Report No. 12601-TA

TanzaniaRole of GovernmentPublic Expenditure Review(In Two Volumes) Volume I Main Report

June 17, 1994

Country Operations DivisionEastern Africa DepartmentAfrica Region

FOR OFFICIAL USE ONLY

MI CROGRAPH I CS

Report No: 12601 TAType: ECO

Document of the Wordo Dak

This document has a restricted distributionf and may be used by recipientsonlty In the perfbonance, of their official duties. Its content may not otherwisebe.disclosed without World Bank authorization

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GOVERNMENT ISCAL YEARJuly I - June 30

CURRENCY EQUIVALENTS,urrency Unit: Tanzanian Shilling (T Sh)

Official Rate: US$1.00 = T Sh 499 (March 1994)

ACRONYMS ANI) ABBREVIATIONS

ADB African Development BankAIDS Acquired Immune Deficiency SyndromeC&CL Contractual and Contingent LiabilitiesCFS Consolidated Fund ServicesCG Consultative GroupCSR Civil Service ReformEEC European Economic CommunityEEB European Investment BankERP Economic Recovery ProgramGDP Gross Domestic ProductGNP Gross National ProductHESAWA Health, Sanitation and WaterHIV Human Inmunodeficiency VirusIDA International Development AssociationIMF International Monetary FundIPC Investment Promotion CenterLART Loans and Advances Realization TrustLIC Low Income CountriesMALD Ministry of Agriculture and Livestock DevelopmentMIC Middle Income CountriesMIT Ministry of Industries and TradeMOCD Ministry of Community Development, Women's Affairs and ChildrenMOF Ministry of FinanceMOL Ministry of Labour and Youth DevelopmentMS Ministerial SupplyNACP National AIDS Control ProgramNAFCO National Agriculture and Food CorporationNaTCAP National Technical Cooperation and Assistance ProgramNBC National Bank of CommerceNGO Non-Government OrganizationNMC National Milling CorporationNORAD Norwegian Agency for Development CooperationOC Other ChargesODA Official Development AssistanceO&M Operation and MaintenanceOTTU Organization of Tanznian Trade UnionsPC Planning CommissionPE Personal Emoluments

FOR OFFICIAL USE ONLY

PER Public Expenditure ReviewPIP Public Investment ProgramPMO Office of the Prime Minister and First Vice PresidentPSRC Parastatal Sector Reform CommissionRPFB Rolling Plan and Forward BudgetRS Regional SupplyS&G Subventions and GrantsSGR Strategic Grain ReserveSIDA Swedish International Development AuthoritySPA Special Program of Assistan^e for AfricaSS Social SectorsSSA Sub-Saharan AfricaSTD Sexually-Transmitted DiseaseTA Technical AssistanceTFC Tanzania Fertilizer CorporationTFR Total Fertility RateUK-ODA UK Overseas Development AdministrationUNDP United Nations Development ProgramUPE Universal Primary EducationURT United Republic of TanzaniaVAT Value-Added TaxWDR World Development Report

Tbis document has a sticted distnbution and may be used by rocipients only in the prfoman of theirofficial dutes. Its content may not otherwise be disclosed without World Bank authorization.

Volume I

Contents

Preface .................

Executive Summary .... ........................................... ii.

Chapter 1: Introduction ............................................ 1Background .......................................... 1

Progress Since the 1989 PER .......................... INature of the Problem ............. ...................... 3

Chapter 2: Role of Government ....................................... 6Macroeconomic Foundation ........................... 7Composition of Public Expenditures ..................... 10

Chapter 3: Economic Composition of Public Expenditures ..................... 11Recurrent Versus Development Expenditures .................... 12B ,akdown of Recurrent Expenditures ........................ 14

Subventions and Grants ............................ 15Contractual and Contingent Liabilities ................... 16Personal Emoluments and Other Charges .................. 19

Civil Service Reform ............. ...................... 20Civil Service Employment ........................... 20Civil Service Pay Reform ........................... a

Summary of Recommendations ........ ..................... 25

Chapter 4: Spending Priorities in Selected Sectors .......................... 27A. Social Sector Spending .......... ...................... 27Education .... .......................... 28

Role of Govermnent in Education .28Trends in Education Sector Spending .29Intrasectoral Issues in Education .30Role of Donors in Education .34Need for Reforn in Education .35

Healdth .. 36Role of Government in Health .36Trends in Health Sector Spending .37Intrasectoral Issues in Health .38Role of Donors in Health .41Need for Reform in Health .42

Other Social Sector Spending ............................. 43Recommendations for Reform ........................ 43

B. Spending in the Economic Sectors ......................... 44Agriculture ............ ............................. 45

Recommendations for Reform in Agriculture ............... 47

Industry and Trade .................................... 48Recommendations for Reform in Industry ................. 48

Infrastructure ........................................ 48C. Expenditures on Public Administration ...................... 49

Recommendations for Reform in Administration .... ......... 51

Chapter 5: Efficiency and Transparency of Aid-Funded Expenditures .............. 54Public Investment Programn ............................... 54

Recommendations for Reform ................... ... 55Budgeting of Aid-Funded Expenditures ........................ 59

Recommendations for Reform of the Aid Budgeting System ... ... 62Accounting of Aid-Funded Expenditures ....................... 63

Recommendations for Reform of the Aid Accounting System .... . 64

Selected Bibliography ............................................ 66

Text Tables

Table 1.1: Basic Economnic and Social Indicators, 1970-1990 .................... 4Table 1.2: International Comparison of Basic Indicators, 1990 ................... 5Table 2.1: Size of Central Govermnent Operations, 1991-94 .................... 8Table 3.1: Breakdown of Total Expenditures, 1992-94 ........................ 11Table 3.2: Recurrent Cost Implications of Development Expenditures .............. 13Table 3.3: Economic Composition of Ministerial Supply Expenditures, 1992-94 .15Table 3.4: Major Subventions and Grants, 1992-94 .15Table 3.5: Major Contractual and Contingent Liabilities, 1992-94 .17Table 3.6: Personal Emoluments and Other Charges, 1992-94 .20Table 3.7: Civil Service Employment, 1961-1988 .21Table 3.8: Personnel-Related Expenditures, 1992-94 .23Table 4.1: Trends in Social Sector Spending, 1990-93 .28Table 4.2: Trends in Education Sector Spending, 1990-93 .29Table 4.3: Summa / of Total Education Sector Spending, 1993/94 .30Table 4.4: Expenditure Allocation Across Inputs in Education, 1991/92 .33Table 4.5: Spending On Education by Program, 1993/94 .35Table 4.6: Trends in Health Sector Spending, 1990-93 .37Table 4.7: Summary of Total Health Sector Spending, 1993/94 .38Table 4.8: Recommended and Actual Per Capita Health Expenditures, 1993/94 .40Table 4.9: Spending On Health by Program, 1993/94 .42Table 4.10: Breakdown of Ministerial Expenditures in the Economic Sectors .... ...... 44Table 4.11: Selected Agricultural Projects, 1993/94 ......................... 47Table 4.12: Breakdown of Ministerial Expenditures on Public Administration, 1993/94 . .. 50Table 5.1: Composition of External Assistance by Type, 1991 .................. 60Table 5.2: Budgeting for Aid-Funded Project Expenditures, 1993/94 ............... 61

Text Figures

Figure 4.1: Shares of Different Levels of Education, 1993/94 ................... 31Figure 4.2: Public Expenditure per Pupil, 1993/94 .......................... 32Figure 4.3: Shares of Different Levels of Health Services, 1993/94 ................ 39Figure 4.4: International Cornparison of Ministerial Expenditures ................. 51

Preface

This Public Expenditure Reiew (PER) for Tanzania reviews progress made in publicexpenditure nanagement since the last PER in 1989 and focuses on examining the implications forpublic expenditures of the Government's decision to redefine its role in the economy. TheGovermnent aims to focus its ̂ carce resources on its core functions of providing law and order, andsocial and physical infrastructure, with the objective of improving the efficiency and equity of publicex.penditures in Tanzania.

The Report is organized in two volumes. Volume I contains the Executive Summary and themain report consisting of five chapters: Chapter 1 provides an introduction to the PER; Chapter 2discusses the role of goverment; Chapter 3 analyzes the economic composition of publicexpenditures; Chapter 4 examines sectoral issues; and Chapter 5 looks at issues relating to aid-fundedexpenditures. Volume II contains the Statistical Annex.

ThJs report is a joint effort of the Government of Tanzana and a team f multiateral agenciesand bilateral donors consisting of the V,;orld Bank, EC, NORAD, SIDA and UK-ODA, thatvsited Tanzania from September 6-22, 1993. The joint-donor mission consisted oft NishaAgrawal (mussion leader and princinal author, World Bank); Aeran Lee (World Bank); JensClaussen (NORAD); Torsten Wetterblad (SIDA); David Pedley (UK-ODA); P. Ahren(consultant, NORAD); H. Bierman (consultant, EC); K Kiragu (consultant, UK-ODA); J.Nioroge (consultant, SIDA); and M. Ravicz (consultant, World Bank). Te mission was assistedby an inter-ministerial team from the Government that was coordinated by P.B. Rweyemamu(Planning Commission), and consisted of M.R. Rubunga, J. Lema, A. Mwaisumo, AM.Mwabeza, F.S. Kiongosya, 0. Mdeme, M.P. Kessy, A.M. Manyama, J. Mwilima, and C.Sonyi. Ihe Report was written under the supervision of Michael Carter, Division Chief, AF2CO.In addtion, several people from the World Bank provided guidance, includig: Peter Miovic(Lead Economist, Eastern Africa Department); Wlltiam Shaw (Country Economist, Tanzania);Charles Griffin (Econonist, Social Sectors); Mike Stevens (Lead Advisor); and Vinaya Swaroop(Peer Reviewer). Vedasto Rwechungura (Resident Mission, Tanzania) also provided assistancewith putting together the report. Finaly, Kathryn Rivera (AF2CO) was responsiblefor the wordprocessing and the physical production of the report.

This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authoriation.

Executive Summary

Introduction

1. This Public Expenditure Review (PER) has found that the main public expenditure problemin Tanzania is that the effectiveness of Government expenditures is extremely low. The Governmentis involved in a wide array of activities and spreads its scarce resources too thinly over theseactivities. As a result, it underfunds all of them. This spreading thin of Government resources resultsin expenditures that have low productivity and quality, and have little impact on poverty reduction.The Govermnent has recognized this problem and has announced its decision to withdraw from amnmber of activities and to focus on its core functions, such as providing law and order, basic healthand basic education, and infrastructure. The focus of this PER is therefore on examining theimplications for public expenditures of the Government's decision to redefine its role. TheGoverrnent's objective is to increase the effectiveness of public expenditures in improving the livingstandards of the Tanzanian people, especially of the very poor. While the PER looked at all thesectors of the economy, it has a special emphasis on the social seciors, since these sectors were foundto suffer most from a scarcity of resources and to be in need of urgent attention. The PER identifiesareas of expenditures from which a substantial amount of resources could be saved during FY95 andFY96. Given that the needs of the infrastructure sector have largely been addressed by the US$ 2billion invested in this sector over the last five years, and the further US$ one billion of investmentsthat is planned over the next two-three years, the PER argues that the entire amount of potentialsavings identified should be allocated to the social sectors in the course of the next three Budget(FY95-FY97).

Strategy to Improve the Allocation and Management ofPublic Expenditures

X. Role of Government

2. The objective of the Tanzanian Government is to accelerate growth with a view to reducingpoverty. There is ample evidence available from recent empirical research which indicates that whatthe Government needs to do to achieve tlese two goals is to provide the right macroeconomicenvironment for private sector development and to focus public expenditures on economic and socialinfrastructure. The rest it should leave to the private sector, where it should only play a supportiverole of building the required social, physical, administrative, regulatory, and legal infrastructure ofgood quality.

3. These broadly stated functions of Government need to be translated into public expenditurepriorities. The 1989 PER had found that the inability to define priorities and focus expenditures hadresulted in chronic underfunding of most programs, with program managers typically receiving onlyone-third of the resources they needed to operate effectively. This problem is just as prevalent todayand needs to be addressed urgently. The process of defining priorities for public expenditures inTanzania should be facilitated by the adoption of the new three-year planning and budgetingframework, the "Rolling Plan and Forward Budgetd (RPFB) from 1993/94 onwards. The first RPFBhas broadly articulated the role and functions of Government in each sector. As part of thepreparations of the second RPFB, these need to be prioritizedfurther as planned so that they canfaciltate the focussing of Govermnent expenditures on priority areas, beginning with the 1994/95Buget.

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4. Once the core Covernment functions have been defined more precisely through the RPFB,the process of pulling the Govermment out of non-core activities will need to be implemented. Thisis necessitated by the severe mismatch between government revenues and expenditures that is causingthe current instability in the macroeconomic enviromnent in Tanzania (see Section 11 below). Givenan already high aid dependency, and the large burden of servicing debt (both internal and external),the Govermment has no option but to increase revenues and to severely curtail expenditures. The latterwill be difficult given the pressing needs for additional funds, especially in the social sectors. Givenalso the severe underfunding of most activities, the only way for expenditures to be reduced furtheris by reducing the number of activ-ties the Government is involved in, instead of only trying to cutthe costs of existing activities.

5. This process has already been initiated in the Ministry of Agriculture and LivestockDevelopment (MALD). MALD is now in the process of being reorganized in line with its new roleand functions. The Government plans to undertake similar functional and organizational reviews ofall its ministries in the next three years, starting with six ministries in 1994. The functions andstructure of the local government administration also needs to be reviewed in parallel. Given thedegree of underfunding of core activities, through these reviews the Government will need to pullback from the non-core activities that it is currently involved in, both at the Central and Localgovermment levels. These functional and organizational reviews for central and local governmentstrctures therefore need to be initiated with some urgency so that they can be completed withinthe three year perod of the second Roling Plan and Forward Budget, i.e., during the period1994/95-1996/97.

6. There are two main objectives of these reviews: firstly, to improve the efficiency ofgovermnent organizations and consequently, the management of the economy; and secondly, toidentify potential areas of savings, including from the retrenchment of personnel (see Section IVbelow on civil service reform). Wim the objective of improving the management of the economy, thethree key central ministries, i.e., the Ministry of Finance, the Planning Commission and the CivilService Department, should be included in the first year's program. To attain the second objective,the other three organizations to be reviewed in the first year should include those that have a largenumber of employees such as, at the central level, the ministries of Works, Home Affairs, Education,and Health. In addition, the staffing levels and management of local governments, in particular of theeducation and health employees that fall under their jurisdiction, needs to be reviewed urgently.

II. Macroeconomic Stability

7. The key to laying the foundation for macroeconomic stability is fiscal prudence. Whileconsiderable progress was made in this area in the first six years following the launch of theEconomic Recovery Program (ERP) in 1986, the fiscal situation has deteriorated precipitously in thelast two years. The fiscal deficit (after grants) swung from a surplus of 2.3 percent of GDP in1991/92 to a deficit of 8.1 percent of GDP a year later. During 1992/93, revenues fell by almost 7percent of GDP compared to the previous year. The 1989 PER had found that there was widespreadtax evasion, particularly in the payment of import duties, and extensive tax avoidance through thegranting of excessive exemptions and "deferments" to taxpayers. These tax administration problemspersist today and have combined with poor tax policies to create the fragile macro environment.

8. The Government is concerned about its inability to attain macroeconomic stability since thelaunch of the ERP, and to bring the rate of inflation below 20 percent per annum, let alone to singledigit levels. It recognizes that such a reduction in inflation is essential for getting an adequate supply

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response from the private sector. Therefore, in response to the continued deterioration of the fiscalsituation during the first half of 1993/94, in January 1994 it adopted a number of measures toimprove the situation. In addition, the Government has recently requested technical assistance fromthe IMF in the area of strengthening overall tax administration, with special emphasis on customsadministration. The recommended measures to strengthen ,ax and customs administrc tion areexpected to be introduced, together with improved tax policy measures, in the 1994/95 Budget.

9. In frami.g future budgets, the objective of the Government is to fund all recurrentexpenditures and an increasing proportion of development expenditures with its own revenues. Thisis critical, both in order to raise the domestic savings rate in the economy and also to reduce theGovernmeit's dependency on foreign aid. To achieve this objective, however, expenditures will needto be curtailed severely and tax revenues wvill need to be raised considerably.

m. Economic Composition of Expenditures

10. An important reason for the low effectiveness of Government expenditures in Tanzania is theinadequate funding of critical expenditures on Other Charges (OC), in particular those required foroperations and mairtmnance (O&M). The 1989 PER had found that neglect of maintenance had ledto a severe deterio1 .on of Government assets, in particular infrastructure, which was leading tocrippling bottlenec.. Maintenance had been neglected for so long that the capital invested ininfrastructure was being lost. While this problem has been corrected somewhat in the infrastructuresector, it persists uncorrected in other sectors, particularly in the social sectors. The neglect ofmaintenance is also reflected in the Development Budget where the bulk of expenditures consist ofrehabilitation of assets necessitated by the lack of routine maintenance.

11. There are three main reasons for the inadequate funding of critical expenditures on OtherCharges: the predominant one is the general underfunding of all activities due to an over-extendedexpenditure base; the second one is the squeezing out of non-personnel expenditures by personnel-related expenditures; and the final one is the squeezing out of critical expenditures in the OtherCharges category (such as on textbooks and drugs) by non-critical expenditures (such as on studentwelfare and Government vehicles).

12. The first of the three reasons has been discussed above and needs no further elaboration. Onthe second point, data indicate that expenditures on personal emoluments grew by 50 percent innominal terms between FY92 and FY93 and are budgeted to grow by another 40 percent betweenFY93 and FY94. With an inflation rate of about 23 percent in FY93 and with a similar outcomelikely in FY94, this would lead to a real increase in wages and salaries of about 27 percent in FY93and 17 percent in FY94. In contrast, the nomiin-l amount budgeted for Other Charges stagnated overthe two year period, implying a real reduction of 23 percent per annum in both FY93 and FY94.Given how acute the degree of underfunding is for critical materials and O&M, this is likely to leadto a further sharp deterioration in the quality of services provided by the Government. There is thusa strong need to control fuure increases in the wage bill so that expendires on selected materialsand O&M can be increased in real terms over the next few years. Finally, the third area, whichdeals with the misallocation of resources within the category of Other Charges, has been the subjectof detailed investigation recently by a Presidential "Cost-Cutting Commission " that was set up in1993 to identify areas of potential savings in expenditures. The Commission's Report is due shortlyand will recommend, inter alia, ways of curbing wasteful expenditures on Other Charges. It is hopedthat the recommendations of Presidential Commission's Report will have an impact on theformulation of the 1994/95 Budget.

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IV. Civil Service Refonn

13. While there is a need to control the size of the wage bill in order to release resources forcritical materials and O&M, there is also a recognized need to improve the remuneration of the civilservice. The 1989 PER had found that the civil service was grossly overstaffed and underpaid. Inaddition, the ci-il servants were poorly equipped to do their jobs because of the lack ofcomplementary inputs. This had resulted in a civil service that had poor morale, weak motivation,widespread absenteeism, and growing corruption. All of these problems persist today, and ifanything, have become more pronounced.

14. With 355,000 civil servants, the civil service is too large to be paid and equipped ad.,-.ttely.The Government has recognized this problem and has launched a civil service reform program, a keyelement of which is the retrenchmnent of 50,000 civil servants over a three year period, starting with10,000 in 1992/93 (which was accomplished) and with 20,000 each in the subsequent two years. Thisretrencl';nent prograrn, however, will need to be intensified and accelerated in order to shrirk the sizeof the e.vil service to one that Tatzania can afford to pay adequately. Under the current program,while some caeegories of civil servants (identified to be redundant) are being retrenched, othercategories continue to be hired. The Government has exempted from retrenchment personnel ineducation, health, and security since they are thought to be in short supply. These categories ofpersonnel account for almost 50 percent of the civil service and continue to be hired at an estimatedrate of about 10,000 per annum (the number that is being turned out from Government traininginstitutions for these personnel). Thus, at the end of three years, there will only be a net retrenchmentof about 20,000 civil servants and the civil service will still have about 335,000 civil servants.

15. A civil service consisting of 335,000 civil servants will still be too large for the Governmentto meet its objective of attaining a more efficient and adequately compensated civil service. Giventhat at the most the Govermnent can only fund about two-thirds of all activities that it is currentlyinvolved in, two-thirds of the existing civil service (about 225,000 personnel) would be the largestfeasible size to target for. This is also the size of the civil service that would exist today if in thethree decades since independence in 1961, the civil service (of 90,000) had grown only at the rateof growth of population (about 3 percent per annum) instead of its actual growth of 4.5 percent perannum. The retrenchment exercise to be carried out in the future would need to be carefully linkedto the functional reviews that are being planned for all ministries and for the local governments asdescribed above. To complete the retrenchment exercise within a reasonable time frame, theGovernment should revise its targets upwards to retrench at least 40,000 instead of 20,000 civilservants on a net basis per year for the next three years. It also needs to include in theretrenchment exercise all groups that have so far been exempt from it. While the fiscal costs ofdoing so will be substantial, they are affordable (at about T Sh 6 billion per annum). The exercisecould be completed within the next few years while Tanzania is still receiving substantial budgetarysupport from donors (in the form of counterpart funds from balance of payments support) to completeits adjustment agenda.

16. The Government also needs to initiate the process of pay reform for civil servants. The 1989PER found that during the 1970s and 1980s, there had been a severe erosion in the real wages andsalaries of civil servants as a result of which average salaries in the late 1980s provided only one-fifththe purchasing power of the 1970s. The Government has tried to arrest further declines in civilservice pay by the recent increases in basic salaries and by the use of various monetary and non-monetary allowances to supplement basic salaries. The pledtora of allowances, however, has led toa remuneration structure that is non-transparent, inequitable, and unmanageable. It is dear hat a

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substana enhancement of saaries wiUl need to await a drastic reduction in the :ize of the civilservice. However, the Government needs to take Imnmediate action to design a transparent andeqitable remnneration package that could be introduced in the 1995/96 Rudget. Such a packagewould eliminate most of the existing monetay and non-monetary allowances and incorporate themonetzed value of any that remain.

V. Public Investment Program

17. The Government needs to develop a public investment program that aims to enhance theefficiency of its project portfolio. One of the reasons why this efficiency is low is because of the largenumber of projects, which makes it impossible tor the Government to either fund them or managethem adequately. As a result, there are long delays in project completion and huge cost overruns. Thelarge size of capital expenditures relative to recutrent ones also leads t(, a chronic insufficiency ofresources to provide for the adequate operation and maintenance of completed investmerts.

18. The PER estimated that at present about one-third of all expenditures in the Deve!opmentbudget are in areas that are no longer a priority for Government, given its proposed new and morelimited role and functions. In the context of the preparation of the first RPFB, an exercise torationalize Development expenditures has begun but needs to be accelerated. As a first step, allprojects that are no longer in priority areas need to be identified and phased out. It is recommendedhat only projects inpnority areas would remain in a 'core investment program " that would receive

the bulk of the Government's counterpartfunds in the 1994/95 Budget; that the number and costof such projects be lindted so that the necessary counterpart funds are fully budgeted; and that inthe event of a shortfall In the avaiabty of counterpat funds, absolute priory will be given toprojects in the "core" PIP. As a second step, as additional information on individual projectsbecomes available, projects within the priority sectors will need to be screened to weed out the non-performing ones. Since most of these projects are funded by donors, the Government will needconsiderable cooperation from donors in undertaing this two-step exercise.

VI. Social Sector Strtea

19. The social sectors in Tanzania are in a state of crisis. The quality and coverage of primaryeducation has been falling and, as a result, the illiteracy rate is on the upswing. Secondary schooleducation is grossly inadequate and is available to only a tiny 4 percent of the population. The publichealth situation is alarming: 50 percent of all children suffer from malnutrition and 80 percent ofpregnant women are anemic. The recent spread of AIDS is further stretching to the limit theGovermment's financial and managerial resources. Added to all this are the pressures for additionalservices created by the high (and growing) fertility rate.

