor TTn.aniun -, dition c
* Advise on wster rold air efsiseol etmndards'*Advie ndonetl -od rop-rt prod-it oorkrtLI.
* Maeck and eppro-e tender apnclficatio and sad di.s"rIhtLcmn
iLoitatlo.s tu bid; rlu.tr bid. sad Rg.ergco-e dtdatlona tv SDC and ASI a Sup'i.ine the cofri,ni ng of the pro--t to
* A,elen in defin cn. roordin-trlg and rons ortnu __________________________nrtho progreonl of ;rrs rk. out,ide rhe prejcrt.
S.. the r-Ji-uY link ro,du. the nill t-onlhipLnd new w teriol . uppIe_
'With the help of tire ireojct fnoin, rn- an*s.it.,C dC snort t uitabl eonr, Ict-r ilr ric_ _
work. and foe qIlp.ent colotion. *nd aup"r.Is _their work
' Assist Nb5C in nogotiatione with sontrortorasoad Isupplier.Isod preptoc and opodite purchar- torders end ICtter. ol credit
Prepare end clhcck a11 In aonea *od bills of PROJiCT P RSq-ntitien ond qoalitie. s Por F R
* Pollet up the progros. of the S.* Rill fereotry (1-0yKY)pl.ating pr.grr nnd nuicrvlne the d-eleprent * Work with the Prrjet hLt.-nagr.r to denelepfor lsggiog debarking nd tranaport.tien of wood eppr-printr engiorrler doc art sod * design
' Aaeist ASSIn sepep-ising and -gcriingteri tiler ill concett, sod O.knegeni progrn- n the renarructlr.n bud ot .. ticaten and tilatrraitng pregrac .cheduCe
a Prepare production plane, acounting and quality a rCep,lre p-rIficatIne r ..ntrution ndcontrol synt_os. sainteDnca sch-dulcc. oerarting * ere. quality reuonsta end
Corls. y.t - .c o. erectionl mthod., q .nlty reur-.nt.s.admanua.. es.tc. stan'dardls
a Supervie tir transition frec plant con.truotitn a Prepare t-rtural, neeh-ical. electriral and
to Pr _ t intrrnrnottion decigrn and provide all
engineCring infor.-tion for the aucesnivli.plenerta.tion of tre project
'Prrlare Orn,lrr deerortnt ior btidding for civi]work and for rh, sspyly of pp tchiosry iryngclctricl cqu-yr-Lt preer-n conttr=Insulation, parra and a11 other allied itene
* frepare technical onaloatiena of tondorn andesfet is ite consequent selection of equipsentand suppliers
• Ansiet na tcchn-ir1 nattotn duingP contractdi c to.ions with uppli rs. and at b1its thebasin for perfor..nce guarantees
• An.int itt tie oeloctin of cieIl engineeringreotragt .r. iroire civil oeest-ne in cmderection of rachi-rcy to ensure dhore-er tods,sgo. contract ind quality reruircrenWithin tin mched,l -nd budget
* Conpile orurrri cis o ndors on orrprztton andsin,loc rc .of oqel 1 .. nt. including spire part
pec if i-a t lon-
* Asnint in hi prC.rpration of e -ciedale -odproCed-rrC c r i L.is lening startrip -nd
grmr.nte. L00L0
* A.isit durtg ro t-a rats, and rc.onioning teanosre Iu rrnt-rd pcror. rnc- v1th rEsecCt tosactinry and iruict qc jlity ard qrrnt ity
o lrrbsitt -1c ochod.lr for denies aetivirir endroer etn wink r l.-r
- 28 -
ORGANIZATION CHART FOR PROJECT IHPLEHENTATION
PROJECT ADVISERS NATIONAL DEVELOPMENT CORPORATION OTHER GOVERNMENT
(ASSI) - - - - - - - - - - - AGENCIES
Chief. Wikstrand Chairman: KilewoChief: Wikatrand
I . _{lChief NDC PROJECT TEAM
Chief: (to be appointed)e Adviser: Husain
l PROJECT MANAGERS l
l (SANDWELL) I
1 Project Manager: VerwestProject Engineer: Grams
I j Field Engineer: Lockyer
PROJECT ENGINEERS
(POYRY)
Chief Engineer: Ehrnroth
a~~ a* __ a
EQUIP?ENT ERECTION CIVIL WORKSSUPPLIERS CONTRACTORS CONTRACTORS
(to be appointed) (to be appointed) (to be appointed)
5.30 The Company will delegate most management responsibilities to a
firm of Project Managers who will coordinate all aspects of project imple-
mentation and early operations. With ASSI's assistance, NDC has selected,
from a short list of four competting firms, Sandwell of Canada to be Project
Managers. Sandwell has had extensive international experience with this type
of work and Mr. H. Verwest, an experienced Sandwell project manager, has
been appointed as the head of t:he Sandwell team. He reports to the Project
Team and provides liaison with Sandwell offices in London, U.K. and Vancouver,
Canada. NDC has negotiated an interim contract with Sandwell to cover the
- 29 -
period until project financing is secured. The average cost of the technicalpersonnel provided by Sandwell under this contract is estimated to be US$6,000per man-month. The contract has been approved by the Government and has beenfound satisfactory by the Bank. The subsequent contract now being negotiatedwill ensure that Sandwell remains as Project Managers during project implemen-tation and subsequently as Company Managers for at least the first three yearsof operations of the mill. There will be provision to extend this contractas required to ensure continuous satisfactory operation of the mill. Thestructure of the Company's organization during operations is intended to besubstantially similar to that during implementation and will, therefore, allowfor adequate continuity from the execution of the project to its operation.NDC will submit to the Bank by June 30, 1979 a detailed plan for the Company'sorganization during operation.
5.31 NDC will rely on a specialized firm of Project Engineers for thedetailed design and engineering of the plant, and with advice from ASSI andSandwell, has selected Jaakko Poyry and Co. of Finland for this position froma short list of three qualified firms. NDC has an interim contract with Poyryto cover the period until financing for the project is secured. The averagecost of the technical personnel provided by Poyry under this contract is esti-mated to be US$4,500 per man-month. The interim contract has been approved bythe Government and has been found satisfactory by the Bank. NDC has agreed toemploy and retain qualified Project Advisers, Project Managers and ProjectEngineers on terms and conditions satisfactory to the Bank and the signing ofthe final contracts with these organization will be a condition of loaneffectiveness.
5.32 Plantation establishment and maintenance as well as replanting afterclear felling will be the responsibility of the Sao Hill Forestry Project.The costs of these services will be covered by the stumpage fees and are thusincluded in the price of the wood the Mufindi mill will have to pay. Fellingwill be carried out by the Wood Supply Division of the Company. The Divisionwill be headed by a Tanzanian Wood Supply Manager who will report directly tothe Mill Manager. To ensure friction-free cooperat:Lon between the Company'sWood Supply Division and the Forest Division's Sao Hill Forestry Project, NDChas agreed that the Ministry responsible for forestry will be represented onthe Company's Board of Directors.
5.33 Since their appointments in November 1977 and June 1978 respect-ively, Sandwell and Poyry have been working in close cooperation with NDCand ASSI to review all aspects of the project, to finalize design conceptsbased on technology appropriate to Tanzania, and to develop accurate andup-to-date assessments of project costs. Concurrently, procurement activityhas commenced with the definition of the various packages to be financed,prequalification of vendors, and invitation to tender for time-criticalitems of equipment. A tentative project implementation schedule has been
- 30 -
prepared and is illustrated below. The schedule assumes that total financingfor the project (paras 6.04 and 6.05) will have been secured by February 1979and order placement for time-critical equipment commenced by March 1979.Commercial production from the first paper machine is scheduled for October1982, and from the second paper machine six months thereafter.
TENTATIVE PROJECT IMPLEMENTATICO SCHEDULE
MONTI -A 0 6 12 18 24 30 36 42 48 04 60
CALANDER YEAR 1978 1979 190 1981 | 1982 1993
FINANCING COMMITMENTS 0
MILL SITE ENGINEERING
MILL SITE PREPARATION
MILL DESIGN AND CONSTRUCTION
BASIC ENGINEERING
DETAILED ENGINEERING_
PROCUREMENT
DELIVERY CONTRACT OF RECOVERY BOILER O
MANUFACTURING AND TRANSPORT OF MAIN MACHINERY
CIVIL WORKS
ERECfION AND TESTS
- PULP MILL AND PAPER MACHINE I
-IPAPER MACHINE 2
PAODUCTION
PULP MILL AND PAPER MACHINE 1 I
PAPER MACHINE 2 0INFRASTRUCTURE
RAILWAY SIDING STUDY AND CONSTRUCTION
ESCARPMENT ROAD STUDY AND CONSTRUCTION __
TO\9NSHIP STUOY AND CONSTRUCTION
POWER LINE _ -j -
Word B.ak - 18274KEY DATES 0
E. Employment and Training
5.34 The mill will provide direct employment for about 800 Tanzaniansof whom about 40 will be highly skilled, 160 skilled, and 140 semi-skilledtechnicians. Preliminary training plans for the technical staff have beenprepared by ASSI; they include acquisition of technical knowledge at theUniversity of Dar es Salaam and pulp and paper schools overseas; and trainingat the Kibo paper recycling plant with practical training abroad at SouthAsian and Swedish plants. Ini addition, it is envisaged that as many as 120skilled personnel from mills in Europe, North America and Asia will be re-cruited immediately prior to and for the first several years of operationto assist with the start-up and on-the-job training for Tanzanians.
5.35 Wood harvesting operations are expected to employ an additional440 skilled and 110 unskilled workers from the fifth year of the paper mill'soperation. The Company's Wood Supply Division will also have approximately140 salaried personnel of which about five managerial positions will befilled initially by expatriates. The selection and training of the above
- 31 -
labor force will need to be arranged well in advance requiring expatriate
instructors who will be working in the Wood Supply Division's training section
and who, among others, will train Tanzanian foresters and technicians who
will later take over as the workers' instructors. It is expected that the
expatriate teachers, including their salaries and expenses together estimatedat about US$1 million, can be provided to the project through bilateral or
multilateral arrangements assisted by the principal suppliers of the pulpwood
harvesting equipment. The Company has agreed to submit detailed trainingprograms for both the mill and the forestry operations to the Bank no later
than June 30, 1979.
VI. CAPITAL COSTS AND FINANCING PLAN
A. Capital Costs
6.01 Total financing required for the project is estimated at US$252
million equivalent, including US$194 million (or 77%) in foreign exchange.
Details of the capital cost estimate and of the assumptions made are given
in Annexes 6-1, 6-2, and 6-3 and are summarized on the following page.
