Contingent Liabilities Study · 2015. 8. 13. · Tanzania - Contingent Liabilities Study Nov. 2014...

Financed by the

European Union

Contingent Liabilities Study

EUROPEAID/132633/C/SER/MULTI Framework contract Beneficiaries – Lot n°11 – Macro Economy, Statistics and Public Finance Management

Draft final report

Client: Delegation of the European Union to Tanzania

ECORYS PFM Consortium

Implemented by:

Sanga Sangarabalan

Leonard Chacha Kitoka

Rotterdam, 8 December 2014

Financed by the

European Union

Initials Date

Author(s)

SS _ LCK 28-11-2014

Counter-reading

FPh FPo

Lay-out / editing DvW/ EV 8-12-2014

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Tanzania - Contingent Liabilities Study Nov. 2014

Abbreviations 5

Executive Summary 7

1 Introduction and Scope of the Contingent Liabilities Study 15

1.1 Overview 15

1.2 ToR for the Contingent liabilities study 16

1.3 Distinction between Liabilities and Contingent Liabilities 18

1.4 Comparison with the Contingent Liability items selected under National Contingent

Liabilities study 21

1.5 Scope and Coverage 22

2 One-off Loan Guarantees 25

2.1 Definition and Coverage: 25

2.2 Aggregate Trends and Stocks: 26

2.3 Case studies: 26

2.4 Energy Sector 27

2.5 Loans Offered by Pension Funds under Guarantee 28

2.6 Other Sectors Related Public Corporations and Agencies 32

2.7 TA’s Overall estimate 33

2.8 Summary of Recommendations: 33

3 Standardised Guarantees 35

3.1 Introduction: 35

3.2 Export Credit Guarantee Scheme: 35

3.3 Small and Medium Enterprise Credit Guarantee Scheme: 36

3.4 Higher Education Student Loan Scheme 37

3.5 Time trends for Total Value of the Guarantees for Export Credits scheme and Higher

Education loan scheme 38

3.6 Default rates for the Schemes at end 2013 38

3.7 Summary of Recommendations 39

4 Guarantees under Pensions and Social Security Schemes 41


4.2 Assessment of the Social Security Sector Deficits 42

4.3 Asset Diversification 47


5 Guarantees Issued Under PPP Arrangement 51


5.2 Procedural steps for a PPP arrangement 52

5.3 Institutional Arrangements under the Special Bill Supplement (Nov 2014) and Capacity: 53

5.4 Related PPP Finance and Risk Management 53


6 Other Contingent liabilities and Credit Risk related debt 57


6.2 Legal Claims: 57

6.3 On-Lent Loans 58

6.4 Other contingent liabilities 59



7 Sustainable Level of Total Liabilities 61


7.2 Main indicators and dynamics of Sustainability 61

7.3 Theoretical Background - Debt Dynamics and Debt Stabilizing surplus 62

7.4 Debt Sustainability Analysis- Approach and Comparisons 64

7.5 National Debt Sustainability Analysis 2013 64

7.6 Debt Sustainability Analysis carried out by IMF (Article IV) 2014 65

7.7 Debt Sustainability Analysis carried by the TA 67


8 Legislative Framework 71

8.1 Introduction 71

8.2 Review and recommended revisions 71

8.3 Guidelines and procedures for loan guarantees and on-lent loans 73

8.4 Other related legislation 74

8.5 Legislative framework for Pensions and Health Insurance Sectors 75

8.6 Legislative framework for Public Private Partnerships 76


8.8 References of the Main Acts and Regulations reviewed: 79

9 Disclosure and Reporting of Contingent liabilities 81

9.1 Statistical Presentation 81

9.2 Fiscal Risk Reporting of Contingent Liabilities 82

9.3 Accounting Disclosure of Contingent Liabilities 83

9.4 Contingent liabilities of Public Authorities and other Bodies (PAOBs) and LGAs 84

9.5 Accounting treatment of contingent liabilities 84

9.6 Disclosure of Contingent Liabilities in Central Government 85

9.7 Disclosure of contingent liabilities in PAOBs 86


10 Institutional Arrangements for Managing Contingent Liabilities 91


10.2 Recommended Institutional Structure and Responsibilities: 91

10.3 Terms of Reference and Responsibilities 92

10.4 Contingent Liability Committees 93

10.5 Information Flow arrangements 93


Annex 1: People contacted and their organisations 97

Annex 2: Questionnaires 99


Abbreviations

AG’s Office Attorney General’s Office

ATCL Air Tanzania Company Ltd

BoT Bank of Tanzania

CFS Consolidated Financial Statements

CHC Consolidated Holdings Company

CPAD Commissioner Policy Analysis Division

CRDB Credit Rural Development Bank

CVC Consolidated Holding Corporation

DAWASCO Dar es Salaam Water and Sewerage Corporation

DAWASA Dar es Salaam Water and Sewerage Authority

DBFOT Design Build Finance Operate Transfer

DSA Debt Sustainability Analysis

DSF Debt Sustainability Framework

ECGS Export Credit Guarantee Scheme

EWURA Energy and Water Utilities Regulatory Authorities

GLGG Government Loans, Guarantees and Grants Act

HESLB Higher Education Students' Loans Board

IPSAS International Public Sector Accounting Standards

LAPF Local Authorities Pension Fund

LGA Local Government Authority

MDAs Ministries Departments and Agencies

MoF Ministry of Finance

NBAA National Board of Accountants and Auditors

NHIF National Health Insurance Fund

NHC National Housing Corporation

NMB National Micro-Finance Bank

NSSF National Social Security Fund

PAOBs Public Authorities and Other Bodies

PER Public Expenditure Review

PFI Private Financial Institutions

PPF Parastatals Pensions Fund

PPP Public Private Partnerships

PSPF Public Sector Pensions Fund

RAHCO Reli Assets Holding Company

SME Small and Medium Enterprises

SME-CGS SME – Credit Guarantee Scheme

SSRA Social Security Regulatory Authority

TA Technical Assistance

TAA Tanzania Airports Authority

TANESCO Tanzania Electric Supply Company Ltd

TAZARA Tanzania Zambia Railway

ToR Terms of Reference

TPA Tanzania Port Authority

TRL Tanzania Railways Limited

TTCL Tanzania Telecommunications Company Limited

TR Treasury Registrar

TSh Tanzania Shillings

TZS Tanzania Shillings


Executive Summary

1. Contingent liabilities of the Government are liabilities that result in most cases from various types

of guarantees offered by the Government and in some cases by abnormal events such as

borrowing to resolve financial crises or natural disasters. Loan Guarantees are the easiest to

identify as explicit contingent liabilities and the Government is legally obliged to repay the lender

when the borrower defaults or cannot repay the whole amount. In Tanzania, over time, the amount

of guarantees requested and issued have been increasing, creating a potential risk to the

Government budget and threatening fiscal sustainability. The Ministry of Finance conducted an in-

house study in 2012 on contingent liabilities with the overall objective of evaluating the impact of

contingent liabilities to the government’s budget, public debt portfolio and fiscal risks associated

with contingent liabilities. The total contingent liabilities was estimated to be Tsh 7.008 bn (as end

June 2012), in which the main contributor was Claims by Social Security Funds (Tsh 4.13 bn). To

study this subject in more detail, the Government embarked on a Technical Assistance project with

financial support from the European Union.

2. The first and most important issue was the proper classification of direct liabilities and contingent

liabilities. This should be followed by the identification of the various categories that are measurable

within contingent liabilities. Contingent liabilities are also divided between explicit and implicit

liabilities, the former is characterised by a legal commitment by the Government whereas implicit

liabilities are identified in terms of moral commitment. For the purpose of this study the TA identified

and estimated; one-off guarantees, standardised guarantees, pension guarantees, PPP

guarantees, litigations and on-lending that includes credit risks (the final borrower is responsible for

repaying the loan). The total contingent liabilities (explicit) with on-lending (credit risk) was

estimated to be Tsh 9333 bn, comprising Pension arrears to PSPF (Tsh 4800 bn), One-off and

standardised guarantees (Tsh 2116 bn), Litigations (Tsh 1855 bn) and On-lending with credit risk

(Tsh 562 bn). This total figure was the basis on which (after adjusting for default probabilities) the

Debt Sustainability Analysis was carried out. However, with regard to pensions, the total amount of

direct and contingent liabilities after applying harmonisation rules is estimated to be Tsh 12.3

Trillion. TA recommends that proper and timely record keeping and reconciliation must be

established and maintained for all the categories of measurable contingent liabilities.

3. The TA’s estimation of contingent liabilities was carried out by examining various consolidated

financial statements, databases and interviews held with selected public corporations (both

operational and asset holding), pension funds, commercial banks, regulatory bodies and relevant

government departments and agencies. Relevant questionnaires were prepared and sent in

advance to these agencies so as to minimise the interview period.

4. After estimating the value of contingent liabilities, a DSA was carried out using the IMF DSF

template to examine whether the total liabilities (debt and contingent liabilities) is sustainable. The

TA used the same macroeconomic and debt assumptions of the National DSA that was carried out

in September 2013. The contingent liabilities used in this study was the value estimated by the TA.

To use this value as an input, it has to be converted in to a debt equivalent which means that

different default rates (first estimated) had to be applied to each category of contingent liabilities.

The final input to the DSA was equivalent to Tsh 7971 bn paid equally over 3 years starting from

2014. The results obtained under this study, were compared with the National DSA and IMF (2014)

DSA results. In all three cases the debt indicators mainly the Debt burden indicator represented by

Present Value of Debt to GDP, was deemed sustainable under globally accepted threshold and

East African Monetary Union Threshold. The indicators were lower than the stipulated limits under


these thresholds, though the TA study gave a higher ratio compared to the other two studies,

largely due to a higher contingent liability figure.

5. The TA examined the legislative framework that governed the various guarantees. It reviewed

the Loans, Grants and Guarantees Act (1974, revised 2003) and the accompanying regulations. TA

has provided several suggestions to improve the current legislation which stipulates guarantee of

loans, export credits and SME credits. It pointed out the need to set a properly defined debt limit

and prepare guidelines and procedures based on a credit rating methodology for the issuance of

guarantees. In addition to this, the TA also reviewed the Public Corporations Act (1992), PPP

policies (2009), Act (2010) and Regulation (2011) and the latest Special PPP Supplement Bill

(2014). The TA also examined the various Pension regulations and Principles including the current

investment guidelines and opportunities. A detailed list of recommendations is given in the

summary of recommendations later in this section.

6. Under disclosure and reporting, TA has recommended that more needs to be done before next

year’s budget preparation. The first step is the identification and listing of all guaranteed loans and

credits including on-lending loans with credit risk. Preparation of a complete list will be good start

for assessing fiscal risk due to contingent liabilities. To this end, a narrative memorandum attached

to the budget would be also a progressive step. At a later stage, categories of contingent liabilities

can be identified and probable default estimated. TA acknowledges that there must be a fine

balance maintained with revealing too much in terms of probable defaults that may cause excessive

public concern and maintaining transparency and accountability for contingent liabilities. It will be

also a progressive step if future DSA exercises are carried out that includes explicit and

measurable contingent liabilities. The government may wish to consider setting a debt limit that

takes in to account both debt liabilities and contingent liabilities. This will help to monitor and

manage not only contingent liabilities but also the overall liability ratios.

7. The second part of the disclosure and reporting will be to meet the accounting standards set

under IPSAS 19 and IFRS 37. Although most government entities including the central government

disclose contingent liabilities in their financial statements, the information that is provided is not

always appropriate enough to help in decision making. The disclosed information in financial

statements is expected to be meaningful enough to provide information for assessing potential

fiscal impact of contingent liabilities, information should be presented to explain the government’s

policy and rationale in support of contingent liabilities, and information should disclose stock of

contingent liabilities in comparable years - this is what the TA recommends the government to

improve upon.

8. There are several recommendations to implement and without a proper organisational structure

and functional responsibilities it will be difficult to make any improvements in monitoring and

managing of contingent liabilities. TA has recommended an organisational structure based on a

Front- Middle-Back Office arrangement that will enable strengthening proper monitoring and

managing of contingent liabilities, similar to a Debt Management Office. It has also mentioned

potential staff requirements and defined the functions to be carried out. However, the TA has learnt

that given the budget constraints this may take some time to implement and therefore has

presented an interim arrangement where a minimum of two half time staff- one from CPAD and one

from the Accountant General’s Office- can be recruited to carry out these functions.