20. The 1989 PER had found that basic social services were under tremendous pressure and hadwarned that earlier achievements in this area (made during the mid-1970s to the mid-1980s) were indanger of being lost. Despite the pressing needs of these sectors for additional resources, the shareof the social sectors in total public resources has been declining in recent years. To make mattersworse, a large proportion of the limited resources that are available to these sectors is wasted on non-priority expenditures like the funding of costly and inequitable expenses for sending students andpatients overseas to receive higher education and medical treatment. What these sectors require,therefore, is not just additional resources, but the more effective use of existing resources. To arrestand mverse the decline in the sociad sectors, what is required is the formulaon and adoption of

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a comprehensive "Sodal Sector Stategy" as soon as possible. This work has been delayedconsiderably but is now undzrway and needs to be completed with urgency.

VII. Allocadon of rublic Resources to the Social Sectors

21. Tanzania needs to increase the amount of public expenditures allocated towards buildinghuman capital and to decrease other expenditures. Greater investment in people requires more, a idmore effective, expenditures in education, health, nutrition, and family planning. Given the low levelsof provision of these services that we are starting from, the demands of these sectors for additionalresource are tremendous. The PER reveals that just to provide quality Universal Primary Education(UPE) and basic health care-both stated objectives of the Government-would require additionalresources to the tune of T Sh 210 billion (US$ 500 million) annually, amounting to 50 percenw of totalGovernment expenditures or 18 percent of GDP in 1993/94 . If we add this to the existingexpenditures on health and education (T Sh 90 billion), the total resources required just for these twoareas would amount to over 85 percent of net Government expenditures (net of debt servicing), whichis clearly unfeasible.

22. Given the large and pressing needs of the social sectors, several types of measures will needto be taken to attain the Government's objectives in these sectors, even by the year 2000. Firstly, aspart of the Social Sector Strategy (SSS), the Government will need to prioitize further even withinthe critical sectors of basic health and education. It will need to make difficult choices, for example,by asking itself whether it wants to focus first on improving the quality of primary education forthose currently enrolled in the system, or whether it wants to spend resources on extending thecoverage to those who are currently being denied any education whatsoever, albeit of a poor quality.Given that part of the reason why enrollment rates are low and declining has to do with the poorquality of education being provided, the PER recommends that the first priority in education shouldbe to improve the quality of education. Within health, the Government faces similar difficult choices.Should it first focus only on fuli; funding a preventive health care program and delay the much-needed improvements to the curative health care system, or should it move simultaneously, but moreslowly, on both fronts? Again, given the tight budgetary situation, and the higher social returns frompreventive care, the PER recommends that the Government first focus on improving the preventivehealth care program.

23. A second set of measures will be to reallocate expenditures from other sectors to the socialsectors. The PER indicates that there is considerable scope for reallocating from other expenditures(including special expenditures, ministerial expenditures and regional expenditures) to the socialsectors. The savings in special expenditures, as proposed in the first RPFB, arise from reducing thecosts of maintaining the Strategic Grain Reserve, eliminating the fertilizer subsidy, limiting salaryincreases so that the wage bill is kept constant in real terms, and by reducing financial assistance toparastatals (see Chapter 3 for details). The savings in ministerial expenditures arise from reducingexpenditures on public administration by two percent of the projected GDP for FY95 ( i.e., onepercent or about T Sh 13.8 billion each from general administration and defence), and by reducingby half expenditures on high cost social welfare programs (see Chapter 4 for details). The savingsin regional expenditures arise by reducing the costs of running the regional layer of government inline with their reduced responsibilities (see Chapter 4 for details).

24. While some of these savings cannot be achieved in time for the 1994/95 Budget, substantialamounts of the proposed savings in special expenditures can be undertaken immediately and can beeffected in the 1994/95 Budget. It is recommended, therefore, that an addonal amount of at least

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T Sh 20 billion be allocated pnmarily to materials and O&M expenditures for basic social servicesin the 1994/95 Budget, of which half would be for improWng the quality of primary education andthe other half for preventive health. To the extent possible, these funds should be allocated andspent through localgovernments. In addition, the 3udgets for FY96 and FY97 should be restructuredso that further savings that can potentially be realized from ministerial and regional expenditures arereallocated to basic social services, with the target being to allocate an additional one percent of GDPeach to basic health and basic education in both years.

25. A third set of measures to build human capital entails reforms within the social sectors. Inthe social sectors, the Government's role is to provide basic health and basic education. As alludedto above, there is ample scope in Tanzania to improve the efficiency and equity of resource allocationwithin the social sectors. Within education, the Government spends only 50 percent of its budget onprimary education; the rest is divided between secondary (13 percent), tertiary (19 percent) and othereducation. Despite the substantial amount of resources spent on post-primary education, access tosuch education is limited to a privileged few. This is because these institutions have a high coststructure (teachers typically work half the norm in private institutions) and spend almost half of theirbudgets on student boarding and welfare costs. Thus, those who are fortunate enough to have accessto such education receive not only free education but also have their entire cost of living paid for bythe Government. As a result, while the Government spends only US$ 15 per primary school studentper annum, it spends more than 10 times as much on each secondary school student (US$ 167), andmore than 200 times as much on each university student (US$ 3,500).

26. Reforms are needed urgently in the way that the education sector's resources are allocatedacross different levels of education and across different inputs. Given that the benefits to society aregreatest from investing in primary education, and that these benefits fall with increases in the levelof education, Tanzanian policy makers need to examine the tradeoffs inherent in the provision ofdifferent levels of education in Tanzania. It needs to be recognized that the cost of sending onestudent to university in Tanzania is not sending 238 students to primary school. Secondly, policymakers need to recognize that if inputs were combined in a more efficient way, then access toeducation could be increased substantially even within the existing resource envelope. For example,within the existing resource envelope for seconday educaton, the enrollment rate could bequadrupledfrom the current 4percent to 16perceni (the average for Sub-Saharan Africa) if studentwelfare expenses were eliminated and if teachers in public schools were required to work additionalhours. In university education as well, where a third of the budget is spent on student welfare, andwhere there are only 3.5 students per teacher, there is clearly ample scope for improvement. Thisissue of the appropriate intra-sectoral allocation of resources in education needs to be addressed morefully in the SSS.

27. In the health sector as well resources are allocated in an inefficient and inequitable manner.Preventive health care, which is the mr-ost cost-effective use of public resources, receives only 14percent of the health budget, while the bulk of the health sectors' resources are spent on curativehealth care provided through hospitals (over 40 percent). If we compare the pattern of health carespending in Tanzania with that recommended by the recent World Development Report (WDR, WorldBank, 1993d) on health, we find that about two-thirds of the total health budget in Tanzania is spenton what the WDR calls "essential health care". The WDR has put together a limited package ofpublic health measures and essential clinical interventions that it recommends as a top priority forGovernment expenditures. The public health package for preventive care includes: immunizations;school-based health services; information and selected services for family planning and nutrition;programs to reduce tobacco and alcohol consumption; regulatory action, information, and limited

ix

public investments to iinprove the household enviromnent; and AIDS prevention. As compared withthe recommended annual spending in these areas of about US$ 4.2 per capita for low incomecountries, Tanzania spends 0.50 cents per capita, which amounts to only 12 percent of WDRrecommnended standards. If the resources that were currently being spent on non-essential healthservices were redirected towards this public health package, it would be possible to fund preventivehealth services at up to 40 percent of the recommended level rather than at the current 12 percent.

28. In terms of curative care, the 1993 WDR recommends a cost-effective package of essentialclinical services that the Govermnent should focus on providing. This package consists of five groupsof interventions that are likely to have the largest impact on reducing morbidity and mortality andinclude: services to ensure pregnancy-related care; family planning services; tuberculosis control;control of sexually-transmitted diseases; and care for the common serious illnesses for youngchildren, which include diarrheal disease, acute respiratory infection, measles, malaria, and acutemalnutrition. In a low income country like Tanzania, this recommended package is estimated to costUS$ 7.8 per capita per annum. Annual expenditures in Tanzania for these five areas, by contrast, areonly US$ 1.7 (about 20 percent) per capita. Instead, budgetary expenditures are allocated to services,such as treatment abroad, spending on food for patients in hospitals, and training of medical staff,that should be paid for by the recipients of these services. Again, the issue of the appropriate intra-sectoral allocation of resources in health will need to be addressed more fully in the SSS.

29. This leads us to the fourth set of measures, namely, cost recovery, which will need to beadopted in the social sectors in order to achieve the Government's objective of improving the deliveryof basic social services. Given the magnitude of the needs of these sectors, a reallocation of publicresources, either from other sectors to the social sectors, or from low priority expenditures to higherpriority ones within the social sectors, will not suffice. In order to achieve the goals for the socialsectors, scarce public resources will necessarily need to be supplemented with private ones. Thereis ample scope for doing this. The collection rate of the nominal Universal Primary Education (UPE)levy (T Sh 200 per annum) is only 36 percent; the fee for students in secondary public schools (TSh 2,500 per annum) is less than half of that charged in private schools; and, university students payno fee at all. In health as well, the recent introduction of user fees for certain categories ofexpenditures could be accelerated, while at the same time the Government could promote a healthinsurance system and the private provision of health care. The issue of cost recovery will also needto be addressed more fully in the Government's SSS.

VIH. Strengthing Local Governents

30. After being abolished in 1972, Local govermnents were reintroduced in Tanzania in 1983 andcharged with the responsibility of delivering, inter iQa, basic health and education services. However,while their responsibilities increased vis-a-vis those of Regional governments, their resources did not,and as a result their finances remained precarious. The 1989 PER found that Local governmentsreceived inadequate transfers from the Central government for effectively carrying out their enhancedresponsibilities and that their own revenue base was not well-developed. Administratively as well,Local governments remained weak due to the shortage of qualified staff, compounded by the loss ofexperience and institutional continuity during the period of their abolition.

31. This continues to be a problem today. During 1992, the Government began preparations ofa Cabinet paper proposing a strategy for strengthening Local governments. This work needs to becompleted with some urgency. A strategy for strengthening Local govemnments should be adoptedduring 1994 and should be implemented during 1995. As part of tis strategy, financial resources

x

and skilled personnel should be transferred from Regional governments to Local governments,where they are in extremely short supply. This would serve to improve the delivery of basic socialservices.

IX. Role of Donors

32. Tanzania receives a large amount of foreign assistance from a large number of donors. In1991, it received net official development assistance (ODA) to the tune of US$ 1076 million, whichamounted to 39 percent of its GDP and to US$ 43 on a per capita basis (World Bank, 1993d). Thismeasure excludes the aid that Tanzania received through the Paris Club in the form of a net reductionin debt service of US$ 243 million in 1991. Together, this amount makes Tanzania one of the largestrecipients of aid in the developing world, relative to the size of its economy or its per capita income.

33. The 1989 PER had found that Tanzania's dependence on foreign aid had increasedsubstantially and that the Recurrent budget, in addition to the Development budget, had becomecritically dependent on aid flows. Donors contributed heavily to Recurrent budget programs, both bydirectly supplying consumables such as school textbooks and essential drugs, as well as through theirbalance of payments support and commodity import support programs. The problem of aiddependency has increased since the last PER. In 1993/94, donors will fund over 80 percent ofDevelopment expenditures, a quarter of which are actually recurrent in nature and consist of directlyfunded recurrent items such as textbooks and essential drugs. In addition, they are projected to fundalmost one-third of Recurrent expenditures (excluding debt amortization) through loans and grantsfor balance of payments support.

34. As stated above, the Government of Tanzania aims to reduce its aid dependency in themedium-term and to fund all of its recurrent expenditures and an increasing proportion of its capitalexpenditures through its own revenues. In the short-term, however, Government efforts to improverevenue collection will need to be supplemented with efforts to improve the efficiency of aidutilization. Towards this end, donors will need to continue to provide support that is recurrent innature, albeit within a framework that explicitly recognizes the implications of this for thesustainability of Tanzania's expenditures. Currently, Tanzania's capital expenditures are too largerelative to its recurrent expenditures for the investments that are taking place to be adequatelymaintained and operated in the future. As part of its public investment strategy, the Government aimsto reduce the size of capital expenditures by closing down non-priority and non-performing projects.Given the needfor additonal resources in the social sectors, and given that the bulk of these needsare recurrent in nature, it is important that donors not continue with their preference for fundingcapital expenditures only and, in the short run at least, are willng to adopt a more progrmn-oriented approach and fuid slices of "development programs" based on sector strategies,irrespecdve of whether the expenditures required are recurrent or capital in nature. In additon,to improve the efficiency of this aid, the aid should be provided, to the extent possible, in the formof balance of payments support. While the funding of recurrent expenditures raises difficult issuesof sustainability of Government expenditures, which will need to be dealt with in the future, it at leastbegins to tackle the current problem of the low effectiveness of capital expenditures in Tanzania.

X. Budgeting and Accoumting of Aid-Fimded Expenditures

35. Tanzania's large aid program is administered by a large number of donors-in 1992/93, 34donors (15 multilateral and 19 bilateral ones) provided aid to Tanzania. The large aid program,combined with the large number of donors, creates enormous difficulties in aid coordination and

xi

management for the Government. It also makes it extremely difficult to budget and account for thisaid. The 1989 PER had noted that the proliferation of programs financed through aid had beenaccompanied by an increasing inability to manage and utilize the aid flows efficiently. This problemhas worsened with the growth in the size of the aid program.

36. Donor cooperation and assistance will be required for achieving success in the Government'sefforts to improve the budgeting and accounting of aid-funded expenditures. Because of a variety ofreasons, almost 85 percnt of donor-provided development aid is controlled and disburseddfrety by donors. This weakens the Government's ability to account for these expenditures. It alsomakes the Govermnent reluctant to budget for expenditures that it knows it will later be unable toaccount for. In turn, the lack of budgeting makes it difficult to record these expenditures. Theweaknesses in the budgeting and accounting systems feed on each other and create a vicious circleof unbudgeted and unaccounted expenditures that weaken the Government's expenditure managementsystem and reduce its accountability to Parliament.

37. As a result of these problems, until 1992/93 a substantial proportion of the aid provided bydonors completely bypassed the Government's budgeting system. Since then, the Governnent hasmade a substantial effort to improve the coverage of the Budget and it is estimated that about 60percent of all project-related aid is now on budget. The Government should now budget at least foral project-related aid in the 1994/95 Budget and at the same time it should adopt measures toimprove the accounting of such aid. Donors are urged to cooperate in the Government's efforts toimprove the transparency and effectiveness of aid-funded expenditures.

Condusion

38. The Tanzanian Government faces a severe challenge to improve the living standards of itspopulation. One of the key instruments through which it will attain this goal is to improve theefficiency and equity of public expenditures. The PER reveals the severity of the problems thatconfront the Government in this area, and the difficult choices that need to be confronted urgentlyby policymiakers. The PER also lays out a comprehensive strategy for improving the allocation andmanagement of public expenditures. While some of the elements of this strategy can be adoptedimmediately, others can only be implemented in the medium term. However, Tanzanian policymakersneed to recognize that there is a high cost to further delays in restructuring public expenditures, giventhat Tanzania is falling further behind the rest of the world in human capital investment, and becausefailure to act risks losing the support of weary donors.

39. The PER highlights the need for a more radical restructuring of public expenditures than whathas been proposed so far under the Rolling Plan and Forward Budget. Over the next three years, theBudgets should be formulated keeping in mind the need to:

(i) increase expenditures on essential Other Charges, primarily critical inputs and O&Mexpenditures, by controlling the growth in the wage bill and by reducing non-essential expenditures on Other Charges;

(ii) reduce the size of the civil service sharply so that the wage levels for the remainingcivil servants can be increased;

(iii) reduce the size of the investment program to one that can be adequately operated andmaintained in the future by closing down non-priority, non-perforning projects; and

xii

(iv) increase the allocation of public resources to basic education and basic health.

This reallocation of public expenditures needs to be supplemented with various measures to improvetheir management.

xiii

Summary of Recommendations for Reform

The key components of the Government's strategy to improve public expenditure management are:

(i) Role of Government: To deal with the severe problem of underfunding of all Government activities, inthe context of the second RPFB define the role of Government more precisely with a view to substantiallyreducing its size. To pull out of non-core activities, complete organizational reviews of all ministrieswithin the three year period of the second RPFB, i.e., during 1994195-1996/97;

(ii) Macroeconomic Stabiiy: To reduce the mismatch between revenues and expenditures, which is the keycause of macro-instability, introduce measures to strengthen tax and customs administration together withimproved tax policy measures to raise the collection of taxes in the 1994/95 Budget;

(iii) Economic Composition of Expenditures: To ensure the funding of critical Other Charges, such asessential materials and O&M expenditures, control the growth in the wage bill and reduce expenditureson non-essential components of Other Charges in the 1994/95 Budget;

(iv) Civil Service Reform: To improve the effectiveness of the civil service and to make salary enhancementa possibility, aim to reduce the size of the civil service by one-third (to 225,000) by retrenching 40,000civil servants per annum (net) for the next three years. On pay reform, start preparations for introducinga transparent salary structure that incorporates all monetary and non-monetary allowances in the 1995/96Budget;

(v) Social Sector Strategy: To arrest and reverse the decline in the social sectors in recent years, preparea comprehensive Social Sector Strategy in the near future;

(vi) Allocation of Publc Resources to the Social Sectors: To improve the provision of basic social services,substantially increase the allocation in the 1994/95 Budget to primary education and preventive health,primarily for expendnures on critical materials and O&M. Allocate a further one percent of GDP eachto basic education and basic health in the FY96 and FY97 Budgets;

(vii) Strengthening Local governments: To strengthen Local governments, who bear the main responsibilityfor the delivery of key social services, a strategy paper on measures to be adopted to strengthen Localgovernments should be prepared for presentation to Cabinet as soon as possible;

(viii) Public Investment Program: To improve the efficiency of public investments, prepare a 'coreinvestment program" whose size is limited to one that can be adequately operated and maintained in thefuture, and whose coi.tents are limited to high priority projects. This core program will receive the bulkof Government's budgeted counterpart funds in the 1994/95 Budget;

(ix) Role of Donors: To improve the Government's capacity to manage and control externally-fundedexpenditures, adopt comprehensive sector strategies for donors to fund jointly with Government, insteadof the current project-by-project, donor-by-donor approach;

(x) Aid Budgeting and Accounting: To improve the transparency of the utilization of aid, continue toimprove the coverage of the Development Budget and adopt measures to improve the accounting for aid-funded expenditures.

1

Introduction

1.1 This chapter provides the background and introduction to the study by reviewing the progressmade in public expenditure management since the first Public Expenditure Review for Tanzania wasundertaken in 1989. It examines the nature of the problems plaguing the policymakers in Tanzaniatoday and indicates the urgent need for the Government of Tanzania to improve the effectiveness ofits expenditures, especially those devoted to investments in human capital.

1.2 The rest of the report is organized into four chapters. Chapter 2 elaborates on the role ofgovernment in economic development and examines the implications for public expenditures. Chapter3 looks at the allocation of resources across economic categories. Chapter 4 examines spendingpriorities in selected key sectors. Finally, Chapter 5 deals with issues relating to improving thetransparency and effectiveness of aid-funded expenditures.

Background

1.3 The first Public Expenditure Reiew (PER) for Tanzania was undertaken in 1989 by theWorld Bank jointly with the Government of Tanzania. It covered a wide range of issues relating topublic sector management. It found that the rapid buildup of the public sector in Tanzania followingthe Arusha declaration of 1967 had combined with the decade of economic decline preceding thelaunch of the Economic Recovery Programn (ERP) in 1986, to place an enormous strain on the abilityof the Tanzanian Government to effectively manage its gigantic public sector. Poor public sectormanagement had manifested itself in a wide range of problems including poorly planned and budgetedgovernment expenditures; increased aid dependence accompanied by a lack of transparency in aidutilization; a heavily distorted tax structure; and an ineffective and demoralized civil service. The1989 PER made a number of recommendations on how to develop an effective public expenditurestrategy that would deal with these problems.

Progress Since the 1989 PER

1.4 Based on the reconmendations of the 1989 PER, the Government initiated reforms in someof the key problem areas of public sector management, as described below. So far, the strategies forreform, and the institutional framework necessary for their implementation, have been put in place.However, the actual implementation of most of these reforms is in its infancy, and therecommendations of the 1989 PER remain just as relevant today.

1.5 Planning and Budgeting Reforms. In this area, one of the key reforms initiated in 1993/94was the replacement of the old style planning techniques with a "Rolling Plan and Forward Budget"(RPFB) framework. The RPFB is a medium-term financial framework that aims to reestablish the linkbetween Government's stated priorities and the actual resource allocation process. It is also the toolthrough which the Govemnment aims to introduce much-needed reforms in expenditure managementsuch as improving the links between planning and budgeting; strengthening the links between therecurrent and development budgets; rationalizing the public investment program; and improving thetransparency and efficiency of aid-funded expenditures.

2 Chapter 1

1.6 Tax Refonn. While efforts to reform the tax system in a piecemeal fashion have beenunderway since the launch of the ERP in 1986, the Government has only just recently started asystemic tax reform exercise. This exercise is based on the recommendations of the PresidentialCommission of Enquiry into Public Revenues, Taxation and Expenditure (henceforth TaxCommission), which was set up in October 1989, and which presented its report to the Governmentin December 1991. With respect to both direct and indirect taxes, the Report urged, broadly, thatrates be lowered and tax bases broadened. In the area of indirect taxation, one of the keyrecommnendations was to replace the current multiple-rate structure of sales and excise taxes by avalue-added tax (VAT). The Government accepted the bulk of recommendations made by theCommission but implemented only some of them in the 1992/93 Budget (see Chapter II for details).In particular, a number of tax rates were lowered in the 1992/93 Budget but without theaccompanying measures that had been recommended to broaden the tax base, contributing thus to thefiscal crisis that has since emerged. These base-broadening measures, such as introduction of theVAT and the monztization and taxation of the remuneration package for civil servants, now need tobe implemented with some urgency.

1.7 Civil Service Reform. In order to attain a leaner and more efficient civil service over the nextthe to five years, the Government initiated a program of civil service reform (CSR) in the 1992-93Budget. The reform program comprises the following elements: (1) improving personnel control andnmanagement to stop the ever-growing civil service; (2) retrenchment and redeployment of 50,000redundant civil servants, to be phased over three years; (3) pay reform to establish an adequate andtransparent remuneration structure; and (4) organizational and efficiency reforms to enhance theproductivity of the civil service. With the assistance of several donors, including the UNDP, theWorld Bank, UK-ODA and SIDA, the Government has prepared an overall strategy for the CSRprogram linking all of these elements. The implementation of these reforms was initiated in 1992/93with the retrenchment of the first 10,000 civil servants. Preparations have also commenced for theretrenchment of the next 20,000 targeted for retrenchment in 1993/94. In other areas, however,implementation is still in the preliminary stages.

1.8 Parastatl Reform. In January 1992, the Government initiated reforms in the parastatal sectorby declaring in a Policy Statement that it had "decided to carry out a systematic reform of theparastatal sector, by attracting participation from within and outside and by revitalizing themanagement of institutions and enterprises within the state sector". The basic objectives of thesereforms are to: (i) improve the efficiency of the sector; (ii) reduce the fiscal burden of loss-makingenterprises; and (iii) expand the role of the private sector. In order to guide and implement theprocess of parastatal restructuring, the Government appointed a Presidential Parastatal SectorReform Commission (PSRC). The Commission has prepared a five-year plan to privatize allcommercial parastatals and to improve the efficiency of those that are to remain in the parastatalsector for the time being (such as the utilities). Implemnentation of this plan has begun and du.ing1993, 12 commercial parastatals were either sold or placed in receivership and another sixreceiverships were initiated; an action program for the enforcement of a hard budget constraint onGovernment funding of parastatals was prepared; performance contracts were drafted for five majornon-commercial parastatals; and the Govermment began the preparation of a program of support forretrenched parastatal employees.

1.9 Strengthening Local Governments. Progress has been slow in this area. There have been anumber of studies that have recommended measures and proposed strategies for the strengthening oflocal governments. While these measures and strategies have been discussed and debated widelywithin Govermment, they have yet to be adopted and implemented.