- 32 -
Capital Cost Estimate
In T Sh Million In US$ Million
Local Foreign Total Local- Foreign Total %
Land a/ -! _ _ _ _
Civil Works 52.8 124.0 176.8 6.6 15.5 22.1 12.9
Machinery, Equipment& Spare Parts 0.8 616.0 616.8 0.1 77.0 77.1 44.9
Inland Freight &Insurance 21.6 - 21.6 2.7 - 2.7 1.6
Erection 48.0 126.4 174.4 6.0 15.8 21.8 12.7
ConstructionOverhead 27.2 51.2 78.4 3.4 6.4 9.8 5.7
Engineering &Project Management 24.0 124.8 148.8 3.0 15.6 18.6 10.8
Total Plant Cost 174.4 1,042.4 1,216.8 21.8 130.3 152.1 88.6
Logging Capital 4.8 28.0 32.8 0.6 3.5 4.1 2.4
Railway Spur 16.8 - 16.8 2.1 - 2.1 1.2
Senior Staff Housing 10.4 2.4 12.8 1.3 0.3 1.6 0.9
Pre-operating &Start-up Exp., 12.0 6.4 18.4 1.5 0.8 2.3 1.4
Technical Assistance &Training 17.6 57.6 75.2 2.2 7.2 9.4 5.5
Sub-Total 61.6 94.4 156.0 7.7 11.8 19.5 11.4
Base CostEstimate (BCE) 236.0 1,136.8 1,372.8 29.5 142.1 171.6 100.0
Physical Contingency 23.2 112.8 136.0 2.9 14.1 17.0 9.9
Price Escalation 52.8 180.0 232.8 6.6 22.5 29.1 17.0
Installed Cost 312.0 1,429.6 1,741.6 39.0 178.7 217.7
Working Capital 32.0 21.6 53.6 4.0 2.7 6.7
Interest duringConstruction 120.8 97.6 218.4 15.1 12.2 27.3
Total FinancingRequired 464.8 1,548.8 2,013.6 58.1 193.6 251.7
a/ The mill will be constructed on Government-owned land which will be
available to the project without cost.
b/ Local costs include approximately US$5 million equivalent of indirect
foreign exchange.
- 33 -
6.02 The estimates were prepared by Sandwell and Poyry in August 1978,and reviewed by the Bank. The base cost estimate is based on August 1978prices. Foreign equipment will not be subject to import duties under exemp-tions drawn up to encourage industrial development. Physical contingenciesof 10% on all cost estimates has been added. Price escalation for (mostlyforeign) equipment is based on annual rates of 7.5% during 1978-79 and 7%thereafter. For civil works, which are expected to be executed by a foreigncontractor, annual escalation rates of 9% are assumed during 1978-79 and 8%thereafter. Total price contingencies thus represent 15.4% of the base costestimate plus physical contingencies. The above cost estimate, includingcontingencies, is considered adequate.
6.03 Initial working capital requirements are estimated at US$7 millionequivalent. This amount is relatively low since felling and logging opera-tions in the nearby forest area will be the responsibility of the Companyitself and thus log inventories can be kept small; the working capital provi-sion is considered adequate to meet the Company's requirements during itscritical two first years of operations. Interest during construction ofUS$27.3 million is based on total debt financing of lUS$126 million carryingan interest rate of 10%. It has been assumed that to the maximum extentpossible, equity funds would be made available to the Company prior to debt.Interest during construction covers the period until the second paper machineis started and a production rate of about 70% is reached allowing the Companyto generate cash in excess of operational needs.
B. Financing Plan
6.04 Project financing will be provided in a 50/50 debt/equity ratio,which is considered satisfactory. All foreign loans and grants will be madeto the Government and passed on to the Company either as debt at a 10%interest rate, or as equity. KfW has agreed that all of its contribution,which will be provided to the Government on a grant basis, could be passed onto the project as equity and it is further proposed that some 67% of the IDAand SIDA contribution be used in this way. The remaining IDA and SIDA funds,the Bank loan, and the contributions from CDC, NIB, the Kuwait Fund and theOPEC Special Fund, would all be passed on as debt. The financing plan forthe project is shown below.
- 34 -
Financing Plan(US$ Million)
Type of Finance ExpenditureDebt Equity Total Local Foreign Total
Tanzania a/ 10.0 41.7 51.7 51.7 - 51.7Bank loan 30.0 - 30.0 - 30.0 30.0
IDA credit 9.9 20.1 30.0 - 30.0 30.0SIDA grant 14.9 30.1 45.0 - 45.0 45.0KfW grant - 34.0 34.0 - 34.0 34.0
Kuwait Fund loan b/ 18.0 - 18.0 - 18.0 18.0
OPEC Special Fundcredit/grant c/ 10.5 - 10.5 6.4 4.1 10.5
CDC loan d/ 20.0 - 20.0 - 20.0 20.0
NIB loan e/ 12.5 - 12.5 _ 12.5 12.5
Total Financing 125.8 125.9 251.7 58.1 193.6 251.7
a/ The Tanzania contribution includes funds from budget allocations,NDC's funds, and about US$10 million equivalent from local banks.
b/ The Kuwait Fund loan would be for a 24 year term, including 6 years'grace, at a 4% interest rate.
c/ The OPEC Special Fund contribution would include a $5 million equivalentcredit for a 20 year term, including 5 years' grace bearing no interestbut a 3/4% service charge. In addition, a $5.5 million equivalent grantrepresenting counterpart funds in Tanzania currency available from otherOPEC Special Fund operations would be made.
d/ The CDC loan would be for a 20-year term, including 5 years' grace.It would carry a 1/2% cormmitment fee, and interest at 8-1/2%.
e/ Terms and conditions of the NIB loan will depend to some extent on thecountry where goods are procured. The term would likely be 15 years,including 5 years' grace. The commitment fee would be 1/2% and theinterest rate would be 8%, or less.
The Government will provide US$51.7 million equivalent during the five yearperiod of project implementation, according to an agreed time-schedule.
6.05 The project cost estimate, as noted, is considered to be adequate.Nevertheless one of the cofinancing agencies would prefer to see a largercontingency allowance and has suggested that the project cost could over-runby as much as 5% raising the total financing required to US$265 million.In consideration of this the Government of Tanzania has agreed to commit anadditional US$5.3 million on a contingency basis, and has arranged with NIBfor additional funds of US$7.5 million to be available if required. Given themagnitude of the project this arrangement is considered to be prudent and hasbeen agreed to by the Bank.
- 35 -
6.06 A Bank loan of US$30 million and an IDA credit also of US$30 millionare proposed. They will be made to the Government, the loan repayable over20 years including 5 years of grace, and the credit on usual IDA terms. Inturn, the Government will channel the proceeds of the loan and some of thecredit to NDC for on-lending to the Company at 10% interest for 16 years,including 5 years of grace. The balance of the credit (US$20.1 million, para6.04) would be passed through NDC to the Company as equity. The Bank loan andthe IDA credit will become effective concurrently with other loans and grantsto the Government which would be passed on the Company as debt or equity onsimilar terms as the Loan and Credit, although some of the financing agenciesare considering longer repayment periods. The 5 years of grace correspond tothe estimated construction period of 3-1/2 years until the first paper machineis in operation, and a start-up period of 1-1/2 years during which the secondpaper machine will be put into service and during which interest will continueto be capitalized. At the end of the grace period, operations are expected toreach about 70% of normal output and be capable of generating profits andservicing debt. The foreign exchange risk will be borne by the Company.
6.07 The Government has agreed to promptly provide or cause to be pro-vided any local and foreign funds that may be required to complete the project,including any necessary working capital, on terms satisfactory to the Bank/IDA.This would mean that at least 50% of any overrun financing will be providedin the form of equity or subordinated debt and the t:erms of any additionalloans would be substantially the same as those of the original loans to theCompany. Also at the time of project completion, the Company will have tohave a current ratio of at least 1.5. In this context the project will beconsidered completed when the pulp and paper mill has, during a period of 90consecutive days, produced 12,000 tons or more of paper and paperboard.
C. Procurement
6.08 With the exception of small items (para 6.09) all contracts to befinanced from KfW, SIDA, CDC, Bank and IDA funds will be awarded on the basisof international competitive bidding (ICB) consistent with Bank Guidelinesfor Procurement. The Kuwait Fund and Opec Special Fund will finance theCivil Works contracts using ICB procedures, together with part of the Work-ing Capital. The Nordic Investment Bank will finance the Recovery Boilerand Evaporator package using competitive bidding procedures within the Nordiccountries.
6.09 With regard to equipment packages to be financed by CDC, SIDA, KfW,the Bank and IDA, a 15% margin of preference or the actual tariff on equiva-lent imported goods, whichever is the lower, will be accorded (for purposesof bid evaluation) to qualified local manufacturers who participate in ICB;and local civil works contractors will be granted the present preference of7-1/2%. Items costing less than US$100,000 equivalent each and totallingnot more than US$5 million in the joint financing paLckage, could be purchasedinternationally on the basis of suitability, availability and price. As noted
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previously, the contract for tLechnical assistance has already been awarded toASSI, an interim contract for project management to Sandwell, and an interimcontract for project engineering to Poyry.
D. Allocation and Disbursement of Bank Loan and IDA Credit
6.10 While SIDA, CDC, Bank and IDA funds will be used for jointfinancing on a pari-passu basis, the bulk of KfW's funds will be disbursedon a single major package (the paper mill) in order to simplify disburse-ment procedures. Allocation of the proceeds of the Bank loan and the IDAcredit is summarized in the following table. Details of the allocation ofother financing for the project are presented in Annex 6-5.
Allocation of Bank Loan and IDA Credit
% of ForeignAmount of Credit Expenditures a/
Category and Loan Allocated to be Financed(US$ million)
Machinery, Equipment and Materials b/ 38.5 48%Consulting Services 8.0 48%Technical Assistance and Training 4.1 48%Interest during construction 3.4 100% c/Refunding of Project Preparation Advance 0.5Unallocated 5.5
60.0
a/ Including allocated price contingencies.b/ Excluding Recovery Boiler and Evaporator Package financed by NIB,
and Paper Mill Package financed by KfW.c/ Interest and other charges on Bank Loan accrued on or before
December 14, 1983.
VII. FINANCIAL ANALYSIS
7.01 The chemical pulp mill and first paper machine are forecast tocommence production in October 1982 producing only pulp and unbleached gradesof paper, while the bleach pliant, mechanical pulp mill and the second papermachine will come into operation in April 1983. The project is expected toreach normal production levels by 1987. In view of the need for on-the-job-training, and the management and operating assistance required, the assumedbuild-up, though rather slow by standards of industrialized countries, isconsidered realistic. The assumptions used in the financial analysis aredetailed in Annex 7-1.
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Production Schedule and Sales Volume(Thousand tons)
1982 1983 1984 1985 1986 1987(1/4 Year)
Domestic Sales VolumeNewsprint - - 2.1 4.5 4.8 5.2Printing & WritingPaper - 12.5 17.9 18.7 20.1 21.4
Kraft Linerboard - 1.2 2.7 3.1 3.5 3.9Kraft Paper 3.7 16.3 16.4 16.5 17.5 18.5
Export Sales VolumePrinting & Writing - - - 0.8 2.6 3.4Paper
Kraft Paper - - 2.9 6.4 7.5 7.6Total Paper Sales Volume 3.7 30.0 42.0 50.0 56.0 60.0Pulp Sales Volume 1.4 1.4 1.4 1.4 1.4 1.4% Capacity Utilization 50% 70% 83% 93% 100%
A. Revenues
7.02 As noted in para 4.15, actual prices paid presently by the consumerscorrespond closely to international prices for the various paper grades withsuitable allowance for transportation to Tanzania and import duties. Theassumption of the analysis presented in this report is that when the millcomes on stream, the mill net price of each paper grade will be such thatthe final price to the consumer, which includes transportation and sellingexpenses, continues to be in line with those obtainable from internationalsuppliers. Duty which is currently 20% on some grades has not been included.Therefore, for a few grades of paper the price to the consumer will go down. 1/For exports, it is assumed that Tanzanian paper will be sold at world marketprices, i.e., CIF in those countries minus an average 15% discount to allowfor effective penetration into those markets (para 4.19). However, thefurther reductions necessary for freight and selling expenses lowers themill-net revenue on export sales to about 80% of the estimated levels fordomestic sales.