9. Finally, the report contains 45 recommendations in total; some can and must be implemented in

the short term and others in the medium term. The following table highlights these

recommendations under various categories, responsible organisation/agency and time frame.


Summary of Recommendations:

Recommendations Comments Responsible

institutions/

agencies

Short

term/Medium

term

One-off guarantees

Recommendation 1-

Data quality

verification, updating

and information

sharing

Data on one-off loan guarantees outstanding

should be verified that is accurate and

shared on Quarterly basis among the

borrower, Treasury Registrar, Debt Unit and

Accountant General’s Department.

CPAD, AcGen, TR

and Borrower

Short term

Recommendation 2-

Guarantee process

A more stringent guidelines of guarantee

approval process (credit rating methodology)

should be introduced.

CPAD, AcGen,

AG’s Office

Medium term

Recommendation 3 –

Compliance to IPSAS

and IFRS accounting

standards

Disclosure and reporting of guarantees

should adhere to relevant IPSAS and IFRS

standards. Fiscal risk assessment due to

one-off guarantees must be prepared as part

of the budget statement.

AccGen Medium Term-

preferably for

budget 2015

Recommendation 4-

cases of default to be

resolved

These should be resolved by planned arrears

clearance strategy, securitisation and

restructuring methods.

CPAD, ACGen,

AG’s Office and

Borrower

Medium term

Standardised Guarantees

Recommendation 1:

continue with the

schemes with Export

and re-start SME

guarantee schemes

This will enable small scale cash crop

production for exports and SME

manufacturing to increase. However sound

credit rating methodologies and proper

assessment of production potential must be

employed to re commence the SME scheme.

BoT, Commercial

Bank and

Enterprise

Medium term

Recommendation 2:

Continue Higher

education loan

scheme

Though the intention of the scheme is good

recovery rates must improve, especially to

service all 3 initial loans provided by PSPF.

HELSB Short term

Recommendation 3:

data improvement and

reporting

Data is reasonably good but need to be

regularly provided to MoF for calculating

exposure and the difficulties faced in

repayments. Also helps to prepare fiscal risk

reports.

BoT, Banks Medium term

Pensions Guarantees

Recommendations 1:

The Actuarial Report

Ensure that staff of Contingent Liabilities Unit

receives a copy of the Actuarial report from

each Pension Fund and NHIF and

understand and review the position.

In future a

Contingent

liabilities Unit in the

MoF. In the interim,

staff responsible

for contingent

liabilities in CPAD,

MoF.

Short term



institutions/

agencies

Short

term/Medium

term

Recommendation 2:

Loans offered by

Pension Funds

Ensure that guarantees offered on pension

funds are assessed properly in terms of

credit risk.

Government/ pension funds should agree a

revised repayment schedule for loans

defaulted.

In the future an

established Middle

and Back offices of

a Contingent

Liability Unit. In the

interim, CPAD and

Acc Gen’s office.

CPAD and

Accountant

Generals’ Office.

Medium term

Short term

Recommendation 3:

Develop the

Government

Securities market

Develop the Market for longer term maturity

and index linked bonds so that opportunities

for investment for pension funds are

increased.

CPAD, Accountant

General’s Office

and Bank of

Tanzania

(Domestic Market

Development

office).

Medium term

Recommendation 4:

Reform the investment

guidelines

Government should consider removing

restriction to invest abroad so that pension

funds can invest in more secure long term

securities.

Ministry of Finance

and Bank of

Tanzania.

Medium term

Recommendation 5:

Resolving PSPF

arrears

An action plan to be developed to resolve the

arrears owed to PSPF

Ministry of

Finance, SSRA

and PSPF

Short/Medium

term

PPP Guarantees

Recommendation 1:

functions to be clearly

defined for PPP

related public finance

and risk

Estimation/calculation of Public finance

needs and fiscal risk sharing arrangements.

Prime Minister’s

Office- PPP Centre

and MoF.

Short term

Recommendation 2:

Clear Terms of

Reference of PPP

finance in terms of

institutional

responsibilities

The role of Finance staff in assessing and

evaluating PPP finance related matters.

Prime Minister’s

Office- PPP Centre

and MoF.

Short term

Recommendation 3:

Strengthen

Institutional capacity

for PPP finance

Both theoretical and practical on-the-job

training will be required to strengthen

capacity in overall functions-identification,

assessment, monitoring, managing and

reporting – of PPP.

Contracting

authorities, Parent

ministries, PPP

Centre, Ministry of

Finance.

Short to

Medium term

Litigation and Other Credit Risks

Recommendation 1:

improvement in

access to data and

default calculation

Especially in the area of litigation cases and

probability of winning/losing

CPAD, AccGen

and AG’s Office

Medium term



institutions/

agencies

Short

term/Medium

term

Recommendation 2:

Strengthening data

collection and credit

risk analysis

Strengthening data management on both

sides – Lender/Government and

Government/final borrower

CPAD, AccGen,

TR and borrowing

agencies

Short to

Medium term

Recommendation 3:

improvement in on-

lending agreements

TA found that on-lending agreements were

not prepared or signed. This needs to be

strengthening with clear terms and conditions

CPAD, AccGen,

Final borrower

Medium term

Recommendation 4:

Collection of data and

analysis of other

explicit and implicit

liabilities

Further expansion in terms of comprehensive

coverage

CPAD Medium term

Recommendation 5:

Reporting and

disclosure of these

contingent liabilities

Reporting and disclosure on Fiscal risk

implications and meeting accounting

standards

CPAD,AccGen Medium term,

preferably for

2015 budget

Debt Sustainability with Contingent Liabilities

Recommendation 1:

Preparation of a

Comprehensive DSA

Ensure that the DSA is carried out taking in

to consideration the value of contingent

liabilities measured as accurately and

comprehensively as possible.

CPAD, other

departments of

MoF, BoT,

Statistics etc

Medium term

Recommendation 2:

improvement of data

base on contingent

liabilities

Data collection, coordination of information

flow and identification should be improved

CPAD, AccGen

and other related

information

providers

Medium term

Legislative Framework for Guarantees

Loans Grants and Guarantees Act (1994, revised 2003)

Recommendation 1 Section 13 only covers loan guarantees

whereas it should cover all guarantees.

MoF and Attorney

General’s Office

Short term

Recommendation 2 Section 13 A, under (b), guarantee limit is

stipulated as 70 per cent, while when all

other guarantees are included the maximum

is 85 per cent. Also though there is a need to

mention the limit, it is not important to

mention a figure such as 70 per cent. The

figure for the limit can be mentioned in the

regulations and respective policy guidelines.

MoF and Attorney

General’s Office

Short term

Recommendation 3 In general the regulations contain some

sections on the guarantee process which

clearly should be in policy guidelines or

procedures. It is recommended that these

sections are reviewed and clear distinction is

made between what should be in the

regulations and what should be in policy

guidelines.

MoF Short/medium

term

Recommendation 4 A guarantee application must be

accompanied by a minimum set of financial

MoF Medium term



institutions/

agencies

Short

term/Medium

term

performance in the recent past and the

organisational structure of the applying

enterprise. It is advised that a proper credit

scoring model is developed (i.e. South Africa)

and applied based on various financial

performance indicators. This will enable to

assess the repayment capacity of the

applicant. This method can also be used to

assess `on-lent’ borrowers.

Recommendation 5 Though Part II, under foreign loans, cover

some aspects of how foreign loans should be

raised and lent to public corporations and

other agencies, it does not clearly define the

whole procedure for `on-lent’ loans. The Act

should include a section that clearly covers `

On-lending’ to public corporations and local

authorities. The two categories namely on-

lent loans that are repaid via the budget and

repaid by the agency via its own funding

sources must be clearly expressed.

MoF Short term

Recommendation 6 It is important that in all cases the subsidiary

agreement (between the Government and

the final borrower) is prepared.

MoF Short term

Recommendation 7 The Government may wish to consider

issues relating to guarantee fee, recourse

action for defaults, etc. The best practices

demands that these are stipulated to improve

credibility of the borrower and encounter

defaults.

MoF and Attorney

General’s Office

Short term

Recommendation 8 A section called `Reporting to Parliament’ be

included in the revised Loans, Guarantees

and Grants Act.

MoF and Attorney

General’s Office

Recommendation 9 The sustainable debt limit (i.e. gross or net

debt of GDP) should be ideally included in

this Act. If not it should be included in GLGG

Act. It should clearly define whether

guarantees are included in the total debt limit

or not.

MoF Short term

Recommendation 10 More detailed coverage of contingent

liabilities should be included. It is also

recommended that when reporting a detailed

list of contingent liabilities the regulations

should clearly stipulate that liabilities other

than loans and credit guarantees should be

included since guarantees are already

covered under Loans, Guarantees and

Grants Act.

MoF Short/medium

term

Additions to the Public Finance Act (2001 and Revised 2004) and Regulations (2001)



institutions/

agencies

Short

term/Medium

term

Recommendation 11 Should include article highlighting pricing or

tariff setting and referring to EWURA.

EWURA Short/ medium

term

Additions to Pensions

Act (fragmented acts

at present)several at

the moment)

Recommendation 12 Reforms to unify and harmonise pension acts

for ensuring pensions benefit guarantees

SSRA Short term

Additions to PPP Act

(2010) and PPP

Regulations (2010)

and Special

Supplement Bill

(2014)

Recommendation 13 Clarification on institutional responsibilities

and functions in PPP public financing and

fiscal risk allocations.

MoF and Prime

Minister’s

Office(PPP Centre)

Short term

Recommendation 14 In the Act, what types of financing modalities

are permitted should be stipulated. A brief

description of the various risks to be shared

between private and public sectors should be

included.

MoF and Prime

Minister’s

Office(PPP Centre)

Short term

Recommendation 15 In the Regulation, details of risks should be

included.

MoF and Prime

Minister’s

Office(PPP Centre)

Short term

Disclosure and Reporting

Recommendation 1:

Individual loan

guarantee and on-lent

loan with credit risk

Details of each loan guarantee, credit

guarantee and on-lent loan (with credit risk).

Proposed table format 9.2.1 a.

MoF (Budget, Debt

and Acc Gen)

Short term

Recommendation 2:

Aggregate statement

of Current and

previous year on


Disclosure /reporting of aggregate amounts

of previous and current year of major

categories of contingent liabilities 9.2.1 b.

MoF (Budget, Debt

and AccGen)

Short term

Recommendation 3:

Aggregate fiscal risk

statement

Fiscal risk due to contingent liabilities for the

forthcoming year. Exposure and probable

outcome. an attachment to the national

budget.

MoF (Budget and

Debt)

Short term

Recommendation 4:

The Government

should fully adapt to

the requirements of

IPSAS 19 when

disclosing contingent

liabilities.

The disclosed information in financial

statements is expected to be meaningful

enough to provide information for assessing

potential fiscal impact of contingent liabilities,

information should be presented to explain

the government’s policy and rationale in

support of contingent liabilities, and

information should disclose stock of

MoF (AccGen) Medium term



institutions/

agencies

Short

term/Medium

term

contingent liabilities in comparable years.

Recommendation 5:

Treasury Registrar

should ensure

comprehensive

disclosure of

Contingent liabilities

for PAOBs

TR should monitor disclosure of contingent

liabilities by PAOBs by requiring full

compliance of IPSAS 19 or ISA 37 as the

case may be for all organisations under its

mandate.

MoF (TR) Short term

Recommendation 6:

AGC should compile

annually all litigations

for disclosure

purposes and share it

with Accountant

Generals Office

The AGC develop a computer database to

keep all litigations that face the GoT and

which might crystallise into liabilities. There

should be a specific requirement that such

information is submitted to Accountant

General annually.

Attorney General’s

Office and MoF

(AccGen)

Short to

medium term

Institutional Arrangements for Managing Contingent Liabilities

Recommendation 1:

Interim structure with

responsibilities

A small functional unit with 2 staff, one from

CPAD and other from AccGen (50 % of the

work time).

CPAD and AccGen

of MoF

Short term

Recommendation 2:

set up a clear

institutional structure

To monitor and manage contingent liabilities.

Clear Terms of Reference, responsibilities

and functions.

Contingent

Liabilities Unit to

established in the

MoF

Medium term

Recommendation 3:

Strengthening

capacity and skills

Recruit the appropriate staff, provide relevant

training.