Chapter 1 3

Nature of the Problem

1.10 Tanzania is one of the poorest countries in the world, with the standard dollar estimate of itsper capita income in 1991 being only US$ 100 (World Development Report, World Bank, 1993d). IWhile alternative methods of estimation may change the absolute value of the estimate of Tanzania'sper capita income, they do not much alter Tanzania's ranking amongst the poorest countries of theworld. 2 According to recent estimates, about one-third of Tanzanians live in absolute poverty, i.e.,they are unable to afford the basic needs for survival. 3

1.11 Table 1.1 below shows the progress (or the lack thereof) that has occurred in Tanzania overthe period 197-'990 in some basic indicators of economic and social development. It reveals thatdespite the gains made since the launch of the Economic Recovery Program in 1986, nominal percapita incomes in 1990 are not significantly higher than those in 1970. 4 The ERP has led to anaverage growth rate of about 4 percent per annum and has halted the decade of economic decline thatpreceded it. However, with the population growing at over 3 percent per annum during the period,this has resulted in only very modest gains in per capita incomes. The story on the social indicatorsis mixed: while life expectancy at birth and infant mortality rates have improved over the last 20years, the primary school enrollment rate has declined during the 1980s and there has been noprogress in the numbers attending secondary school. The decrease in primary school enrollment rates,combined with the deterioration in the quality of the education, is already beginning to show effect:the illiteracy rate has increased from 10 percent in 1986 to 16 percent in 1992, and at current trends,is projected to rise to 24 percent by the year 2000. Thus, it is evident that some of the social gainsmade earlier are now being eroded. The problem is compounded by a high fertility rate (6.6) thatcreates tremendous demands for additional resources and makes it difficult to provide either thedesirable quantity or quality of social services.

I This standard dollar estimate of Tanzania's per capita income is likely to be an underestimate and needs to be treatedwith caution. For example, the recent Poverty Profile (World Bank, 1993c) of Tanzania based on a sample of 1,046 householdsestimates the nominal figure for per capita expenditures to be US$ 280.

2 For example, the United Nations Intemational Comparison Programme (ICP) estimates Tanzania's per capita incomebased on the purchasing power of currency (PPC) method to be US$ 570 in 1991. However, even using this method, Tanzaniaremains one of the poorest countries in the world.

3 See 'Tanzania: A Poverty Profile". World Bank (1993).

4 Intertemporal comparisons of dollar per capita incomes can be misleading due to differences in the degree ofovervaluation of the Tanzanian Shilling in the three periods under compaison.

4 Chapter 1

Table 1.1: Basic Economic and Social Indicators, 1970-90

Indicator 1970 1980 1990 |

Per Capita Income (US$) I 100 280 110 1

Life Expectancy at Birth (years) 45 47 48

Infant Mortality Rate(per 1000 live births) 132 119 115

Primary School GrossEnrollment Rate 34 93 63

Secondary School GrossEnrollment Rate 3 3 4

Total Fertility Rate 6.4 6.8 6.6

1 May be substantially distorted due to large fluctuations in the official exchangerate during this period.

Source: World Bank: World Development Reports and African Development Indicators.

1.12 Table 1.2 compares the performance of Tanzania in 1990 with that of two groups ofdeveloping countries: Sub-Saharan African (SSA) countries and low income countries (LIC). sItreveals the fact that Tanzania lags far behind other countries in human capital investments and theliving standards of its population. The Tanzanian per capita income is only a third of the average forSSA or LICs; its life expectancy at birth at 48 years is about the same as the average for SSA butsubstantially lower than the 62 years average achieved in LICs; its infant mortality rate (115) ishigher than the average for SSA (107) and much higher than the average for LICs (69). Even inprimary school enrollment, where considerable gains had been made during the 1970s, the enrollmentrate in Tanzania (63) is now lower than the average for SSA (68) and substantially lower than inUCs, which on average have achieved the goal of Universal Primary Education (UPE). Tanzania'ssecondary school enrollment rate (4) is the lowest in the world (matched only by Malawi) and onlyone-fourth of the average for SSA and one-tenth of the average for LICs. Finally, the total fertilityrate (TFR) in Tanzania (6.6) is comparable to that in SSA, but is high compared to other LICs (3.8).A high fertility rate implies the need to incur ever-increasing expenditures even to maintain theexisting level of social service delivery, which is of poor quality by international standards. With thedemands created by the high fertility rate-leading to a population growth rate of over 3 percent anda population structure where over 45 percent of the population is below 15 years of age-a heroiceffort will be needed to actually attain an improvement in the quantity and quality of human capitalinvestment.

5 Low income countries are those with a GNP per capita of US$ 635 or less in 1991.

chapter 1 5

Table 1.2: International Comparison of Basic Indicators, 1990

Indicator Tanzania SSA' LIC2

Per Capita Income (US$) 110 340 350

Life Expectancy at Birth (years) 48 51 62

Infant Mortality Rate(per 1000 live births) 115 107 69

Primary School GrossEnrollment Rate 63 105 68

Secondary School GrossEnrollment Rate 4 17 41

Total Fertility Rate 6.6 6.5 3.8

1 Sub-Saharan Africa.2 Low Income-Countries (defmed in footnote 5).

Source: World Bank: World Development Reports and African Development Indicators.

2

Role of Government

*...the 1992/93 Budget has been evolved to address a number ofareas including the redefining of the role of the Government witha vew to reducing its size. In this regard the Government will beconstrained to confine uself to its traditionalfunctions which it canreasonably sustain. n

Minister of FinanceBudget Speech, June 1992

2.1 This chapter examines the implications for public expenditures of the Govermnent's decisionto redefine its role in the economy. It indicates that there is no scope for further expansion of publicexpenditures without damaging the fragile macroeconomic enviromnent. In fact, given the currentmismatch between revenues and expenditures, and given the general tightening of the aid climate,there is an acute need to reduce ine size of public expenditures. However, the only way that areduction in the size of expenditures can be achieved together with an improvement in the quantityand quality of basic govermnent services is by improving the allocation of public expenditures. Howthis should be done, both across and within sectors, is the subject of discussion of the followingchapters.

2.2 The 1991 World Development Report (WDR) on "The Challenge of Development" drew onan exhaustive review of the experience of developing economies during the past 30 years to explainthe sharp contrast between the successes of some and the failures of others. A central issue indevelopment and a principal theme of that WDR is the interaction between governments and markets.The WDR suggests a reappraisal of the respective roles of the market and the state. Put simply,governments need to do less in those areas where markets work, or can be made to work reasonablywell, and do more in those areas where markets alone cannot be relied upon. Above all, as far aspriorities for government actions are concerned, the implications are that governments should:

(i) provide a stable macroeconomic foundation without which little can be achieved; and,

(ii) invest in education, health, nutrition, family planning, and poverty alleviation; andbuild social, physical, administrative, regulatory and legal infrastructure of betterquality.

2.3 Recent research on the rapidly growing economies of East Asia also further supports thedesirability of a two-track approach to development policy emphasizing macroeconomic stability onthe one hand and investments in people on the other. 6 This research also indicates that the key toataining macroeconomic stability in these countries was fiscal prudence. This chapter deals with theissue of macroeconomic stability in Tanzania. It examines in detail the fiscal situation, and especially

6 See 'The East Asian Miracle: Economic Growth and Public Policy", World Bank, 1993a.

7 Chapter 2

the revenue issues that are the key cause of the current macroeconomic problems that are facingTanzania. The following chapters examine the implications for Government expenditures of the newlydefined role of the Goverunent in Tanzania.

Macroeconomic Foundation

2.4 In Tanzania, while the macroeconomic situation has improved since the launch of the ERP,it nevertheless remains fragile. 7 The performance of investmen., savings, and exports have allimproved after the launch of reforms. However, the savings-investment gap remains large, andofficial exports finance only about one-third of imports, making Tanzania extremely dependent onforeign aid to finance its imports, investments, and even recurren expenditures. As a result, thereremains a critical need to maintain prudent fiscal and monetary policy and to continue with the effortsto bring inflation down. Furthermore, appropriate market-based incentives for raising the domesticsavings rate and improving the efficiency of investment are necessary if Tanzania is to reduce itsdependency on foreign aid.

2.5 Table 2.1 provides data on the size of Central Govermnent operations in Tanzania in recentyears to indicate the magnitude of the problem facing the Tanzanian Government. It reveals thegrowing mismatch between revenues and expenditures in recent years and the fragile fiscal situationthat has resulted. In FY91 and FY92, the Govermment maintained a tight fiscal stance and, as aresult, in both years it generated a fiscal surplus after grants. In addition, in FY92 it also generatedpositive savings of 1.6 percent of GDP on its current account. In comparison, preliminary results forFY93 indicate that the fiscal position has deteriorated severely. Revenues fell from 23.5 of GDP inFY92 to 16.8 percent in FY93, a fall of 6.7 percent of GDP in one year. The resulting fiscal deficit(after grants) in FY93 was 8.1 percent of GDP, and Government dissavings were at 7.8 percent ofGDP.

2.6 The FY93 fiscal outcome eroded the gains made in revenue enhancement during the reformperiod, when revenues went up steadily from a mere 14.9 percent of GDP in FY86 to a high of 23.5percent of GDP in FY92. Expenditures have also grown over the period and bave risen from 23.0percent of GDP in FY86 to 26.3 percent in FY92. The rpismatch between revenues and expendituresin FY93 contributed to the deterioration in the macroeconomic environin: -it of the economy.Measures were therefore adopted in the FY94 Budget that aimed to enhance revenue collection andto reduce the deficit back to more sustainable levels (1.3 percent of GDP after grants).

2.7 Preliminary data for the first half of FY94 indicate, however, that the revenue enhancementmeasures adopted in the June 1993 Budget have not succeeded in reversing the decline in revenuecollection experienced in FY93 and that in fact, the macroeconomic situation has deteriorateddramatically. The decrease in revenue collection has meant that the Government has resorted to bankborrowing, from the central bank and from the commercial banks, to finance its activities and is thuscontributing both to continuing high levels of inflation and to a credit squeeze on the private sector.Hence, the weak financial performance of the Tanzanian economy during FY93 and FY94 can beattributed principally to the weak fiscal position, which has become a cause of great concern.

7 For an evaluation of the macroeconomic performance of Tanzania during the five yea; period following the launchof the ERP, see "Strucwtal Adjustmnent, Economic Performance, and Aid Dependency in Tanzania'. by Agrawal, Ahmed,Mered and Nord (World Bank Working Paper No. 1204, October 1993).

Chapter 2 8

Table 2.1: Size of Central Government Operations(selected years between 1986 and 1994)

(perceat of GDP)

Actual Prelim Bud,etedActual

FY86 FY92 FY93 FY94

Total Revenue 14.9 23.5 16.8 20.5Total Expenditure 23.1 26.3 30.8 33.4

Recurrent Exp 19.2 21.9 24.6 21.9Development Exp 3.9 4.4 6.2 11.5

Deficit before Grants -8.2 -2.8 -14.0 -13.0Grants ,, 5.2 6.0 11.6Deficit after Grants .. 2.3 -8.1 -1.3(checks issued)Financing 2 6.0 -2.0 7.8 1.3

Foreign (net) 1.6 2.3 3.0 4.5Domestic (net) 4.4 -4.4 4.8 -3.2

Bank 3.7 -4.9 4.4 -3.4Non-Bank 0.7 0.6 0.4 0.3

Memo itemGovernment SavingS 3 -4.3 1.6 -7.8 -1.4Inflation Rate 32.4 22.1 23.2 12.04

1 The lsrge increase in the size of budgeted Development expenditues between FY93and FY94 reflects the Government's efforts to record more fiuly in the Budget thetotality of the aid that it receives from donors.

2 The difference between the financing amount and the deficit after grants is due tothe "float, which is the difference between checks issued and checks cleared.

3 Defined as the difference between revenues and recurrent expenditures (on a checksissued basis).

4 Targeted rate.

2.8 Weaknesses in the fiscal situation arose in 1992, when the Government made a partial attemptto reform the tax system following the presentation of the Tax Commission's Report in December1991. In June 1992, consistent with the recommendations of the Tax Commission, various taxes weresimplified, and a number of rates were lowered in the FY93 Budget. These were accompanied bysome measures aimed at widening the tax base. It was expected that these measures would yieldadditional revenue that would more than offset the anticipated decline in revenue due to the tax ratereductions. The revenue enhancing measures included the elimination of exemptions on customsduties and the improvement of duty collection with the introduction of preshipment inspectionarrangements. In the event, however, there were major shortcomings in the implementation of thesemeasures to widen the tax base, and indeed, tax exemptions, far from being eliminated, haveincreased even further. This is reflected in the fact that in September 1993, for example, less than10 percent of import taxes payable under the preshipment inspection/tax assessment program hadactually been paid. In these circumstances, and exacerbated by the introduction of a remission orderat the end of August 1993 exempting most raw materials from import duties, Government borrowingfrom the banking system has continued to increase sharply during the first half of FY94.

9 Chapter 2

2.9 In addition to poor implementation of the announced measures, another major factorcontributing to the current fiscal problems was the inordinate delay in the adoption of important base-broadening measures recommended by the Tax Comnmission. The two major recommendations in thisarea were the introduction of a value-added tax (VAT) and the monetization and subsequentincorporation of all monetary and non-monetary allowances paid to formal sector employees into theincome tax base. In the June 1992 Budget Speech, the Government announced it intention to replacethe existing Sales Tax with a VAT in January 1994. Given the substantial amount of lead time(ranging from 18-24 months) that is necessary for the preparation for a VAT, its implementation byJanuary 1994 would have required that preparations commence immediately following thatannouncement. Instead, to this day, very little progress has been made in this area, and even ifintensified efforts are made to launch the preparations immediately, the earliest that it will be possibleto introduce the VAT would be by mid 1995.

2.10 The adoption of the second major base-broadening measure, i.e., the widening of the incometax base, has also suffered inordinate delays. One of the key elements of the Govermnent's overallprogram to improve the efficiency of the civil service is pay reforn (see Chapter 3 for details). Theurrent remuneration system for civil servants consists of a meager basic salary supplemented by a

host of non-taxable monetary and non-monetary allowances. This severely erodes the tax base,especially since the Government's practice of paying non-taxable allowances to its employees has alsobeen adopted by the private sector. The Tax Commission strongly recommended the taxation of allmonetary allowances and fringe benefits. However, no progress has been made as yet in this area.Given the tight fiscal situation, there is an urgent need to adopt such base-broadening measures.

2.11 While progress has been slow in taking the more medium-term measures of tax reform, suchas the preparation for the VAT and the widening of the income tax base, the Government hasrecognized the serious deterioration in the fiscal situation and in January 1994, it took several othermeasures to improve the situation. A package of revenue measures was adopted that included thereimposition of a 10 percent customs duty on all imported raw materials for locally manufacturedgeonds (thereby rescinding the exemptions order issued in August 1993), the inclusion of the excisetax in the sales tax base of locally produced goods, the strict adherence to preshipment inspection,the immediate withdrawal of the concession allowing staggered payments of taxes combined withrenewed efforts to collect arrears that had resulted from this concession, the strict monitoring ofbonded warehouses, and a review of tax exemptions with a view to decreasing their number. Newtaxes include a surtax on cars, an increase in the transport withholding tax, an increase in the customsduty on all imported commodities which are also produced locally, and an increase in a number ofcustoms fees and penalties. The Government estimates that this package of revenue measures willgenerate revenues equivalent to about 2.8 percent of GDP on an annualized basis. While the mainemphasis of the package adopted in January 1994 was on stemming the deterioration on the revenueside, some measures were also taken on the expenditure side, to curtail expenditures as well as toimprove their monitoring and control.

2.12 A critical priority for Tanzanian policymakers is the need to attain and maintainmnacroeconomic stability. As Table 2.1 indicates, the Government's objective is to bring inflationdown to 12 percent in FY94 from a level of 23 percent in FY93. However, in the first half of PY94,the annual rate of inflation continued at the level of FY93. To achieve the 12 percent target for FY94would thus imply a marked reduction in the rate of monetary growth during the second half of FY94,to about half its current level of about 35 per cent per annum. This in turn will necessitate asignificant tightening of the fiscal stance. While the budgeted fiscal deficit (after grants) for FY94 isonly 1.3 percent of GDP, given the poor revenue performance in the first half of the year, it is

Chapter 2 10

unlikely that this target can be met even taking into account the measures adopted in January 1994,without further efforts to enhance revenues and curtail expenditures.

2.13 A second priority for the Tanzanian policymakers is to ac4'elerate growth by stimulating theprivate sector. Large fiscal deficits that are financed domestically have negative consequences for theprivate sector, whether the deficits are financed through banks or the non-bank sector. During FY93,the Government financed the bulk of its deficit by borrowing from the banking system. Thismechanism limits the access of the private sector to available credit and creates the danger that privatesector development would be stifled due to lack of credit. During FY94, the Government hasincreased its reliance on non-bank borrowing through the use of Treasury bills (T-bills). During thefirst half of FY94, the stock of T-bills outstanding has increased over three-fold, from T Sh 4.7billion at the end of June 1993 to T Sh 16.2 billion at the end of December 1993. To facilitate thesale of T-bills, weekly auctions were introduced by the Bank of Tanzania in August 1993. Theinterest rates determined through this mechanism have been fairly high (averaging about 40 percentcurrently). While resorting to non-bank financing of the deficit reduces the risk of building up furterinflationary pressures in the economy, it creates the risk of crowding out private investment. The onlyway for the Government to prevent destabilizing the economy further and to prevent stifling theprivate sector is to take all the measures necessary to reduce the fiscal deficit to a level that can befmanced without recourse to domestic financing.

Composition of Public Expenditures

2.14 In addition to stressing the role of goverunents in providing a sound macroeconomicfoundation for growth, the 1991 WDR also provides direction for the focus of public expenditures.In particular, it stresses the need for investing in people. The WDR argues that the economic andsocial returns from public and private investments in people are often extremely high. TheGovernment has an important role to play in adequately financing basic social services-education(especially primary education), health care, nutrition and family planning services-especially for thepoor. Therefore, a priority for Government must be to spend adequately and effectively on these basicservices. In addition to spending on people, the Government also needs to incur other expendituresthat have proven to have high returns, such as law and order, agricultural research and development(R&D), and investments in infrastructure. The next two chapters examine the composition ofGovernment expenditures in Tanzania in greater detail.

3

Economic Composition of Public Expenditures

3.1 The Goverunent of Tanzania faces a formidable challenge: it needs to substantially downsizeexpenditres in relation to GDP and it needs to improve their allocation. This chapter examines thecomposition of spending by "economic" categories, i.e., wages and salaries, other goods and services,suosidies and transfers, and so forth. The following chapter examnines key expenditure issues by"function" or sector, i.e., education, health, agriculture, and so forth. The main data sources for thePER are the Budget Estimates for various years. Each year's Estimates are published in four volumes:Revenues (Volume I); Consolidated Fund Services and Ministerial Supply (Volume Il); RegionalSupply (Volume III); and the Development Budget (Volume IV). The most recent Budget Estimatesare for FY94. Forecasts for FY95 have been obtained from the first Rolling Plan and Forward Budget(RPFB), which was for the years 1993/94-1995/96.

Table 3.1: Breakdown of Total Expenditures, 1992-94(percentage shares)

Actual Expenditure Approved Budgeted EtimatesFY92 Estimates FY93 FY94

Recurrent 83.9 79.5 68.3Consolidated Fund Services 27.2 21.6 19.4Ministerial Supply 47.3 43.3 36.8Regional Supply 9.4 14.6 12.0

Development 16.1 20.5 31.7Total Expenditures 100.0 100.0 100.0

Source: For Recurrent expenditures, FY94 Budget Estimates; for Development expenditures, the FY92 figure isobtained from the Report of the Controller and Auditor-General; the FY93 figure is a preliminary estimateobtained from the Tanzanian authorities; and the FY94 figure is from the FY94 Budget Estimates.

3.2 Table 3.1 above depicts the breakdown of total expenditures into broad categories for theperiod FY92-FY94. In FY94, it shows that Recurrent accounted for 68 percent and Developmentexpenditures for the remaining 32 percent of total expenditures. Furthermore, Recurrent expendituresare broken down into three broad categories: Consolidated Fund Services (CFS), Ministerial Supply,and Regional Supply, which in FY94 accounted for 19 percent, 37 percent, and 12 percent,respectively, of total expenditures. CFS is essentially for debt servicing. The remainder is recurrentexpenditure broken down by level of Govermnent. In Tanzania, spending is undertaken by two levelsof governments: the Central govermment (including regional governments) and Local governments.Govermnent Recurrent expenditure (net of debt servicing) is allocated to 41 "ministerial supply votes"or central spending agencies and to 20 "Regional supply votes" or Regional governments. In addition,

12 Chapter 3

the Central Goverment gives block grants to Local governments, which consist of 19 urban and 82district (rural) councils. I

Recurrent Versus Development Expenditures

3.3 One reason for the low productivity of Tanzania's investment expenditures is that there arenot enough recurrent funds available to operate and maintain these investments once they arecompleted. Before we examine the relative sizes of the Recurrent and Development budgets, thereader is cautioned that in looking at Development expenditures in Tanzania, it needs to be kept inrnind that until recently the bulk of these expenditures bypassed the budgetary system. Thus, inFY92, only about 20 percent of project-related aid was in the Budget. While the coverage of theDevelopment budget has improved significantly in the last two years, it is estimated (see Chapter 5)that still only about 60 percent of project-related aid has been brought into the FY94 Budget.

3.4 If we look at the breakdown of total expenditures into Recurrent and Developmentexpenditures during FY94, Table 3.1 indicates that Recurrent expenditures account for 68 percentand Development expenditures for the remaining 32 percent. However, the Development budgetsignificantly overestimates the share of capital spending in total spending since the PER estimates thatalmost a quarter of the expenditures on the Development Budget are actually recurrent in nature. Ifwe adjust for this, then the share of capital expenditures in total expenditures drops to 24 percent.However, even the adjusted figure for Tanzania is large compared with the average for Africa (20),Asia (15) or All Developing Countries (14). 9 Given the already severe underfunding of recurrentexpenditures, the implications of these high capital expenditures in Tanzania for future recurrent costsneed to be examined carefully.

3.5 The effect of the Development budget on future recurrent spending depends on both theiagnitude as well as the composition of the Development budget, since some investment expenditures

have a relatively high recurrent impact (mainly in the social sectors), while those in the economicservice areas have a relatively low impact. Little empirical work has been done on the recurrentimplications of investment in Tanzania. However, using the same sectoral "r" coefficients (whichestimnate the annual recurrent implication as a fraction of the investment) as were used in the 1989PER for Tanzania, the average "r" coefficient and the impact on recurrent expenditures arising fromTanzania's Development budget for 1993/94 is shown in Table 3.2 below. '° For purposes ofcomparison, the Table also reports historical data obtained from the 1989 PER, though these may beof questionable value, considering what we now know about the lack of reporting of developmentexpenditures, at least since the mid 1980s.

8 For a detailed description of the structure and functions of local governments, see "Tanzania: Local Government:A System in Distress", World Bank (1992b). Prior to FY92, the grants to local governnents were included under ministerialsupply and channeled through the Office of the Prime Minister (PMO). During FY92, this arrangement changed and thesegrants are now included under regional supply and channeled through the Regional governments. The PMO, however, stillremains responsible for the budgets and accounts for local government expenditures.

9 See Government Finance Statistics, IMF, 1990.

10 Table V.7 in the Statistical Annex shows the sector "r" coefficients used as well as the detailed calculation of theaverage "rr coefficient.

Chapter 3 13

3.6 Table 3.2 shows that the average "r" coefficient of the Development budget in FY94 is highcompared with other years, reflecting the composition of the Development budget. Although thereis a relatively large component of economic services which have a low "r" coefficient, the averageis raised reflecting the large recurrent requirements of the social sectors, and the increasing weightsof these sectors in development expenditures. This is particularly true for health, which has thehighest "r" coefficient of all sectors (0.34) and whose siare of total development expenditures wasonly 1.5-1.6 percent in the three earlier years reported in Table 3.2, but rose to 9.6 percent of theDevelopment budget in FY94.

Table 3.2: Recurrent Cost Implications of Development Expenditures'

I } FY81 F FY84 F FY86 I FY94

Average 'r' Coefficient 0.07 0.07 0.09 0.11

Development Exp. as a % ofTotal Supply 2 58.0 45.6 28.8 64.9

Required Total SupplyGrowth Rate (per annum) 4.1 3.1 2.5 6.9

I Data for FY81-FY86 are from the 1989 PER; for FY94, they are missionestimates.