7.03 The financial analysis is done in current prices through 1983, thefirst year of significant production, and in constant 1983 terms thereafter.Financial projections are based upon the "1977 Computed Prices" presented inpara 4.17. The actual prices used in the projections are as follows:
1/ The Government is examining this aspect of the project to establish theextent of both the revenue loss and the beneficiaries of any such lowerprices. These factors will be taken into account in any future pricingpolicy (para 7.03).
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Paper Prices for Financial Projection(In T Sh/ton)
Mufindi MillCIF Dar es Salaam Net (1983 Prices)
GradeGrade 1977 Prices Factor-/ 1983 Prices Export Domestic
Newsprint 4,320 - 6,920 5,480 6,850Printing & Writing 5,920 0.97 9,200 7,310 9,140Kraft Linerboard 4,080 - 6,540 5,170 6,460Kraft Paper 4,640 1.03 7,660 6,070 7,590
a/ The 1977 prices shown are for a "basic" grade of paper or board. Infact, the detailed analysis of BIS shows that several grades within thePrinting and Writing category, and several grades within the Kraft Papercategory, should be produced. This factor makes allowance for the pricevariations in these subsidiary grades.
Pricing of the project's output has been discussed in detail with NDC and theGovernment. The Government has agreed in principle to set minimum paperprices so as to permit the Company to operate on a sound commercial basis,and to allow it a reasonable return under conditions of efficient operations.
B. Operating Costs
7.04 Pulpwood costs have been estimated on the basis of data developedin the feasibility study prepared by Poyry in 1977 and adjustments have beenmade to raise them to 1978 levels. The results for each type of pulpwood arepresented in the following table:
Delivered Pulpwood Costs in a Normal Year of Operation3
(T Sh/m , in 1978 prices)
Pulpwood Harvestedby the Company a/ Purchased Pulpwood b/ All Pulpwood
Pine Eucal. Average Wattle Sawmill Chips Average Cost
Operating Costs
Road and Logging 26 29 26. - - 22Wood Transport 21 24 21 61 24 26Overhead 9 9 9 2 2 8Stumpage/Purchase 55 41 54 34 72 52
Total 111 103 110 97 98 108
a/ Excluding capital charges. The initial and recurring investments requiredby the logging operations are included in the project capital costs.
b/ Purchase prices are based on preliminary negotiations between NDCand the supplier.
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The indicated stumpage for pine and eucalyptus pulpwood is a calculated figureto recover the normal costs of growing pulpwood. On the ~asis of currentplanting Sechniques and costs, these values are T Sh 61/m for pine, andT Sh 41/m for eucalyptus which are sufficient to enable the industrial for-est plantations to become financially self-supporting. However, ths overallvalue for pine Is brought down to T Sh 55/m because up to 20,000 m per yearof tops and smallwood from sawlogging operations, representing about 10% ofthe annual pine requirement, would be available at zero stumpage.
7.05 Manufacturing costs in 1987 (the first year of full production),including depreciation, but excluding financing charges, are estimated tobe about T Sh 3,480 per ton in 1978 currency value. Large items in thesecosts are fuel and power, which together account for about 25% of the directmanufacturing cost (excluding depreciation). Other major cost items are wood(23%), and chemicals (22%). Direct labor required for the operation of themill and ancillary facilities, on the other hand, is a relatively minor costitem. More details are contained in Annex 7-2.
Mill Manufacturing Costs at Normal Production(1978 T Sh)
% TotalT Sh/ton incl. deprec. excl. deprec.
Wood 462.5 13.3 23.3Chemicals 433.2 12.5 21.8Fuel and Power 491.9 14.1 24.8Other Materials 252.4 7.3 12.7Labor 122.1 3.5 6.2Administration & Overhead 223.1 6.4 11.2Depreciation 1,493.5 42.9 -
3,478.7 100.0 100.0
C. Financial Projections
7.07 Financial projections for the project are summarized below fromAnnexes 7-3 through 7-7.
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Summary of Projected Financial Data for the Project(T Sh Million)
Year ending December 31 1982 1983 1984 1985 1987 1989(1i74-r.)
Income & Cash Flow Statements
Sales Revenue 36.5 254.2 345.9 399.9 476.2 484.8Manufacturing Costs(excl. deprec. & amort.) 34.9 163.0 188.8 202.8 197.0 185.3
Depreciation & Amortization 44.5 178.0 179.5 181.0 159.1 113.7Interest - - 96.2 87.0 76.7 58.7Net Income (Loss) after Taxes (42.9) (86.8) (118.6) (70.9) 43.4 127.1Cash Generation beforeInterest Payment 1.6 91.2 157.1 197.1 279.2 299.5
Debt Service - - 142.2 179.0 167.0 149.0
Balance Sheet
Current Assets 16.5 49.6 143.0 143.0 154.2 154.2Accumulated Cash Surplus 1.6 92.8 8.3 3.9 155.4 390.5Current Liabilities 3.1 55.4 104.5 104.5 102.8 102.8Net Fixed Assets 1,707.0 1,737.5 1,580.5 1,422.0 1,108.3 928.4Long-Term Debt 800.1 947.8 869.2 777.2 631.6 451.0Equity 921.9 876.7 758.1 687.2 684.5 919.3
Ratios
Current Ratio (:1) 5.8 2.6 1.4 1.4 2.7 5.1Long Term Debt/Equity 46/54 52/48 53/47 53/47 45/55 30/70Debt Service Coverage - - 1.1 1.1 1.7 2.1
7.08 The above forecasts show the Company's tight financial positionduring the initial operating years, notwithstanding the fact that interestduring construction will be capitalized through the first full year of opera-tion, i.e., until after the second paper machine has come on stream. TheCompany is expected to maintain an adequate liquidity from the outset, andthere is an accumulation of surplus cash through the early operating years.Debt service coverage, however, reaches a comfortable level only in the fifthfull year of operation (1987). The financing plan for the project requiresthat 50% of the financing will be in the form of equity; as noted in para 6.07this will also apply to any possible overrun financing. After start-up, thedebt to equity ratio is expected to deteriorate to about 53/47 in 1984, be-cause of the project's start-up 'Losses, but to improve quickly thereafter.
7.09 As a capital intensive project, the Mufindi mill requires a highrate of capacity utilization before it reaches the profit breakeven point.In 1984, the first full year when both paper machines are in operation (atan average of 70% of capacity), the profit breakeven point is close to 100%
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due to the large expenses in start-up and technical assistance, high interestpayments and the amortization allowances for pre-operating expenditures. By1987, the first year of full operation, the profit breakeven point is expectedto drop to about 85% of capacity and the cash breakeven point to 70%.
7.10 The initial tight financial position of the Company, the high break-even point and the sensitivity analysis discussed further below indicate thatit is imperative for the mill to reach full production as quickly as possibleand to preserve a sound financial structure and liquidity in those criticalinitial years. To demonstrate the relief the Company, would have financiallyif it were allowed to charge somewhat higher domestic paper prices in theinitial few years of operation, the following table gives the most importantfinancial indicators under the assumption that domestic prices during 1982through 1985 will be 15% above those used in the financial projections shownin para 7.07 above, all other assumptions made there remaining unchanged.
Important Financial Indictors with Domesstic Selling Prices15% above International Prices during 1982 through 1985
(T Sh Million)
1982 1983 1984 1985 1986 1987(1/4 year)
Sales Revenues 42.0 292.3 397.8 459.9 444.9 476.2Net Income (Loss) after Taxes (37.4) (48.7) (66.7) (10.9) (26.3) 49.8Cash Generation Before Interest 7.1 129.3 209.0 257.1 234.0 279.2Accumulated Cash Surplus 7.1 136.4 180.7 236.3 278.0 374.1Ratios:
Current Ratio (:1) 7.6 3.4 2.4 2.9 3.3 4.2Long-Term Debt/Equity 45/55 51/49 51/49 50/50 45/55 41/59Debt Service Coverage - - 2.1 1.4 1.3 1.7
It can be seen that all financial indicators, particularly accumulated cashsurplus, current ratio and debt service coverage, improve considerably as aconsequence of the price increase. The Government has agreed to consider thepossibility of granting such a temporary price increase should this be neces-sary to allow the Company to operate on a sound financial basis.
7.11 To ensure that the Company operates in a financially satisfactorymanner it has agreed to:
(a) make no investments outside the scope of the projectuntil the project is completed (as defined in para6.07) and thereafter seek prior Bank approval for addi-tional investments in fixed assets in excess of US$3million per year, until such time as the mlill is oper-ating at full normal production rates;
(b) take all necessary action not to exceed a debt to equityratio of 60/40;
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(c) not incur any additional debt if by doing so it could notmaintain a debt service coverage of at least 1.5 in any ofthe succeeding fiscal years;
(d) maintain a current ratio of at least 1.5 at all times; and
(e) pay no dividends during the first three full years of oper-ations and thereafter pay dividends only out of accumulatedearnings and only to the extent that, after such payment,the Company's current ratio is at least 1.5.
D. Financial Rate of Return
7.12 The cost/benefit streams for the financial return are expressedin constant 1978 terms (Annex 7-8). The economic life of the project isassumed to be 16 years following the attainment of full normal productioncapacity, or 20 years in all. The return is 8.7% before and 6.8% after taxes.Results of the sensitivity analyses are presented below.
Sensitivity Tests on Financial Rate of Return (%)
Case before Taxes after Taxes
1. Base case 8.7 6.82. Sales revenues increase by 10% 10.6 9.03. Sales revenues decrease by 10% 6.6 4.24. Capital cost increase by 10% 7.6 5.75. Capital cost decrease by 10% 9.9 8.16. Manufacturing cost increase by 10% 7.8 5.87. 6-month delay in project implementation 8.2 6.48. Capacity utilization decrease by 10% 7.5 5.89. No export 8.4 6.610. 20-year life at full procluction 9.2 7.2
The rate of return is mostly sensitive to changes in sales revenues, capitalcosts and capacity utilization. Should the project not be able to export(and the assumed export tonnage not produced at all), the return woulddecrease to 8.4% and 6.6% respectively before and after taxes. A six-monthdelay in project implementation, combined with a 10% capital cost increaseand an eventual drop in sales revenue of 10%, would reduce the return to 5.5%and 4.2%, respectively before and after taxes. The plant has been assumed tohave an economic life of 16 years after the achievement of full productionsome four years after start-up. Adequate allowances have been included foradditional capital expenditures throughout the project's life to achieve this.If in fact however, the project's life were increased to 20 years at fullproduction, the rate of return would increase to 9.2% and 7.2% before andafter taxes respectively.
E. Auditing and Reporting
7.13 It is mandatory in Tanzania that the audit of all parastatal com-panies should eventually be carried out by the Tanzania Audit Corporation
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(TAC) which was established in 1968. The number of such companies auditedby TAC has increased gradually to 270 out of the totaLl of 320 parastatalcompanies in Tanzania. TAC conducts both financial as well as managementaudits, and the audit reports are submitted directly to the Board Chairmanof the parastatal company concerned with copies to the parent Ministry andthe Treasury. -ae Company has agreed to submit to the Bank the audit reportsof TAC within four months of the end of the year. Further, to facilitate thework of TAC and effective financial management of the project, the Companyhas agreed to employ and train competent accounting personnel to prepare theaccounts satisfactorily. The Company has also agreed to give prompt atten-tion to audit recommendations. In addition to the annual audit reports, theCompany will submit quarterly financial statements and project progress andprocurement status reports within 45 calendar days after each quarter.Finally, after completion of the project, the Company will prepare and furnishto the Bank a comprehensive report on the project, its implementation, initialoperation, and the costs and benefits expected to be derived therefrom.