Contingent

Liabilities Unit to

established in the

MoF

Medium term


1 Introduction and Scope of the Contingent Liabilities Study

1.1 Overview

1.1.1 Contingent liabilities of the Government are liabilities that result in most cases from various

types of guarantees offered by the Government and in some cases by abnormal events such as

borrowing to resolve financial crises or natural disasters. Guarantees form the major part of

contingent liabilities and the Government is legally obliged to repay the lender when the borrower

defaults or cannot repay the whole amount. There are also cases where Government has a moral

obligation to address unexpected events such as financial crisis or helping disaster affected lives

and physical assets. Some of these events are also due to adverse external factors beyond the

control of the Government or due to poor economic and financial management.

1.1.2 Though it appears that Government faces high spending and borrowing when contingent

liabilities are realised, Governments can also benefit from guaranteeing borrowers. If guarantees

are properly formulated, monitored and risks well managed, Governments can play a role in

facilitating private sector participation in sectors that traditionally belonged to the public sector.

Private sector is encouraged when i) there is a shortage of public funds, ii) efficiency gains can be

made via application of new technology. On the other hand Government has to balance this with

potential market failures and externalities. In general, evidence suggests that the Government can

derive many benefits by offering guarantees, some of which are as follows:

Public enterprises can obtain a lower cost financing if guarantees are provided;

Promote private financing in infrastructure via public private partnership (PPP) arrangements by

offering minimum revenue guarantee;

Reduce government risk exposure by passing commercial risk to the private sector;

Encourage co-financing, risk sharing and cost reduction.

1.1.3 Managing the budget prudently, efficiently and effectively is a very important task for fiscal

authorities in a country. There are several risks that can cause marked differences between actual

and expected fiscal outcomes. In this regard, one of the main fiscal risks is in identifying and

managing contingent liabilities. If contingent liabilities are realised then Governments may have to

borrow significant amounts to fulfil the obligations due and this can subsequently lead to an

unsustainable debt position and damage future borrowing possibilities.

A typical representation of explicit and implicit contingent liabilities are given in table 1.1

Table 1.1 Contingent Liabilities

Contingent

Explicit (by

Contractual law)

One-off guarantee- loans to Public Enterprises, private sector and Sub national

governments;

Standardised guarantees-Credit guarantee schemes, student loans, mortgages

Exchange rate guarantees;

Minimum Revenue Guarantee;

Pension obligations and contributions.

Implicit (by Moral

Obligation)

Bank – bad loans;

Deposit protection;

Clean –up of liabilities Public enterprise divestiture including debt assumptions; and

Disaster recovery payments.

Source: Government at Risk, World Bank Publication, 2002.


1.1.4 In Tanzania, over time, the amount of guarantees requested and issued have been

increasing, creating a potential risk to the Government budget and threatening fiscal sustainability.

In some cases, Government guarantees issued amount to direct borrowing by the Government to

bridge financing gaps to public institutions in development budgets. In addition, the Government

has been borrowing funds and lending them to public institutions, and in some of these cases the

loans are not being serviced by the final borrower. In addition to typical loan guarantees by

Government, there are other forms of guarantees and unexpected take-over of liabilities by the

Government. Examples of these are; the Bank of Tanzania (under an agency agreement with

Government) issues guarantees for two schemes, namely, the Small and Medium Enterprises

Credit Guarantee Scheme Export Credit Guarantee Scheme1. The Government also has the

responsibility to guarantee employee benefits in Pensions and social security schemes, liability take

over under privatisation, proper risk sharing under PPP arrangements, settling litigations and

disputes.

1.1.5 The Ministry of Finance conducted an in-house study on contingent liabilities with the overall

objective of evaluating the impact of contingent liabilities to the government’s budget, public debt

portfolio and fiscal risks associated with contingent liabilities. It proposed strategies to address

government guarantees and on-lent loans in order to minimize risk exposure. It estimated the total

contingent liabilities (as end June 2012), to be TZS 7.008 bn, in which the main contributors were;

Claims by Social Security Funds (TZS 4.13 bn), Guarantees to MDAs (TZS 1.78 bn), on-Lent loans

(TZS 664 mln) and Government guarantees to Public Corporations and Government Institutions

(TZS 418 mln).

1.1.6 The key recommendations of the study included, among others, that i) the issuance of

government guarantees to MDAs be permanently suspended and ii) the quantified actual liabilities,

together with verified debt from transformation of provident funds to pension funds, which has

immediate implication to the government’s fiscal policy, to be restructured into long term maturities

and acknowledged through Consolidated Financial Statement (CFS).

1.2 ToR for the Contingent liabilities study

To study this subject in more detail, the Government has embarked on a Technical Assistance

project with financial support from the European Union. This study was proposed by the Policy

Analysis Division of the Ministry of Finance of Tanzania and the Bank of Tanzania to the PER

Group. The activities and outputs of the study are set in the Terms of Reference (ToR):

i. Analyse and quantify the consequences (both magnitude and impact on debt) of

contingent liabilities; to do this, the assessment of contingent liabilities related to pensions

(to be performed under the separate study carried by the World Bank) will have to be

aggregated in this analysis;

ii. Identify success stories within the region in managing contingent liabilities;

iii. Identify the type, institutions and magnitude of contingent liabilities as well as government

on-lent loans given to Local Government Authorities (LGAs) and Parastatal Organizations

over the last ten years;

iv. Identify expected sources of future contingent liabilities, including the risk from PPPs;

v. Assess the efficiency of record keeping of contingent liabilities by the government;

vi. Examine the impact of an implicit contingent liability to the fiscal risk and debt

sustainability;

1 The SME Scheme became non- operational in 2008.


vii. Analyse and advise on the best practice related to the disclosure of contingent liabilities in

the consolidated financial statement based on the International Public Sector Accounting

Standards (IPSAS);

viii. Assess and make recommendations on non-performing guarantees from SMEs Guarantee

Schemes, Export Credit Guarantee Scheme and guarantees to parastatal organizations,

individuals and private companies;

ix. Identify causes of defaults of Government guaranteed liabilities;

x. Assess the adequacy of existing legal and regulatory frameworks in management of

contingent liabilities;

xi. Assess the level of compliance to existing legal and regulatory frameworks in

management of contingent liabilities and enforcement mechanism;

xii. Take stock of government’s efforts in reducing contingent liabilities and advise the

government on; what worked, what didn’t work and why?

xiii. Come up with the sustainable2

level of contingent liabilities given the state of the economy

and devise a contingent liabilities assessment management framework; and

xiv. Make recommendations on how to manage contingent liabilities and reduce risk exposure

relating to defaulting. Recommendations should be specific to each type of contingent

liability and spell out possible needed changes to the legal and regulatory frameworks

and/or administrative practices to avoid risk exposure.

The ToR can be simplified to represent five broad areas as illustrated in the diagram below.

Figure 1.1 Terms of Reference diagram

Stock of Contingent Liabilities and analysis: This will address the ToR items; (i), (ii), (iii), (iv), (v),

(viii), (ix);

Sustainable Level of Contingent Liabilities: This will address the ToR item (vi);

Legislative Framework: This will address the ToR items (x) and (xi);

Disclosure and Reporting standards: This will address ToR item (vii);

Overall recommendations: This will address ToR items (xi), (xii), (xiii) and (xiv) taking all the

above.

2 During the inception report meeting (9

th July 2014), it was decided that optimal level should be replaced by sustainable

level.

Contingent liabilities

(ToR)

Stock of contingent

liabilities

Legislative

framework

Sustainable level of


(ToR)

Disclosure and

reporting standards

Recommendations


1.3 Distinction between Liabilities and Contingent Liabilities

1.3.1 For the sake of clarity, it is very important at this stage to distinguish between liabilities and

contingent liabilities. In our view, it is essential that a proper classification is adopted and conforms

to accepted standards. We propose that the classifications and definitions described in the recently

published Public Sector Debt Statistics by the IMF in 2011 be followed. In addition to the IMF, many

other recognised institutions such as the Bank for International Settlements, OECD, World Bank,

European Investment Bank, Eurostat, Commonwealth Secretariat, UN Conference on Trade and

Development have contributed to the preparation of this document and therefore being

acknowledged as a guide for proper compilation of public sector debt statistics. The diagram below

shows the various items that fall in to the categories of liabilities and contingent liabilities.


Figure 1.2 Liabilities and Contingent Liabilities

Liabilities Contingent Liabilities

Explicit Contingent Liabilities

Implicit Contingent Liabilities

Net Obligations for future social security benefits

Other implicit contingent liabilities

GuaranteesOther Explicit

Contingent Liabilities

Guarantees in the form of financial

derivatives

One-Off Guarantees

Other One-Off Guarantees

Loan and other debt instrument

guarantees (publicly

guaranteed)

Other:• Special Drawing Rights (SDRs)• Currency and Deposits• Debt Securities• Loans • Nonlife insurance technical

reserves• Life Insurance and annuities

entitlements • Pension entitlements, claims, of

pension funs on sponsors, and entitlements to non pension funds

• Equity and investment fund shares• Other financial derivatives and

employee stock options

Provision for calls under standardized guarantee schemes


1.3.2 Liabilities can be classified as either `direct’ or `contingent. It is easy to identify a repayment of a direct

liability with certainty. In the case of contingent liabilities, the default can take place with a probability range

between 0 per cent and 100 per cent. Therefore, guarantors are only called to repay if the final borrower defaults

and therefore can be regarded to have as uncertain repayment schedule. However, if a reliable probability of

default can be estimated, then that item of contingent liability can be considered as a debt liability.

1.3.3 The TA has looked at the items that have been categorised within contingent liabilities in the Evaluation

report (page 13, Table 1). A number of queries remain that needs to be clarified. The table below shows the

various items identified as contingent liabilities in the Evaluation report and the queries.

Table 1.2 Contingent Liabilities – Items and Level of importance

Contingent Liabilities-

Category of important

items in Tanzania

Definitions Remarks

Items covered

1 One–Off guarantees

Government guarantees

issued to Ministries,

Ministerial Departments

and Agencies (MDAs);

Commitments of the Government to repay the

lender when final borrower defaults or there are

shortfalls in repayment.

It is only a contingent liability if the final

borrower has to repay from its own

income.

If guarantees are offered to the

Lender/Creditor but finally paid off from

the budget, then this is a debt liability

and not a contingent liability.

There are also cases where,

contractors carrying out services for

PAOBs who may require assurances

for payments. These can be classified

as letters of comfort and not strictly

legal obligations.


issued to Local

Government Authorities

(LGAs);

As Above As above


issued to Public

Corporations and

Government Agencies.

As above As above

2 Standardised guarantees:

1. Export Credit

Guarantee guarantees;

2. Small and Medium

Enterprises guarantee

Offered to private sector

start-ups.

Guarantees issued to private Companies through

export Credit Guarantee Schemes. Credit offered

by commercial banks with guarantee offered by the

Bank of Tanzania on behalf of the Government.

Loans offered by the commercial bank, guarantee

offered by the BoT on behalf of the Government.


Contingent Liabilities-

Category of important

items in Tanzania

Definitions Remarks

3. Higher Education Loan

guarantee scheme.

The scheme operated by Higher Education Loans

Board offering loans to students to be repaid when

borrowers are employed. The initial lump sum

loans to operate the scheme comes from Pension

Funds and other financial institutions.

3 Litigations These are court cases pending to be adjudicated

for compensation payments by the Government or

Public corporations.

These could be land ownership/resettlement

disputes, labour disputes, un paid supplier arrears,

liability valuation disputes etc.

These will fall under cases where there

is a probability between either parties

winning a case.

4 Pension guarantees Unfunded part of Pension guarantees under the

defined benefit schemes.

A distinction has to be made between

actuarial valuation deficit, cash flow

deficit and arrears.

5 Public Private Partnership

guarantees

Typically, private sector brings in finance with

Government providing certain guarantees such as

Minimum Revenue guarantee.

In Tanzania proper PPP arrangements

have not commenced though some of

PPP have been introduced. Also in

PPP financing, Government may have

to invest some funds as public

financing.

6 On lent loans by

Government to its

institutions;

This does not come under contingent liabilities.

However, some cases (where the final borrower

has to repay the Government out of its own

revenues/income then there is a credit risk.

Not contingent liability but a credit risk.

Items not Covered

1 Uncalled share capital External example is contribution to international

financial institutions. Domestic example share

ownership but unpaid amount of public

corporations.

2 Indemnities Commitment to identify and value.

3 Financial derivative-

Credit Default Swap

Especially applicable when issuing international

sovereign bonds.