2 Total supply in the Tanzanian context is the term for recurrent expenditureexcluding debt servicing payments.

3.7 The size of the Development budget for FY94 relative to total supply (at two-thirds of totaldiscretionary recurrent spending) is also at a high, adding to the future impact of developmentexpenditures on recurrent expenditure. Table 3.2 shows that net recurrent expenditure (excluding debtservice) would need to increase at an annual rate of 6.9 percent solely to take account of the recurrentimplications of the Development budget, assuming that this type and size of development programwas sustained, and that all the expenditures in the development program are investment. 11

3.8 It should be kept in mind that the 6.9 percent growth in recurrent expenditures is only theincrease needed to finance addiional O&M costs arising from the present investment budget, and itassumes that we are starting off from a satisfactory Recurrent budget, which at present we are not.In fact, it is widely recognized that the Recurrent budget is seriously underfunded, and that thisunderfunding is particularly concentrated in maintenance expenditure, given its residual nature in thebudget process. There is ample evidence of this underfunding in the budget for 1993/94, as asignificant part of the Development budget consists of rehabilitation necessitated by lack of routinemaintenance.

11 Adjustment to exclude the high recurrent components from the Development budget would yield an average 'r'coefficient of about 0.9 and a DE/TS ratio of less than 50 percent. Thus the required growth rate of Total Supply would be'only' about 4 percent. However, this would include all the reclassified recurrent expenditure in the base of the total supply.Effectively this would mean that in addition to the 4 percent required increase in supply, there would also be a once and forall increase in recurrent expenditure corresponding to the reclassified expenditure, and this expenditure would need to befunded every year as part of total supply.

14 Chapter 3

3.9 There are no firm estimates of the extent of the underfunding of O&M expenditures in theRecurrent budget, and the consequent increase in recurrent expenditure which will be needed toensure that past investments will be adequately maintained and operated. Nevertheless, the large scalerebabilitation of most assets which is now needed, and which is being mainly financed by donors,should send a signal to both the Tanzanian Govermnent and to the foreign donors against continuedoverextension of the Development budget, in the sense that Tanzania cannot afford the currentexpenditure needed to realize the intended return on the investments. These considerations argue fora severe downscaling of the Development budget to ensure improved efficiency of investmentexpenditures and imply that both Govermnent and donors should channel an increasing proportionof their resources to recurrent expenditures. While detailed project profiles are not available at thisstage, just by getting a (verbal) summary description of each on-going project from Governmentofficials, the PER team estimated, roughly, that about one-third of the expenditures in theDevelopment Budget are on projects that no longer reflect Government's priorities. As these projectsare phased out, capital expenditures in Tanzania can be brought more in line with the reseurcesavailable to utilize them effectively. A reduction in the size of capital expenditures is also envisagedin the first RPFB, which projects a 26 percent decline (in nominal T Sh terms) in the Developmentbudget between FY94-FY96. How this rationalization of Development expenditures should occur isdiscussed in Chapter 5.

Breakdown of Recurrent Expenditures

3.10 According to the Government's classification, ministerial supply expenditures (i.e., totalrecurrent expenditures less debt servicing less regional supply expenditures) can be decomposed intofour economic categories:

(i) Subvenhons and Grants. These payments are of two kinds: internal and externalgrants. The internal grants consist mostly of transfers to non-commercial parastatals;the external payments consist chiefly of Tanzanian subscriptions to variousinternational organizations.

(ii) Contractual and Contingent LiabilMies. These are claims on the Government arisingfrom loan guarantees, contingencies and other special payments.

(iii) Personal Emoluments. This category consists of the Government's wage bill, andincludes wages and salaries as well as monetary allowances.

(iv) Other Charges. This is the residual left to fund the general operating costs ofdepartments, and includes components such as travelling, office supplies,maintenance and running expenses, and so on.

3.11 Table 3.3 provides data on the breakdown of ministerial supply expenditures into these fourcategories. It shows that in FY94, subventions and grants account for 15 percent; contractual andcontingent liabilities for 26 percent; personal emoluments for 21 percent; and all other charges for39 percent of MS expenditures. Each of these four categories is discussed below in detail.

Chapter 3 15

Table 3.3: Economic Composition of Ministerial Supply Expenditures, 1992-94(percentage shares)

Actual Approved BudgetedExpenditure FY92 Estimates FY93 Estimates FY94

Subventiors and Grants 15.7 16.9 14.5

Contractual and ContingentLiabilities 6.7 16.6 25.5

Net Supply 77.6 66.5 60.0Personal Emoluments 20.6 23.0 21.3Other Charges 57.0 43.5 38.7

Total Ministerial Supply 100.0 100.0 100.0

Source: FY94 Budget Estinates.

Subventions and Grants

3.12 Table 3.3 indicated that subventions and grants (S&G) have accounted for a steady share ofabout 16 percent of ministerial supply expenditures on average during FY92-94. Table 3.4 revealsthe major recipients of these funds.

Table 3.4: Major Subventions and Grants, 1992-94(T Sh billion)

Actual Approved BudgetedExpenditure FY92 Estimates FY93 Estimates FY94

Total Extermal Grants 1.1 1.8 1.4Total Internal Grants 23.0 54.4 59.2

University of Dar 3.3 3.7 3.1University of Agriculture(Sokoine) 1.0 1.2 1.5Muhimbili Medical Center 2.8 3.2 4.0Tanzania Fertilizer Co. 0.0 4.6 3.5Other Domestic 15.9 41.7 47.1

Total Grants 24.1 56.2 60.6

Source: FY94 Budget Estimates.

3.13 During FY94, external grants account for about 10 percent of total grants. These representpayments for the membership of over 100 international organizations. As suggested in the TaxCommission 's Report, these expenditures need to be reviewed and rationalized to the extent possible.Of the internal grants, about 90 percent of the funds are for four institutions: the University of Dar-

16 Chapter 3

es-Salaam, the Sokoine University of Agriculture, the Muhimnbili Hospital, and the Tanzania FertilizerCompany (TFC). The expenditures on the two universities and on the hospital will be discussed inthe next chapter in the context of the discussions of the education and health sectors. The subsidy tothe TFC is discussed next.

3.14 Fertilizer Subsidy. The Government has continued to raise domestic fertilizer prices so thatthe subsidy was reduced from 80 percent of the farmgate cost in FY89 to 40 percent in FY93 andfurther to 20 percent in FY94. Until 1992, the Tanzania Fertilizer Corporation (TFC) was the soleimporter of fertilizer in Tanzania. While legally the market has been open to all importers since 1990,the private sector has had difficulty in securing subsidy funds from Government, as a result of which,in practice the TFC continues to have a monopoly in the import of fertilizer. The recentcomprehensive report on agriculture in Tanzania, the Agriculture Sector Memorandum (World Bank,1993b), argues for the removal of the fertilizer subsidy on the grounds that the move is likely toresult in a net increase in fertilizer use. The Report argues that the elimination of the fertilizersubsidy will remove the major constraint to private sector importation and distribution and hence, islikely to lead to an improvement in the supply of fertilizer that will meet some of the high excessdemand that currently exists. The Government agrees with this position and has decided to eliminatethe fertilizer subsidy entirely from FY95 onwards. 12

3.15 Other Domestc Grants. The remaining 10 percent of domestic grants (excluding those to thetwo universities, the hospital and the TFC) are spread across about 100 non-commercial parastatals,mostly educational and training institutes of various sorts. The share of these institutes has declinedfrom over 50 percent of domestic grants in FY92 to just 10 percent in FY94, exacerbating theirfunding problems. The Government should undertake a review of the list of non-commercialparastatals that receive grants from the budget, with a view to consolidating expenditures and fundingfully those institutions that provide a high return. Several of these recipients, such as institutes ofmanagement and accounting, could, in principle, be self-financing. Others, such as the variousresearch institutes that provide core government services, would continue to need Governmentfunding.

Contractual and Contingent Liabilities

3.16 During the three-year period FY92-FY94, contractual and contingent liabilities (C&CL) havegrown rapidly from 7 percent of ministerial supply expenditures in FY92 to 17 percent in FY93, andfurther to 26 percent in FY94 (see Table 3.3). However, it is misleading to compare actual figures(for FY92 and FY93) with budgeted figures (for FY94) in this category since a fairly large proportionof the budgeted amount consists of an item for salary adjustments that gets distributed amongst thevarious ministries during the course of the fiscal year. It should be noted that almost the entireamount of C&CL expenditures are budgeted under the Ministry of Finance. Table 3.5 provides abreakdown for the major components of this category of expenditures.

3.17 Costs of Parastata Reform. The first three items in Table 3.5 capture part of the fiscal costsof reforms and restructuring in the agricultural sector, in the industrial sector and in the financialsector. Prior to 1986, the Tanzanian economy was dominated by parastatals in almost all aspects ofagricultural marketing, industrial production, as well as banking. The food marketing system ofTanzania was a single channel system, with the National Milling Corporation (NMC) having a legal

12 This was announced in the 1993/94 Budget speech of the Minister of Industries and Trade.

Chapter 3 17

Table 3.5: Major Contractual and Contingent Liabilities, 1992-94(T Sh billion)

Actual Approved BudgetedExpenditure Estimates Estimates

FY92 FY93 _FY94

Crop Authority Overdraft 1.6 2.1 3.6Parastatal Rehabilitation 1.6 0.4 1.0

Financial Assistance toParastatals 0.9 13.1 12.0

Management and Supervisionof Strategic Grain Reserve ' 2.1 3.8 1.3

Contingencies 0.0 0.8 20.3Otier 0.6 2.5 --

Total Contractual &Contingent Liabilities 6.8 22.7 41.6

1 In FY94, the SGR was moved from the Ministry of Finance budget to the regularbudget of the Ministry of Agriculture and Livestock Development (MALD), and is nolonger listed under C&CL in the Budget Estimates.

Source: FY94 Budget Estimates.

monopoly over the requisition, processing, and distribution of the eight major staple foods. Theindustrial manufacturing system consisted of giant public sector monopolies in several sectors. Thebanking system, dominated by the National Bank of Commerce (NBC), a fully Government-ownedmonopolistic institution, was directed to lend to NMC as well as to several other parastatals andcooperatives. This resulted in the build up of huge volumes of bad debts in the banking system, whichthe Government has been trying to reduce over the last few years.

3.18 In Table 3.5, the item "Crop Authority Overdraft" represents the budgetary cost of the NMCdebt that was taken over by the Government from NBC; the item "Parastatal Rehabilitation" refersto the costs of running the Parastatal Sector Reform Commission (PSRC) and the Loans andAdvances Realization Trust (LART), agencies that were set up to oversee the privatization andliquidation of the parastatal sector, respectively; and, the third item "Financial Assistance toParastatals" is largely the cost of servicing the Government bonds that were used to clean up the baddebts of the banking system. During FY93, as part of its financial sector reform program, theGovernment took over the bad debts of the publicly-owned commercial banks (valued at T Sh 24.1billion); provisioned for their doubtful debts (valued at T Sh 57.2 billion); and undertook to partiallyrecapitalize the banks (at the cost of T Sh 8.1 billion). Thus, during FY93, the Government incurreda total cost of T Sh 89.4 billion for financial sector reforms, which it met by the issuance ofGovernment bonds. These bonds have a maturity of 20 years and carry an interest rate of 11 percentfor bad debts (i.e., for non-performing assets that were transferred to LART) and 5 percent fordoubtful debts (i.e., for provisioning of those debts that remained with the NBC). The total annualcost of servicing the bonds issued so far is estimated to be T Sh 6.4 billion. However, the total costof financial sector reforms is likely to rise further in FY94 with the issuance of additional bondsworth T Sh 55.4 billion to complete the recapitalization of the commercial banks. The budgetary cost

18 Chapter 3

of servicing this additional debt is estimated at T Sh 2.8 billion per annum, leading to a total cost ofT Sh 9.2 billion per annum for financial sector reforms.

3.19 These large costs of parastatal reform reduce the availability of already scarce resources forcurrent purposes, and because of their long-term nature, reduce the Government's flexibility inallocating resources in the future. In light of this, any decision to take on additional bad debts fromeither the agricultural cooperatives or the industrial parastatals or the financial sector needs to beevaluated carefully. In addition, to eliminate the possibility of creating the wrong incentives on thepart of the parastatals, the Government should clearly announce that the taking over of their bad debtsfrom the financial system was a once-off exercise that will not be repeated.

3.20 Srategic Grain Reserve (SGR). After five years of experience with the liberalization of grainmarketing, one of the problems that still remains in this sector is the inefficient management of theSGR, which was set up to provide food security. Because of poor management, the SGR continuesto be a significant drain on budgetary resources, costing T Sh 3.8 billion in FY93. The AgriculturalSector Memorandum (World Bank, 1993b) proposes several mechanisms for improving themanagement of the SGR and of reducing the costs of its operations. The SGR is supposed to hold100,000 tons of grain which, at current prices, should cost about T Sh 5 billion. If propermanagement practices are adopted, it should be possible to reduce the operating cost of the SGR to10 percent of the cost of the stock of grain, or about T Sh 500 million. Given the tight budgetarysituation, it is critical that the Government undertake measures to improve the functioning of the SGRso that budgetary transfers to it can be reduced significantly. The objective should be to reduce thecost of maintaining the SGR to T Sh one billion by FY95 and to T Sh 500 million by FY96.

3.21 Contingencies. Under the Ministry of Finance's vote for FY94, this one obscure line itemin the Budget Estimates contains T Sh 20 billion (about 13 percent of ministerial supply or over 2percent of GDP). There are two components to this expenditure: about half of it is for salaryadjustments to be made during the fiscal year, and the other half is for genuine contingencies suchas famines, epidemics, etc. For example, during FY93, T Sh 22 billion were budgeted for thiscategory, of which T Sh 12 billion were later distributed for salary increases and T Sh 10 billionprovided for emergencies. Of the amount set aside for emergencies, only T Sh 1.6 billion wereactually spent for that purpose; the remainder was spent on other items.

3.22 This practice of budgeting for large sums of expenditures for contingencies under the Ministryof Finance's vote creates problems of lack of transparency. An additional problem with this budgetingpractice is that it gives the other ministries an impression that there is a large pot of unallocatedexpenditures that they can draw upon during the course of the year, and reduces their incentive tomaintain fiscal discipline. If it is known in advance that a salaries award will be granted in the courseof the year and if there is a fixed aggregate amount available for this purpose, then it seems legitimateto budget for this, and subsequently adjust ministerial allocations. However, transparency requiresthat Parliament should be informed what the provision is for, which is not the case currently. Itwould seem more appropriate to distinguish in the Budget Estimates the amount that is for salaryadjustments from that which is for general contingencies, and to label it as such.

3.23 There is also a wider issue of the soundness of holding back large sums for generalcontingency purposes. While there is a legitimate need for having contingency funds since certainexpenses cannot be predicted and have to be met immediately, there is also a need to limit thediscretionary spending by the Executive branch of the Government. The practice of budgeting largesums for contingency detracts from transparency and from the role of the legislature. If the

Chapter 3 19

emergency requires expenditures greatly in excess of the contingency amount in the Budget,presumably the Parliament could be summoned to grant additional revenue and spending authority.Currently there is no framework within which contingency provisions are set. What is required is theadoption of some framework that clearly sets out the rules for how the contingency money shouldbe allocated and which sets a ceiling on the proportion of the total budget that can be allocated tocontingencies. The framework should also be clear to the legislature and accepted by it.

Personal Emoluments and Other Charges

3.24 An important reason for the low effectiveness of Government expenditures in Tanzania is theinadequate funding of critical expenditures on Other Charges (OC), in particular those required foroperations and maintenance (O&M). There are three main reasons for the inadequate funding ofcritical expenditures on OC: the predominant one is the general underfunding of all activities by anover-extended Government; the second one is the squeezing out of non-personnel expenditures bypersonnel-related expenditures due to an ever-growing civil service; and the final one is the squeezingout of critical expenditures in the Other Charges category (such as on textbooks and drugs) by non-critical expenditures (such as on student welfare and Government vehicles). The first reason has beendiscussed thoroughly in the 1989 PER and elsewhere and is well understood by policymakers inTanzania. Below, we discuss the second and third reasons.

3.25 Table 3.6 compares the trends in Personal Emoluments (PE) and OC over the period FY92-FY94. It reveals that PE grew by 50 percent in nominal terms between FY92 and FY93, and if theT Sh 10 billion that are budgeted for salary adjustments in FY94 are taken into account, then therewill be a further increase by 40 percent in nominal termns between FY93 and FY94. With an inflationrate of about 23 percent per annum in FY93 and with a similar outcome likely for FY94, this wouldlead to a real increase in wages and salaries of about 27 percent in FY93 and 17 percent in FY94.In contrast, the nominal amount budgeted for Other Charges has stagnated over the two year period,which implies a real reduction of about 23 percent per annum in both FY93 and FY94. Given howacute the degree of underfunding already is for critical inputs such as textbooks and medicines, thisis likely to lead to a further sharp deterioration in the quality of services provided by theGovernment. There is, therefore, a strong need to control future increases in the wage bill so thatOther Charges can be increased in real terms over the next few years. The implications of controllingthe wage bill for civil service reform, both for the reduction in total employment and for pay reform,are discussed below in the next section.

20 Chapter 3

Table 3.6: Personal Emoluments and Other Charges, 1992-94(T Sh billion)

I -| Actual | Approved | BudgetedExpenditure FY92 Estimates FY93 Estimates FY94

Personal Emoluments 20.9 31.4 33.6

Other Charges 57.9 59.4 61.1

Total Net Supply 78.8 90.8 94.7

I An additional T Sh 10 billion has been budgeted under contingencies for salary increases inFY94.

Source: FY94 Budget Estimates.

3.26 In addition to controlling the growvth in the wage bill to free up resources for essentialcomponents of Other Charges, there also appears to be ample scope for improving the allocation ofexpenditures within the Other Charges category by reallocating from non-essential to essential inputs.In the education sector for example, as Chapter 4 indicates, a lare., proportion of the sector's budgetis spent on food and housing for the students rather than on textbooks and school maintenance. Asimilar misallocation is evident in the health sector. More broadly, across the entire civil service,there appear to be too many vehicles and not enough funds to maintain and operate them. TheGovernment is aware of this problem and in the past has attempted to address it in various ad hocways, including Presidential Circulars limiting the use of Government vehicles, and so on. Morerecently, it has attempted to address this problem more systemnically when it set up the Presidential"Cost-Cutting Commission" in mid-1993 and charged it with the responsibility of identifying areasfor savings across a wide range of Government activities. The Report of the Commission is dueshortly and should provide a useful input into the 199,t/95 Budget formulation exercise.

Civil Service Reform

Civil Service Employment

3.27 Table 3.7 indicates that the civil service grew from about 90,000 civil servants in 1960/61,at the time of Independence, to about 300,000 in 1987/88, when the Civil Service Census was carriedout. Since then, it has grown further to about 355,000 employees. 13 Thus, while the populationgrew at an average growth rate of 3 percent per annum over the three decades, the civil service hasexpanded at a growth rate of about 4.5 percent per annum. If the civil service had expanded at thesame rate as the population, then its size today would have been about 225,000.

3.28 The Government has realized that the rapid growth in civil service employment, combinedwith a tight budgetary constraint, has led to an erosion of pay and a shortage of other essential inputs.The 1989 PER found that there was an urgent need for pay reform since the average purchasing

13 For details of the size and composition of the civil service in Tanzania, see 'Personnel Control and InformationSystemns', a report prepared by Coopers and Lybrand (1992) for the Government of Tanzania and UK-ODA.

Chapter 3 21

power of civil service salaries had fallen to one-fifth their 1970 levels. As a result, the Reportconcluded that ther- had been " serious decline in public service morale, motivation and discipline.Absenteeism is common, frustration levels are high, and there has been an increase iii corruption thatis of deep concern to authorities." (1989 PER, Vol. II, p. 3).

Table 3.7: Civil Service Employment, 1961-88

Sector FY61 FY71 FY81 FY88 % GrowthFY61-FY88

Education 11,145 23,131 93,318 101,042 806.6Health 6,300 12,400 17,036 32,650 418.3Agriculture 10,258 18,697 26,029 28,834 181.1Other 62,042 84,446 78,797 136,612 120.2

Total 89,745 138,674 215,180 299,138 233.3

Sources: Tanzanian Authorities and Report of the 1988 Civil Service Census (United Republicof Tanzania, 1991b).

3.29 To improve the efficiency of the civil service, in FY92 the Government initiated acomprehensive program of civil service reform (CSR), which has three essential elements:establishing personnel control and management; reducing the size of the civil service; and introducingpay reform. While it is understood that retrenchment is not the objective of the civil service reformprogram, and nor will it alone lead to an improvement in the efficiency of the civil service, theGovernment recognizes that without substantial retrenchment, it will be impossible to improve eitherthe remuneration or the management of the civil service. Therefore, the initial phase of the CSRprogram has deliberately emphasized up-front retrenchment. As part of this program, the Governmenthas provided for a compensation package to the retrenchees that averages about three years of annualsalary, and is also preparing a redeployment and training program for them. The CSR program issupported by a number of bilateral donors. In addition, the World Bank is providing technicalassistance for the program through the Parastal and Public Sector Reform (PPRP) Credit (1993)and it is also currently preparing a project to assist with the training of the retrenchees.

3.30 To reduce civil service numbers, the CSR program aimed to retrench 50,000 civil servantsover three years: 10,000 in FY92 (which was accomplished) and another 20,000 each in FY93 andFY94. In order to limit new hiring, the ret, -nchment exercise was combined with a temporary hiringfreeze, while more medium-term measui were being designed to improve personnel controlsystems. However, the freeze exempts internal security workers (prison and police) and health andeducation personnel, which together account for over 50 percent of the civil service. These groupshave also been exempted from the retrenchment exercise itself. The problem is that not only are thesegroups large, but as Table 3.7 indicates, they are also amongst the fastest growing. If, as is expected,there is an annual increase in employment of 10,000 civil servants in these exempt categories (as theGovernment automatically hires all graduates of these training colleges), then at the end of a costlyand administratively difficult retrenchment exercise, the civil service would have been reduced byonly 20,000 instead of the planned 50,000. This will result in a civil service in 1996 that will stillbe too large (with 330,000 employees) to be paid and managed adequately.

22 Chapter 3

3.31 If the Govenrnent really wants to fulfill its objective of having a more efficient civil serviceby improving its pay and working conditions, it will have to adopt a more aggressive policy ofcontaining and further reducing the size of the civil service. The first round of 50,000 retrencheeswere identified on the basis of "manning level" studies. These studies took the existing role andfunctions of Government as given and tried to estimate the appropriate number of people requiredto perform a given task, based on some norms. What is required, however, is something morefundamental. The Government iiow needs to redefine its role and functions and to pull back from anumber of areas in which it was previously involved, but which it will now leave to the privatesector. This process has already started in the Ministry of Agriculture (see Chapter 4) and needs tobe replicated in each of the other mninistries. As part of the future program for planning and budgetingreforms and civil service reform, the Govermnent is committed to completing thorough functionaland organizational reviews of all ministries during the next three years. To achieve this target,reviews of the first six ministries (including the Ministry of Finance and the Planning Commission)will need to be completed by end 1994; of the next six by end 1995; and of the remaining by end1996. Given the tight timetable, it is critical that these reviews be initiated urgently.

3.32 Given the requirements for pay reform and for increasing other expenditures, one objectiveof the exercise could be to try and reduce the civil service to 225,000 employees, the number thatwould be warranted by the growth of the population since Independence in 1961. As the discussionin the next chapter reveals, there is ample scope for reducing numbers even in the professions thathave so far been exempted, such as primary school teachers. In addition, the Government needs toreplace the current hiring freeze, which is not sustainable in the long term, by more permanentmeasures of personnel control. It also needs to review its policies on training and recruitment.Currently, all graduates from training institutions in health, education and internal security areautomatically hired into the civil service. The Government needs to reexamine this policy and toensure that for occupations where it will remain the sole employer (such as police and prisons), thenmbers graduating from the training institutions are reduced to the numbers that are actuallyrequired.

Civil Service Pay Reform

3.33 The 1989 PER found that during the 1970s and 1980s, there had been a severe erosion in thereal wages and salaries of civil servants, as a result of which average salaries in the late 198&provided only one-fifth the purchasing power of the 1970s. The Government has tried to arrestfurther declines in civil service ?ay by the recent increases in personal emoluments (PE) that itgranted in FY93 and FY94. In addition, it has increasingly resorted to the use of non-salary monetaryand in-kind allowances to supplement the basic salaries of civil servants. Furthermore, civil servantshave also attempted to supplement their incomes by using expenditures budgeted under Other Chargesfor PE-related expenditures, such as for Travelling, Visits, Conferences and Missions, and Training.These practices tend to further erode civil service effectiveness by taking civil servants away fromtheir regular duties.