VIII. ECONOMIC ANALYSIS AND RISKS
A. Adjusted Costs and Revenues for Economic Evaluation
8.01 The economic costs and benefits have been evaluated at world prices;tradeables at CIF border prices, and non-tradeables at their border priceequivalent through the application of conversion factors that have beenestimated for Tanzania. The assumptions used and adjustments made are shownin Annexes 8-1 and 8-2. Unskilled local labor contained in the capital andmanufacturing costs has been valued at 50% of its financial costs, and anoverall shadow exchange rate of T Sh 12 to the dollar has been used. Duties,taxes and other transfer payments have been eliminated from the cost andrevenue streams.
8.02 As mentioned in para 5.20, supporting infrastructure facilities,though not included in the project scope itself and largely financed outsidethe project, will have to be implemented; namely the railway spur, theescarpment road, the power line and the mill township and forest villages.For the purpose of this economic evaluation, all costs that are not recoveredthrough direct charges have been added to the project cost. The cost of therailway spur will be recovered through TAZARA freightt charges; the cost of thepower transmission line through TANESCO power charges; the cost of housing andrelated utilities through rents, water, electricity and other direct charges.The following items were allocated to the project, with the appropriateadjustments mentioned in para 8.01:
(i) half the cost of the escarpment road, or about US$6 million.It is assumed that the road will also be used as a majorlink between the TanZam Highway and the TAZARA Railway,and that in addition to local traffic, another main userof the road will be a tea estate in the area; and
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(ii) all of the township basic infrastructure, or aboutUS$2 million (25% of the township cost).
8.03 As previously noted (para. 7.04), for financial calculations thestumpage element of the wood cost has been established at a level whichwould recover the costs of growing pulpwood and enable the industrial for-est plantations to become financially self-supporting. In the absence ofthe proposed project, much of the wood in the existing plantations couldnot be utilized and would therefore have no value. A calculation based onpossible alternative wood uses presented in Annex 8-1 indicates that theappropriate stumpage value for use in economic calculations should be about60% of the financial values. For plantations not yet established, however,the economic wood cost is the full cost of establishing these plantationswith adjustments only for shadlow pricing labor and foreign exchange.
8 . 0Z4 Since in he absence of the proposed project, the mill s eutputwould have to be imported, the economic benefits are measured on the basisof projected import prices. International prices of these commodities aremainly influenced by the structure of the paper and forest industries in majorexporting countries (USA, Canada and Northern Europe). For the purpose ofproject evaluation, estimated world prices are used (in 1978 terms), i.e.,those already used for domestic prices in the financial analysis. Economicprices of exported paper, like the financial prices (para 7.02), include anaverage 15% discount.
B. Economic Rate of Return
8.05 On the basis of the economic projections of costs and benefitsover the project lifetime, the economic rate of return is 11.3% (Page 4 ofAnnex 8-2), compared to the 8.7% financial rate of return before taxes. Thedifference between the two rattes of return indicates that the adjustment dueto additional infrastructure costs (about 0.4%) is outweighted by shadowpricing of the unskilled labor and stumpage fees (+1.1%), and by the adjust-ment in the exchange rate (+1.9%).
8.06 Results of the sensitivity analysis are shown on the following page.Like the financial rate of return, the economic return is sensitive to changesin revenues: it would decrease to 9.4% if paper prices dropped by 10%, whilea 10% increase in paper prices would raise it to 13.1%. The return is lesssensitive to investment and manufacturing costs, but is sensitive to a delayin implementation. Under the adverse circumstances, were the project cost toincrease by 10% and the project: suffer a 6-month delay in completion, thereturn would drop to 9.7%; this drop, however, would be offset if at the sametime paper prices were to increase by only 10%. Should the project not beable to export, the resulting d[rop in capacity utilization would decrease therate of return to 10.9%. Should the project's economic life be extended to20 years of full production (para 7.12) the rate of return would increase to12.0%.
8.07 As mentioned in para 5.01, the proposed project is designed so thatexpansion from 60,000 to 75,000 TPA will be possible at a minimal additional
ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS
Case Ex-Mill Price-20% -15% -10% -5% Base Case +5% +1OZ +15% +20%
Base Case-Excluding expansion 7.2 8.3 9.4 10.3 11.3 12.2 13.1 13.9 14.7-Including expansion in 1991 8.3 9.3 10.2 11.1 12.0 12.8 13.6 14.4 15.2-Including expansion in 1987 9.0 10.0 10.8 11.7 12.5 13.3 14.1 14.9 15.6
Project Capital Cost-Increased by 10% 6.3 7.3 8.3 9.3 10.2 11.0 11.9 12.7 13.5-Increased by 20% 5.4 6.4 7.4 8.3 9.2 10.0 10.8 11.6 12.4-Decreased by 10% 8.4 9.5 10.6 11.6 12.6 13.5 14.4 15.3 16.2
Project-Related Infrastructure-Costs up 20% 7.2 8.3 9.3 10.3 11.2 12.1 13.0 13.8 14.6-Costs up 50% 7.1 8.1 9.2 10.1 11.1 12.0 12.8 13.7 14.5
Manufacturing Costs-Increased by 10% 6.5 7.6 8.7 9.7 10.7 11.6 12.5 13.4 14.2-Increased by 20% 5.8 6.9 8.0 9.1 10.1 11.0 11.9 12.8 13.6-Decreased by 5% 7.6 8.7 9.7 10.7 11.6 12.5 13.4 14.2 15.0
Capacity Utilization-Increased by 10% 8.6 9.7 10.8 11.8 12.8 13.7 14.6 15.5 16.3-Decreased by 10% 5.7 6.8 7.8 8.8 9.7 10.6 11.4 12.2 13.0
Project Implementation-Delay of 6 months 7.0 8.0 8.9 9.9 10.7 11.6 12.4 13.1 13.9-Delay of 6 months and capital costs
increased by 10% 6.0 7.0 8.0 8.8 9.7 10.5 11.3 12.0 12.7
Markets-No export Sales 7.0 8.0 9.0 10.0 10.9 11.8 12.6 13.5 14.3
Shadow Exchange Rate-T Sh 10 to 1 dollar 6.2 7.3 8.4 9.4 10.3 11.2 12.1 13.0 13.8-T Sh 14 to 1 dollar 8.0 9.1 10.1 11.1 12.0 12.9 13.8 14.6 15.4
Project Life-20 years at full production 8.2 9.2 10.2 11.1 12.0 12.8 13.6 14.4 15.2
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cost. Such an expansion would cost about US$25 million (in 1978 terms).The economic rate of return for the expansion alone is estimated at some 34%(Page 3 of Annex 8-2). If the expansion takes place in 1991, as is presentlycontemplated, the return of the overall proposed project, including the ex-pansion, would be 12.0%. If rnarket conditions allow an earlier expansion(in 1987), the overall return rises to 12.5%.
C. Other Benefits
8.08 No allowance has been made in the economic return calculation forexternal economies attributable to the project since they are difficult toquantify. One of the most important of these is the contribution to regionaldevelopment in the South-central part of Tanzania by the establishment of whatwould be the largest industrial plant in the country. The construction of apower line extending the national grid into the region will stimulate localdevelopment activity. The creation of a substantial demand for coal and forlimestone, both of which are available locally, will stimulate mining andquarrying in the region, and the various transportation needs of the projectwill stimulate trucking and servicing facilities. In the same general region,long-range plans call for the further exploitation of major coal-fields, andpossibly of iron-ore deposits, and some of the infrastructure provided for theproject would facilitate these later developments. It is also anticipatedthat the project will stimulat:e downstream converting activities in otherparts of the country as paper supplies become more readily available.
8.09 A second important benefit relates to the technology transfer impactwhich a major processing industry will have in Tanzania. Through a normalprocess of employee turnover, a certain proportion of the large skilled work-force will find its way into other process plants where newly acquired ex-pertise may be expected to contribute to improved efficiency in other sectors.The total cost of training and technical assistance prior to the mill start-up, and during the early years of operation, amounts to almost US$40 million.To the extent that these expenditures effectively transfer technology toTanzania, they can be considered to be a direct benefit to the country.
8.10 A further benefit relates to the stability which the project pro-vides to Tanzania's forestry eff'orts. Although reforestation can be justifiedfor the provision of logs Eor sawmilling alone, approximately 40% of thetimber produced is not suitable for sawing. By providing a market for thismaterial, the overall economics of plantation establishment are greatly im-proved and the jobs of the 800 persons employed in this activity are secured.Additional benefits to the sawmilling and the wattle bark industry accrue asa result of the project's need, and ability to pay for waste wood from theseoperations.
8.11 As previously noted, the proposed project facilities incorporatespare capacity for a 25% expansion, with minimal additional investment, andin the base case estimate of the project's rate of return, this benefit hasnot been claimed. The impact of the expansion, and the value of this sparecapacity, is better demonstrated in the analysis of the sensitivity of theproject's rate of return to an eventual expansion (para. 8.07).
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8.12 Finally, the project will provide direct employment for some 1,500people in addition to the 800 persons employed in reforestation and willgenerate net foreign exchange savings averaging US$30) million per year (1978terms) during its economic life (16 years at full production)). These foreigrexchange benefits compare to the project's estimated foreign exchange expendi-ture of US$194 million and Tanzania's present import requirements of aboutUS$16 million annually.
D. Risks
8.13 The above analysis indicates that the economic rate of return of theproject is relatively low (about 11%) and this heralds a number of potentialrisks both for Tanzania and for the project that need to be guarded against.
8.14 This is a large project in the context of the Tanzanian economy andrepresents as much as one third of the planned expenditures in the manufactur-ing sector during the current Five-Year Plan (1977-81). While Tanzaniansources are not expected to contribute more than 21% to the financing of theproject (US$52 million), this is a large amount in the context of that coun-try's economy, and the substantial external financing the project and relatedinfrastructure requires could possibly affect Tanzania's future borrowingcapacity if the project were not to generate the expected substantial foreignexchange savings because of poor operational performance. Also, Tanzania iscarrying the prime financing obligation should there be a cost overun in theproject or should a slow start-up give rise to a need for additional workingcapital in the initial operating years.
8.15 Therefore, in order to avoid the project becoming a liability tothe Tanzanian economy, rather than generating the benefits expected from it,it is imperative that (i) the project be implemented efficiently within thetime and cost presently allowed for, and that (ii) production be brought upto capacity operations at least as quickly as forecast in this report.
8.16 To overcome these two potential risks three specific countermeasureshave been taken. Firstly, the Project Managers and Project Engineers havealready been appointed to the project on an interim basis and have reviewedall aspects of the project in considerable detail during the past six months.The prospective lenders have had several opportunities to participate in thisreview process. The project concepts and cost estimates here presentedreflect the results of this review and a high level of confidence can beattached to them. Secondly, the construction time allowed for the projectin this appraisal is some 12-18 months beyond what might be considered rea-sonable in an industrialized country situation. Given the high level ofinternational expertise which has been retained to implement the projectthis is considered to be an adequate margin to take into account Tanzanianconditions. Furthermore, since the key to adhering to the constructionschedule will not be the timely delivery of imported equipment, but thetimely execution of the civil works, these will be bid internationally andparticular attention will be paid to the speed of execution and the reli-ability with which this can be achieved. Thirdly, substantial expatriateassistance will be provided not only during project implementation, but also
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during the critical stage of initial plant operations. While the scope ofassistance to be provided is eipected to be adequate, its impact can only beas effective as the close cooperation that needs to be developed between theCompany and those providing the expatriate assistance. Any deficiencies insuch cooperation are bound to result in delays in project execution andincreased project costs which Tanzania can simply not afford. While theGovernment and NDC are aware of. the crucial nature of such good cooperation,the Bank will need to put in a substantial supervision effort to foreseeoncoming difficulties early enough and help correct them.