May be applicable in the future.

4 Liability assumptions Takeover/debt assumption under

divestiture/privatisation. May include arrears.

1.4 Comparison with the Contingent Liability items selected under National Contingent

Liabilities study

Table 1.3 Comparison with the Contingent Liability items selected under National Contingent Liabilities study

Source of Contingent Liabilities Comments /Remarks

1 Government guarantees issued to Ministries,

Ministerial Departments and Agencies (MDAs)*;

Some are comfort letters to contractors, others are

guarantee letters and therefore contingent liabilities.

2 Government guarantees issued to Local Government

Authorities (LGAs);

As Above


Source of Contingent Liabilities Comments /Remarks

3 Government guarantees issued to Public Corporations

and Government Institutions;

Many are one-off guarantees and can be classified as

contingent liabilities.

4 Government guarantees issued to private Companies

through Credit Guarantee Schemes managed by the

Bank of Tanzania;

These are standardised guarantees that can be classified

under contingent liabilities.

5 On lent loans by Government to its institutions; These are not strictly contingent liabilities. However, the on

–lent loans to institutions that has to make repayments out

of their own revenue do pose credit risks.

6 Government Issuance of Letters of Consent and No

objection to borrow; and

Not strictly explicit contingent liabilities, but may turn out to

be implicit and if there is default, Government may have to

bail out.

7 Claims by Social Security funds. Those that are unfunded and have financing needs to pay

pensions contributions, arrears and other social security

payments

*Note; Loans to MDA’s are usually paid via the budget and not considered as guarantees, though some letters of comfort would have been given

to contractors. TA was unable to clarify this.

1.5 Scope and Coverage

1.5.1 This TA will focus on the following:

1. One off Loan guarantees:

a. typical loan guarantees to public enterprises and other government entities.

2. Standardised guarantees:

a. Export credit guarantees;

b. SME guarantees;

c. Student loan guarantees.

3. Guarantees Issued Under PPP Arrangement:

a. Minimum Revenue guarantee;

b. Bulk Concession guarantees.

4. Guarantees under Pensions and Social Security Schemes:

a. Typical minimum pension income guarantees and potential shortfalls under defined benefit schemes.

5. Other Contingent liabilities and Credit Risk related liabilities:

a. Litigation cases arising from some form of guarantees;

b. On-lent loans (credit risk);

c. Liabilities take over under impending privatisation/divestiture.

1.5.2 The report addresses the above mentioned topics in the following sections and these form the major part of

the TA study. This is followed by the impact of identifiable and quantifiable contingent liabilities on public sector

debt sustainability. The last two sections deals with i) legislative framework and ii) disclosure and reporting

standards for contingent liabilities.

1.5.3 The Report contains ten sections. At the end of each of the sections from 2 to 10, a summary of

recommendations is presented. Following this introductory section, the next covers one-off guarantees. Section 3

covers standardised guarantees followed by pensions on section 4. As PPP arrangements are gaining

importance, especially physical infrastructure and utilities development, an introduction to PPP and its financing

and risk sharing issues are covered in section 5. Section 6 covers litigations, on-lending and mentions all the

other potential contingent liabilities. The importance of debt sustainability taking in account the contingent

liabilities and the legal framework are discussed in sections 7 and 8. This is followed by disclosure and reporting


which mainly covers fiscal risk due to contingent liabilities and accounting treatment of contingent liabilities.

Finally, section 10 proposes an institutional structure and responsibilities to carry out monitoring and managing

contingent liabilities in Tanzania.


2 One-off Loan Guarantees

2.1 Definition and Coverage:

2.1.1 One-off guarantees can be defined as `Commitments of the Government to repay the lender when final

borrower defaults or there are shortfalls in repayment’. Since such guarantees are offered regularly to a Public

Corporation or any other entity by the Government it is difficult to estimate the likelihood of default.

2.1.2 The main receivers of guarantees are the major public corporations. The lenders and creditors request the

borrowers to obtain the guarantee from the Government so that credit risk as a result of default is minimised. At

present the maximum guarantee according to the Loans Guarantees and Grants Act (1974, revised 2004) is 70

per cent.

Figure 2.1: Application Process for Loan Guarantees


2.2 Aggregate Trends and Stocks:

2.2.1 The Treasury Registrar is responsible in maintaining records and the statuses of government guarantees

offered to all PAOBs and also disclose this information to the public at large.

Table 2.1 Outstanding one-off guarantees to public corporations

Public Corporations June 2010 June 2011 June 2012 June 2013

Outstanding Guarantees

(TSH bn)

383.77 367.24 377.1 274.5

Source: Treasury Registrar Statements.

The TA felt that the data provided by the Treasury Registrar on guarantees has to be verified for accurate

reporting and consistency. The TA has used this data as well as several other sources to estimate an

overall figure for one-off guarantees given in section 2.6. The estimated figure by the TA is far above the

figure quoted in the Treasury Registrar’s database.

2.3 Case studies:

2.3.1 Visits were made to a number of selected enterprises and institutions to gather information on loan

guarantees, the status of repayment, new expansion plans and financing modalities. The selections of these

entities were based on:

All stakeholder discussions;

The value of existing guarantees and on lending; and

Significant role played (supervisory or regulatory) in guarantees or loans given.

The following entities were therefore visited:

Tanesco - Tanzania Electric Supply Company Ltd;

TPA - Tanzania Port Authority;

Tazara - Tanzania Zambia Railway;

TRL - Tanzania Railways Limited;

RAHCO –Reli Assets Holding Company;

Dawasco - Dar es Salaam Water and Sewerage Corporation;

Dawasa - Dar es Salaam Water and Sewerage Authority;

NHC - National Housing Corporation;

TTCL - Tanzania Telecommunications Company Limited;

ATCL - Air Tanzania Company Ltd; and

TAA - Tanzania Airports Authority;

EWURA – Energy and Water Utilities Regulatory Authorities.

2.3.2 Methodology

These corporations were selected after reviewing the data given by Treasury Registrar. These entities have

taken loans under a guarantee provided by the Government. The purpose of this specified area of study is to

understand what factors enable some corporations to easily pay off the loan and while others find it difficult to

repay and default on their obligations.

Two sets of questionnaires were sent in advance before interviews are held. Table below shows the variables

and indicators under each factor.


Table 2.2 Types of factors and financial performance

Factors Past 5-10 years data

Financial Capital structure, Balance sheet, profit and loss account, liquidity, financial

performance ratios

Economic Demand and price variables

Technological Application of modern technology, quality, capital output ratios,

Organisational Management structure, Political interference, skill to non-skilled ratio, unbundling

Legal/regulatory Price determination, minimum quantity

The second set of questionnaire will be on the specific loan features, terms and conditions and status (prompt

payments, guarantees under negotiation, guarantees defaulted, under litigation etc.). Questions will be also

asked about any identified plans for the future such as debt restructuring, arrears clearance,

divestiture/privatisation and liability take-over by Government. These have been prepared and sent to the

selected public corporations and other agencies.

Table 2.3 Specific features of existing guaranteed and on-lending loans

Sector

Project and purpose

Creditor

Borrower/Beneficiary

Guarantee or On- lending

Guarantee Agency/On-lending Agency

Type of Guarantee

Contracted date

Original Amount

Original & Remaining Maturity

Loan –currency of repayments

Interest rate

Balance outstanding

Probability of default Assessment

The other questionnaires to the Banks and funding agencies are given in Appendix 2.

2.4 Energy Sector

2.4.1 TANESCO

Tanzania National Electricity Supply Cooperation is totally owned by the Government. It is responsible for

generation, transmission and distribution of electricity throughout the country. It’s borrowing to finance these

activities is obtained from several sources. At end June 2013, its borrowing portfolio that was guaranteed by the

Government stood as follows.


Table 2.4

Source Amount (TSh bn)

Outstanding

Type/ Guaranteed Status

Banks and Pension Funds 206.55 Syndicated Loan serviced

Banks and Pension Funds 135.55 Syndicated Loan serviced

Banks and Pension Funds 54.09 Syndicated loan serviced

CRDB 36.3 Short term credit/guarantee serviced

Source: Tanesco, 2013 report.

Tanesco is repaying its syndicated (a mix of creditors mainly pension funds and banks) loans and short term loan

from CRDB promptly, but defaulting on all its other loans including loans borrowed directly from a single lender

such as a pension fund. However, the Government is repaying all the on-lent loans, many of them are from

external creditors. Therefore there are no defaults to the external creditor. Tanesco claimed that the existing tariff

structure was not adequate to maintain the company in a healthy situation. More tariff increases were required to

reflect the improvements made in the generation and supply of electricity.

2.4.2 However, EWURA, the regulatory authority that is responsible for all regulatory related matters including

tariff setting for electricity and water sectors has informed the TA that large increases were made in recent times

and any financial loss made by Tanesco can be attributed to operational inefficiencies. EWURA also mentioned

that current tariff for Dar es Salaam water services were justified and if non-revenue water losses (55%) can be

reduced to the maximum recommended of 20% then DAWASCO can improve its performance.

2.5 Loans Offered by Pension Funds under Guarantee

2.5.1 The pension funds in Tanzania also face a specific challenge through their high exposure to loans financing

government projects. As stated in the investment guidelines (2012), Pension funds are allowed to invest (limit of

10 per cent) in corporations. However, in the past loans offered to public corporations has had a government

guarantee. Many of the direct loans offered by the pension funds have not been repaid on time. A revised

repayment plan is currently being negotiated with the government, and the Bank of Tanzania has instructed the

funds not to take on any new loans until the 10% limit in the investment guidelines has been met.

The table below shows the guaranteed loan details of the respective pension funds.

Table 2.5 Guaranteed loan details of the respective pension funds

Creditor Borrower Loan Type Terms and Maturity Stock outstanding

(000’ TSh)

Status

PPF 31 December 2013

PPF1 Kagera Sugar

Company

GoT

guaranteed

loan

Interest rate 3.5% +

182TBs, maturity

2020

6,879,316.5 The loan is being

serviced

PPF2 Pension Properties GoT

guaranteed

loan

Interest 15%,

maturity 2017

5,331,814.4 Not serviced

PPF3 21st Century Textile

Company

GoT

guaranteed

loan

Interest 12%,

maturity 2017


serviced

PPF4 University of

Dodoma (MoF)

GoT

guaranteed

Interest 15%,

maturity date not




(000’ TSh)

Status

loan stated

PPF5 Tanesco GoT

guaranteed

loan

Interest not stated,

maturity date 2020


PPF6 Nelson Mandela

University

GoT

guaranteed

loan

Interest rate 15%,

maturity 2022


PPF7 GOT Syndicated

loan,

guaranteed

Interest rate 4.7% +

3months LIBOR,

maturity 2018


serviced

PPF8 NIDA GoT

guaranteed

loan

Interest rate 13.8,

maturity 2019


LAPF 30 June 2014

LAPF1 Homboro Project

(PMO RALG),

Local Governement

Training Insitute –

PMO-RALG

GoT loans Interest rate 15%,

Maturity 2022


LAPF2 GoT Budget Support

Project

GoT loans Interest 4.5%+

3Months LIBOR,

maturity 2018

13,676,871.1 Loan being

serviced

LAPF3 Pension Properties

– Bunge Project

GoT

guaranteed

loans

Interest 12.95%,

maturity 2017


LAPF4 Pension Properties

– Nelson Mandela

University

GoT

guaranteed

loans

Interest 15%,

maturity 2022


LAPF5 University of

Dodoma (MoF)

GoT

guaranteed

loans

Interest 15%,

maturity 2021


LAPF6 MoF Back purchase Interest rate 11.08%,

maturity 2021


LAPF 7 National Housing

Corporation

Mortgage Interest rate 15.8%,

maturity 2014

15,871,859.9 Loan is being

serviced

LAPF 8 TANESCO GoT

guaranteed

loans

Interest 4.5% +

T/Bills, maturity 2019

6,987,568.9 Loan is being

serviced

PSPF 30 June 2014

PSPF1 Higher Education

Students Loans

Board

GoT

guaranteed

loan

Interest 15%,

maturity 2008


PSPF2 Police Force GoT

guaranteed

loan

Interest 15%,

maturity 2020


PSPF3 TISS GoT Interest 15%, 23,872,387.4 Not serviced



(000’ TSh)

Status

guaranteed

loan

maturity 2014

PSPF4 University of

Dodoma (MoF)