3.34 Table 3.8 indicates the share of two major allowances in PE: the housing allowance (4percent in FY94) and the transport allowance (9 percent in FY94), which are shown separately in theBudget Estimates. There are various other monetary allowances, such as "professional allowances"for health, education and police and prison workers, which are essentially salary top ups and areincluded in the PE line and not shown separately. Wages and salaries are not identified separately inthe Budget Estimnates. Table 3.8 also identifies certain PE-related expenses that are included in the

Chapter 3 23

Other Charges category. Based on the assumption that half of all travel expemses are PE-related, weestimate that PE-related expenses amount to about 15 percent of Other Charges.

Table 3.8: Personnel-Related Expenditures, 1992-94(percentage shares)

Actual Expenditure Approved BudgetedFY92 Estimates FY93 Estimates FY94

Personal Emoluments 100.0 100.0 100.0Personal Emoluments 95.t 89.2 86.5Housing Allowance 2.5 4.1 4.1Transport Allowance 2.4 6.7 9.4

Other Charges 100.0 100.0 100.0- of whichTravelling 11.1 9.6 9.8Visits, Conferences, and

Missions 3.8 2.9 2.5Training 5.2 6.7 7.5

I This does not include an additional T Sh 10 billion that has been budgeted under contingencies fordistribution as allowances during FY94.

Source: FY94 Budget Estimates.

3.35 A study undertaken in 1992 by the Government, jointly with the Bank, reveals that a majorityof Govermnent employees in Tanzania receive, in addition to their basic salaries, a large number ofmonetary allowances that are very diverse in terms of nature, value, and distribution. '4 A selectfew employees also receive in-kind benefits such as free housing, transportation and utilities. Formany Government employees, monetary allowances now constitute a significantly large proportionof remuneration. In the majority of salary grades, direct (payroll-based) allowances are more than50 percent of basic salary. In a few grades, these allowances are on average about four times thebasic pay. At the lower end of the grades, there are fewer allowances, ranging from about 2040percent of basic pay. The proliferation of these diverse allowances has led to a number of problems:

3.36 (i) Lack of Transparency in Remuneration Strcture. On the basis of comparing basic salarylevels, the compression ratio of the pay structure (i.e., the ratio of maximum to minimum salary) isconsidered to be low (under 10) and inconsistent with an appropriate (incentive-oriented)remuneration structure. However, when monetary allowances are incorporated into the remunerationpackage, the effective compression factors improve considerably. For example, for those salarygrades with a disproportionate share of allowances, the effective compression factors are as high as25. Moreover, if the value of in-kind benefits such as free housing, utilities and transportation areincluded for the senior Government employees who are entitled to them, then the compression factorscould range as high as 50 or more. Therefore, contrary to general impressions, the need todecompress the overall salary structure may not be a priority goal and what might be required instead

14 For details, see 'Tarzania Civil Service Reform Program: Monetization of Benefits and Pay Reform Proposals",by K. Kiragu and R. Mushi (1992), a joint Governmnnt of Tanzania-World Bank study.

24 Chapter 3

is selective decompression for certain grades. However, the first thing that is required before anappropriate salary structure can be designed is the adoption of a more transparent remunerationsystem.

3.37 (u) Lack of Horizontal Equi. While personnel in the same salary grade receive about equalbasic salaries, the uneven distribution of allowances has resulted in gaping differences in the amountsof effeetive remuneration accorded to personnel within the same grades. Within the same salarygrade, it is possible for some civil servants to receive allowances that amount to as much as twentytimes what others receive. Consequently, the take-home pay for personnel in the same grade mayvary by several multiples. This is exacerbated by the practice of using donor funds to top up thesalaries of civil servants working on donor-funded projects. Hence, one of the key aims of pay reformought to be .o develop a remuneration structure that is equitable in terms of providing equal rewardfor equal skills, work and responsibility.

3.38 (iu) Erosion of Tax Base. All monetary and non-monetary allowances are exempt fromtaxation. The effect of this policy is to considerably lower the effective rate of taxation on wageincome. This is true not just for public employees but also for private ones, since the Governmentpractice of paying a large proportion of its employees non-taxable allowances has also been adoptedby the private sector. The Tax Commission strongly recommended the taxation of all monetaryallowances and fringe benefits. Given the tight fiscal situation, there is an urgent need to adopt suchbase-broadening measures as quickly as feasible. If all allowances are brought into the tax base, amajor reason for separating allowances from basic salaries will in fact no longer exist.

3.39 (iv) Erosion of Pension Base. Pensions for civil servants are calculated on the basis of basicsalaries. While the existence of various allowances might enable a civil servant to afford a betterstandard of living while in the civil service, low basic salaries imply a totally inadequate pensionstructure. This has led to the problem of a lack of willingness on the part of civil servants to retirefrom the civil service upon reaching the mandatory retirement age, and a lack of will on the part ofthe Government to enforce the existing legislation on mandatory retirement. The decision in June1993 to award civil servants with increases in allowances in-lieu of salary adjustments during FY94has led to loud protests by civil servants, through the Organization of Tanzanian Trade Unions(OTTU), due to the implications of this action on their future pension benefits. The problem ofproviding adequate retirement incomes would be tackled by consolidating allowances into a basic andupgraded salary structure that would then provide an adequate pension base.

3.40 (v) Lack of Adequate Provision for Other Charges. Efficiency in the public service requiresa proper balance between expenditures on personal emoluments and those on Other Charges, whichincludes expenditures on goods and services and on operations and maintenance. Since a number ofthe income-supplementing allowances are currently hidden in the Other Charges category, it isdifficult to estimate how the Budget is being allocated between PE and non-PE expenditures. Asindicated in Table 3.8, about 15 percent of Other Charges could be for salary-supplementingexpenditures.

3.41 (V) Weakening of Budgetary Control on the Wage Bill. The granting of some open-endedallowances has weakened the Government's ability to control the size of its wage bill. A goodexample is the petrol allowance. This allowance is paid to all staff with cars and motorcycles in

Chapter 3 25

certain salary grades. '5 Depending on the grade, the per day entitlement ranges from 2.8 liters ofpetrol for motorcycles up to 10 liters for cars. The value of this allowance thus varies from T Sh146,832-T Sh 734,160 per annum, per recipient, and for certain grades, is up to five times the valueof their basic salary. Currently, not many persons who are entitled to this allowance own cars andhence the utilization rate is low. However, given that the Government has also set up a loan facilityto acquire cars and motorcycles, the size of this allowance could grow considerably. This trend isalready evident in Table 3.8, which shows that the share of the transport allowance in PE hasincreased from just 2 percent in FY92 to 9 percent in FY94.

3.42 (vui) Loss of Ability to Effectively Manage the Civil Service. The proliferation in the numberof allowances is generating a crisis for those responsible for salary administration. This isdemonstrated by the on-going saga of the doctors and nurses in Tanzania, who are either repeatedlygoing on strike or threatening to go on strike, both on the mainland and in Zanzibar, and of thegrowing tensions between the Government and the OTTU. There is a need for Government to moverapidly in the area of pay reform to bring this crisis under control. The rationalization of the paystructure by eliminating the large number of allowances and replacing them with a consolidated salarystructure will empower the Government to better manage the civil service. It will limit the ability ofvarious employee groups to hold the Government hostage to their demands for increases in variousallowances that are special to those particular groups.

3.43 The immediate objective of pay reform is to address these problems. This objective wouldbe best achieved by consolidating the value of the plethora of monetary and non-monetary allowancesinto a transparent, equitable, and taxable salary structure. The medium- to longer-term objective ofpay reform is to remunerate all civil servants sufficiently and competitively. However, achieviLagtransparency is a necessary first step towards achieving the more longer term goal of adequacy of paystructures.

Summary of Recommendations

3.44 To sum up, the PER recommends the following measures to improve the economiccomposition of public expenditures:

(i) To ensure improved efficiency of investment expenditures, scale down the size of theDevelopment Budget by closing down non-priority, non-performing projects;

(ii) Reduce expenditures on external grants by rationalizing expenditures on about 100international organizations;

(iii) Rationalize and consolidate domestic grants to about 100 non-commercial parastatals;

(iv) Eliminate the fertilizer subsidy in the FY95 Budget, as announced;

(v) To contain the fiscal costs and to prevent the future build up of bad debts in thesystem, exercise extreme caution in taking over any more debts of the financial andcooperative sectors;

15 For details on allowances for civil servants, see Kiragu and Mushi (1992).

26 Chapter 3

(vi) Reduce costs of operating the SGR by improving its management. Limit these coststo T Sh I billion by FY95 and further to T Sh 500 million in the future;

(vii) To improve transparency of the Budget and accountability to Parliament, abandon thepractice of budgeting large sums of expenditures under contingencies;

(viii) To improve the funding of critical materials and O&M expenditures, control thegrowth of the wage bill and reduce expenditures on non-critical items in the OtherCharges category;

(ix) To improve the effectiveness of the civil service and to make salary enhancement apossibility, redu^e the size of the civil service by one-third (to 225,000) byretrenching 40,010 civil servants per annum (on a net basis) for the next three yearsstarting in FY95;

(x) To improve the remuneration structure for civil servants, start preparations forintroducing a transparent salary structure that incorporates all monetary and non-monetary allowances in the FY96 Budget;

(xi) To reorganize the Government in line with its more limited role, undertake functionaland organizational reviews of the first six ministries by end 1994, another six by end1995, and the remaining by end 1996.

4

Spending Priorities in Selected Sectors

'The revenue from internal sources, which in essence reflects theGovernment s ability to finance its commitments, can only financejust about one third of Government's actual operationalrequirements. External loans and grants have continued to financea larger portion of Government operations. Inspite of this donorsupport, the Government can only meet 50 percent of itsrequirements. "

Minister of FinanceBudget Speech, June 1992

4.1 This chapter examines key expenditure issues within each of the major sectors and highlightsthe degree of underfunding of core Government services. For ease of discussion, all sectors aregrouped into three broad categories: the social sectors consisting of education, health, and other socialsectors; the economic sectors consisting of agriculture, industry, and infrastructure; and publicadministration consisting of general administration, defence, and law and order. While the PERexamined issues in all the sectors, the focus of discussion is on the social sectors, which are shownto be suffering from a severe underfunding in Tanzania despite the Government's historicalcommitment to these sectors.

4.2 In the discussion below, a distinction is made between Recurrent and Development Budgetexpenditures. Over 80 percent of the Development Budget is funded by donors. Given the largenumber of donors in Tanzania and the large aid prcgram funded by them, and given theGovernment's limited capacity to coordinate aid, it would be fair to say that the aid program inTanzania is donor-driven and that to a certain extent, it is the Recurrent Budget that better reflectsthe Government's own priorities than the Development Budget.

A. Social Sector Spending

4.3 Table 4.1 summarizes trends in Recurrent, Development and total spending in the socialsectors (SS) during the three year period FY90-FY93, and compares them with trends in therespective aggregates for total Government spending. It takes into account expenditures for all levelsof governments: central, regional, and local. The Table indicates that, on average, expenditures inthe social sectors grew by about 11 per cent per annum in real terms during this three year period.During the same period, however, net public expenditures grew by an average of over 17 percent perannum. As a result, expenditures on the social sectors declined relative to other expenditures duringthe period. Furthermore, most of the growth in the expenditures on the social sectors came from anexpansion in the coverage of the Development Budget during FY92 and FY93. Real Recurrentexpenditures in the social sectors grew by an average of only 6 percent per annum, as compared withan average growth rate of 10 percent per annum for all Recurrent expenditures. In contrast, realDevelopment expenditures in the social sectors grew by an average of 74 percent per annum ascompared with an average growth rate of 55 percent per annum for all Development expenditures.This is because the inproved coverage of the Development Budget has tended to bring on-budget alot of social sector projects that had previously been off-budget.

28 Chapter 4

Table 4.1: Trends in Social Sector Spending, 1990-93

Average Share Average RealFY90-FY93 Growth per Annum

FY90-FY93

Net Public Expenditures 100.0 17.5Total Exp. in SE 30.2 11.3

Net Recurrent Exp. 100.0 10.3Recurrent Exp. in SS 36.3 6.1

Total Development Exp. 100.0 54.6Development Exp. in SS 14.0 74.4

Source: Central and Local Budget Estimates.

Education

4.4 Tanzania's education system is in a state of crisis. While rapid gains had been made in theeducation system after Independence, since the late 1970s the system has deteriorated drastically.Gross primary school enrollment rates have fallen from 93 in 1980 to 63 in 1990, and secondaryschool education is provided to only a tiny proportion (4 percent) of the relevant age group.Furthermore, because of the deterioration in coverage and quality of education, illiteracy rates areon the upswing and according to official estimates, have risen from 10 percent in 1986 to 16 percentin 1992. The recent Poverty Profile for Tanzania (World Bank, 1993c), based on a survey of 1,046households in 1991, indicates that the self-reported illiteracy rate is actually twice as high. Thus, boththe quality and coverage of education in Tanzania is grossly inadequate.

4.5 The Poverty Profile also highlighted the importance of education for raising the livingstandards of the people. It found that one feature that distinguishes the poor from the non-poor inTanzania is the amnount of education they have received. The Profile found that the poor have lesseducation than other groups, and that 35 percent of those living below the absolute poverty line, theso-called "hard-core' poor, have received no education whatsoever as compared to 19 percent ofbetter-off people. One of the key distinguishing features of the poor is a much lower likelihood ofreaching and completing secondary education. Over 11 percent of the better-off are in, or havecompleted, secondary qducation as compared with just one percent of the hard-core poor. Thelimiting of secondary education has been a long-standing Government policy and has contributed toincreasing inequity in income distribution as well as disastrously low levels of educational attainmentby international standards.

Role of Government in Education

4.6 While the household is the primary decision-making unit regarding the education of itsmembers, the Government nevertheless plays a strong role in influencing the choices made by thehouseholds through its education policy. The role of government in the education sector shouldtherefore be to provide the right policy environment as well as to assist households to finance basiceducation, both primary and secondary. A recent study that compares international experience in theeducational sector indicates that the difference between social and private returns from education is

Chapter 4 29

higher at the primary and secondary levels than at the university level (Psacharopoulos, 1993). Manypositive spillovers come from literacy acquired at the lower levels of schooling, while the returnsfrom training at the university level are almost fully captured by the higher income of individualswith university education. Furthermore, as far as vocational training is concerned, evidence suggeststhat it is most cost-effective if provided on the job and if the trainees have a solid base of primaryand secondary education. All of this argues for broad based priiuiary and secondary education as ameans of improving economic efficiency and income distribution. This has been confirtned by theperformance of the rapidly growing East Asian economies where the Governments have adopted sucheducational policies (see "The East Asian Miracle, World Bank, 1993a). Thus, efficient Governmentexpenditures in education would be aimed at the schooling levels where the social returns are thehighest (primary first, then general secondary). This orientation to efficiency would benefit the poordisproportionately and thus is also equitable. However, equity can be improved through the carefultargeting of public subsidies, especially at the secondary and tertiary levels.

Trends in Education Sector Spending

4.7 Table 4.2 provides a summary of trends in education sector spending during FY90-FY93. Ittakes into account expenditures on education by all levels of governments. The Table indicates that,on average, expenditures on education grew by about 8 percent per annum in real terms during thisperiod. However, during this period, net public expenditures grew at over twice this rate (17.5percent) on average, and expenditures on the social sectors grew at an average rate of over 11 percentpe, annum. As a result, expenditures on education fell as a share of net public expenditures and ofsocial sector expenditures over this period. Furthermore, most of the increase in educationexpenditures is accounted for by the improved coverage of the Development Budget. As Table 4.2indicates, during FY90-FY93, Development expenditures on education grew by an average of 66percent in real terms whereas Recurrent expenditures on education grew by an average of only 5percent per annum in real terms.

Table 4.2: Trends in Education Sector Spending, 1990-93

Average Share Average RealFY90-FY93 Growth per Annum

FY9O-FY93

Net Public Expenditures 100.0 17.5Total Exp. in Education 17.5 8.0

Net Recurrent Exp. 100.0 10.3Recurrent Exp. in

Education 21.8 4.8

Total Development Exp. 100.0 54.6Development Exp. inEducation 6.0 65.9

Source: Central and Local Budget Estimates.

4.8 Table 4.3 provides a summary of total education sector spending for 1993/94. Totalexpenditures on education are budgeted at T Sh 52 billion, which account for 15 percent of net public

30 Chapter 4

expenditures and 4.5 percent of GDP. Donors play an important role in the education sector. Of theT Sh 8.5 billion budgeted for education in the Development Budget, T Sh 7.3 billion (US$ 16.3million) comes from donors. This amounts to about 84 percent of the Development expenditures oneducation and 14 percent of all Government expenditures on education.

Table 4.3: Summary of Total Education Sector Spending, 1993/94

Recumat Development TotalBudget Budget

Education Expenditures(T Sh billion) 43.5 8.5 52.0

Education as a % of NetPublic Expenditures 20.8 6.3 15.1

Education as a % ofGDP 3.8 0.7 4.5

Source: Central and Local Budget Estimates.

Intersectoral Issues in Education

4.9 Expenditure Allocation Across Programs. In addition to the decline in the education sector'sshare of resources vis-a-vis other sectors, a major factor contributing to the recent decline in thequality of, and access to, education in Tanzania is the inefficient and inequitable allocation ofresources within the educational sector. Figure 4.1 provides a breakdown of Government expenditureson education by different levels of education. It indicates that in FY94 only 52 percent of totaleducation experditures are budgeted for primary education. The remaining 48 percent is distributedamong secondary education (13 percent'; higher and technical education (19 percent); teachers'education (4 percent); and ministerial administration and other education-related programs (12percent). As discussed below, these other educational programs have high unit costs compared toprimary education. They are also available only to the relatively well-off, as indicated in the recentPoverty Profile (World Bank, 1993c).

Chapter4 31

Prlmary52%

Secondary 12%13%

Tachers'

Higher19%

Figure 4.1: Shares of Different Levels of Education, 1993/94

4.10 Expenditures Per Student. Figure 4.2 is based on the 1993/94 Budget and shows publicexpenditures per pupil for different levels of education. It shows that per annum, the Governmentspends T Sh 6,600 (US$ 15) on each student in primary schools; T Sh 75,000 (US$ 167) on eachstudent in secondary schools; T Sh 110,000 (US$ 244) on each student in teacher training colleges;T Sh 666,000 (US$ 1,480) on each student in technical colleges; and an astounding T Sh 1,575,000(US$ 3,500) on each student at the two Universities (including study abroad).

4.11 While higher level education is expected to cost more than primary education, secondaryschool expenditures that are 11 times that per primary school pupil appear high. Also, per unitexpenditures on teacher training students at 50 percent higher than secondary school expendituresappear high, given that the teacher training schools essentially provide secondary school education.In addition, the efficiency and equity of expenditures amounting to US$ 1,480 per pupil in technicalcolleges, which amounts to the cost of nine secondary school pupils or of 100 primary school pupils,is certainly questionable. And finally, the expenditure per university student is astronomically high,when one takes into account the fact that instead of sending one student to university, the Governmentcould send 238 students to primary school or, even at the current high cost structure of secondaryeducation as described below, 21 students to secondary school. T nese patterns of expenditures needto be carefully investigated in future work.

32 Chapter 4

U8$ Per Annum4000

3500

3000

2500

2000

1600

1000

500

Primary Secondary Thaahor Training T.ohnboai Univereity

Figure 4.2: Public Expenditure per Pupil, 1993/94

4.12 Expenditure Allocation Across inputs. Critical underfunding of primary school education hascreated a situation in which personal emoluments (PE) have basically squeezed out all otherexpenditures, contributing as a major factor to the poor quality of education being provided. As Table4.4 indicates, in 1991/92, in primary schools, PE accounted for 81 percent of expenditures; schoolmaterials for only 5 percent; and spending on O&M was completely eliminated. Penrose (1992)estimated that the 1992/93 education budget in Tanzania would be sufficient to cover only one-thirdof the norm for school materials.

4.13 The mix of inputs is no more efficient, and is considerably more inequitable, in secondaryschools where boarding costs and other student welfare expenditures dominated costs and accountedfor 49 percent of total expenditures in 1991/92. The share of PE fell to 23 percent, though this wasbeing supplemented by the 8 percent budgeted for travel, visits, and training under Other Charges.While tie share being spent on O&M was much larger (14 percent) in secondary schools than inprimary schools, school materials still accounted for only a meager 5 percent. Thus, about half theaverage secondary school budget is spent on student boarding and welfare. Given that in Tanzaniaone of the distinguishing features of the poor and the non-poor is the amount of secondary educationthey have received, it seems inequitable to use Government expenditures to subsidize not just theeducation costs, but also other living expenses for food, housing and transportation for secondaryschool students.

4.14 Despite limited efforts to promote cost-sharing, the situation is even more inequitable at thetertiary education level. In 1992/93 at the University of Dar-es-Salaam, 35 percent of expenditureswere spent on PE; another 44 percent on student and staff allowances, travel and fringe benefits(including 15 percent for overseas travel for students); and of the remaining 21 percent, only 10percent for O&M. Furthermore, the trend of expenditures is in the wrong direction, with non-essential inputs increasing further (the 1993/94 budget for students' overseas allowances wasincreased by almost two-thirds of its 1992/93 level) at the expense of critically underfunded inputssuch as O&M

Chapter 4 33

Table 4.4: Expenditure Allocation Across Inputs in Education, 1991/92(percentage shars)

I Primary Secondary UniversitvEducation Education Education

Personal Emoluments 81 23 35Staff Training, travel, visits 3 8 10Stuident Boarding/welfare 4 49 34Materials 5 5 9O&M 0 14 10Other 7 1 2

Total Inputs 100 100 100

I Includes fringe benefits for staff and students.

4.15 A quick comparison of the cost structure of one private secondary day school with that ofpublic secondary schools indicates that public schools were about four times as costly as this privateschool. While half of these additional costs can be attributed to the costs of boarding students inpublic schools, the costs of salaries and other non-boarding items was also found to be twice as muchin public secondary schools, partly due to the specialized training programs that are provided bythem. 16 Another factor responsible for the higher costs in public secondary schools, and is alsoprobably true for public primary schools, is the relatively high cost of wages and salaries due to thelow student teacher ratios in public schools. Public secondary schools have a student teacher ratio of15:1, as compared with a ratio of 50:1 in the private school visited. A recent World Bank report thatexamined the issue of teachers' salaries and workloads in Tanzania found that low student teacherratios in Tanzania were not due to smaller class sizes but due to the light teaching loads of teachers. 17

The Report found that primary school teachers spend less than 20 hours a week actually teaching,averaging only 15 hours in urban areas and 19 hours in rural areas. Secondary school teachersaverage only 16 hours per week. These figures are very low as compared to other countries andcompared to the official 35 hours per week for civil servants in Tanzania.

4.16 The Report argued that increases in teachers' workloads could have important benefits forthe educational system in Tanzania. If teachers taught more hours, fewer of them would be requiredand the resulting budgetary savings could be used to improve the quality and coverage of education.There was ample scope to increase the current workload since the Tanzanian pupil teacher ratio forprimary school at 34:1, was significantly lower than the average of 45:1 for Sub-Saharan Africa(SSA). This was also true for secondary schools, where the Tanzanian ratio at 16:1 was again lowas compared with the average of 23:1 for SSA. There is even greater scope for reallocating resourcesat other levels of education away from PE and towards other expenses by utilizing staff resourcesbetter. For example, at teacher training colleges, the student teacher ratio falls to 12:1; at technicalcolleges it is only 8:1; and finally, the two universities have an incredible ratio of 3.5: 1.

16 Secondary schools in Tanzania are divided into three categories: Technical; Commercial; and Agriculture and HomeEconomics.