8.17 The project also faces the risk that the experienced expatriates bereplaced by Tanzanians before the latter may be adequately trained. While thetraining of local staff is one of the major tasks of the expatriate assistance,the premature withdrawal of outside operational personnel would be an expen-sive proposition. It is therefore intended that the Bank would have to giveits prior approval to any termiination of or substantive changes in theseassistance contracts.
8.18 Furthermore, the project may encounter a certain market risk sincethe mill will not only have to be built somewhat larger than the initialdomestic market is predicted to support at the time of project start-up, butthe domestic market might grow somewhat more slowly than now predicted shouldcontinuing foreign exchange constraints reduce paper imports in the meantime.In such a case, a somewhat higher volume of paper will have to be exportedduring the initial operating years of the project with resulting lower netrevenues to the project. This risk, however, is expected to be limited intime and could be overcome by aL temporary increase during say 4 years in theproject's domestic selling price of paper, which is presently assumed to beidentical to the price of imported paper without any import duty. Suchtemporary increase in domestic prices, which appears to be fully justified,would also help to overcome possible initial liquidity difficulties of theCompany and thus make it independent of budgetary support from the Governmentthat would otherwise be needed to overcome such difficulties.
IX. AGREEMENTS
9.01 The following agreements were reached.
A. With the Government that it will:
(i) Make pulpwood available to the extent required from theSao Hill plantations, the Mbeya plantations together withwaste wood generated at the TWICO sawmill (para 5.13);
(ii) Arrange for adequate quantities of suitable coal to bemade available to the project (para. 5.15);
(iii) Ensure that the railway spur, the township, the escarpmentroad and the power line are implemented as required by theproject (para. 5.26);
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(iv) Provide US$51.7 million equivalent amounting to 21% ofthe total financing required for the project during thefive-year period of project implementation (para. 6.04);
(v) Provide any local or foreign funds that may be required tocomplete the project, under terms and conditions acceptableto the Bank (para. 6.07); and
(vi) Permit the Company to set paper prices so as to enable itto operate on a sound financial basis at efficient operation(paras. 7.03, 7.10).
B. With NDC and the Company that they will:
(i) Submit to the Bank not later than December 31, 1980, detailedmarketing and distribution programs for both the domestic andthe export markets (para. 4.22);
(ii) Enter into a suitable long-term arrangement with theTanganyika Wattle Company for the Supply of wattle timber(para 5.14).
(iii) Install the necessary anti-pollution devices at the mill andinstitute acceptable procedures for monitoring their properoperation (para. 5.19);
(iv) Submit quarterly reports describing physical progress of in-frastructure implementation (para. 5.26);
(v) Submit to the Bank not later than June 30, 1979, detailedplans for the Company's organization during operation(para. 5.30);
(vi) Employ and retain qualified Project Advisers, the ProjectManagers and Project Engineers on terms aLnd conditionssatisfactory to the Bank (para 5.31);
(vii) Arrange that the Ministry responsible for forestry will berepresented on the Company's Board of Directors (para. 5.32);
(viii) Submit to the Bank not later than June 30, 1979, detailedtraining programs for mill and forestry operations (paras.5.34, 5.35);
(ix) Bear the foreign exchange risk on the Bank Loan proceeds andthe IDA portion passed on as debt to the Company (para. 6.06);
(x) Conform to the financial covenants as detailed in para. 7.11;
(xi) Submit audited financial reports to the Bank within four monthsfollowing the end of each year and give prompt attention toaudit recommendations (para 7.13); and
- 50 -
(xii) Employ and train competent accounting personnel and submitto the Bank reports in substance and time as to be agreedto (para. 7.13).
9.02 Conditions of effectiveness for the Bank Loan and IDA Credit willbe that all the conditions precedent to the effectiveness of the other agree-ments have been met (para. 6.06); and the signing of final contracts with theProject Advisers, the Project Engineers and the Project Managers (para. 5.31).
9.03 Based on the above mentioned agreements, the project provides asatisfactory basis for Bank Group lending of US$60 million to the Governmentto be partly on-lent (US$39.9 million) to the Company for 16 years, including5 years of grace, and partly to be passed on to the Company as equity.
Industrial Projects DepartmentDecember 1978
TANZANIA - MUFINDI PULP AND PAPER PROJECT
PLANT CAPITAL COST ESTIMATE I/(US$ '000)
CivilWorks Machinery and Equipmen_ Total
Inland FreightCIF Value & Insurance Erection Spare Parts Sub-Total
Wood Handling 450 2,410 80 530 140 3,160 3,610
Pulping 1,650 4,380 170 1090 310 5,950 7,600Groundwood Plant 440 3,050 90 420 140 3,700 4,140Bleachirig 280 2,700 80 360 160 3,300 3,580Bleach Chemical Preparation 490 3,690 110 630 180 4,610 5,100Paper MLll 7,270 26,520 1000 9670 3400 40,590 47,860Recovery & Power Plant 2,690 17,750 620 5860 1100 25,330 28,020
White Liquor Preparation 740 2,650 100 940 90 3,780 4,520Fresh Water System 910 1,450 60 230 50 1,790 2,700
Effluent Treatment 2,430 890 90 650 80 1,710 4,140Mobile Equipment - 1,950 50 - 220 2,220 2,220
Maintenance 880 1,880 80 340 300 2,600 3,480
Office, Personnel Rooms 810 890 50 100 - 1,040 1,850
Site Preparation & Services 3,050 620 110 1020 50 1,800 4,850
Total Direct Plant Cost-2/ 22,090 70,830 2,690 21,840 6,220 101,580 123,670
Of which: Local Currency 6,560 - 2,690 6,000 120 8,810 15,370Foreign Exchange 15,530 70,830 - 15,840 6,100 92,770 108,300
1/ August 1978 prices2/ Elxcluding physical anci price contingencies
Industrial Projects DepartmentNovember 1978
-52-
ANNEX 6-2
TANZANIA - MUFINDI PULP AND PAPER PROJECT
PRICE ESCALATION ALLOWANCES-'
Item Period?2 Multiplier Escalation Amount (US$ Million)
(Months) Local Foreign Local Foreign Total
Civil Works 24 0.181 0.152 1.19 2.35 3.54Machinery & Equipment 18 0.136 0.114 0.38 8.78 9.16Erection 316 0.275 0.232 1.65 3.67 5.32Construction Overhead 36 0.275 0.232 0.93 1.48 2.41Project Management &
Engineering 18 0.136 0.114 0.34 1.78 2.12
Logging 36 0.275 0.232 0.16 0.81 0.97Railway Spur 15 0.114 0.095 0.24 - 0.24Senior Staff Housing 15 0.114 0.095 0.15 0.03 0.18Pre-operating & Start-up Exp. 42 0.325 0.275 0.49 0.22 0.71Technical Assistance &Training 30 0.227 0.191 0.50 1.37 1.87
Sub-Total 6.03 20.49 26.52Physical Contengencies 0.60 2.05 2.65
Total 6.63 22.54 29.17
Yearly Escalation Rates
Year Local Foreign
1978 9% 7.5%1979 9% 7.5%1980 8% 7%1981 8% 7%
1/ Prices have been escalated from August 1978 prices.2/ The period covers the time span between August 1978 and the average
time of disbursement.
Industrial Projects DepartmentAugust 1978
-53-
ANNEX 6-3
TANZANIA - MUFINDI PULP AND PAPER PROJECT
WORKING CAPITAL ESTIMATE
Item Period Amount (T Sh Million)Local Foreign Total
Raw Material Inventories-/
Logs 2 months 4.96 0.64 5.60Chemicals 3 months 2.32 4.88 7.20Fuel Oil 2 months 0.40 - 0.40Coal 1 month 0.80 - 0.80Other Materials 6 months 1.60 6.40 8.00Finished Products
(at cost) 1 month 6.80 4.00 10.80
Sub-total 16.88 15.92 32.80
Receivables (at cost)- Domestic 1 month 5.36 3.44 8.80- Export 2 months 2.08 1.36 3.44Prepaid Expenses 1.12 0.40 1.52Cash 2.24 - 2.24
Sub-total 27.68 21.12 48.80
Less: Payablesb/ 4.48 4.80 9.28
Total Working Capital in Constant 1978Tanzanian Shillings 23.20 16.32 39.52
Escalated Working Capitalin 1983 Tanzanian Shillings 32.00 21.60 53.60
a/ Includes freight and insuranceb/ Includes one month supplies plus one-half month payroll
Industrial Projects DepartmentAugust 1978
-54-
ANNEX 6-4
TANZANIA - MUFINDI PULP AND PAPER PROJECT
DISBURSEMENT SCHEDULES FOR BANK LOAN AND I)A CREDIT(US$ million)
Fiscal Year Calender Year Bank Loan IDA Creditand Quarter and Quarter by Quarter Cumulative by Quarter Cumulative
1979 III 1979 I 0.5 0.5IV II 1.0 1.5
1980 I III 1.5 3.0II IV 1.7 4.7III 1980 I 1.9 6.6IV II 2.0 8.6
1981 I III 2.3 10.9II IV 3.3 14.2III 1981 I 4.5 18.7IV II 5.0 23.7
1982 I III 6.3 30.0II IV 6.5 6.5III 1982 I 5.8 12.3IV II 5.2 17.5
1983 I III 4.2 21.7II IV 3.8 25.5III 1983 I 2.4 27.9IV II 2.1 30.0
Industrial Projects DepartmentNovember 1978
TANZANIA - MUFINDI PULP AND PAPER PROJECT
ALLOCATION OF FINANCE(US$ Million)
IBRD/ OPEC!Tanzania CDC IDA KfW Ku'ait NIB Sweden Total
1. Machi-cry, Equipment andMatria s
;.) stock pr.:paratTon plant witha'tive syst-ems and two-achir.a paper mill u? to and
ir.z;ding wTinders 3.8 - - 28.0 - - - 31.8
(b) b1ack li-uor evaporatorplant an6 -C>co-Vey 'oiier 1.1 - - _ 9.1 - 10.2
y:) other machinery, equiDmentand materials 14.6 11.1 38.5 - - - 31.3 95.5
2. S Prepa---aion and Main kC '<l ann Structural Works ,
2.8 - - - 22_9 - - 25.