GoT

guaranteed

loan

Interest 15%,

maturity 2018


PSPF5 PCCB GoT

guaranteed

loan

Interest rate 11%,

maturity 2017


PSPF6 Pension Properties

– Bunge Project

GoT

guaranteed

loan

Interest rate 12.94%,

maturity N/A


PSPF7 Pension Properties

Ltd- Nelson

Mandela University

GoT

guaranteed

loan

Interest rate 15%,

maturity 2020


PSPF8 Kagera Sugar

Company Ltd

GoT

guaranteed

loan

Interest rate 10%,

maturity 2011


serviced

PSPF9 21st Century Textile

Company

GoT

guaranteed

loan

Interest rate 11%,

maturity 2016


serviced

PSPF10 Tanesco GoT

guaranteed

loan

Interest rate 0.5%

to2% + 182 T/bills,

maturity 2016


serviced

NSSF 30 June 2013

NSSF1 University of

Dodoma

GoT

guaranteed

loan

N/A3 441,332,202.0 Not serviced

NSSF2 Tanzania Peoples

Defence Force –

factory

GoT

guaranteed

loan

Interest 15% 54,697,142.9 Not serviced

NSSF3 Tanzania Peoples

Defence Force –

house loan

GoT

guaranteed

loan

N/A 23,805,920,5 The loan is being

serviced

NSSF4 Police Force –

M/Vehicles /Cycles

GoT

guaranteed

loan

N/A 7,842,252.4 Not serviced

NSSF5 Tanzania Police

Force – staff houses

GoT

guaranteed

loan


NSSF6 Government Loan –

house loan

GoT

guaranteed

loan

N/A 461,288.3

The loan is being

serviced

NSSF7 Tanesco GoT

guaranteed

loan

N/A 14,000,000.0 The loan is being

serviced

3 Not Availed. Specific information on the issue was not made available within the timeframe of the assignment.



(000’ TSh)

Status

NSSF8 Pension Properties

Ltd- Nelson

Mandela University

GoT

guaranteed

loan

Interest rate 15%,

maturity 2020


NSSF9 Pension Properties

– Bunge Project

GoT

guaranteed

loan

Interest rate 12.94%,

maturity N/A


NSSF10 PCCB GoT

guaranteed

loan

Interest rate 11%,

maturity 2017


NSSF11 GoT infrastructure

loan

GoT loan

($15million)


NSSF12 General Tyre GoT

guaranteed

loan

($16,638,179)


NSSF13 Continental Venture

Tanzania

GoT

guaranteed

loan

($6,395,810)


NSSF14 Dar City Council –

Machinga Complex

GoT

guaranteed

loan


NSSF15 Kagera Sugar

Company Ltd

GoT

guaranteed

loan


serviced

NSSF16 21st Century Textile

Ltd

GoT

guaranteed

loan


serviced

NSSF17 NBAA GoT

guaranteed

loan


serviced

GEPF 30th

June 2013

GEPF1 Tanesco Loan GoT

guaranteed

loan

Interest rate 0.5%

to2% + 182 T/bills,

maturity 2016


serviced

GEPF2 Ministry of Finance Direct Loan to

Government


Source: NSSF, PSPF, LAPF, PPF, GEPF.

The following table shows the total loans outstanding for each pension fund and the default rate.

Table 2.6 Loans outstanding for each pension fund and the default rate

Accounting date Number of

loans

Value

(‘000 Tsh)

Repayment

default value

(‘000 TSh)

Default

percentage of

total

PPF 31-12-2013 8 146,857,789.8 128,157,892.7 87.3

LAPF 30-6-2014 8 198,829,641.7 162,293,341.8 81.6


Accounting date Number of

loans

Value

(‘000 Tsh)

Repayment

default value

(‘000 TSh)

Default

percentage of

total

PSPF 30-6-2014 10 480,145,880.3 460,995,168.7 96.0

NSSF 30-6-2013 17 733,196,438.7 661,342,680.8 90.2

GEPF 30-6-2013 2 11,900,503 10,233,409 86

2.5.2 As the data above are available for different financial years and therefore difficult to aggregate them, it can

be seen that majority of the loans offered by the pension funds under government guarantee have not been

repaid by the borrowers. On average 90 per cent of the loan amounts have not been repaid thus weakening the

investment base of the pension funds. In general, syndicated (offered as a mix of creditors such as banks and

pension funds) loans are being repaid while pension fund loans, though smaller, as a single lender source has

not been serviced. With reference to aggregation for DSA, the TA has fixed a starting point for the DSA to be end

June 2014, therefore an aggregated amount at end June 2014 is needed for the analysis to be conducted. For

this purpose all data available only up to end June 2013 has been carried over to end June 2014. Interest

accrued on loans from end June 2013 has not been capitalised in to the end June 2014 figure, as the TA was

unable to gather interest rate information on each loan.

2.6 Other Sectors Related Public Corporations and Agencies

As at end 2013 there were some other guarantees offered to the other sectors/corporations as highlighted in

Table 2.7

Table 2.7 other guarantees offered to the other sectors/corporations

Corporation/Agency Type of Liability Status as June 2013

ATCL Government guarantee loan for

Wallis Trading Company from

Liberia

TZS 47,126,819,631. The company has failed to service the

loan and it has now been taken over by the GoT.

Government guarantee loan to Celtic

Capital Corporation of Miami (USA)

TZS 1,696,681,481 outstanding. The GoT is considering

assuming the loan since ATCL has failed to service the loan.

Friendship Textile

Mills Ltd

Government guarantee loan TZS 25,781,394,289 outstanding. The loan has been

restructured by Exim Bank of China to maturity in year 2019

and repayment by 2029.

Tanzania Sisal

Authority

Government guarantee loan TZS 1,648,936,493 outstanding. The company has failed to

service the loan to CHC (NBC) and is now under liquidation.

State Motor

Corporation

Government guarantee loan TZS 3,065,026,923 outstanding. The amount has been

written off after liquidation realised only TZS 194,156,393.

General Tyre East

Africa

Government guarantee loan TZS 18, 276,168,539 outstanding. The company stopped

production and the discussions are ongoing on how to revive

the company.

NBAA Government guarantee loan TZS 15,000,000,000. This loan to NSSF is being serviced

directly by GoT.

Tanzania Fertiliser

Company

Government guarantee loan TZS 29,100,000,000. The GoT has started to service the loan

after the guaranteed company failed to service the loan to

CRDB Bank and ABC Bank.

University of Dar es

Salaam

Government guarantee loan TZS 829,284,580, the loan is being serviced to CRDB.

Mara Cooperative Government guarantee loan TZS 8,502,977,181 is outstanding and has been taken over


Union by GoT after failure by Mara Coop Union to service it.

SUKITA Government guarantee loan TZS 10,139,494,513 is outstanding. The company has

collapsed and CHC expects to recover the money through

receivership proceeds.

Source: TA from interviews, financial statements or Treasury Registrar databases.

2.7 TA’s Overall estimate

Taking into consideration three data sources- TR, Pension Funds and individual financial statements of

corporations - and removing any double accounting, the TA has estimated the total one-off guarantee to be Tsh

1699 bn of which Pension fund guarantees amount to Tsh 1571 bn and others Tsh 128 bn.

2.8 Summary of Recommendations:

Table 2.8 Summary of Recommendations


institutions/agencies

Short term/Medium

term

Recommendation 1- Data quality

verification, updating and

information sharing

Data on one-off loan guarantees

outstanding should be verified

that is accurate and shared on

Quarterly basis among the

borrower, Treasury Registrar,

Debt Unit and Accountant

General’s Department.

CPAD, AccGen,TR and

Borrower

Short term

Recommendation 2- Guarantee

process

A more stringent guidelines of

guarantee approval process

(credit rating methodology)

should be introduced.

CPAD, AccGen, AG’s

Office

Medium term

Recommendation 3 – Compliance

to IPSAS and IFRS accounting

standards

Disclosure and reporting of

guarantees should adhere to

relevant IPSAS and IFRS

standards. Fiscal risk

assessment due to one-off

guarantees must be prepared as

part of the budget statement.

AccGen Medium Term-

preferably for budget

2015

Recommendation 4- cases of

default to be resolved

These should be resolved by

planned arrears clearance

strategy, securitisation and

restructuring methods.

CPAD, AccGen, AG’s

Office and Borrower

Medium term

Recommendation 5 – Government

should pensions for defaulted

guarantees

GoT should agree with the

pensions on payment schedule

for all the defaulted loans.

AccGen, MoF, SSRA Short – Medium Term


3 Standardised Guarantees

3.1 Introduction:

The loan and credit schemes that covered here are; Export Credit, Small and Medium Enterprises and Higher

education student loans. Unlike one-off loan guarantees these are umbrella schemes that run continuously. With

regards to these schemes the following Policies and procedures were examined:

Export Credit Guarantee Scheme (ECGS, 2003/2004);

Small and Medium Enterprises Credit Guarantee Scheme (SME-CGS, 2005);

Higher Education Student Loan scheme.

3.2 Export Credit Guarantee Scheme:

3.2.1 Introduction:

The Scheme seeks to promote economic development in general by encouraging high value exports such as

horticulture and floriculture and value added exports that will generate high level of employment and foreign

exchange earnings.

Export Diversification- This would be done by improving product mix by increasing the share of high value

exports of horticulture and floriculture products, increasing the share of manufactured products and reducing

market concentration by firms seeking alternative markets.

Employment Creation- This would be done through providing labour intensive employment and productivity.

Financial Deepening- This would be achieved by increasing the share of financial assets to GDP, that ensures

broad export financing and credit facilities e.g. structured finance/loan syndication, risk diversification/sharing, this

would result into rapid increase in exports.

In terms of the institutional arrangements, the Government placed the responsibility to the Bank of Tanzania for

the development and implementation of the scheme under an Agency Agreement until a fully-fledged Export

Credit Guarantee institution is formally established.

The Credit Scheme permits a maximum of eighty five percent (85%) for export production finance, eighty per cent

(80%) for pre-shipment finance and seventy-five percent (75%) for post-shipment finance.


3.2.2 Process for Application

Figure 3.1 Export Credit Guarantee Scheme – ECGS

3.3 Small and Medium Enterprise Credit Guarantee Scheme:

3.3.1 The purpose of the scheme is to provide credit guarantees to financial institutions lending to SMEs.

Financial institutions are expected cover shortfalls in the collateral and provide credits to SMEs. Eligible projects

are Start-up and existing productive SME projects but not available for trading and retail businesses. An SME

Borrower must be a formally registered business and majority share had to be owned by Tanzanian citizens. The

Scheme is operated by mainly banks and the guarantee is offered by the Bank of Tanzania on behalf of the

Government.

3.3.2 When applying for a Loan, the SME should provide business plan and other requirements. When the Public

Financial Institution (PFI) has been satisfied with credit worthiness of the SME, it will approve the loan. The

lending decision will remain with the PFI. The SME credit scheme allows for a maximum guarantee of 50 per

cent. However, disappointingly the scheme was terminated in 2008 and no new guarantees were offered.


Figure 3.2 SME Credit Guarantee Scheme – SMECGS

3.4 Higher Education Student Loan Scheme

The Higher Education Students Loan Board is responsible in operating this scheme where students can obtain

loans for meeting higher education costs – fees and living expenses- runs the scheme. After completion of their

studies the students are expected to pay back the loan over time. All three loans were obtained from PSPF under

guarantee from the Government. The Board is unable to repay the loans on time due to low recovery rates from

former students.


Figure 3.3 Student Loans application process

3.5 Time trends for Total Value of the Guarantees for Export Credits scheme and Higher

Education loan scheme

Table 3.1 Time trends for Total Value of the Guarantees for Export Credits scheme and Higher Education loan scheme

2009/10 2010/11 2011/12 2012/13

Export Credit Guarantees

(TSh bn)

39.807 197.84 233.0 295.4

SME Guarantees (TSh bn) 1.303 1.262 0.574 0.574

Higher Education Loan

Guarantees *(TSh bn)

68.13 94.36 121.5 121.6

Source: Bank of Tanzania, HESLB.

* note that the 3 loans outstanding from PSPF has been accounted under the one-off guaranteed loan to a total value of Tsh 165.9 bn at end

June 2014.

3.6 Default rates for the Schemes at end 2013

3.6.1 TA discussed the default rates of the 3 schemes with CRDB, NMB and HESLB. CRDB and NMB are two

main banks offering export credits and SME credits to private sector with the permitted government limit on

guarantees. The two banks carry out their own credit assessment of those who wish to borrow. HESLB operates

the higher education scheme, from the data provided by these institutions the TA was able to estimate the default

rates of the schemes.