17 See "Teachers and the Financing of Education", World Bank, 1991a.

34 Chapter 4

4.17 This discussion indicates that there is considerable scope for reallocating expenditures in theeducation system in a more efficient and equitable manner. For example, if expenditures on studentwelfare were eliminated at public secondary schools, and other costs were brought into line with thoseprevailing in private secondary schools, say, by inc7-,asing the workload of teachers, the number ofstudents being sent to secondary school could quadraple even within the existing resource envelopefor secondary education. This would increase the percentage of the relevant age group who haveaccess to secondary education from 4 percent to 16 percent which, while still considerably below theaverage enrollment rate of 41 percent for all low income countries, would at least bring Tanzaniawithin attainable distance of the average rate prevailing in the rest of SSA (17 percent).

Role of Donors in Education

4.18 As shown in Table 4.3, inclusion of donor funding (as reflected in the Development Budget)reduces the share of education in total public spending. This is partly due to the fact that theDevelopment Budget is largely capital in nature, and the need for capital formation is lower ineducation (and health) than in other sectors such as infrastructure. However, given that in Tanzaniathe Development Budget includes all donor expenditures whether capital or recurrent, it also reflectsthe fact that, because of their preference for funding capital rather than recurrent expenditures, donorsprefer to fund sectors such as infrastructure rather than education or health.

4.19 Table 4.5 indicates that the inclusion of donor funding also alters the intra-sectorai allocationof resources, away from basic primary education and secondary education. Because donors onlyspend 43 percent of their education resources on primary education, the share of primary educationin total education falls from 55 percent in the Recurrent Budget to 52 percent in the total Budget.Similarly, the share of secondary education falls from 14 percent to 13 percent because only 2 percentof donor education resources are spent in this sector. The share of higher and technical education andother educational programs rises as a result of donor spending. Donors urgently need to review theirsupport of the education sector so that their spending raises the shares of primary and secondaryeducation in total education rather than lowering them.

Chapter 4 35

Table 4.S: Spending On Education by Program, 1993/94(percentage shares)

Recurrent Donor Spending TotalBudget In Development BudgetZ

Budget'

Primary Education 55 '3 52

Secondary Education 14 2 13

Higher and Technical Education 18 23 19

Other 3 13 32 16

Total Education 100 100 100

I Mission estimates; need to be treated with caution given the incomplete coverage of theDevelopment budget.

2 Column 3 is the total of the Recurrent plus Development budgets, i.e., in addition to columns Iand 2 of the Table, it includes Governmnent spending in the Development budget.

3 Includes Adult education and literacy programs; other education, science and cultur.l programs;and ministry and regional administration.

Need for Reform in Education

4.20 Universal Primary Education (UPE) is a stated objective of the Government of Tanzania andyet the gross enrollment rate in primary schools is currently only about 68 percent. At currentstandards of education, it would cost an additional T Sh 12.8 billion (US$ 28 million) annually toattain UPE in Tanzania. This amounts to an increase of about 25 percent in the current educationbudget. However, given the degree of underfunding of most inputs except teachers in the currentsystem, this amount would be necessary merely to extend the coverage of education, but not toimprove its quality, which is at least as desperately needed (and may even be part of the reason forsuch a low enrollment rate).

4.21 Available evidence from Penrose (1992) indicates that the primary education system isseverely underfunded. Usirng his analysis of the requirements for providing quality primary education,and updating to 1993/94 prices, we find that to achieve quality education for those students currentlyenrolled in primary schools would cost an estimated additional T Sh 62 billion (US$ 138 million)annually, which amounts to 119 percent of the total education budget for 1993/94 and over 5 percentof GDP. About 84 percent of the additional resources would need to be earmarked for non-personnelrelated expenditures. For the Govermnent to adequately fund quality education for all appropriately-aged children would cost approximately T Sh 91 billion in addition to the amount already budgetedin 1993/94 (T Sh 52 billion). In other words, to attain quality UPb would cost an amount equal to176 percent of the 1993/94 education budget, or an additional 27 percent of net public expenditures.If this were to happen, the education sector alone wou'd claim 43 percent of net public spending andover 12 percent of GDP.

36 Chapter 4

4.22 Although there is some scope for reallocating resources away from other sectors towards theeducation sector, given the pressing need for additional resources of some of the other sectors aswell, most notably health, a reallocation of the magnitude indicated above would clearly be difficultto attain. A large proportion of the needs of the education sector will, therefore, have to be met fromwithin the existing resource envelope for education. This can be done by reallocating resources fromlower to higher priority programs within the sector, by taking measures to reduce costs, and bysupplementing public expenditures with private ones. The World Bank Report on " Teachers and theFinancing of Education in Tanzania" (199la) had suggested a number of areas for possible savingsin costs and for raising additional revenues in the education sector. Further guidance will be availablefrom the forthcoming Social Sector Review which will be based, inter alia, on new household surveydata that is being undertaken with the objective of guiding the formulation of a comprehensive socialsector strategy.

Health

4.23 Tanzania's public health system is also in a state of crisis. Mortality and morbidity aredominated by malaria, respiratory infections, and diarrheal diseases, which account for over half ofall the diagnosed health problems. 18 Other frequent health problems include undernutrition(malnutrition and nutrient deficiency related disorders such as anemia and Vitamin A deficiency) andpregnancy-related conditions. Malnutrition is a serious contributor to morbidity: a national surveyconducted in 1986 and 1987 showed that almost 50 percent of all children under the age of five sufferfrom moderate to severe malnutrition, while 80 percent of pregnant women were anemic. Pregnantwomen also suffered from malnutrition (13 percent) and iodine deficiency (52 percent).

4.24 The spread of AIDS in the country has further exacerbated the problems of the public healthsystem in Tanzania. Throughout most of the 1980s, malaria was thought to be the major cause ofdeath in Tanzania. This picture, however, has changed with AIDS. The National AIDS ControlProgramn (NACP) estimated that by 1991, about 800,000 Tanzanians would have been infected withthe human immunodeficiency virus (HIV), which causes AIDS. By 1993, AIDS is expected to be thesingle greatest cause of death in both adults and children in T'anzania, and more than three times asmany people are expected to die from AIDS than from malaria.

Role of Government in Health

4.25 The 1993 WDR made a strong case tha. efficient and equitable investments in health (as ineducation) can have high payoffs as investments in human capital and in improving the distributionof the benefits of Government spending. The role of government in the health sector should be toprovide for those health-related services that are public goods, such as information and control ofcontagious disease, or those that have large externalities, such as immunization programs. Becauseprivate markets alone would tend to provide too little of these services, government involvement isnecessary to increase their supply to more adequate levels. In addition, the Government should assistin financing cost-effective (usually preventive) health services targeted primarily to the poor. Finally,governments have an important role to play in regulating privately provided health insurance, or in

18 For a detailed description of the problems of the Tanzania health system, see " Tanzania: Population, Health andNutrition Sector Review", World Bank, 1989a and 'ranzania: AIDS Assessment and Planning Study', World Bank, 1992a.

Chapter 4 37

mandating alternatives such as social insurance, in order to ensure widespread coverage and holddown costs. '9

Trends in Health Sector Spending

4.26 Table 4.6 provides a sunmnary of trends in total health sector spending during FY90-FY93.It takes into account expenditures on health by all levels of governments. The Table indicates that,on average, expenditures on health grew by almost 13 percent per annum in real terms during thisperiod. However, this was still below the average rate of growth of net public expenditures (17.5percent per annum). As a result, expenditures on health fell as a share of net public expendituresduring this period. Furthermore, as in education, most of the growth in health expenditures camemerely from an improvement in the recording of Development expenditures. Thus, as Table 4.6indicates, during FY90-FY93, real Development expenditures on health grew by an average of over100 percent per annum, whereas real Recurrent expenditures on health grew by an average of only9 percent per annum.

Table 4.6: Trends in Health Sector Spending, 1990-93

Average Share Average RealFY90-FY93 Growth per Annum

FY90-FY93

Net Public Expenditures 100.0 17.5Total Exp. in Health 10.1 12.6

Net Recurrent Exp. 100.0 10.3Recurrent Exp. inHealth 12.8 9.4

Total Development Exp. 100.0 54.6Development Exp. inHealth 3.2 100.6

Source- Central and Local Budget Estimates.

4.27 Table 4.7 provides a summary of total health sector spending for 1993194. Total expenditureson health are budgeted at T Sh 42.3 billion, which account for 12.3 percent of net public expendituresand 3.7 percent of GDP. Just as in the education sector, donors also play an important role in thehealth sector. Of the T Sh 13.5 billion budgeted for health in the FY94 Development Budget, T Sh12.2 billion (US$ 27.1 million) is expected to come from donors. This amounts to 90 percent of theDevelopment expenditures on health, and 29 percent of all Government expenditures on health.

19 For a fuller discussion of the issues, see "Investing in Health", World Development Report, World Bank, 1993d.

38 Chapter 4

Table 4.7: Sumnmary of Total Health Sector Spending, 1993/94

Recurrent Development TotalBudget Budget

Health Expenditures(T Sh billion) 28.8 13.5 42.3

Education as a % of NetPublic Expenditures 13.7 10.0 12.3

Healthas a %of GDP 2.5 1.2 3.7

Source: Central and Local Budget Estimates.

Intrasectoral Issues in Health

4.28 The analysis above indicates that one of the factors responsible for the inability of Tanzania'spublic health system to adequately finance public health interventions and contribute to the financingof basic health services is the stagnant share of the health sector in total Government resourcescombined with the increasing demands on the sector. Another major factor, however, is themisallocation of resources within the health sector, and the heavy bias towards curative rather thanpublic health and preventive health programs.

4.29 Figure 4.3 provides a breakdown of total health spending in FY94 by different levels ofhealth care service. It shows that in FY94, only 14 percent of total health expenditures are budgetedfor preventive services and programs. The remaining 86 percent is divided between curative healthcare (79 percent) and other expenditures (6 percent) for administration, training etc. Expenditures oncurative care are distributed between dispensaries and health centers (38 percent), which provide themost basic curative health care and hospitals (41 percent). The hospitals are of two kinds: regionaland district hospitals (18 percent), which provide the first level of hospital care; and referral hospitals(23 percent), which provide the highest level of treatment.

Chapter 4 39

Health Centers

Preventive

14%

Other7%

Hospitals41%

Figure 4.3: Shares of Different Levels of Health Semces, 1993/94

4.30 To examine the appropriateness of the distribution of health expenditures across differentprograms in Tanzania, we reclassify them according to the categories adopted in the 1993 WorldDevelopment Report (WDR) on "Investing in Health", and compare them with the recommendationsmade in the WDR. The WDR has put together a limited package of public health measures(preventive) and essential clinical interventions (curative) that it recommends as a top priority forgovernment expenditures. In low income countries (i.e., those with per capita incomes below US$350), this package is estimated to cost US$ 12 per capita per annum.

4.31 Components of the recommended public health package (which is estimated to cost aboutUS$ 4.20 per person per year) include:

* hmnunizations;* School-based health services;* Information and selected services for family planning and nutrition;* Programs to reduce tobacco and alcohol consumption;* Regulatory action, information, and limited public investments to improve

the household environment;* AIDS prevention.

4.32 The WDR recognizes that components of a cost-effective package of basic cinical serviceswill vary from country to country, depending on local health needs and the level of income. At aminimum, however, it reconunends that the package include five groups of interventions, each ofwhich is likely to have a large impact on morbidity and mortality in the country. The five groupsof the package (which is estimated to cost about US$ 7.80 per person per year) are:

o Services to ensure pregnancy-related (prenatal, childbirth, and postpartum) care;* Family planning services;* Tuberculosis control;

40 Chapter 4

* Control of sexually-transmitted diseases (STDs);* Care for the common serious illnesses of young children, which include diarrheal disease,

acute respiratory infection, measles, malaria, and acute malnutrition.

4.33 By itself, the public health package would have a major impact on morbidity and mortalityin Tanzania. However, the services included in the expanded package of basic clinical services arevery inportant in the Tanzanian context because of the high population growth rate and the AIDSepidemic. Thus it is our conclusion that, given the seriousness of the health problem that Tanzaniafaces, the proper standard against which to evaluate health spending is the cost of the full set ofpublic health and basic clinical services packages. I

Table 4.8: Recommended and Actual Per Capita Health Expenditures, 1993/94(US$)

Health Care Component Tanzania FY94 WDR Tanzaniaas%Budgeted Recommended of WDR

Essential Health Spending 2.27 12.00 18- of which

Public Health 0.51 4.20 12Essential Clinical 1.76 7.80 23Services

Non Essential HealthSpending 1.19 na na

Total Health Spending 3.46 na na

Source: FY94 Budget estimates and WDR (World Bank, 1993d).

4.34 Table 4.8 indicates that the Tanzanian health care system is severely underfunded based onWDR standards for cost-effective health care. Firstly, the Table reveals that total public spending onhealth care in Tanzania is only 29 percent of the minimum recommended spending by the WDR forthe basic package. Of this total, however, the Government spends only two-thirds on essential healthcare. As a result, the degree of underfunding of essential health care (at only 18 percent ofrecommended levels) is even more severe than of total health care. Within essential health tcare, wefind that the severity of underfurnding is more pronounced in public health services, which receiveonly 12 percent of recommended resources, than in essential clinical services, which receive 22percent of recommended resources. While it is not necessary for the Govermnent alone to fully fundthe Basic Clinical Services category, as private spending can also be relied upon to fund many ofthese services, failure by the Government to fully fund the public health package is a seriousshortcoming.

4.35 A limited comparison of per user expenditures in public dispensaries and health centers withthose in a few private facilities visited by the PER mission provides another indicator of the degreeof underfunding of the public health care system in Tanzania. The comparison shows that these public

20 For a detailed description of the leading causes of morbidity and mortality in Tanzania, see "Tanzania: AIDSAssessment and Planning Study', World Bank, 1992a.

Chapter 4 41

facilities typically spend only 13 percent as much as their private counterparts on each user.Expenditure per user in public hospitals appears to be less than 5 percent of comparative privatefacility expenditures. It should be noted that these numbers need to be treated with caution, since theMinistry of Health statistics possibly overstate the actual public facility usage levels, and thesenumbers therefore probably understate actual public facility expenditures per user. Nevertheless, theyare consistent with other evidence that the health care system in Tanzania is severely underfunded.

4.36 While there is clearly a need to direct additional Government resources towards the healthsector in Tanzania, Table 4.8 also reveals that there is considerable scope for improving the currentallocation of resources within the sector. According to our estimates, currently one-third of all healthsector spending is directed towards non-essential services. If these resources could be channeledinstead to essential services then, for example, it would be possible to fund public health services atup to 40 percent of the recommended level rather than at the current 12 percent.

4.37 Expenditure Allocation Across Inputs. There is insufficient data to indicate whether thecurrent mix of inputs in public health facilities is efficient. Some preliminary data gathered by thePER team indicate that employee compensation for many health care professions is significantly lowerin the public than in the private sector. Our data indicate that compared to their counterparts in theprivate sector, public sector doctors, pharmacists, technicians and administrators are particularlypoorly compensated, probably earning less than 50 percent of the wage earned by their counterpartsin the private sector. However, given the current practice in the Tanzanian civil service of using avast array of monetary and non-monetary allowances to compensate civil servants in general, anddoctors in particular, the actual remuneration package received by public health care workers is noteasily discernible. 21 Additional work is needed in this area to determine the actual and optimal mnixof inputs in the health sector. From the data available, it appears that the health system as a wholeis underfunded, and that all inputs into the system suffer from the shortage of resources.

4.38 While the health sector in general, and public health facilities in particular, are underfunded,it appears that access to facilities is not a problem in most parts of the country. Governnent statisticsimply per capita utilization rates of about seven visits per year. Even assuming that available datasignificantly overestimate actual utilization, this would imply that the public has relatively easy accessto facilities. This hypothesis is further supported by the number and geographic distribution offacilities. While there is considerable regional variation in the population per hospital and per healthcenter beds, in general the number and distribution of facilities is adequate. I The implication isthat additional resources to the health sector should be directed towards funding inputs for existingfacilities rather than towards an expansion in the number of facilities themselves. This calls for anincrease in the allocation of recurrent rather than capital expenditures in the heaith sector.

Role of Donors in Health

4.39 The inclusion of donor funding improves the intrasectoral allocation of health expendituresbecause donors spend a considerably larger share than Government on preventive rather than hospitalcare. As indicated in Table 4.9, 40 percent of donor funding is spent on preventive health services,as compared with only 4 percent of Recurrent budget spending. As a result, the inclusion of donor

21 For a description of the allowances received by medical doctors in the civil service, see Mushi (1992).

22 For additonal infornation on this topic. see Bloom (1992).

42 Chapter 4

funding increases the share of preventive services from 4 percent to 14 percent. in contrast, only 16percent of donor funding is spent on hospitals as compared with 51 percent of Recurrent budgetspending. The inclusion of donor funding therefore reduces the share of hospitals in total healthspending from 51 percent to 41 percent.

Table 4.9: Spending On Health by Program, 1993/94(percentage shares)

Recurrent Donor TotalBudget Spending In Budget 2

l ~~~~~~~~~~DevelopmentlI _________________ Budget _ _l

Preventive 4 40 14

Curative 88 57 79- of which

Dispensaries/HealthCenters 37 41 38

Hospitals 51 16 41

Other 3 8 3 7

Total Health 100 100 100

1 Mission estimates: need to be treated with caution given the incomplete coverage ofthe Development budget.

2 Column 3 is the total of the Recurrent plus Development budgets, i.e., in addition tocolumns I and 2 of the Table, it includes Government spending in the Developmentbudget.

3 Includes administration and training.

Need for Reform in Health

4.40 Providing basic health care to its citizens is an important objective of the Government ofTanzania. Yet currently, expenditures on health are only about 30 percent of what are required, andof this, only two-thirds is being channeled towards essential health spending. What is worrisome isthat recent trends indicate a worsening of both the intersectoral and the intrasectoral allocation ofexpenditures in health. During FY90-FY93, even though real net Government expenditures inaggregate grew by over 10 percent per annum, expenditures on the health sector stagnated. Inaddition, during this period, while the share of preventive versus curative health care remainedunchanged, within the curative sector, the share allocated to hospital care increased (from 62 percentin FY90 to 67 percent in FY93) while that of health centers and dispensaries declined (from 27percent to 23 percent). However, despite the increased share received by hospitals in recent years,they also suffer from the across-the-board underfunding of the health sector. The extent of the crisiscan be gauged from the fact that during 1992/93, the Muhimbili hospital in Dar-es-Salaam had to beclosed down for an extended period because it ran out of funds.

Chapter 4 43

4.41 If one uses the WDR recommendations as a standard, then the Government of Tanzania isspending only 18 percent of the recommended amounts on essential health care. To meet therecommended standards would require additional spending of about T Sh 120 billion. This isequivalent to almost three times the size of the current health budget, and would require 46 percentof net public expenditures or over 10 percent of GDP. Again, while there is some scope forreallocating resources away from other sectors towards health, a reallocation of this magnitude wouldclearly be difficult to attain. The Government might therefore need to prioritize even within basichealth care and focus first on the most public of preventive services, i.e., those generating thegreatest societal benefits. To meet the WDR standards for preventive health care alone would requirean additional T Sh 43 billion, which is equivalent to 25 percent of aggregate net governmentspending, and still unattainable. There is therefore an urgent need in Tanzania to undertake reformswithin the health sector. This would entail reallocating resources from non-essential to essential healthservices; taking measures to reduce costs; and supplementing public resources with private ones. TheGovermnent needs to assess where in the health sector its limited resources can have the greatest andwidest impact and allocate funds accordingly. In this area as well, the work being done under theforthcoming Social Sector Review should provide guidance.

Other Social Sector Spending

4.42 In addition to spending on education and health, the Government has allocated T Sh 8.7billion (US$ 19 million or one percent of GDP) for other social sector spending in FY94. Thesefunds are to be spent on various training institutions and programs, labor issues, youth recreation anddevelopment, "Folk Development colleges", social welfare programs, and a rural water and sanitationprogram in a limited number of districts called the Health, Sanitation and Water (HESAWA)program. These expenditures are channeled through the Ministry of Labour and Youth Development(MOL) and the Ministry of Community Development, Women's Affairs and Children (MOCD). Thetwo ministries are relatively small and funded largely by donors, who provide 70 percent of allexpenditures of these two ministries.

4.43 About 65 percent of the FY94 budgets of the two ministries is devoted to training institutionsand programs. These programs tend to be small and to have relatively high unit costs. For example,the 54 Folk Development colleges train about 1,500 students per annum and the MOCD runs severalcolleges that together provide training of various sorts (including 'local leadership development") tofewer than 500 students per annum. The unit costs of these programs are high: they have annual perstudent expenditures of more than T Sh 420,000 (US$ 933). This is 60 times as high as the annualexpenditure per primary school student and over five times as high as the annual expenditure persecondary school student.

Recommendations for Reform

4.44 Whiie the MOL and MOCD operate some social welfare and community developmentprograms that might serve an important need in society and are not being replicated elsewhere, theyalso operate education and health programs that could easily be consolidated with those run by theMinistries of Education and Health, respectively. This would force these programs to compete withthe more basic programs for scarce resources. In general, the rate of return to spending on thesetechnical and folk development colleges, and health programs such as HESAWA, should be comparedto the return to spending for basic education and health in order to ascertain whether the former meritGovernment support. If they do not, these programs could either be run on a fee for service basis andthe public resources allocated to them reallocated to priority programs, or they could be phased out.

44 Chapter 4

All other labor, youth and welfare programs also need to be reviewed to see if their rates of returnare as high as those for basic health and education. If not, they too would need to be phased out andtheir funds reallocated to priority programs.

4.45 As discussed earlier, there are pressing and overwhelming demands for additional funds forbasic health and education. To meet these demands, the Government needs to examine the costs andbenefits of every Shilling that it spends, and to reallocate Shillings from programs with lower socialreturns to those, such as basic health and education, that are known to have high returns. If, forexample, the T Sh 8.7 billion that is used to fund these various programs were reallocated to primaryeducation, then out of the 1.8 million children who currently have no access to primary education,1.2 million of them could be sent to school. In other words, just by reallocating resources fromwithin the social sectors, it is possible to fund an increase in the primary school enrollment rate to90 percent instead of the current 68 percent. The PER recommends that the MOL and MOCD bemenred into one Ministry of Socil Welfare (to reduce overhead costs) and that the expendituresincurred by these two ministries on education and health be rationalized and consolidated with basicexpenditures in these two sectors. In addition, it is recommended that the expenditures of these twoministries be reduced by half (from the proposed T Sh 22.2 billion for FY95 to T Sh 11.1 billon)and the resources saved reallocated to basic education and basic health. Donors will need to assistthe Government in this reallocation of resources from low priority areas to high priority ones.

B. Spending in the Economic Sectors

4.46 The Tanzanian Government is trying to disengage from the commercial activities that it hasbeen so pervasively involved with for the last two decades. It has recognized that production anddistribution of most goods and services is best left to the private sector, and that it should focus itsattention on providing the few core Government services that will improve the operations and equityof results of private market activities. These include agricultural research and extension, andinfrastructure.

4.47 Table 4.10 provides a summary picture of the composition and trends of public expendituresin agriculture, industry and infrastructure. In FY94, these sectors together accounted for almost 40percent of ministerial supply expenditures. Within that, agriculture accounted for 8 percent; industryfor 2 percent, and infrastructure for the remaining 29 percent. Key expenditure issues in each of thesesectors are discussed next.

Table 4.10: Breakdown of misterial Expenditures in the Economic Sectors

Sector Share of Share of Share ofRecounent Development Total

l FY94 F9 F94

IAgriculture 5.1 12.7 8.4

Industry 2.9 0.8 2.0

Infrastructure 5.8 57.5 28.5

All Economic Sectors 13.8 71.0 38.9

Source: FY94 Budget Estimates.

Chapter 4 45

Agriculture

4.48 Agriculture is central to the Tanzanian economy and accounts for over 60 percent of its GDPand over 80 percent of its employment. The role of Government in agriculture should be to financepublic goods and services in support of agricultural development by the private sector. 23 The keyactivities here are support for research and extension (R&E) and the monitoring and regulation ofcultivation practices with negative environmental externalities. In addition, there are important effectson agricultural development from providing basic physical and social infrastructure, particularly ruralaccess and feeder roads, and basic health and primary education.