' 'ie inc ard Managemient3.3- 2.3 8.0 - - - 6.6 20.2
.Te~j i: I. Assistauc, and
Trai,-il ~~~~2.7 1.2 L.1 - 3.3 11.3
5. ,;cr'!-ac Cani-al 4.0 - - - 2.7 - 6.7
6. Refinancing 2'rojec Prepara-
:i.on F;acility - - 0.5 - -
7. lrtew- accruing On finar,--rc Dccemb'c 14, ,`83 13.8 3.7 3,L/ - 2.0 2. !t - 27.3
6. Unal½ocated 6.6 1.7 5.5 6.0 0. 1.0 3.8 -
,1.7 20.0 60.0 34.0 28.5 12.5 45.0 251.7
Industrial Projects DepartmentDecember 1978
-56-
ANNEX 7-1
TANZANIA - MUFINDI PULP AND PAPER PROJECT
ASSUMPTIONS USED IN FINANCIAL PROJECTIONS
1. The financial analysis is done in current terms through 1983, thefirst year of operation, and in constant 1983. terms thereafter.The yearly escalation factors used are given below:
Manufacturing Costs
Paper Prices Foreign Local
1977-79 8.5% 7.5% 10%1980-83 8% 7% 10%
2. Start-up of Paper Machine No. 1: October 1, 1982Start-up of Paper Machine No. 2: April 1, 1983
3. Capacity Build-up for each Paper Machine: 1983: 58% 42%1984: 73% 67%1985: 87% 80%1986: 95% 92%1987: 100% 100%
4. Project Life: 16 years after the attainment of full production
5. Revenues: see Annex 7-4
6. Manufacturing Costs: see Annex 7-2
7. Fixed and Variable Manufacturing Costs:Wood 100% variableChemicals 100% variableOperating Supplies 100% variableEnergy 85% variable, 15% fixedOther Materials 50% variable, 50% fixedLabor 100% fixedAdm. & Overhead 100% fixed
8. Depreciation and Amortization: see Annex 7-3
9. Terms of Loan:
- maturity: 16 years, including 5 years of grace- repayment in semi-annual installments- interest: 10%
10. Taxes: The corporate income tax rate is 40% of pre-tax income; lossescan be carried forward indefinitely and offset against theprofits of immediately following years.
11. The cost/benefit streams have been brought to 1978 terms using an overalldiscounting rate of 6% per annum between 1978 and 1983.
Industrial Projects DepartmentAugust 1978
-57-
ANNEX 7-2
TANZANIA - MUFINDI PULP AND PAPER PROJECT
MANUFACTURING COST ESTIMATE(At 100% Operating Capacity)
Production Volume Unit Quantitv
Grade- Newsprint tons 7,000- Printing & Writing Paper tons 23,000- Kraft Lineboard tons 8,000- Kraft Paper tons 22,000Total Paper tons 60,000
Pulp tons 1,400
Manufacturing Cost Unit Quantity Unit Price Annual Amount1978 prices 1978 prices 1983 prices
(T Sh) (T Sh million)
Wood- Pine Pulpwood m3 196,0o0 111 21.8- Eucalyptus Pulpwood m3 21,000 103 2.2- Wattle m3 30,000 97 2.9- Sawmill Chips m3 15,000 98 1.5
Total m3 262,000 28.4 41.6
Chemicals 26.6 36.0
Fuel- Coal tons 37,000 285 10.5 15.4- Oil tons 2,500 900 2.2 7.3
Electric Power MWh 76,000 230 17.5 25.6
Other Materials 15.5 21.0
Labor (654 men) 7.5 11.0
Administration & Overhead 1/(including 150 salaried employees) - 13.7 19.5
Total Direct Manufacturing Cost 121.9 177.4
1/ Excludes temporary expatriate staff the cost for whom is identifiedseparately in the projected income statement Annex 7-5.
Industrial Projects DepartmentAugust 1978
TANZANIA - MUFINDI PULP AND PAPER PROJECT
DEPRECIATION AND AMORTIZATION ALLOWANCES(T Sh Million)
Base Cost Physical Price AnnualEstimate Contingencies Contingencies Total Years Allowance
Building & Civil Works 206.4 20.5 34.8 261.7 25 10.47Plant 891.2 88.3 148.2 1127.7 15 75.18Logging Capital 32.8 3.2 8.5 44.5 5 8.90 1Pre-operating Expenses 18.4 1.8 6.3 26.5 5 5.30 _Project Engineering andManagement 148.8 14.8 18.6 182.2 5 36.44Technical Assistance & Training 75.2 7.4 16.4 99.0 5 19.80Working Capital - - - 53.6 - -Interest during Construction _ _ _ 21 4 10 21.84
1,372.8 136.0 232.8 2,013.6
Industrial Projects DepartmentNovember 1978
x
TANZANIA - MUFINDI PULP AND PAPER PROJECT
FROJECTED SALES VOLUME AND REVENUE
ANNUAL SALES VOLUME (TONS)
NET MILLPRICE
(T SH/TON) 1982 1983 1984 1985 1986 1987 1988 1989
DOMESTIC SALES VOLUME_____________________
NEWSPRINT 6850 - 2100 4500 4800 5200 5500 5900PRINTING WRITING PAFER 9140 - 12500 17900 18700 20100 21400 22900 24100KRAFT LINERBOARD 6460 - 1200 2700 3100 3500 3900 4400 5000KRAFT PAPER 7590 3700 16300 16400 16500 17500 18500 19600 20800
SUB-TOTAL 3700 30000 39100 42800 45900 49000 52400 55800
EXF'ORT SALES VOLUME. __________________
PRINTING AND WRITING PAPER 7310 - - - 800 2600 3400 1600 -KRAFT PAPER 6070 - - 2900 6400 7500 7600 6000 4200
SUB-TOTAL - 2900 7200 10100 11000 7600 4200
TOTAL PAPER SALES VOLUME 3700 30000 42000 50000 56000 60000 60000 60000
CAPACITY UTILIZATION (X) - 50,0 70.0 83.3 93.3 100.0 100.0 100.0
PULP SALES 6000 1400 1400 1400 1400 1400 1400 1400 1400
ANNUAL HILL NET SALES REVENUE (T SH MILLION IN 1983 PRICES)-----------------------------------------------------------
DOMESTIC PAPER SALES 28,1 245.8 319.9 346.9 372.0 396.8 424.2 450.9
PULO SALES REVENUE 17.6 44.6 64.5 71.0 48.1 25.58.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4
TOTAL SALES REVENUE 36.5 254.2 345.9 399.9 444.9 476.2 480.7 484.8
INDIUSIRIAL PROJECTS DEPARTMENTDATE REFORT PREPARFtl - 09/06/78
TANZANIA - MUFINDI PULP AND PAPER PROJECT-----------------------------------------
PROJECTED INCOME STATEMENT__________________________
(T SH MILLION)
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
NET SALES REVENUE_________________
DOMESTIC PAPER SALES - - - 28.1 245.8 319.9 346.9 372.0 396.8 424.2 450.9EXPORT PAPER SALES - - - - - 17.6 44.6 64.5 71.0 46.1 25.5
PULP SALES REVENUE - - - 8.4 8.4 8.4 8.4 9.4 8.4 8.4 8.4…__ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SUB-TOTAL - - - 36.5 254.2 345.9 399.9 444.9 476.2 480.7 484.8
MANUFACTURING COSTS___________________
WOOD - - - 3.5 21.8 30.1 35.6 38.9 41.6 41.6 41.6
CHEMICALS - - - 3.1 18.8 26.0 30.8 33.7 36.0 36.0 36.0FUEL AND POWER - - - 5.3 28.8 37.0 42.4 46.5 48.3 48.3 48.3OTHER MATERIALS - - - 3.5 16.0 18.1 19.5 20.5 21.0 21.0 21.0LABOR - - - 2.8 11.0 11.0 11.0 11.0 11.0 11.0 11.0
ADMIN. AND OVERHEAD - - - 4.9 19.5 19.5 19.5 19.5 19.5 19.5 19.5START-UP ASSIRTANCE - - - 11.8 47.1 47.1 44.0 40.8 19.6 15.7 7.9
SUB-TOTAL - - - 34.9 163,0 188.8 202.8 210.9 197.0 193.1 185.3
DEPRECIATION - - - 21.4 85.7 87.2 88.7 90.2 91.7 93.2 94.7 oAMORTIZATION - - - 23.1 92.3 92.3 92.3 92.3 69.1 21.8 21.8
SUB-TOTAL - - - 44.5 178.0 179.5 181.0 182.5 160.8 115.0 116.5
OPERATING INCOME - - - (42.9) (86.8) (22.4) 16.1 51.5 118.4 172.6 183.0________________
INTEREST ON LOANS - - - - - 96.2 87.0 77.8 68.6 59.2 49.8
INCOME BEFORE TAX - - - (42.9) (86.8) (118.6) (70.9) (26.3) 49.8 113.4 133.2_________________
ACCUMULATED LOSSES - - - - (42.9) (129.7) (248.3) (319.2) (345.5) (295.7) (182.3)
TAXABLE INCOME - - - - _ _
TAXES
NET INCOME - - - (42.9) (86.8) (118.6) (70.9) (26.3) 49.8 113.4 133.2__________
ACCUMULATED NET INCOME - - - (42.9) (129.7) (248.3) (319.2) (345.5) (295.7) (182.3) (49.1)
INDUSTRIAL PROJECTS DEPARTMENTDATE REPORT PREPARED - 11/29/78
TANZANIA - HUFINDI PULP AND PAPER PROJECT-----------------------------------------
PROJECTED CASH FLOW STATEMENT_____________________________
(T SH MILLION)
1979 19E0 1981 1982 1983 1984 1985 1986 1987 1989 1999
CASH GENERATION
NET INCOME - - - (42.9) (86.8) (118.6) (70.9) (26.3) 49.8 113.4 133.2DEPREC. AND AMORT. - - - 44.5 178.0 179.5 181.0 182.5 160.8 115.0 116.5INTEREST - - - - - 96.2 87.0 77.8 68.6 59.2 49.8
SUB-TOTAL - - - 1.6 91.2 157,1 197.1 234.0 279.2 287.6 299.5
CAPITAL FUNDS_____________
EQUITY 121.6 269.6 382.4 191.2 41.6 - - - - - -LT LOAN 46.4 106.4 356.0 291.3 193.7 13.4 - - - - -
SUB-TOTAL 168.0 376.0 738.4 482,5 235.3 13.4 - - - - -
TOTAL CASH AVAILABLE 168.0 376.0 738.4 484.1 326.5 170.5 197.1 234.0 279.2 287.6 299.5
CAPITAL EXPENDITURES____________________
PLANT 118.5 358.0 685.5 308.3 73.8 - - - - - -WORKING CAPITAL - - - 13.4 26.8 13.4 - - - - -OTHER CAPIT. EXPENDIT. 49.5 18.0 52.9 160.8 134.7 - - - - - -RECURRENT CAPITAL EXPEND. - - - - - 22.5 22.5 22.5 22.5 22.5 22.5
SUB-TOTAL 168.0 376.0 738.4 482.5 235.3 35.9 22.5 22.5 22.5 22.5 22.5
DEBT SERVICE
INTEREST ON LT LOAN - - - - - 96.2 87.0 77.8 68.6 59.2 49.8PRINC. REPAY. LT LOAN - - - - - 46.0 92.0 92.0 92.0 92.0 92.0
SUB-TOTAL - - - - - 142.2 179.0 169.8 160.6 151.2 141.8
TOTAL CASH REQUIREMENT 168.0 376.0 738.4 482.5 235.3 178.1 201.5 192.3 183.1 173.7 164.3
ANNUAL NET CASH SURPLUS - - - 1.6 91.2 (7.6) (4.4) 41.7 96.1 113.9 135.2CUMULATIVE CASH SURPLUS - - - 1.6 92.8 85.2 80.8 122.5 218.6 332.5 467.7