Table 3.2 Default rates for the Schemes at end 2013

Scheme Default rate

Export Credit Scheme Average of 7 per cent based on cash crops exports

SME Credit Scheme 100 per cent in 2008, scheme suspended

Higher Education Scheme 90 per cent

Source: CRDB, NMB and HESLB.


3.7 Summary of Recommendations




Short term/Medium

term

Recommendation 1: continue with

the schemes with Export and re-

start SME guarantee schemes

This will enable small scale cash

crop production for exports and

SME manufacturing to increase.

However sound credit rating

methodologies and proper

assessment of production

potential must be employed to re

commence the SME scheme.

BoT, Commercial Bank

and Enterprise

Medium term

Recommendation 2: Continue

Higher education loan scheme

Though the intention of the

scheme is good recovery rates

must improve, especially to

service all 3 initial loans provided

by PSPF.

HELSB Short term

Recommendation 3: data

improvement and reporting

Data is reasonably good but

need to be regularly provided to

MoF for calculating exposure

and the difficulties faced in

repayments. Also helps to

prepare fiscal risk reports.

BoT, Banks Medium term


4 Guarantees under Pensions and Social Security Schemes

4.1 Introduction:

4.1.1 Providing retirement income and other health benefits to the population is a key responsibility of the

Government. The two main types of pension schemes are, i) Defined Benefit (DB) and ii) Defined Contribution

(DC) schemes. The funding of these benefits range from `Fully Funded’ scheme where each employee’s

contribution is invested to provide the retirement benefits to `Pay As You Go’ (PAYG) where the current

employees contribute to retired employees. In practice, most countries have a combination of both Funded and

PAYG schemes that provide pension income. In Tanzania, pension schemes are largely based on DB scheme

though there are a few DC schemes available to employers which are now also being offered directly to workers

from the informal sector on an individual and a collective basis.

4.1.2 There are five pension funds and one health insurance fund that provide pension and health benefits to

employers and to their dependents. These funds are as follows:

1. NSSF – National Social Security Fund;

2. PSPF – Public Sector Pensions Fund;

3. LAPF – Local Authorities Pensions Fund;

4. PPF – Parastatal Pensions Fund;

5. GEPF – Government Employees Pensions Fund;

6. NHIF – National Health Insurance Fund.

The Authority that regulates these funds is the Social Security Regulatory Authority4 (SSRA).

4.1.3 The overarching legislation that governs the social security sector is the Social Security Act (2008) and

Amended Act (2012)5. This is supported by a number of guidelines on code of conduct, investment, data and

information disclosure and actuarial valuation. Though several individual Pension Fund Acts are in current use

the SSRA is implementing reforms to unify these Acts and bring them under a single Act in the future. It has

already harmonised the fragmented benefit structure through the Social Security Scheme (Pension Benefits

Harmonisation Scheme) Rules 2014.

4.1.4 This section covers two areas. The first, is related to understanding whether Tanzania is likely to encounter

an actuarial deficit situation under various assumptions regarding GDP growth rate, population growth,

employment level and participation rate in the pension contributions, investment income etc. If deficits persist

then Government may have to borrow to pay pension and health benefits. This may lead to debt levels rising and

in some cases breaching the debt sustainability thresholds. The second, since pension funds may be called upon

to contribute to the country’s development in terms of offering loans under guarantees, these investments may

fail to provide the required rates of return due to shortfalls in repayments or in the worst case default by

borrowers.

4.1.5 The TA, in accordance with the Terms of Reference, has used the World Bank Consultants actuarial study

to assess the deficit situation. However, since the WB consultants have only addressed the pensions, the TA had

initially thought of including the NHIF. After careful consideration the TA reached a conclusion to remove the NHIF

4 Social security sector includes pension benefits and health insurance benefits.

5 See section 8- Legislative Framework for more details.


from this study due to 2 reasons. First, the last actuarial/analysis was carried out in 2010 and therefore the TA felt that

the study was not recent enough to include NHIF to the TA study, whereas the numbers for the Pension funds are

current (2014). Second, two actuarial studies were carried out in 2010 (one commissioned by SSRA and the other by

NHIF) each employing a different approach (as opposed to a unified approach and results) in assessing the

performance and looking at the future prospects.

4.2 Assessment of the Social Security Sector Deficits

4.2.1 The tables below show the current position of the pension funds in Tanzania represents contributing

employee size and the composition of the percentage contribution by employee and employer.

Table 4.1 Base Year (FY2013) data on Pension System Members

All

funds

NSSF PSPF PPF-

DB*

PPF-

DAS**

LAPF GEPF

Contributors

Number of persons(000’s) 997.3 421.8 315.3 110.9 21.5 95.0 32.7

Average age 38.3 38.2 39.9 36.5 35.3 37.6 34.6

Average annual wage (TSh 000’s) 7,096 6,427 7,047 11,097 9,330 6,006 4,336

Old age pensioners with regular pensions

Number of persons (000’s) 69.0 5.9 33.2 25.2 - 4.7 -

Average age 62.6 65.2 61.6 63.2 - 62.5 -

Average annual pensions(TSh 000’s) 1,970 1,929 2,343 1,593 - 1,401 -

Average annual pensions as % of average

wage in respective fund

28 30 33 14 - 23 -

System dependency rate (number of old

age pensioners as % of the number of

contributors)

8.1 1.9 13.2 23.3 - 5.6 -

*Average number during year.

** Number of active contributors for PPF was derived from data on contributions due in 2013, compliance rate and wages of contributors.

Source: Individual pension funds.

Table 4.2 Base Year (2013) data on Pension System Finances, millions TSH

All funds NSSF PSPF PPF LAPF* GEPF

Contributions 1,347,721 476,410 444,853 275,015 114,143 37,300

Benefit payments – Total (Tsh 000’s) 957,645 228,049 543,712 131,971 44,751 9,162

Pension benefits** (TSh 000’s) 943,501 220,454 543,344 127,094 43,447 9,162

Non-pension benefits (TSh 000’s) 14,143 7,595 368 4,877 1,303 0

Non-pension benefits as % of total benefits 1.5 3.3 0.1 3.7 2.9 0

Administrative expenses 180,897 86,253 26,097 39,994 21,687 6,866

Administrative expenses as % of

contributions

13 18 6 15 19 18

Assets beginning of year (TSh 000’s) 4,709,170 1,970,636 953,021 1,091,500 539,601 154,411

*LAPF 2013 estimated by WB team as 2012/2013 annual report was not available.

**GEPF excluding voluntary benefits.

Source: individual pension funds.


NSSF and PSPF are the two major funds in terms of number of contributors – 422,000 and 315,000 respectively.

These numbers are based on full – time employee equivalent contributions. Total percentage contribution are 20

per cent of salary; NSSF and GEPF operates on equal split between employer (10%) and employee (10%) while

the other funds receive more contribution from the employer (15%). It is worth noting that LAPF and PPF operate

a scheme for private sector employees based on an equal (10% each) contribution from employer and employee.

Figure 4.1 Employee andEmployer contributions to pension funds

In terms of the financial position of the funds, the NSSF, PPF, LAPF and GEPF are in a stable position and do

not pose a contingent liability threat to the government until at least 2060. At that point their benefit payments will

be larger than the contributions they receive, and they will have no investment income having had to sell their

assets to cover the gap. This is when the government would have to step in to pay the benefits promised by the

funds.

The PSPF is a particular case. In addition to the long-term contingent liability which the fund represents, the

government also faces a direct obligation to reimburse the PSPF for the payments made on its behalf for pension

benefits accrued before 1999 when the fund was established. This amounts to TZS 1.5 trillion to date (and is

currently rising by around TZS 300 billion a year) and the non-payment by the government is causing an

immediate fiscal problem for the fund. The PSPF has been paying out more in benefits than it receives in

contributions since 2013. Investment income is not expected to be able to fill the gap this fiscal year, so that the

fund will not be able to pay full benefits without either selling assets or receiving further cash transfer from the

government.

Table 4.3 Summary indicators under base case and reform scenarios

NSSF

PSPF PPF LAPF GEPF

Excluding

pre99

Including

pre99

Pensions at retirement full / reduced*

(%)

Base case (no reform) 47 / 40 75 / 37 75 / 37 42 / 31 66 / 33 67 / 50

Harmonisation rules 44 / 33 75 / 37 75 / 37 47 / 35 66 / 33 67 / 50

Harmonisation rule- partial 62 / 31 62 / 31 55 / 28

Harmonisation rule - full 58 / 43 58 / 43 52 / 39

0 100000 200000 300000 400000

NSSF

PPF

PSPF

LAPF

GEPF

number of employees

Employees Contribution to Pension Funds

0

2

4

6

8

10

12

14

16

NSSF PPF PSPF LAPF GEPF

Percentage Contribution for Public Sector Employees

Empoyer cont.

Employee Cont.


NSSF

PSPF PPF LAPF GEPF

Excluding

pre99

Including

pre99

Break-even point**

Base case (no reform) 2052 2024 2015 after 2080 2063 2072

Harmonisation rules 2068 2022 2015 2086 2076 2072

Harmonisation rule- partial 2028 2015 2077

Harmonisation rule - full 2068 2065 2077

Assets depletion point***

Base case (no reform) 2061 2031 2019 after 2080 2072 after 2080

Harmonisation rules 2077 2028 2019 2045 after 2080 after 2080

Harmonisation rule- partial 2036 2021 after 2080

Harmonisation rule - full 2075 2067 after 2080

*Percentage of individual’s last wage for an average retiree (man).

**Year when the annual current balance becomes negative assuming interest rate and inflation are equal.

***Year when own assets are depleted and government needs to finance the deficits assuming interest rate and inflation are equal.

Harmonization Rules = parameters apply to all members NSSF/ PPF/ GEPF but only to new members of PSPF/ LAPF.

Harmonization Rules (partial) = new reference salary applied to all members of PSPF/ LAPF.

Harmonization Rules (all) = all new parameters applied to all members of PSPF/ LAPF.

The total pension liabilities of the government, both the obligation to the PSPF and the contingent liability of all

funds represents TZS 23.5 trillion or 46% of GDP. The Harmonization Rules issued by the pension regulatory

authority in July 2014 introduce parametric reform to the funds which will reduce the liability of the government

over the long-term (to 23% of GDP). If some of the funds were merged (creating one fund covering the public

sector and another covering the private sector), this contingent liability could be further reduced (to 5-6% of

GDP), as the surplus of the funds would be combined.

Table 4.4 Government contingent liabilities under base case and reform scenarios (net present value as % of 2013

GDP)*

All funds NSSF PPF PSPF LAPF GEPF

Base case(no reform) 48.5 5.7 0 41.8 1.0 0

Harmonisation rules 25.1 0.6 7.5 17.1 0 0

Harmonisation rules- partial 19.7 0.6 7.5 11.6 0 0

Harmonisation rules - full 18.6 0.6 7.5 10.5 0 0

Merger 15.9 5.2 10.7

Merger cost saving 12.4 2.6 9.8

*Real discount rate used for present value calculation is 5 percent. Also assumed that interest rate equals inflation.

** Assuming PSPF does not finance pre99 pensions.

4.2.2 Pension Fund Investment Income

In the past five years, on average investment income has contributed to 66 per cent of pension payments, its

contribution to the total funding i.e. for pension payments and assets growth, has been only 33 per cent per

annum.

As the pension funds in Tanzania face favourable demographics, they operate mostly on a PAYG / partially

funded basis. Hence the fiscal position of the funds is not very sensitive to investment income and / or asset write

downs. For example, increase investment returns by 1% would improve the breakeven of the funds by around 2

years, with the impact mostly being felt in the long-term.


However, given the pension funds collectively are a large source of domestic capital (assets under management

representing around 10% of GDP), how their portfolios are invested is important for the economy as a whole.

Historical review of the assessment: TA has looked at the investment performance of the 5 Funds over the past 6

years. A number of tables are presented below with comments and remarks.