4.49 Support for research and extension is essential if current efforts to increase agriculturalgrowth are to be successful. Based on a review of practice in successful agricultural economies andexperience in the developed world, the Agriculture Sector Memorandum (ASM) recommends thatTanzania set aside a minimum of 1.5 percent of agricultural GDP in budgetary funds to supportagricultural research and extension. This would imply annul public expenditures of about T Sh 10.4billion (US$ 23 million) on R&E in agriculture. In recent years, R&E activities in Tanzania havebeen receiving only half of this recommended amount.

4.50 In FY94, total resources allocated to the agricultural sector (i.e., to the Ministry ofAgriculture and Livestock Development (MALD) and the Ministry for Tourism, Natural Resourcesand Environment) were T Sh 8.0 billion from the Recurrent budget and another T Sh 15.7 billionfrom the Development Budget, amounting to a total of T Sh 23.7 billion. Of this, MALD accountedfor a total of T Sh 21.9 billion (T Sh 6.9 billion for Recurrent expenditures and T Sh 15.0 billionfor Development expenditures). This is twice the amount of recommended spending for R&E. Thus,it would appear that once the agricultural parastatals are divested (and the donor resources arechanneled to Government priorities in agriculture) and other drains on the Ministry of Agriculture'sBudget are stemmed, there should be sufficient resources to fully fund R&E activities in agriculture.However, the restructuring of parastatals is proceeding only slowly whereas funding for agriculturalR&E activities need to be increased immediately to the recommended level in order to stimulate thedevelopment of the agricultural sector. The PER recommends that funding for R&E in agriculturebe increased to 75 percent of the recommended level in the FY95 Budget and to 100 percent by theFY96 Budget and thereafter,

4.51 The Ministry of Agriculture recently undertook a review of its roles and functions, and onthe basis of that, has initiated a program that will enable it to withdraw from non-core governmentactivities and focus on its core functions. 24 In addition to reorienting the Ministry itself towardsdelivering core government services better, there is also an urgent need to undertake a thoroughreview of the portfolio of Development budget projects in agriculture. As pointed out above, twiceas much is budgeted for agriculture in the Development budget as in the Recurrent budget.

4.52 Of the T Sh 15.7 billion budgeted for the agricultural sector in the Development budget,donor spending accounts for T Sh 13.7 billion (87 percent). Thus, donors are spending almost twiceas much on the agricultural sector as they do on the education sector (T Sh 7.3 billion) and more thanwhat they spend on the health sector (T Sh 12.2 billion). An examination of the Development budget

23 This discussion draws on the recent Tanzania: Agriculture Sector Memnorandum", World Bank, 1993b.

24 This program is being supported by a new IDA project, the Agricultural Sector Management Project (1993).

46 Chapter 4

in agriculture reveals that a large proportion of the spending is on commercial agricultural parastatals.Of the almost 100 projects under the Ministry of Agriculture, the 7 commercial ones listed below inTable 4.11 account for T Sh 3.6 billion or 30 percent of the agricultural Development expenditures.The two largest projects (for T Sh 2.6 billion and T Sh 0.6 billion) are for the rehabilitation of twosugar mills. In addition, T Sh 229 million have been allocated to three rice farms being operated bythe National Agriculture and Food Corporation (NAFCO), an agricultural parastatal that, inter alia,operates state-owned rice and wheat farms. All of these projects are funded entirely by donors.

4.53 In its January 1992 Policy Statement on the reform of the parastatal sector, the Governmentannounced its intention to privatize all commercial parastatals. Since then, it has also decided that inthe interim, while the privatization process is underway, these parastatals will be subject to a hardbudget constraint. In other words, the Goverrnent has committed itself to eliminating all explicit andimplicit subsidies to commercial parastatals. The FY94 Development Budget for agriculture confirmsthat large amounts of Government's own resources are not being channeled to commercial enterprises.Except for the T Sh 28 million budgeted for the Tanzania Sisal Authority, there are no Governmentfunds budgeted for any of the other six large commercial projects listed in Table 4.11. Furthermore,the funds that these parastatals are receiving from donors are supposed to be in the forrn of once-offgrants that are being provided to assist them to prepare for their forthcoming privatization. Currently,the privatization of the parastatal sector is proceeding slowly. Some of the commercial agriculturalenterprises should be fairly easy to sell and should be brought to the forefront of the privatizationagenda. Not only would this serve to release donor resources that could be redirected towards morecritically needed activities in agriculture and other sectors, but it would also serve as an impetus tospeed up the privatization program.

Chapter 4 47

Table 4.11: Selected Agricultural Projects, 1993/94(T Sh million)

Name of Project Local Sources | Foreign Sources | Total Spending

NAFCO'Ruvu Rice Farm 0 59 59Dakawa Rice Farm 0 57 57Madibira Rice Scheme 0 113 113

Tanzania Sisal Authority StaffHouses 28 0 28

Tanzania Tea AuthorityUkalawa Factory 0 109 109

Sugar Dev. Corp (SUDECO)Kilomberi Rehab 0 640 641Mtibwa Rehab 0 2599 2599

Total Above Projects 28 3578 3606

Total Min. of Agriculture 1157 11083 12240Projects

Share of 7 Projectsin MALD Dev Budget 2.4% 32.3% 29.5%

I National Agriculture and Food Corporaton.

Recommendations for Reform in Agriculture

4.54 Some of the areas for reform were discussed earlier in Chapter 3. Those and other areas arelisted below:

* eliminate the fertilizer subsidy in the FY95 Budget (as decided);

* improve the management of the Strategic Grain Reserve and reduce its operating costs toT Sh I billion by FY95 and further to T Sh 500 million by FY96 (see Chapter 3);

* increase the share of public spending devoted to agricultural research andextension to 75 percent of the recommended level of 1.5 percent of agricultural GDP bythe FY95 Budget and to 100 percent of the recommended level by the FY96 Budget andthereafter;

* eliminate all budgetary (local or donor-funded) transfers to commercialagricultural parastatals except those provided in the context of privatization; and

* as part of the overall privatization program, privatize or liquidate all commercialagricultural parastatals by end FY96.

48 Chapter 4

Industry and Trade

4.55 With the setting up of the Presidential Parastatal Sector Reform Commission (PSRC) in1992, the Government has initiated the process of withdrawing from the industrial sector andfocussing its attention on its core function in this sector, which is to create an enabling environmentfor private sector development. This is reflected in the appropriately low level of public expendituresallocated to this sector. The Recurrent budget allocation for the sector is only T Sh 4.6 billion (ofwhich T Sh 3.5 billion is for the fertilizer subsidy, which is technically budgeted under the Ministryof Industries and Trade) and the Development budget allocation is T Sh I billion. Toget'.er theindustrial sector receives only 2 percent of net public expenditures (see Table 4.10).

4.56 Compared to most ministries, the Ministry of Industries and Trade (MIT) has a relativelylarge number of programs (12), each administered by a separate department. The structure of theMinistry reflects the historical perception of its roles and functions. For example, the Ministryincludes a Directorate for Intemal Trade and one for External Trade. These departments were neededwhen the Government was heavily involved in the control of the commercial sectors, but with theliberalization of trade that has taken place in recent years, they are no longer relevant. The MITwould benefit from a reorganization to bring its structure more in line with its new role andfunctions, similar to what is happening in the Ministry of Agriculture and Livestock Development.Its current organizational structure results in a thin scattering of its limited resources over a varietyof programs that differ widely in priority. Given that its new role is limited to promoting the privatesector, which is also what the Investment Promotion Center (IPC) does, perhaps the two could bemerged into one institution.

4.57 The Development budget contains 18 industrial projects. While the total amount allocated tothem is small (about T Sh 932 million), almost all of it (95 percent) is Government subsidies(locally-funded) to commercial parastatals (textile mills, chemical industries, and so on). Given theGovernment's intention of imposing a hard budget constraint on all commercial parastatals, thesesubsidies need to be eliminated. This would free up resources for more productive uses, such as theeducation of 140,000 primary school children for a year.

Recommendations for Reform in Industry

* Undertake a functional review of the MIT, with a view to restructuring it;* consolidate recurrent expenditures on priority programs;* undertake a review of the industrial portfolio on the Development budget and eliminate

budgetary transfers to commercial parastatals.

Infrastructure

4.58 As in the development of human capital, the Government has an important role to play infmancing infrastructure. The 1989 PER had found that during the 1970s and 1980s, the transportsystem had deteriorated to the point that it was severely hampering Tanzania's economic recovery.This was true of all sub-sectors: roads, railways, ports, and civil aviation. The two main reasons forthe deterioration were an inadequate allocation of resources to the sector and weak institutionalstructures.

Chapter 4 49

4.59 Since then the Govermnent, together with the donor community. has made a concerted effortto improve the quantity and quality of infrastructure in Tanzania. Since 1990, there have been severallarge joint-donor investment projects in the infrastructure sector, totalling over two billion dollars ininvestment. These include: a US$ 122.3 million project for port modernization (World Batik, 1990);a US$ 871 million project for road rehabilitation (World Bank, 1991); a US$ 74 million project forthe rehabilitation of the petroleum sector (World Bank, 1991); a US$ 275 million project for therestructuring of railways (World Bank, 1991); a US$ 15.5 million engineering credit for urbaninfrastructure (World Bank, 1991); a US$ 10 million engineering credit for the power sector (WorldBank, 1992); a US$ 220.1 million investment project for telecommunications (World Bank, 1993);and a US$ 440.4 million project for the power sector (World Bank, 1993). As a result of these largeinvestments, the share of infrastructure in total net public expenditures increased by 12 percentagepoints between FY90 and FY93, and in FY94 infrastructure is to account for 58 percent of theDevelopment Budget. In addition, new investments totalling over a billion dollars are being plannedin the roads, urban infrastructure and natural gas sectors over the next few years. Institutionalstructures are being strengthened and pricing and management issues are being addressed in thecontext of the preparation and implementation of these projects.

4.60 The major public finance issue in the infrastructure sector is the recurrent cost implicationsof this growing portfolio of investments. A lot of the current investment in rehabilitation isnecessitated by the inadequate attention paid to the maintenance of these assets in the past. To avoidrepeating the costly mistake of neglecting maintenance, in the roads sector, for example, in 1991 theGovernmnent established a Roads Fund to fund the maintenance and repair of roads. The charges forthis Fund consist of a tax on fuel (T Sh 25 per liter), and other charges, primarily vehicle licensingfees. By 1995/96, the Roads Fund is supposed to fully fund the total road maintenance costs. Prudentfiscal policies need to be adopted to ensure the proper maintenance of other public assets as well.

C. Expenditures on Public Administration

4.61 This section includes a brief discussion of expenditure issues in the public administrationsector, which includes General Administration, Defence, and Law and Order. While intrasectoralissues were not examined in these sectors, the appropriateness of the size of government spendingin these sectors relative to others was examined, and is discussed below.

4.62 Table 4.12 provides a breakdown of Central ministerial expenditures (i.e., excludingexpenditures of regional and local govermments) on public administration. It shows that in FY94,almost 65 percent of the Recurrent budget, another 10 percent of the Development budget, and about40 percent of the total budget is devoted to public administration. It should be noted that theseexpenditures do not include the grants to local governments. Prior to FY92, the local governmentgrants were channeled through the Prime Minister's Office (PMO) and would have been includedunder the General Administration category above. However, during FY92, they were moved out ofthe PMO's office and are now channeled through the Regional govermnents.

50 Chapter 4

Table 4.12: Breakdown of Ministerial Expenditures on Public AdmInistration, 1993/94

Sector Share of Recurrent Share of Share of TotalDevelopment

General Administration 36.1 5.1 22.5

Defence 14.2 2.6 9.1

Law and Order 14.2 1.8 8.8

AU Administaton 64.5 9.5 40.4

Source: FY94 Budget Estimates.

4.63 Figure 4.4 compares the intersectoral allocation of ministerial expenditures in Tanzania to theaverage of these expenditures in three Sub-Saharan African (SSA) countries: Ghana, Kenya, andMalawi. 2 All sectors have been classified into four groupings: general administration (includinglaw and order); defence; social services; and economic services. The Figure reveals that incomparison to these countries, on average, Tanzania spends too little on the social sectors and toomuch on all other sectors. In particular, there is ample scope for Tanzania to reallocate resourcesaway from general administration and defence towards the social sectors. A comparison with Ghanareveals that Ghana spends less than one-third as much as Tanzania on public administration: Ghana'stotal spending on all adm iiistration (including defence) is only 3 percent of GDP as compared withTanzania's 10 percent. Part of these savings come from Ghana's considerably lower defenceexpenditures: only 0.4 percent of GDP as compared with Tanzania's 2.2 percent. In order to freeup additonal resources for the social sectors, the PER recommends that by the FY96 Budget,expendiures on general administragion (including law and order) and on defence be ech reducedby one percent of GDP (which amounts to about T Sh 13.8 billion each in FY95) as compared tothe amount proposed under the RPFB.

25 It would be useful to include local govemnt expenditures in the analysis, but such data are not easily availablefor the comparator countries.

Chapter 4 51

Prcentage of GOP

4-

2

0Oeser;t Admin Defence 8ocIat servicee Econlomlo OOtvieee

M Tanzania =S-Country Average

Figure 4.4: International Comparison of Ministerial Expenditures

Recommendations for Reform in Administration

4.64 The savings sought from expenditures on administration and defence could be achieved byimplementing some of the recommendations of the Presidential Tax Commission's Report. TheReport had made several recommendations for reducing administrative costs, including the following:

(i) Naional Service (JK1). The Commission reviewed the benefits from the NationalService (NS) program, and in light of "our inability even to provide adequately forthe regular army and our universities and secondary schools" recommended that theNS be abolished, and the savings effected be used to strengthen traditional education.In FY94, the abolition of the NS would have freed up T Sh 2.9 billion for basiceducation (10 percent of primary school funding).

(ii) Size of the Army. The Commission noted the development of peace and stability inthe region and the prospects for the future and reconmmended that the reduction in thesize of the army, which began in 1987, be accelerated. If, for example, Tanzania wasto spend only 0.4 percent of its GDP on defence, as Ghana does, this would resultin a savings of T Sh 2.1 billion (8 percent of primary school funding).

(iii) Moving the Capitol to Dodoma. The Commission noted that the economic andfinancial situation of Tanzania in 1973, when the decision was made to move thecapital to Dodoma from Dar es Salaam, was completely different from the situationtoday. In light of this, the Commission recommended that the idea of makingDodoma the legislative capital and keeping Dar es Salaam as the administrativecapital "should be considered seriously". According to the Commission, this decisioncould be reconsidered when the country's financial situation had improved.

52 Chapter 4

(iv) Prison Management. The Commission saw scope for "significant savings" in otherservices like the prisons, where it recommended measures to reduce costs, includinga review of the current remand arrangements and regulations to reduce the remandprisonex population. The Ministry of Home Affair's recurrent expenditures in FY94are budgeted at T Sh 19.8 billion. If the Government set a target of reducing its totaladministration budget by one-third, say, to bring it in line with the three SSA-countryaverage, then potential savings of T Sh 6.5 billion could be obtained from theMinistry of Home Affairs' budget (25 percent of primary school funding).

(v) Costs of Foreign Operations. The Conunission recommended that foreign missionsand embassies be restructured to enhance performance and reduce costs. It alsorecommended that the costs of membership of international organizations also bereduced. By following this advice, savings can be attained from the T Sh 5 billionbudgeted for the Ministry of Foreign Affairs in FY94 (18 percent of primary schoolfunding).

(vii) Costs of Regional Administraton. The Commission noted that although seven yearshave lapsed since the restoration of local governments, their performance remainshighly unsatisfactory. This is because the resources allocated to them have proved tobe too little for the responsibilities transferred to them (for providing primaryeducation, basic health, roads maintenance, and water). The Commission noted thatabout two-thirds of the Regional governnents' responsibilities have been shifted tothe local governments, but the Regions' resources (including funds, manpower, andequipment) have remained largely itact. It recommended that this be "urgentlyremedied". The PER recommends that Regional spending be reduced by two-thirdsand reallocated to local governments, so that the budgets of local governmentscould be increased by T SSh 10.5 biUlion, or by 15 percent in FY95. This could bedone by consolidating the number of regional govermnents from 20 to a smallernumber (say four or five), as used to be the case earlier.

4.65 Some of these recommendations have been adopted by the Government. For example, in theJune 1993 Budget Speech it was announced that the Government intends to close down 12 foreignmissions during 1993/94 so as to pool resources for the remainder. Most others, however, remainto be adopted two years after the Commission submitted its Report to the Government. The adoptionof these measures would begin to address a mimber of critical issues in Tanzania. The most importantof these is the improvement in the delivery of social services.

4.66 Poverty Focus of Expenditure Reallocation. The increase in the allocation of publicresources towards basic health and basic education should in itself lead to an improvement in theliving standards of the Tanzanian population in general. However, it is possible and desirable to directthese additional expenditures towards the poorer segments of the population. Since the bulk of localgovermnent expenditures are on basic health and basic education, one way of improving the deliveryof social services to the poor would be to strengthen the role of local governments and to channel atleast some of the additional resources through them to the poor. An attempt was made in the PERto examine the extent to which local government expenditures were being utilized as an instrumentof poverty reduction by focussing them on the poorer regions. However, reliable data on the

Chapter 4 53

distribution of incomes across regions in Tanzania is presently unavailable. I This, should be a highpriority for future research in Tanzania. Ofice reliable information becomes available on the incidenceof poverty by region in Tanzania, one way of tackling poverty would be to channel additionalresources to local governments of poorer regions by making regional per capita incomes one of themain determinants of the size of grants to local governments.

26 Table IV. 32 in Voluine 11 compares the estimates of regional per capita inxomes obtained from the National Accountspublished by the Bureau of Statistics with those obtained from the household expenditure survey data underlying the PovertyProfile (World Bank, 1993c). It shows that there is not much overlap in their ranking of regions by incoens.

5

Efficiency and Transparency of Aid-Funded Expenditures

5.1 Tanzania receives a large amount of foreign assistance from a large number of donors. In1991, it received net official development assistance (ODA) to the tune of US$ 1076 nillion (WorldBank, 1993d). This does not include the aid received through the Paris Club in the form of a netreduction in debt service of US$ 243 million. The aid community in Tanzania consists of 34 donors,15 multilateral and 19 bilateral. The largep aid program, combined with the large number of donors,creates two major problems. Firstly, the large size of the investment program relative to theRecurrent budget makes it difficult for Tanzania to operate and maintain its investments adequatelyand hence lowers the efficiency of this investment. Secondly, the large aid program creates enormousdifficulties in aid coordination and management for the Govermnent, and also makes it extremelydifficult to budget and account for this aid. This also reduces the effectiveness and transparency ofaid utilization.

5.2 Until FY92, only about 20 percent of Tanzania's project-related aid went through thebudgetary system. Since then, however, the Government has made an effort to bring more aid on theBudget, as a result of which the coverage of the Development budget has improved considerably.Budgeted Development expenditures have increased from T Sb 39 billion in FY92 to T Sh 101 billionin FY93, and further to T Sh 136 billion in FY94. However, even with this expansion, the coverageis far from complete. While the budgeted amount for FY94 is about US$ 300 million, donors reportdisbursing on average about US$ 525 million per annum for project financing during FY91-FY93.2According to this estimate, therefore, the Tanzanian budget still captures less than 60 percent ofall project aid. However, even with this incomplete coverage, enough information is available thatmakes it evident that there is an urgent need for the Government to start formulating a publicinvestment strategy for Tanzania. For example, preliminary results indicated that one-third of allexpenditures in the Development budget are in areas that no longer reflect Government's priorities.The efforts to rationalize development expenditures need to be combined with further efforts toimprove the coverage of the Development budget by strengthening the systems for budgeting andaccounting of aid-funded expenditures.

Public Investment Program

5.3 Tanzania's Development Budget includes the public investment program (PIP) of the national,regional and local governments, as well as transfers to the parastatals for the purpose of financingtheir investments. However, the investmnent program is not explicit, and it is difficult to identify oreven estimate its components for a number of reasons. Firstly, many of the projects which comprisethe program are found broken down into numerous smaller components or activities, spreadthroughout the Development budget. Secondly, the format of the Development budget hampers adistinction between recurrent expenditure and investment, and in fact many projects contain elementsof both recurrent and capital expenditure. Finally, about 40 percent of public investment expenditureis still off the budget and there is no centralized information on their nature or financing.

27 As reported by donors to the Special Program of Assistance (SPA) for Africa.

Chapter 5 55

5.4 Becase of its improved coverage, the Development budget has risen sharply in recent years,both in nominal and relative terms. In 1989/90 there were over 800 separate projects in theDevelopment budget and budgeted Development expenditure was equivalent to less than 20 percentof total expenditure and 5 percent of GDP. By comparison, the Development budget for 1993/94contains over 1500 project activities (even after the consolidation of some projects), equivalent toover 30 percent of budgeted expenditures and 12 percent of projected GDP. With the improvedcoverage of the Development budget and the introduction of the first Rolling Plan and ForwardBudget (RPFB), the Government is now attempting to formulate a public investment strategy. TheRPFB aims to create a more stable budget framework that can be used to infonn spending agenciesabout the level of resources which they may expect to be allocated to them over the next three yearsso that the horizon for their planning and budgeting can be extended.

5.5 While the first RPFB makes a significant improvement to the planning process in Tanzania,the process of development of the RPFB is sdll in its initial stages and, as far as the DevelopmentBudget is concerned, suffers from three basic shortcomings which still affect the overall efficiencyof resource management:

(i) insufficient ranking of sector priorities to effectively guide the prioritization ofinvestnent;

(ii) insufficient project information is available to separate technically good from badprojects (ongoing and new) by project screening. This is particularly important giventhe large amount of projects included in the budget; and

iii) a chronic insufficiency of resources to provide for adequate operation andmaintenance costs of completed investments.

5.6 To imiprove the management of public investment, under the RPFB, projects are beinggrouped into so-called "core programs", consistent with sector and economy wide priorities.However, all that this is intended to do is to regroup existing projects or activities into a number ofsectoral programs. It does not aempt to tackle the two main problems ndelying the Developmentbudget fitsdy, that oneArd of the expenditres are on projects hat no longer reflect theGovernment's prories and need to be dosed down, and secondly, that the effidency of the publcinvestmet portfolio in Tar.ana is extremely low beause of Is large she relative to the amountof resources avaable to complte the projects and mae than effective.

Reconundations for Reform

5.7 Crteria to Guide Project Sdecion . To improve the efficiency of the investment portfolio,the Government needs to adopt certain broad principles that would guide its decisions about the sizeand composition of its public investnent programn (PIP). These should include:

(i) priority to be given to rehabilitation and maintnance rather than to new projects;

(ii) projects should have a broad impact on the population, especially on the lowerincome groups;

(iii) only projects whose estated recurrent costs are sustainable after the conpletion ofthe project would be undertaken; and

56 Chapter 5

(iv) projects should be located in priority sectors.

5.8 Idexdjkadon and R ondng of Prioriy Sectors. Given the stated tole of the governmuent, suchpriority areas should include:

(i) economic and financial administration;(ii) defence, law and order;(iii) basic social services; and(iv) basic economic services.

Even within these categories, however, there is ample room for reduction in the current Tanzanianportfolio. For categories (iii) and (iv) in particular, what is considered as "basic" and the role ofgovernment in the provision of those services needs to be defined clearly.

5.9 As stated above, this work of identifying priority sectors has already begun with theformulation of the first RPFB. In the context of the second RPFB and the budget submissions for1994/95, the Government should require that sector ministries rank their respective sector priorities,wbich have been identified under the first RPPB. As explained below, this ranking should be donefor the purpose of identifying a program of core projects which would be fully funded in the FY95Budget. A preliminary analysis of allocations in the Development budget for 1993/94 shows that thebroad priority sectors as -defined above accounted for only two-thirds of the total Developmentbudget, and around 60 percent of its local funding. Thus, there is ample scope for reducing the sizeof the Development budget and improving its efficiency.

5.10 Ioden aon offa Core Pabli Invesment Program for 994/95. The Governmnt needsto review its investments to prepare a PIP that contains only high priority, high quality projects.Given the lck of information on the quality of individual projects at this stage, while such anexercise canmot be completed in titne for the 1994/95 Budget, a lot can still be done. The exercisecan be broken down into two steps. The first step, which can be completed in titne for the 1994/95Budget, is to separate priority projects from non-priority ones. Thus, the core PIP as defined for the1994/95 Budget would consist of projects in priority areas only (as defined above). The aim shouldbe to fully find this core PIP in the 1994/95 Budget, and if that is not possible for lack of resources,then to allocate at least 80 percent of local counterpart fimding (instead of 60 percent) to theseprojects. During FY95, all non-priority projects should be phased out, i.e., either completed or closeddown, so that no resources are wasted on them in the FY96 Budget.