DEBT SERVICE COVERAGE - - - - - 1.1 1.1 1.4 1.7 1.9 2.1
INDUSTRIAL PROJECTS DEPARTMENTDATE REPORT PREPARED - 11/29/78
TANZANIA - MUFINDI PULP AND PAPER PROJECT-----------------------------------------
PROJECTED BALANCE SHEET
(T SH MILLION)
1?7Y 1980 198t 1902 1983 1984 1995 1986 1987 1988 1989
ASSETS
CURRENT ASSETS
CASH (OPERATING) - - - .8 2.3 80.0 80.0 91.2 91.2 91.2 91.2
RECEEIABLES - - - 4.1 12.5 16.6 16.6 16.6 16.6 16.6 16.6
INVENTORIES - - - 11.1 33.2 44-3 44.3 44.3 44.3 44.3 44.3
OTHER - - - .5 1.6 2.1 2.1 2.1 2.1 2.1 2.1
SUB-TOTAL - - 16.5 49.6 143.0 143.0 154.2 154.2 154.2 154.2
CASH (EXCESS) - - - 1.6 92.8 8.3 3.9 34.4 130.5 244.4 379.6
FIXED ASSETS
PLANT 118.5 476.5 1,162.0 1470.3 1,544.1 1,544.1 1544.1 1,544.1 1.544.1 1,544.1 1,544.1
RECURRENT CAPITAL EXPEND. - - - - - 22.5 45.0 67.5 90.0 112.5 135.0
CAPITALIZED EXPEND. 49.5 67.5 120.4 281.2 415.? 415.9 415.9 415.9 415.9 415.9 415.9
GROSS FIXED ASSETS 168.0 544.0 1,282.4 1,751.5 1,960,0 1,982.5 2,005.0 2:027.5 2iO50.0 2,072.5 2,095.0
LESS DEPREC. AND AMORT, - - - 44.5 222.5 402.0 583.0 765.5 926.3 1,041.3 1-157.8
NET FIXED ASSETS 168.0 544.0 1,282,4 1.707.0 1.737.5 1,580.5 1,422.0 1,262.0 1.123.7 1.031.2 937.2
TOTAL ASSETS 148.0 544.0 1.282.4 1F725.1 1t879.9 1,731.8 1.568.9 1,450.6 1t408.4 1,429.8 1,471.0
LIABILITIES
CURRENT LIABILITIES
PAYABLES - - - 3.1 9.4 12.5 12.5 12.5 12.5 12.5 12.5
LT DEBT DUE - - - - 46.0 92.0 92.0 92.0 92.0 92.0 92.0
OTHER - - - - -
SUB-TOTAL - - - 3.1 55.4 104.5 104.5 104.5 104.5 104.5 104.5
LT DEBT (EXCL. CURR. PORTION) 46.4 152.8 508.8 800.1 947.8 869.2 777.2 685.2 593.2 501.2 409.2_____________________________
EQUITY
SHARE CAPITAL 121,6 391.2 773.6 964.8 1.006.4 1,006.4 1,006.4 1,006.4 1.006.4 1,006.4 1,006.4RETAINED EARNINGS - - - (42.9) (129.7) (248.3) (319.2) (345.5) 1295.7) (182.3) (49.I)
…______ - - - -- - - - -- -- - - - - --- -- - -- -- -- -- -- - -- - - - - -- - - - - - - - - -- - - - - - - - - - - - - - - - -- - -
BUB-TOTAL 121.6 391.2 773,6 921.9 876.7 758.1 687.2 660.9 710.7 824.1 957.3
TOTAL LIABILITIES AND EQUITY 168.0 544.0 1,282.4 1,725.t 1,879.9 1,731.8 1,568.9 1.450.6 1,408.4 1.429.8 1.471.0
R A T I 0 5
CURRENT RATIO (TO 1)(FXCL. EXCESS CASH) - - - 5.3 .9 1.4 1.4 1.5 1.5 1.5 1.5
CURRENT RATIO (TO 1)(INCL, EXCESS CASH) -5. 8 2.6 1.4 1.4 1.8 2.7 3.8 5.1
LI DEBT/EQUITY (TO 1) .4 .4 .7 .9 1.1 1.1 1.1 1.0 .9 .6 .4
INDUSTRIAL PROJECTS DEPARTMENTDATE REPORT PREPARED - 11/29/78
TANZANIA - MUFINDI PULP AND PAPER PROJECT
CASH FLOWS FOR FINANCIAL RATE OF RETURN
(T SH MILLION)
CURRENT PRICES THROUGH 1983 AND CONSTANT PRICES THEREAFTER CONSTANT 1978 PRICES
CAPITAL MANUF DEPREC INTEREST SALES INCOME BEFORE TAX AFTER TAX BEFORE TAX AFTER TAXCOST(1) COST(2) AMORT(3) (3) REVENUE TAX CASH FLOW CASH FLOW DEFLA"OR CASH FLrN CASH FLOW
1979 165,6 - - - - - (165.6) (165.6) 1.06 (156.2) (156.2)1980 365.6 - - - - - (365.6) (365.6) 1.111' (326.4) (326.4)1981 704.1 - - - - - (704.1) (704.1) 1.19 (591.7) (591.7)1982 411.5 34.9 44.5 - 36.5 - (409.9) (409.9) 1.26 (325.3) (325.3)1983 134.1 163.0 178.0 - 254.2 - (42.9) (42.9) 1.34 (32.0) (32.0)
1984 35.9 188.8 179.5 96.2 345.9 - 121.2 121.2 1.34 90.4 90.419B5 22.5 202.8 181.0 87.0 399.9 - 174.6 174.6 1.34 130.3 130.31986 22.5 210.9 182.5 77.8 444.9 - 211.5 211.5 1.34 157.8 157.81987 22.5 197.0 160.8 68.6 476.2 - 256.7 256.7 1.34 191.6 191.61988 22.5 193.1 115.0 59.2 480.7 - 265.1 265.1 1.34 197.8 197.8
1989 22.5 185.3 116.5 49.8 484.8 - 277.0 277.0 1.34 206.7 206.71990 22.5 177.4 118.0 40.6 485.2 - 285.3 285.3 1,34 212.9 212.91991 22.5 177.4 120.0 31.4 485.2 49.3 285.3 236.0 1.34 212.9 176.11992 22,5 177.4 117.0 22.2 485.2 67.4 285-3 217.9 1.34 212.9 162.61993 22.5 177.4 101.0 13.0 485.2 77.5 285-3 207.8 1.34 212.9 155.1
1994 22.5 177.4 102,0 4.4 485.2 80.6 285-3 204.7 1.34 212.9 152.81995 22.5 177.4 104.0 - 485.2 81.5 285.3 203.8 1.34 212.9 152.11996 22.5 177.4 105.0 - 485.2 81.1 285.3 204.2 1.34 212.9 152.41997 22.S ;77.4 88.0 - 485.2 87.9 285.3 197.4 1.34 212.9 147.31998 22.5 177.4 33.0 - 485.2 109.9 285.3 175.4 1.34 212.9 130.9
1999 22.5 177.4 33.0 - 485.2 109.9 285.3 175.4 1.34 212.9 130.92000 - 177.4 33.0 - 485.2 109.9 307.8 197.9 1.34 229.7 147.72001 - 177.4 33.0 - 485.2 109.9 307.8 197.9 1.34 229.7 147.72002 (53.6) 177.4 33.0 - 485.2 109.9 361.4 251.5 1.34 269.7 187.7
…. __________________________________________________________NOTES (1) EXCLUDES INTEREST DURING CONSTRUCTION
(2) EXCLUDES AMORTIZATION, DEPRECIATION AND INTEREST(3) INCLUDED FOR TAX CALCULATION PURPOSES ONLY(4) RESIDUAL VALUE EQUALS WORKING CAPITAL
FINANCIAL RATE OF RETURN
-BEFORE TAXES 8.7%
INDUSTRIAL PROJECTS DEPARTMENT -AFTER TAXES 6.8%DATE REPORT PREPARED - 12/04/78
-64-
ANNEX 8-1Page 1
TANZANIA - MUFINDI PULP AND PAPER PROJECT
DEVELOPMENI OF ECONOMIC STUMPAGE VALUE
1. The sources, volumes, and costs of wood used in the financialanalysis of the project are as tabulated below:
Source of Wood Volume Costs('000 min) Stumpage or Other Total
Price Costs Costs(T Sh per cubic meter)
Plantation pine 196 55 56 111Plantation eucalyptus 21 41 62 103Wattle 30 34 63 97Sawmill chips 15 72 26 98
Total 262 52 56 108
Possible alternative uses for each type of wood, and the economic valuederived therefrom, are discussed in the following paragraphs.
2. Plantation pine: The plantations have been established primarilyfor the pulp and paper mill and the silvicultural treatments (tree spacing,thinning and pruning) have been designed with this in mind. Nevertheless,a program of plantation establishment and maintenance could be modified sothat in the long run, up to 70% of the wood could be used for sawmilling.This would require improvements to the stands and the extension of the rota-tion age from 15 to about 25 years with attendant higher costs. By age 25the accumulated cost of the trees would be more than double the amount ofT Sh 55 per m3 accrued by age 15, but as sawlogs they would be worth thisamount. Thus, in the absence of the project, 70% of the trees alreadyestablished wouldhave a value of T Sh 55 per m3 at age 15, which would furtherincrease until full growth to sawlog dimensions has been achieved. The remain-ing 30% would be removed as thinnings at age 15 but could be used only forfuelwood or as poles for buildings.
3. Within a radius of about 25 km of the project area there is anestimated population of 30,000 people. Fuelwood for cooking and heating inthe region is estimated at approximately 0.5 m3/capita giving a total demandfor fuel wood of 15,000 m3 annually. Based on a coal price of T Sh 285 perton, fuelwood has a value of about T Sh 40 per m3 delivered. Allowing T Sh 25
-65-
ANNEX 8-1Page 2
per m for felling, and T Sh 4 per m for an average haul of 10 km, theresidual worth of the fuelwood at the stump is about T Sh 11 per m3.Thus, of the 30% of the volume of pine not suitable for retention as saw-logs, equivalent to 59,000 m3 meters annually, 15,000 m3 could be used asfuel. Approximately one-half of the balance could be used as poles, and astumpage of T Sh 20 per m3 has been taken as a realistic estimate of thevalue of this material. The balance of the volume would have no alterna-tive use and therefore no economic value.
4. Of the 196,000 m reaching age 15, therefore, the alternative uses inthe absence of the project would be as follows:
(i) 70% or 137,000 m3 would be left to continue to grow tosawlog maturity. The accumulated cost of this volume(and imputed value) at age 15 would be r Sh 55 per m3;
(ii) 15,000 m3 would be sold as fuelwood for a stumpage of T Sh 11per m3 which is the equivalent coal price adjusted for heat-ing value, felling and transportation;
(iii) 20,000 m3 would be sold as poles at an assumed stumpage ofT Sh 20 per m3; and
(iv) 24,000 mi would have no use.
5. Plantation eucalyptus: has not yet been established and need not therefore beconsidered in determining the economic value of existing plantation stands.
6. Wattle: is presently of no value except for aL minimal local use asfuelwood. In the absence of the project it will continue to have no value.
7. Sawmill chips: have some local value as fuel but as noted above(para. 4) the total requirement for fuel can be more than adequately met byforest residues. In the absence of the project, therefore, they would haveno alternative use.