Table 4.5 Asset value, total contributions, investment income and net benefits

Fund 2007/08

(Tsh bn)

2008/09

(Tsh bn)

2009/10

(Tsh bn)

2010/11

(Tsh bn)

2011/12

(Tsh bn)

2012/13

(Tsh bn)

NSSF

1. Asset Value 746.45 921.19 1129.18 1448.49 1970.64 2239.87

2. Total contribution 205.39 255.27 300.09 356.51 420.25 476.11

3. Investment income 75.98 62.33 92.01 190.15 398.67 231.06

4. Expenditure 114.96 122.12 151.56 193.80 249.50 314.30

Net balance (2+3-4) 166.4 195.48 240.54 352.86 569.4 392.87

PPF

1. Asset Value 499.33 624.85 722.5 894.52 1091.5 1487.394

2. Total contribution 109.78 136.6 147 187.5 235.8 278.5


4. Expenditure 36.88 47.19 63.82 71.88 99.4 132.0

Net balance (2+3-4) 135.14 156.49 126.63 206.92 247.6 464.51

PSPF

1. Asset Value 572.50 716.09 732.38 924.50 1086.28 1251.17



4. Expenditure 138.49 150.37 286.21 296.34 374.79 569.81

Net balance (2+3-4) 83.82 139.32 13.76 188.93 158.73 151.39

LAPF

1. Asset Value 216.93 271.48 361.33 450.19 539.60 645.0



4. Expenditure 9.29 14.89 22.51 26.51 38.09 57.5

Net balance (2+3-4) 22.92 32.16 63.54 86.06 107.29 113.9

GEPF

1. Asset Value 55.86 72.55 91.28 119.40 154.41

2. Total contribution 10.40 13.79 16.32 25.71 30.15

3. Investment income 6.22 6.65 8.08 9.57 15.02

4. Expenditure 2.74 3.37 5.72 7.17 10.20

Net balance (2+3-4) 13.88 17.07 18.68 28.11 34.97

Total (Pension Funds only)

1. Asset Value 2091.07 2624.16 3036.67 3837.1 4842.43

2. Total contribution 509.4 684.74 756.9 1043.13 1219.36

3. Investment income 215.13 194.32 235.8 415.45 670.63

4. Expenditure 302.36 338.02 529.82 595.7 771.98

Net balance (2+3-4) 422.7 541.04 463.88 862.88 1118.01

Source: Annual reports of the 6 funds and World Bank Pensions Consultants.

4.2.2 From the table above, the total assets available for investment of the five pension funds have increased at

25 per cent per annum between 2007 and 2012.


Figure 4.2 Pension funds’ performance over 5 years

Source: TA and World Bank consultants.

During the same period, contributions increased by an annual average of 25 per cent, invest income by 37 per

cent, pension expenditure by 28 per cent and net balance by 32 per cent.

4.2.3 The overall rate of return on investment has been low from 2007 to 2010. However from 2010, the rate of

return has increased. The overall asset position and rate of return on investment is shown in the diagrams below.

Figure 4.3 Pension Funds Assets and Investment Returns

Source TA and World Bank consultants.

4.3 Asset Diversification

Aside from generating poor investment income, another issue relating to the pension funds’ portfolio is their lack

of diversification. Like many social security funds in developing economies, the assets remain highly

concentrated in government bonds and bank deposits (46% on average). This compares with the leading funds in

both developed and developing economies which have more diversified portfolios. Moreover, the funds currently

do not comply with the Investment Guidelines which were issued by the Bank of Tanzania in 2012. The table

0

1000

2000

3000

4000

5000

6000

2007/08 2008/09 2009/2010 2010/2011 2011/12

Tsh

s b

n

Asset Value

Total contribution

investment income

Expenditure

Net balance

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

T

s

h

s

b

n

Assets -Pension Funds

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

%

Return on Investment


below shows the current regulations/guidelines on investment categories and limits as stated in The Social

Security Schemes Investment Guidelines (2012), part III.

Table 4.6 Pension Fund Asset Portfolio Allocations at end 2013

Pension Fund Allocation (% of

Portfolio)

Investment

guidelines

Funds

Average

NSSF PSPF PPF LAPF GEPF

Government Securities 20-70 29 22 13 27 38 47

Fixed Deposits 16 18 13 5 26 16 30

Loans and other special lending 20 (10 + 10) 24 37 46 14 18 6

Corporate Bonds 40 2 1 1 3 3 4

Equity (+ collective investments) 45 (15+30) 12 6 16 20 11 5

Real Estate 30 14 21 19 10 14 8

Infrastructure 25

Source: Pension Funds’ Annual Reports.

Figure 4.4 Pension Funds’ Portfolios

Source: Pension Funds’ Annual Reports.



Recommendations Comments Responsible institutions/agencies Short term /

Medium term

Recommendations 1:

The Actuarial Report

Ensure that staff of Contingent

Liabilities Unit receives a copy of the

Actuarial report from each Pension

Fund and NHIF and understand and

review the position.

In future a Contingent liabilities Unit in

the MoF. In the interim, staff

responsible for contingent liabilities in

CPAD, MoF.

Short term

Recommendation 2:

Loans offered by Pension

Funds

Ensure that Guarantees offered on

Pension Fund loans are assessed

properly in terms of credit risk.

Government/ pension funds should

In the future an established Middle

and Back offices of a Contingent

Liability Unit. In the interim, CPAD

and Acc Gen’s office.

CPAD and Accountant Generals’

Medium term

Short term

0

10

20

30

40

50

60

Domesticbonds(gov +corp)

Foreignbonds

Cashdeposits

Loans Domesticequity

Foreignequity

Realestate

Tanzania Pension Funds

CPPIB Canada

GEPF SA


Recommendations Comments Responsible institutions/agencies Short term /

Medium term

agree a revised repayment schedule

for loans defaulted.

Office.

Recommendation 3:

Develop the Government

Securities

market

Develop the Market for longer term

maturity and index linked bonds so

that opportunities for investment for

pension funds are increased.

CPAD, Accountant General’s Office

and Bank of Tanzania (Domestic

Market Development office).

Medium term

Recommendation 4:

Reform the investment

guidelines

Government should consider

removing restriction to invest abroad

so that pension funds can invest in

more secure long term securities.

Ministry of Finance and Bank of

Tanzania.

Medium term

Recommendation 5:

Resolving PSPF arrears

An action plan to be developed to

resolve the arrears owed to PSPF

Ministry of Finance, SSRA and PSPF Short/Medium

term


5 Guarantees Issued Under PPP Arrangement

5.1 Introduction:

5.1.1. Public Private Partnership arrangements provide several advantages to the Government. First, since the

funding comes mainly from the private sector, the burden on government’s funding sources is reduced. Second,

the participation by the private sector brings in modern skills and technology so that the infrastructure created has

the latest `state of the art’ technology. Third, when constructed and run by the private sector the service delivery

will be efficient and reliable. However, in return for these benefits, the private sector expects some form of

revenue guarantees in order to meet a required rate of return on capital and permissions to utilise land for

transport sectors such as roads and railways. What guarantees to be granted and how to identify and share the

risks when offering such guarantees will be an important assessment that needs to be carried out by the

Government.

5.1.2 In the case of Tanzania, three main documents – legislation and policy guidelines- in the form of an Act

(2010), Regulations (2011), and Policy (2009) were prepared for promoting and managing PPPs. The Policy

document states that all sectors- productive, infrastructure and social services- are included and can be

developed under a PPP arrangement. The TA team has reviewed these documents. However, recently (May

2014) a Special Bill Supplement has been prepared that emphasises changes in the institutional responsibilities

of the approval process and management of PPP, this bill has been passed in parliament in November 2014 and

is now awaiting Presidential assent. The main change has been the merging of the `Coordination Unit’ with the

PPP Finance Unit into one office called the PPP Centre which will be placed in the Prime Minister’s Office, the

centre will be a legal person and body corporate with right to sue and to be sued. The most applied option in

many countries that the TA has reviewed is for the PPP Centre to be placed under a ministry responsible for

finance.

5.1.3 In the past, Tanzania had entered into some form of Public Private Partnership arrangements. So PPP is

not new to Tanzania, but now it is subject to enacted legislation and policy guidelines. In the past some of the

PPPs have been in the form of management contract/leases and joint venture projects. Until now however, there

has not been any PPP that was implemented in accordance to the PPP Act and guidelines.

5.1.4 At the outset, it is important to emphasise that this TA study is not intended to cover the entire scope of

PPP which is larger than what this TA’s scope. It is worth mentioning that this study is only focusing to the public

financing of PPP projects and the extent of fiscal risk caused by financial risk allocation/sharing.


5.2 Procedural steps for a PPP arrangement6

Figure 5.1 Procedural steps for a PPP arrangement

Source: TA construction from PPP Bill ©2014.

Main Steps- Project identification to approval

1. A Government agency makes its own development plans, including feasibility studies and then assess

whether the project should be done under a PPP arrangement;

2. A government agency may seek PPP Facilitation Fund from the PPP Centre;

3. Two months before the year end, the PMO invites Government Agencies to submit their PPP projects to PPP

Centre;

4. A feasibility study before decision taken for promoting PPP arrangement is prepared by the Government

Agency (Contracting Authority - CA);

5. The Contracting Authority analyses projects submitted within 30 days and forwards to the Ministry responsible

for Finance;

6. The Ministry of Finance analyses for fiscal risks and affordability and reverts to PPP Centre within 15 working

days;

6 based on the passed Special Bill Supplement (2014) – The Public Private Partnership (amendment) Act (Cap 103).

1

Contracting Authority (CA)

(Submit a list of potential PPP

project)

PPP Center (Provide assistance

and advice in selection,

prioritisation, development and

implementation of PPP projects

and PPPFF)

PPP Technical Committee

(analysis and recommendation

of projects. Approval of PPPFF

and feasibility studies)

4

National Investment Steering

Committee (consider and

approve PPP projects)

5

Minister – PMO (publish

approved PPP projects)6

Cabinet (reviews annual PPP

report)7

Minister for Finance ( analysis

for financial viability of the

proposed PPP projects)

2

3

CA( enters into contract with

the private sector after

approval of the PPP project)8


7. The PPP Centre then and within 7 days and after consulting other relevant ministries, submits the projects to

the PPP Technical Committee;

8. The PPP Technical Committee submits recommended projects to National Investment Steering Committee

for scrutiny within 15 days;

9. The National Investment Steering Committee processes the projects within 15 days and submits them back to

PPP Technical Committee and to the PPP Center;

10. In case the project requires public financing, the National Steering Committee directs the Minister of Finance

to initiate funding process;

11. PMO shall inform the public of all approved PPP projects;

12. PMO shall submit to Cabinet annual implementation report of all PPP projects.

5.3 Institutional Arrangements under the Special Bill Supplement (Nov 2014) and

Capacity:

5.3.1 As mentioned earlier the most important change has been the merging of the `Coordination Unit’ which was

in the Tanzania Investment centre and the `PPP Finance Unit’ in the Ministry of Finance into one office called the

`PPP Centre’. The PPP Centre has been placed within the Prime Minister’s Office; the centre shall be a body

corporate with perpetual succession and common seal. In the decision making process, there will be two

committees involved in approval of projects requested by contracting authorities. The PPP Technical Committee

(in which the Permanent Secretary of Ministry of Finance is a member) plays an advisory role and makes

recommendations to the National Investment Steering Committee that will finally approve the projects.

5.3.2 For the projects to be successfully launched (under new legislation and Policy guidelines) it is important that

a capable team is built up with well-defined responsibilities and functions, so that the team can assess the

benefits, costs and risks prior to any engagement in promoting, negotiating or contracting for PPPs. The

TA learnt that several positive negotiations have taken place and in-progress in a number of infrastructure

projects and each of them is at a different stage of progress. The strong potential for PPPs is in the power

generation, sea port and airport development and road network expansion programmes and projects.

5.3.3 On the disclosure side, it is important that assets built under PPP should be identified in terms of ownership

and potential transfer from Private to Government. These must be properly recorded in the balance sheet and

disclosed.

5.4 Related PPP Finance and Risk Management

5.4.1 Financial sources of finance: In a typical PPP financing arrangement, all the financial resources comes from

the private sector which will raise its resources from debt and equity. The private sector will operate a Design-

Finance- Build- Operate and Transfer (DFBOT), but in the case of most developing countries, PPP arrangements

will remain as explained except that financial resources may be obtained from private and public sector sources.

The Typical types of project finance and operational modalities are given below in Table 5.1

Table 5.1 Project Finance and Operational Modalities

Schemes Modalities

Build Own Operate (BOO)

Build Develop Operate (BDO)

Design Construct manage Finance (DCMF)

The private sector designs, builds, owns, develops, operates and

manages an asset with no obligation of transfer.