5.11 Screening of Projects for 1995/96. The second phase of the development of the PIP wouldbe to screen all projects in the priority categories to weed out the non-performing ones. The decisionto include ongoing projects in the core PIP must not only be based on the criteria outlined above, butshould also take into account an assessment of the status of the project including, inter alia, the statusof implementation, implementation problems, time and resources required to completion, cost of shut-down, etc. However, for most ongoing projects, the technical information required does not appearto be readily available. The Planning Commission is attempting to conpile the basic data for allprojects in the Development budget from information that it is trying to collect from the projectimplementing agencies, but the work is far from completion. This work needs to be accelerated sothat the project screening exercise can be completed during FY95, with the objective that only highpriority, high quality projects will receive any fumding in the 1995/96 Budget.

apter 5 57

5.12 Consolidation of Projects. The present Development budget format breaks "projects", asrecognized by both the Government and the external donors, into activities depending on theirfunctions. For example the World Bank's Education Project appears about 10 times in the Ministryof Education's vote (under the subvotes of administration, planning, secondary technical educationetc.) as well as in the Office of the Prime Minister/ First Vice-President under the local governmentsubvote. The project is then again broken down into items under the subvotes. While this presentationmay be useful in linking individual activities to the Recurrent budget, it reduces the transparency ofthe Development budget and increases the need for management of many small project activities. Thepresent project fragmentation may complicate the assessment of project activities by individualministries and regions, and in many cases may lead to only parts of what has been designed as oneproject being included in the core program.

5.13 Ministries and regions should be asked to consolidate their development activities into largerprojects where this is feasible, with the understanding that such consolidation will not cause a lossof financial resources. However, it is not expected that such a request will lead to comprehensiveconsolidation in the short run. Furthermore, major consolidation would require changes in the formatof the Development budget, which should only be introduced after careful examination of allimplications, including for the linking with the Recurrent budget. In the meanwhile, it isrecommended that the second volume of the RPFB will complement the Development budget bypresenting the project profiles of the complete projects, rather than by presenting profiles of each ofthe over 1500 project activities.

5.14 Reclassijfcahon of Recurrent Expenditures. Preliminary analysis of the development projectsof the central spending agencies indicates that about one-fourth of the development expenditures inthe 1993/94 Budget are recurrent in nature. Furthermore, the investment nature of the remaining 75percent may be questioned, given that numerous projects are classified in this analysis as investmentssolely on the basis of the use of the term h rehabilitation" in the project description. This termappears to have been used often when the term "maintenance" would have been more appropriate.However, "maintenance' is more clearly a recurrent item, which may well discourage donor funding.

5.15 To improve the transparency of the budgets, expenditure which is recurrent in nature shouldbe reclassified as such, preferably in the Recurrent budget. This should be straightforward forrecurrent projects that are fully funded from domestic funds. However, it might not be possible fordonor-funded projects, particularly in view of donor hesitation to finance expenditure on currentaccount. If this is the case, such expenditure could remain on the Development budget as long as itis clearly identified as recurrent. This could be done by introducing classification by economicobjective in the Development budget. At present, there appears to be some confusion as to whatconstitutes investment as opposed to recurrent activity, and identical activities on the Developmentbudget are classified as recurrent or investment by different individuals, even within the sameministry. Establishment of standard criteria for the coverage of the Recurrent and Developmentbudgets, and for the sectoral and economic classification of development expenditure is needed, alongwith changes in the presentation of the Development budget in order to improve the transparency ofthe budget and facilitate economic analysis. 2

28 International standards for such classifications are detailed and explained in 'A Manual on Government FinanceStatistics". Intemational Monetary Fund (1986).

58 Chapter 5

5.16 Obtaining a Better Balance Between Recurrent and Investnent Expenditure. Tanzania'sbudget system includes two parallel systems of budgeting that separates the preparation, management,and monitoring of the Recurrent budget from that of the Development budget, both at the level of thesectoral ministries as well as at the level of the central ministries of Planning and Finance. One resulthas been that the Development budget has grown disproportionately without taking into account theimplications for the efficiency of investment of inadequate allocations of recurrent expenditures forthe O&M of completed projects. Such provisions have not been considered priority areas in thepreparation of the Recurrent budget. In fact, provision for O&M needs have had very low priorityin the preparation of the Recurrent budget and have often been calculated as a residual item.

5.17 The RPFB should now be used to integrate the two budgets, even if not formally, at least byincluding in the forward budgets estimates for the recurrent cost requirements of ongoing investments,in particular the full funding for the recurrent cost requirements of the core projects. Three yearestimates of the capacity to finance recurrent costs, calculated in the process of future RPFBs, shouldthen be the binding constraint for the targeted size and composition of investment. In this way theplanning process can bring about a better balance between investment and recurrent expenditure, withreduced, but more efficient investment. To accomplish this, information on recurrent costrequirements for larger projects, and at least estimates for groups of smaller projects, should berequested in the context of the second RPFB. In the future, before any new project is included in thePIP, its recurrent cost implications must be clearly estimated and taken into account.

5.18 Budget Unification and Budgeting Reform. The problem of the underfunding of recurrentcosts of investments is not caused simply by the formal separation between the two budgets. In manycountries where the Recurrent and Development budgets are managed bv the same authority or wherethe budget is "unified" to some degree, the recurrent cost is still calculated as a residual, as inTanzania, assuming resources and other budget targets. This residual methodology is the reason forits underfunding. Wherever this methodology of determining O&M expenditure is applied,underfunding of recurrent cost will be the most painless expenditure-cutting measure in the short run.Therefore, budget unification by itself may not automatically change the practice. What is needed inaddition to unification or closer coordination between the two budgets is the functional linkagebetween the two, i.e., one centered on the explicit calculation of the O&M costs of investment, withthe size and composition of investment determined by Tanzania's projected capacity for maintenanceand operation of completed projects.

5.19 A useful step towards the explicit linkage between the two budgets, which would not by itselfimply that the two budgets would be unified, would be to phase in program-based budgeting for theMinistries, which they could use as a management tool, and particularly for the preparation of theirbudget submissions. This would necessitate coordination, if not merging, of the now independentresponsibilities of preparing the Recurrent and the Development budgets in the ministries, and wouldhighlight the linkage, or lack thereof, between the two budgets.

5.20 Role of Donors. Given the high degree of donor funding, successful completion of therestrcturing of the investment portfolio will be difficult and will necessarily require extensive donorparticipation and cooperation. Less difficult decisions are expected for new projects, as donorcountries are expected to follow Tanzania's lead in their investment decisions. It is recommended thatTanzania advise the donor community at the earliest opportunity of its decision to restructure itsinvestment portfolio. In this way the donors can prepare for active involvement in the review ofinvestments in their portfolio.

Chapter 5 59

5.21 Another area where donor cooperation is urged is to assist the Goverment in its effort toimprove aid coordination. The current project-by-project, donor-by-donor approach to the PIPstretches to the limit the Government's weak capacity to coordinate donors and to manage its PIP.A better approach would be for the Government to adopt detailed sector strategies to achieve nationalpriority goals, and for the donors to jointly assist in the financing of the expenditure program thatwould be required to achieve these goals. Such a program would typically include recurrent, capital,and TA expenditures. This approach has already been tried in the case of the successful IntegratedRoads Project that was started in 1990. It is also being adopted for the social sectors. This approachhas several advantages over the current approach including conservation of Government's scarceresources for donor coordination and better prioritization and allocation of expenditures. Furthermore,as recurrent expenditures come to be financed by donors as an integral part of any expenditureprogram, it might serve to remove the existing bias that donors have in favor of funding capitalexpenditures. While this raises difficult issues of sustainability that need to be addressed in the future,it would at least improve the current imbalance between recurrent and capital expenditures and thusraise the efficiency of donor-funded expenditures in Tanzania.

Budgeting of Aid-Funded Expenditures

5.22 For a variety of reasons, including bureaucratic delays and weaknesses in the Government'sexpenditure control and monitoring systems, almost 85 percent of donor-provided development aidin Tanzania is controlled and disbursed directly by donors, completely bypassing the Government'saccounting system. This weakens the Government's ability to account for these expenditures. Forexample, in FY93, it was able to account for only two-thirds (T Sh 65 billion) of the amountbudgeted (T Sh 101 billion) for Development expenditures. It also makes the Government reluctantto budget for expenditures that it knows it will later be unable to account for. The incompletebudgeting in turn makes it difficult to record these expenditures. The weaknesses in the budgetingand accounting systems thus feed on each other and create a vicious circle of unbudgeted andunaccounted expenditures and reduce the Government's accountability to Parliament. The Governmentis now making an effort to break out of this vicious circle and to improve the management andtransparency of aid-funded expenditures.

5.23 Principle of Budgeting. Since donors provide aid in many different forms, an importantquestion to ask is whether all types of aid provided by donors belong on the recipient country'sBudget. Table 5.1 details the composition of aid (excluding debt relief) to Tanzania for 1991 (UNDP,1993). It reveals that almost 30 percent of all aid to Tanzania, amounting to over US$ 300 million,was provided in the form of technical cooperation. Of this, three-fourths was in the form of free-standing technical assistance (TA) while the remaining quarter was for investment-related TA. Thefree-standing TA is largely donor-controlled and contains a high element of the overhead costs ofdelivering the donor agency's aid program. 2' The bulk of these funds are also disbursed overseasdirectly by donors.

5.24 The general principle guiding budgeting should be that the budget should be complete andnot partial, and should present all categories of resources that are acquired and used by theGovernment. This is desirable for two reasons:

29 For an evaluation of the effectiveness of teclmical assistance in Africa, see Rethinking Technical Cooperation',Berg (1993).

60 Chapter 5

(i) transparency and accountability to Parliament; and

(ii) the use of the budget as a central mechanism for examining priorities and makingtradeoffs.

Table 5.1: Composition of Extemal Assistance by Type, 1991

US$ Million Percent

Free Standing Technical Cooperation 238 22.5

Investment-related Technical Cooperation 73 6.9

Investment Project Assistance 416 39.2

Balance of Payments Support 275 26.0

Food plus Emergency Aid 17 1.6

Unallocated' 41 3.8

Total 1060 100.0

i Disbursements from donors who provide only aggregate data.

Source: Development Cooperation, Tanzania (UNDP, 1993).

5.25 In practice, however, the Tanzanian Government (in common with a number of other aid-receiving Governments) is reluctant to show on its Budget aid that it has no control over and forwhich the funds are not spent in Tanzania, as is the case with most free-standing TA. This area,therefore, remains a difficult one for most Governments to deal with. For all project-relatedexpenditures, however, whether for capital investments or for TA, the Government is involved in thedecision-making process and agrees to the use of funds for those purposes. At a minimum, therefore,these funds need to be fully reflected in the Development Budget. As discussed above, even excludingall free-standing TA, the Tanzanian budget in FY94 only covers about 60 percent of all project-related expenditures.

5.26 Recently, the Government has launched a UNDP-assisted NaTCAP (National TechnicalCooperation and Assistance Program) in Tanzania. The objective of this exercise is for theGovernment to do an assessment of TA programs that would describe the number and types of TApersonnel in the country; identify problem areas in TA; outline policies relevant to technicalcooperation; and introduce better technical cooperation progranmiing. This exercise needs to becompleted soon so that it can help Tanzania gain more information on the nature and composition ofthe large volumes of free-standing TA thit is provided to it. As this information becomes available,the coverage of the budget can be extended gradually to include some of the free-standing TA,starting with the larger TA projects that the Government agrees to with donors.

Chapter 5 61

5.27 Practice of Budgeting. The budgeting of aid-funded expenditures in Tanzania is done in avery ad hoc fashion and consists of a three step process depicted in Table 5.2 below. I At Step 1,donors make annual commitments of aid to Tanzania, for which the protocols are signed by theMinistry of Finance. At Step 2, the MOF translates these commitments into expected disbursementfigures. And at Step 3, the MOF and the Planning Commission decide jointly as to how much of theexpected disbursements should be shown on Budget. Unfortunately, because of the ad hoc way ofgoing from Step 1 to Step 3, the budgeted numbers bear little resemblance in the end to the originallycomniitted numbers.

Table 5.2: Budgeting for Aid-Funded Project Expenditures, 1993/94

Donor MOF's Expected DevelopmentCommitments at Donor Budget, FY94 as aJuly 1993 CG Disbursements' % of (2)US$ million as a % of (1) (3)

15 Multilaterals 398 21.9 89.2IDA 185 14.0 178.7ADB 70 7.2 210.8EEC 42 81.6 35.5EIB 28 24.2 0.0Kuwait Fund 25 0.0 na10 others 48 32.0 52.8

19 Bilaterals 401 39.8 105.9Denmark 74 33.3 191.6Germany 61 22.2 64.8Norway 48 56.8 162.0Sweden 47 100.0 79.3l

l Netherlands 30 31.6 104.7l14 others 141 26.7 57.2

AUl34 Donors 2799 30.9 100.0l

I It should be noted that dthese numbers are not actual disbursement figures as reported by donors.2 Only 24 of these donors were reptesented at the 1993 CG Meeting.

5.28 Column I of Table 5.2 indicates the commitmetfts made for project aid at the lastConsultative Group (CG) meeting of Tanzania's donors held in July 1993. At that meeting, 24 donorspledged aid to Tanzania. For most donors, this was just a reaffirmation of commitments already madeto Tanzania earlier in the year in the context of annual aid consultations. The Table shows that aboutUS$ 800 million was pledged for project financing for Tanzania. Column 2 of the Table indicates theexpected disbursement figures that the Ministry of Finance provided to the Planning Commission forthe purpose of formulating the Development Budget for FY94. Column 2 shows that, on average,the MOF expected only about 31 percent of funds committed for projects to be disbursed in a given

30 For illustrative purposes, Table 5.2 lists the five largest multilateral and bilateral donors (based on the pledges madeat the July 1993 CG meeting). For a complete list of donors and their pledges, see Annex Table IV.9 in Volume 11.

62 Chapter 5

year. Underlying this average is a huge range that goes all the way from zero percent (for the KuwaitFund) to 100 percent (for SIDA). Factors that may legitimately account for this range include pastdisbursement rates of donors' projects, the age of their portfolio, and so on. However, given that theMOF has no database that it could rely upon for this information, it is not clear exactly how thesedisbursemnent figures are put together. Finally, Column 3 shows the aggregate amounts, by donor.that are actually shown in the Development Budget (which is fortnulated by the PlanningCommission) as a percentage of the figures provided by the MOF in Column 2. It should be notedthat while the total amount in the Development Budget is the same as the aggregate sum provided bythe MOF, its distribution across donors is quite different and ranges from zero percent (for EIB) toover 200 percent (for the ADB). How the aggregate sum to be budgeted is distributed across donorsis not very clear, but probably depends on the submissions of various ministries and the informationthat the Planning Commission has on the implementation status of the various projects.

5.29 What these numbers indicate is that as part of the budgeting process, the Government firstdecides on the aggregate size of the Development budget, and then somehow distributes the budgetedfunds across various projects, adding up to a somewhat ad hoc distribution of budgeted funds acrossdonors. During the FY94 budgeting process, budget submissions of the spending ministries and otherproject implementors totalled T Sh 230 billion (US$ 510 million) for externally-funded projects. Thiswas then reduced by 40 percent to meet the budgetary ceilings for FY94. If all of these expenditureshad been budgeted, the coverage of the Development budget could have been expanded almost to thefull 100 percent of project financing provided each year by donors (about 525 million) rather thanto the current 60 percent.

Recommendations for Reform of the Aid Budgeting System

5.30 In the 1994/95 Budget, the Government needs to improve the cover,-ge of the Developmentbudget further and to bring 100 percent of the project-related aid and some of the larger free-standingTA projects on Budget. To budget properly for Development expenditures, the Government wouldneed to forecast expected annual disbursements for 1500 projects (or components), to be financed by34 donors. There are a number of technical problems with this exercise that will necessarily introducea degree of uncertainty into the whole budgeting process. Different donors hold bilateral consultationson their aid programs with the Govermment of Tanzania at different times of the year; their fiscalyears vary and sometimes differ considerably from Tanzania's; the size and composition of donors'aid programs vary from year to year, and so on. Nevertheless, the current process could be improvedupon if certain measures were adopted. Firstly, if a database was compiled on the historicaldisbursement profiles of all projects, then for on-going projects at least, the transformation of aidcommitments by donors to expected aid disbursements could be done in a more systematic fashion.Even though work was initiated several years ago to compile such a database in the Ministry ofFinance, progress has been extremely slow, and the work is far from completion. Secondly, closercooperation during the annual budgeting exercise between the MOF, which is responsible for thedonor consultation process, and the Planning Commission, which is responsible for putting togetherthe Development budget, should help to tackle some of the remaining problems. Given the large sizeof the aid program and its tremendous impact on public expenditures, the costs of poor budgeting andthe consequent misallocation of aid-funded expenditures can no longer be ignored. One way ofensuring a closer link between the activities of the Planning Commission and the Ministry of Financewould be by merging the two institutions.

Chapter 5 63

Accounting of Aid-Ftnded Expenditures

5.31 As indicated earlier, accounting for donor-financed projects is a major problem for Tanzaniaand in FY93, the Governmuent was able to account for only two-thirds of all budgeted Developmentexpenditures. One of the major causes of this problem is that donors disburse over 85 percent ofDevelopment expenditures directly to projects and bypass the Government's accounting system. Basedon the method of disbursement of funds, extemally-financed projects can be divided into threegroups:

(i) 'C-Funded" or cash-funded projects for which cash is paid in advance to theGovernment;

(ii) "R-Funded' or reinbursable projects for which the Govemment uses its own fundsand then clains reimbursemnent from donors; and

(iii) "D-Funded" or directly-funded projects for which donors disburse funds directly tothe projects.

5.32 In Tanzania, the bulk of externally-financed projects are D-funded. In FY94, cash-fundedprojects account for 7 percent; reimbursable projects for another 7 percent; and directly-fundedprojects for the remaining 86 percent. The mission was informed that accounting for "C' or "R"funded projects was not a problem. For the "D" funded projects, accounting is an old and well-acknowledged problem, which has been highlighted perennially in the annual reports of the Controllerand Auditor-General (CAG). His reports list this as one of the major factors for his refusing to certifythe annual appropriation accounts of a number of spending agencies. Of the 59 total votes (orspeding agencies) in FY91, only 9 had accounts that were certified by the CAG; the remaining 50(85 percent of the votes) were unable to have their accounts certified.

5.33 The main reason given by line Ministries for their inability to account for D-funded projectswas the lack of supporting expenditure documents from donors who had paid for the equipment 9 -dother services overseas. Donors indicated that because of the large volume of transactions for whichfunds were paid overseas, the cost of transporting the mass of paper that would be required assupporting documents was prohibitive. Instead, some donors were providing aggregate disbursementreports on a quarterly basis to the MOF. In addition to these technical accounting problems, part ofthe problem of poor accounting for aid is also related to the poor budgeting practices. If a project isoff-budget, or if adequate funds are not budgeted for it, then it becomes difficult for the spending unitto account for expenditures that are actually taking place for that project. This appeared to be acommon problem faced by many project managers.

5.34 There is an urgent need to reform the system of accounting for D-funded expenditures. Notonly does the current system not work, it is also extremely cumbersome and may contravene the law.According to the Government Loans, Guarantees and Grants Act of 1974, all foreign loans and grantsmst be paid into the Consolidated Fund and then be appropriated out by the Parliament. In caseswhere no provision was made for the expenditures in the Development budget and payments weremade by donors through special accounts or deposit accounts, the transactions did contravene the law.However, in cases where expenditure provision was provided in the Development budget, the MOFdesigned a complex (but legal) system to capture the transactions in its accounts. The problem withthe system, however, is that it generates a lot of paperwork and makes tremendous demands on themanagerial and accounting capacity of the system. Unfortunately, as long as D-funded expenditures

64 Chapter S

continue to be approved in a manner that assumes that they must be drawn from the ConsolidatedFund, there is no other way to account for D-funded expenditures.

5.35 The Government has recognized the severity of this problem and, in an attempt to resolveit, had appointed a Task Force which submitted its report on Problems of Accounting andMonitoring of Development Aid Funds Disbursed Direcdy to Projects ("D7 Funds) in May 1992.On the basis of this Report, the Government adopted a new procedure for the accounting of D-fundsand issued a directive for its implementation in July 1993. One of the key features of the newdirective was that, henceforth, all imported goods were to be referred to the MOF for issuance of acertificate of release. As recognized by the officials of the MOF, however, while this would provideadditional information on the importation of equipment for projects, it still would not be able to dealwith the problem of accounting for other types of expenditures, such as for services for whichpayments had been made overseas. Another problem with the procedure is that due to the limitedcapacity of the MOF to deal with the additional paperwork required, the new procedure could alsobecome a bottleneck in the release of goods to projects, and hence cause delays in projectimplementation.

Recommendations for Reform of the Aid Accounting System

5.36 It seems unnecessary and impracticable for the Government to try and account for the use ofD-funded expenditures in the same way that it accounts for the use of funds that it exerts somecontrol over. Given that donors maintain detailed accounts of D-funded expenditures for their ownpurposes, the Government could set up a simplified system that utilizes this informnation. Such asystem would consist of donors reporting disbursement figures to the Go =rnent on a quarterly basisand for these reports alone to suffice as statements of expenditure for accounting purposes. TheAccountant General confirmed that these donor reports would be acceptable for accounting of D-fumdsprovided they contained the required detail in terms of Ministry, vote, sub-vote and project items andfurthermore, provided they distinguished between the cost of equipment and other services. A simpleform (such as that depicted in Appendix 5.1 in Volume II) would suff. e for this purpose. TheController and Auditor General also confirmed that he would accept donors' reports as long as theywere signed by the Head of the Donor Mission. For equipment, however, he emphasized that theMOF may need to obtain as many supportiuig documents as possible through other channels.

5.37 Adoption of this new system for the reporting and accounting of D-funded expenditures bythe Government and by donors is urgently required. To make this system work, however, will requirea considerable amount of work both from the Goverment and from donors, especially in its first yearof implementation. There will need to be regular consultations between the Government and thedonors in order to establish a mapping between the way projects are defined by donors and the waythey are defined in the budgeting system of Tanzania, according to ministry, vote and sub-vote. Thequarterly reporting system to be set up could start by trying to capture disbursement figures for FY92and FY93. This would facilitate the reporting of actual expenditures for previous years in theDevelopment budget-a practice that has not been followed since FY81. It would also vastly improvethe budgeting process for aid-funded expenditures since it would allow fuiture disbursements to beprojected more systematically on the basis of past disbursement patterns, rather than in the currentad hoc fashion.

Chapter 5 65

5.38 An additional area of reform that is suggested is to allow D-funds to be accounted for asAppropriation-in-aid and to change the layout of the Development budget to reflect this. 3' Insteadof perpetuating the current myth that D-funds were received as cash from donors, paid into theConsolidated Fund, and then voted out, the new system would make use of a provision of the existinglegal system that allows expenditures to be financed through credit. This change would reduceconsiderably the volume of checks and other paperwork that is currently exchanged between lineministries and the central ministries. It would also deal with another major accounting problem in thecurrent system that arises when line ministries receive more funds from donors than budgeted. Thecurrent accounting system cannot accommnodate this since technically the ministries cannot spend morethan the budgeted amount. A similar accounting problem is created if supporting documents forexpenditures, or for that matter, donors' quarterly reports, arrive too late to be included in the currentfiscal year accounts. For expenditures incurred in the last quarter of the fiscal year, i.e., for thequarter ending in June, donor and other reports will necessarily not be available at least till the Julyof the next fiscal year. The current system has no room for adjustment since Exchequer Issues lapseat the end of the financial year as stated in Section 20 of the Exchequer and Audit Ordinance. Theonly alternative for documents received late to be included in the previous year's accounts is to allowthe D-funds to be accounted for as Appropriation-in-aid (which is possible under the current legalsystem).

31 Three alternative formats for the new layout of the Development budget are suggested in Appendices 5,2-5.4 inVolume 11.

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