8. Overall, the stumpage or purchase price of wood in the absence of theproject would be as follows:
Type of wood Volume Price(mi) (T Sh/m3)
Plantation pine:- retained for sawlogs 137,000 55- for fuelwood 15,000 11- for building poles 20,000 20- no usage 24,000 0- sub--total 196,000- Plantation eucalyptus 0 -Wattle 30,000 0Sawmill waste 15,000 0
Tntnl 241.000 32
-66-
ANNEX 8-1Page 3
9. The average stumpage of T Sh 32/m3 is thus about 60% of the-averagefinancial value of T Sh 52//m3 for the existing wood supplies. For theplantations yet to be established, no such adjustments were made.
Industrial Projects DepartmentNovember 1978
-67-
ANNEX 8-2
TANZANIA - MUFINDI PULP AND PAPER PROJECT
ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS
Assumptions
The assumptions used in the economic analysis are identical to thoseused for the financial analysis (detailed in Annex 7-1) with the followingadjustments:
(i) Unskilled labor has been valued at 50% of its financialcost;
(ii) An overall shadow exchange rate of r Sh 12 to the dollarhas been used for all foreign exchange costs and benefits;
(iii) Stumpage for wood to be logged from plantations which havealready been established has been reduced to 60% of itsfinancial value; and
(iv) Infrastructure costs not recovered through direct charges(i.e. 50% of the cost of the escarpment road and 25% of thecost of establishment of the basic township) have been addedto the project capital costs.
Details of the analysis are contained in the four attached tables.
Industrial Projects DepartmentSeptember 1978
TANZANIA - MUFINDI PULP AND PAPER PROJECT
ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS
Table 1: Cash-Flow of Project Capital Costs and Infrastructture Costs allocated to the Project(in current T Sh Million)-'
Project Capital Costs Infrastructure Costs allocated to the Project
of which Escarpment Road TownshipEconomic Total
Year Total b Unak. Lab c/ For. Exch.-/ Costs Total Unsk. Lab. e For. Exch.f/ Econ. Cost Total Unak. Lab.01 For. Exch.f/ Econ. Cost Economic Costs
1979 165.6 5.8 127.5 226.5 16. 6 4.1 10.8 19.9 5.5 1.4 3.6 6.6 26.51980 365.6 10.6 281.5 501.1 25.8 6.5 16.8 31.0 4.2 1.0 2.7 5.0 36.01981 704.1 20.4 542.2 965.0 8.3 2.1 5.4 10.0 6.2 1.6 4.0 7.4 17.41982 411.5 11.9 316.9 564.0 0 2fi/ 0.1 0.1 0.2 0.3 0.1 0,2 0.4 0.61983 134.1 3.9 103.3 183.8 0 2 0.1 0.1 0.2 0.. 0.0 .° 0.31984 35.9 1.1 27.6 49.1 0.2 0.1 0.1 0.2 0.1 - 0.0 0.l 0.31985 22.5 0.7 17.3 30.8 0,2 0.1 0.1 0.2 0.1 0.0 0.1 0.31986 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31987 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31988 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31989 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31990 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31991 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.3 11992 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.3 11993 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0311994 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31995 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31996 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31997 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31998 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.31999 22.5 0.7 17.3 30.8 0.2 0.1 0.1 0.2 0.1 - 0.0 0.1 0.32000 - -
2001 --
2002 (53.6) _ 41.3 (62.0) _ _ _ _ _ _ _
al In current prices up to 1983 and in constant prices thereafter.b/ Based on cash-flow for financial analysis (Annex 7-8). -c/ About 2.97. of project installed costs plus working capital.d/ Abouit 77X of project installed coats plus working capital.e/ About 25% of infrastructure costs.f/ About 657. of infrastructure cost.&/ Infrastructure maintenance cost is about 0.5% of infrastructure cost.
Industrial Projects Department F' COAugust 1978
TANZANIA - MUFINDI PULP AND PAPER PROJECT
ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS
Table 2: Cash-Flow of Project Manufacturing.Costs and Revenues(in current T Sh Million)!
Manufacturing Costs Sales Revenues
of which
Wood Cost
Year Total__ Tot c/ Usk Lab.' S e/ f Unskill?d Fore b/,b / / oeb REvenomesyear Totaik' oet.-/ Unsk. L ab.-/ Stumpage-/ Foreign Exch.- Econ. Cost Labor - Exchange-' Economic Costs Domestic- Expor/ Total/ Revenues
1979 -1980 - - - - - - - - - - -
1981 - - - - - - - - - - -
1982 34.9 3.5 0.3 1.7 0.6 7.9 1.9 17.3 42.0 36.5 _ 36.5 54.8
1983 163.0 21.8 1.9 10.5 3.9 18.0 7.4 75.3 193.2 234.2 - 254.2 381.3
1984 188.0 30.1 2.6 14.4 5.4 24.9 7.4 82.3 221.1 328.3 17.6 345.9 518.9
1985 202.8 35.6 3,1 17.1 6.4 29.4 7.4 84.5 235.1 355.3 44.6 399.9 599.9
1986 210.9 38.9 3.4 18.7 7.0 32.2 7.4 86.1 243.0 380.4 64.3 444.9 667.4
1987 197.0 41.6 3.6 20.0 7.5 34.4 7.4 70.0 221.1 405.2 71.0 476.2 714.3
1988 193.1 41.6 3.6 20.0 7.5 34.4 7.4 66.9 215.7 432.6 48.1 480,7 721.1
1989 185.3 41.6 3.6 20.0 7.5 34.4 7.4 60.6 204.7 459.3 25.5 484,.8 727.2
1990 177.4 41.6 3.6 20.0 7.5 34.4 7.4 54.3 193.7 469.4 15.8 485.2 727.8
1991 177.4 ,41,6 3.6 20.0 7.5 34.4 7.4 54.3 193.7 482.2 3.0 485.2 727.8 C
1992 177.4 41.6 3.6 20.0 7.5 34.4 7.4 54.3 193.7 485.2 3 485.2 727.8 0'
1993 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
1994 117.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
1995 177.4 41.6 3.6 20.0 7.5 '42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
1996 i77.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
1997 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
1998 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
1999 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
2000 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
2001 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
2002 177.4 41.6 3.6 20.0 7.5 42.4 7.4 54.3 201.7 485.2 - 485.2 727.8
a/ In current prices up to 1983 (first year of plant operation) and in constant prices thereafter.
b/ Based on cashnflow for financial analysis (Annex 7-8).c/ Based on income statement (Annex 7-5).d/ About 8.7 of total wood cosc.e/ About 48% of total wood cost.f/ About 18.0% of total wood cost: 27.9% of the stumpage fee and 10.8% of other costs.
&/ About 5070 of labor and 10% of administrative costs in income statement (Annex 7-5). Excludes that portion of unskilled labor of the wood cost.
h/ About 40% of manufacturing cost plus 80% of start-up assistance identified in Annex 7-5. Excludes that portion of foreign exchange of the wood cost.
Industrial Projects DepartmentAugust 1978
TANZANIA - KUFINDI PULP AND PAPER PROJECT
ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS
Table 3: Cash-Flow of Project Expansion(in Million of 1982 T Sh)
Incremental
Project Expansion Costs Incremental Manufacturing Costs Sales Revenues
of which of which
Wood Coat c//
bl b} Economic Unskillecd Foreign- Economic Economic Project Expansion
Year Total Unak. Lab.- For. Exch.- Costs Total Tot. Unsk. Stumpage For. Exch. Econ. Cost Labor Exch. Costs Sales Revenues Cash-Flow
1990 198.0 5.5 156.0 264.8 - - - - - - - - - - - (264.8)
1991 66.0 1.8 52.0 88.3 21.7 7.3 0.6 3.5 1.3 5.6 0.4 14.5 26.3 73.9 106.9 ( 7.7)
1992 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 112.7 163.0 120.2
1993 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5
1994 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5 -.
1995 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5
1996 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5
1997 4.0 0.1 3.2 5.4 30.9 11.0 0,9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5
1998 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5
1999 4.0 0.1 3.2 5.4 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 132.5
2000 - - - - 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 137.9
2001 - - - - 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 137.9
2002 (39.6) a/ - (31.2) (53.5) 30.9 11.0 0.9 5.3 2.0 8.5 0.4 20.6 37.4 121.2 175.3 191.4
a/ Residual value is 15% of expansion costbI Assumptions of Table Ic/ Assumptions of Tablc 2 Economic Rate of Return of Project Expansion 34.2%
Industrial Projects DepartmentAu ust 1978
L3 Mm >4
W l0
TANZANIA - MUFINDI PULP AND PAPER PROJECT-----------------------------------------
CASH FLOWS FOR ECONOMIC RATE OF RETURN--------------------------------------
(T SH MILLION)
CURRENT PRICES THROUGH 1983 AND CONSTANT PRICES THEREAFTER CONSTANT 1978 PRICES
PROJECT PROJECT CASH FLOW CASH FLOW CASH FLOW CASH FLOWCAPITAL INFRASTRUCT MANUF SALES EXPANSION WITH WITHOUT WITH WITHOUTCOST(1) COSTS(1) COST(2) REVENUE(3) BENEFIT(4) EXPANSION EXPANSION DEFLATOR EXPANSION EXPANSION
1979 226.5 26.5 - - - (253.0) (253.0) 1.06 (238.7) (238.7)1980 501.1 36.0 - - - (537.1) (537.1) 1.12 (479.6) (479.6)1981 965.0 17.4 - - - (982.4) (982.4) 1.19 (825.5) (825.5)1982 564.0 *.6 42.0 54.8 - (551.8) (551.8) 1.26 (437.9) (437.9)1983 183.8 .3 193.2 381.3 - 4.0 4.0 1.34 3.0 3.0
1984 49.1 .3 221.1 518.9 - 248.4 248.4 1.34 185.4 185.41985 30.8 .3 235.1 599.9 - 333.7 333.7 1.34 249.0 249.01986 30.8 .3 243.0 667.4 - 393.3 393.3 1.34 293.5 293.51987 30.8 .3 221.1 714.3 - 462.1 462.1 1.34 344.9 344.91988 30.8 .3 215.7 721.1 - 474.3 474.3 1.34 354.0 354.0
1989 30.8 .3 204.7 727.2 - 491.4 491.4 1.34 366.7 366.71990 30.8 .3 193.7 727.8 (264.8) 503.0 238.2 1.34 375.4 177.81991 30.8 .3 193.7 727.8 (7.7) 503.0 495.3 1.34 375.4 369.61992 30.8 .3 193.7 727.8 120.2 503.0 623.2 1.34 375.4 465.11993 30.8 .3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.3
1994 30.8 .3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.31995 30.8 .3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.31996 30.8 .3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.31997 30.8 .3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.31998 30.8 ,3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.3
1999 30.8 .3 201.7 727.8 132.5 495.0 627.5 1.34 369.4 468.32000 - - 201.7 727.8 137.9 . 526.1 664.0 1.34 392.6 495.52001 - - 201.7 727.8 137.9 526.1 664.0 1.34 392.6 495.52002 (62.0) _ 201.7 727.8 191.4 588.1 779.5 1.34 438.9 581.7
…-------------------------------------------------------------NOTES (1) ECONOMIC COSTS FROM TABLE 1
(2) ECONOMIC COSTS FROM TABLE 2(3) ECONOMIC REVENUES FROM TABLE 2(4) ECONOMIC NET BENEFITS FROM TABLE 3
ECONOMIC RATE OF RETURN
-EXCLUDING EXPANSION 11.3% Z-3-INCLUDING EXPANSION 12.0% pINDUSTRIAL PROJECTS DEPARTMENT
DATE REPORT PREPARED - 11/30/78 ,
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