Schemes Modalities

Buy Build Operate (BBO)

Lease Develop Operate (LDO)

The private sector buys or leases an existing asset from the

government; renovates, expands and operates with no obligation

to transfer to government.

Build Operate Transfer (BOT)

Build Own Operate Transfer (BOOT)

Build Rent Own Transfer (BROT)

Build Lease Operate Transfer (BLOT)

Build Transfer Operate (BTO)

The private sector designs and builds the asset, operates it and

transfers it to government. The private sector may subsequently

rent or lease it

Source: IMF Public Private Partnership 2005.

5.4.2 Typical risk faced in PPP arrangements;

There are mainly five types of risks; construction risk, demand risk, financing risk, availability/supply risk and

transfer risk:

Construction risk: These are related to legal contract agreement risks, design problems, building cost

overruns and project delays. The delays can be also due to site being available and compensations made;

Demand risk: The amount of output and services required;

Financing risk: Initial financing risks followed by changes in market conditions affecting factors such as

interest rates and exchange rates that affect costs;

Availability risk: Continuity and quality of provision of services;

Transfer risk: related to final value and state of the product when transferring to Government.

In addition to these risks, there are other risks related to changes in political and legislative environment and

Force Majeure.

5.4.3 Risk sharing responsibilities

Figure 5.2 Risk sharing responsibilities

Risks Sharing Calculations and responsibilities

Line Ministry

Responsible for Construction Demand and

transfer

Ministry Of Finance

Responsible for Demand and Financial risks


Example 1: Road Project: Financing arrangements and Product Supply

Source: TA

Road Project- Essential steps for preparation of PPP and service provision

The main functions are;

i. Prepare legal framework on shared responsibility

ii. Competitive bidding

iii. Road specifications and quality checks

iv. Estimate traffic volume and pricing structure

v. Financing options

vi. Offer guarantees to supplier

vii. Completion of lease period and transfer

Project Company

Maintenance Company Toll-road Operator D&B Contractor

Public

Authority

Lenders Investors

Distributions Equity

Concession Agreement

Maintenance

Contract

Operating Contract Design & Build

Contract

Finance

Debt Service Project-Finance Debt

Subcontracts

Road Users

Toll Payments


Example 2: Electricity Generation and Supply Project: Financing arrangements and Product Supply

Electricity Generation and Supply Project - Essential steps for preparation of PPP and service provision

The main functions are:

i. Prepare legal framework on shared responsibility;

ii. Identifying and unbundling (Generation, Transmission and Distribution);

iii. Competitive bidding Process;

iv. Estimate demand and pricing structure;

v. Specification and quality checks;

vi. Financing options;

vii. Offer guarantees to supplier.





term

Recommendation 1: functions to

be clearly defined for PPP

related public finance and risk.

Estimation/calculation of Public finance needs and

fiscal risk sharing arrangements.

Prime Minister’s Office-

PPP Centre and MoF

Short term

Recommendation 2: Clear

Terms of Reference of PPP

finance in terms of institutional

responsibilities.

The role of Finance staff in assessing and

evaluating PPP finance related matters.

Prime Minister’s Office-

PPP Centre and MoF

Short term

Recommendation 3: Strengthen

Institutional capacity for PPP

finance.

Both theoretical and practical on-the-job training

will be required to strengthen capacity in overall

functions-identification, assessment, monitoring,

managing and reporting – of PPP

Contracting authorities,

Parent ministries, PPP

Centre, Ministry of Finance

Short to

Medium

term

Project Company

O&M Contractor Fuel Supplier EPC Contractor

Electricity

Distribution

Company

Lenders Investors

Distributions Equity

Power Purchase

Agreement

Operation and Maintenance

Contract

Fuel Supply

Contract

Engineering, Procurement and

Construction Contract

Finance

Debt Service Project-Finance Debt

Subcontracts


6 Other Contingent liabilities and Credit Risk related debt

6.1 Introduction:

This section discusses the following:

1. Legal claims;

2. On-lent loans;

3. Others – Indemnities, uncalled share capital, financial derivatives (Credit Default Swaps).

6.2 Legal Claims:

6.2.1 These cover claims that are being made by outside entities and individuals on the Government and could

result in additional unexpected losses for the Government. In order to estimate the total value of these litigation

cases and the probability of losing them, the TA visited Attorney General’s (AG) Chambers (AGC). It is

important to note that only cases where there is a genuine dispute or grievance will fall in to the category of

contingent liabilities. For example, default on loan repayments (under a signed loan contract) would not fall under

this category because they are actual liabilities and recognisable in financial statements.

6.2.2 There are mainly three sources from which information on pending cases were obtained. The largest

amount is from the AGC which deals with all the pending cases of the Government. Second, are the individual

public corporations where there are pending cases of disputes related to employment/redundancy benefit

payments, supplier arrears, unpaid tax and pension contributions etc. These problems are exaggerated when

public corporations undergo restructuring and privatisation. The third source is Consolidated Holding Corporation

which dealt with litigations arising out of divesture process.

Table 6.1 Litigations pending in courts against government and its institutions

Institution Amount (TZS) Remarks

Tanzania Airports

Authority

8,012,808,000 Land related litigations

Institute of Social Work 2,040,695,233 Employees related litigations

Tanapa 285,000,000 Employees related litigations

Tanzania Ports

Authority

358,300,000,000 Contract of work litigation (TZS 337.7 billion) and other litigations

(TZS 20.6 billion).

Consolidated Holding

Company

373,300,000,000 Pending 337 litigations (former NBC (TZS 199,130,555,621), LART

(TZS6,987,423,069), SIMU 2000 ((TZS263,059,200), PSRC

(TZS165,730,810,024), ATHCO (TZS1,174,291,735.20)). The

cases are on contract matters, divestiture, defamation, employment,

land, insurance, liquidation, etc.)

TTCL 33,584,000,000 Various litigations

MSD 144,000,000 Various litigations

NBAA 380,000,000 Various litigations

NHC 16,809,000,000 Various litigations

Tanesco – IPTL 426,855,000,000 Contract related litigations


Institution Amount (TZS) Remarks

Tanesco - Dowans7 108,591,000,000 Contract related litigations

Ministry of Finance 526,244,483,984 Various litigations in central government

Total 1,854,545,987,217

Source: MoF, PAOBs Audited Financial Statements 2013.

6.3 On-Lent Loans

6.3.1 On-lent loans are loans that are received by the Government from external or domestic lenders and

creditors and offered as loans to corporations and government agencies. Though on-lent loans are not

considered as contingent liabilities they pose credit risk to government if they are unable to repay as stipulated

and therefore default. It is worth noting that only the borrowers who are offered these loans and expected to

repay back through their own generated income rather through the national budget fall into this category of credit

risk borrowers.

Table 6.2 Aggregate On-lending data

Years End 2010 End 2011 End 2012 End 2013

TShs Bn 497.1 576.19 501.91 562.4

Source Treasury Registrar reports 2010, 2011, 2012, 2013.

Table 6.3 Main borrowers of on-lent facilities

Public Corporation Value at end 2013(TSh bn)

SONGAS 238.2

Tanesco 1- ING Bank 66.98

Tanesco 2-IDA 20.69

Tanesco 3-EDCF, EIB, JICA, ADF 67.84

Total 393.71

Source: TANESCO, Treasury Registrar databases.

Table 6.4 Other on lent loans

DAWASA-IDA On-lent loan from IDA TZS 43 billion balance as of 30 June 2014 and

DAWASA has been struggling to service the loan

with frequent application for extensions to GoT

TTCL On lent loans since 2005 US$28 million still outstanding at 4.75% + LIBOR;

repayment schedule is yet to be agreed with CHC

DAWASCO On lent loan through Dawasa TZS 16,707,041,000 still outstanding and can’t be paid by

the company

TRL N/A All liabilities were taken over by RAHCO

RAHCO On lent loan at 11% interest TZS 30,649,646,488. The loan is not being serviced but

the GoT has assumed the liabilities

TAA On lent loan at 0% interest TZS 2,586,320,000. The loan is not being serviced but

the GoT has assumed the liabilities

7 Does not include interest at 15% and penalties from 15.11.2010.


6.4 Other contingent liabilities

6.4.1 Indemnities

Indemnities are commitments to accept the risk of loss or damage another party might suffer. The TA was not

able to obtain any value for this. However, it is important that they be identified in the future and disclosed in

government consolidated financial statements.

6.4.2 Uncalled `share capital’

This is an obligation to an entity such as public corporations or international and regional financial organisations

to provide the balance of the capital that was pledged and paid. In the case of the domestic share capital, TA

found it difficult to assess these since there is less clarity between injected capital for losses made by

corporations and intended financial investment as equity. In the case of contributions to external financial

institutions the TA was not able to track the source of the information. In any case, uncalled share capital being

called by the financial institutions is relatively low. Nevertheless, to complete the list of contingent liabilities an

attempt has to be made in the future to collect such information and have them disclosed in government

consolidated financial statements.

6.4.3 Credit Default Swaps

The first is the Credit Default Swaps (CDS) that may arise out of Sovereign debt instruments such as

international bonds. TA learnt that Tanzania is considering issuing Euro Bonds in the near future. The CDS

instrument is a financial derivative bought for protection by investors and hence an explicit contingent liability.





Short term/Medium

term

Recommendation 1: improvement

in access to data and default

calculation

Especially in the area of litigation

cases and probability of

winning/losing.

CPAD, AccGen and

AG’s Office.

Medium term

Recommendation 2: Strengthening

data collection and credit risk

analysis

Strengthening data management

on both sides –

Lender/Government and

Government/final borrower.

CPAD, AccGen, TR

and borrowing

agencies.

Short to Medium term

Recommendation 3: improvement

in on-lending agreements

TA found that on-lending

agreements were not prepared or

signed. This needs to be

strengthening with clear terms and

conditions.

CPAD, AccGen, Final

borrower.

Medium term

Recommendation 4: Collection of

data and analysis of other explicit

and implicit contingent liabilities

Further expansion in terms of

comprehensive coverage.

CPAD Medium term

Recommendation 5: Reporting and

disclosure of these contingent

liabilities

Reporting and disclosure on Fiscal

risk implications and meeting

accounting standards.

CPAD, AccGen Medium term,

preferably for 2015

budget


7 Sustainable Level of Total Liabilities

7.1 Introduction:

7.1.1 Though an exact definition is yet to be found, an acceptable definition is that `Debt is

sustainable in a country, both on the external side and in the public sector, when that country does

not have to make major economic policy modifications to service the debt. This means that for

example, in the public sector, debt is sustainable when no major drastic fiscal policy changes have

to be made to service the public sector debt burden while in the external sector, no major monetary

and external policy changes are required to pay off the total external debt.

7.1.2 Sustainability takes in to account, solvency and liquidity issues and it is essentially a forward

looking exercise. Sustainability is assessed in terms of the future usually in the medium to long-

term. Two types of sustainability are examined; first and the more important one to Governments

when assessing their sustainability position is the public sector debt sustainability usually derived

from the total public sector accounts and in some cases the narrower base of central government

accounts. The second, external sustainability is derived from the Balance of Payments accounts.

External debt sustainability can include total external debt (private and public debt) or public

external debt only.

7.2 Main indicators and dynamics of Sustainability

7.2.1 Various debt indicators (after a DSA exercise) are examined and judged whether they exceed

a defined threshold. If they exceed, then clearly the debt is not sustainable. Different indicators will

be looked at for external public debt sustainability and for total public sector debt sustainability. The

typical indicators for the two types of sustainability analyses are given in the table below.

Table 7.1 Main indicators and dynamics of Sustainability

Indicator Representation Threshold for moderately

performing country assessed by

CPIA

Public and Publicly Guaranteed External Debt

Present value of Debt to GDP Burden indicator 40%

Present value of Debt to exports

and Present value of debt to

budget revenue

Solvency indicator 150%/ 250%

Total debt service to exports and

Total debt service to budget

revenue

Liquidity indicator 20%/30%

Total Public Sector Debt

Present value of debt to GDP Burden indicator 74 % internationally accepted but

can be country specific

Present value of debt to budget

revenue

Solvency indicator No established threshold- can be

country specific

Total debt service to budget

revenue

Liquidity indicator No established threshold- can be

country specific


7.2.2 The DSA is carried out for Baseline, Alternative and Bound test scenarios. If all the indicators

show that they are below the specified thresholds under all scenarios then the country has a low

level of debt distress. To assess situation more comprehensively, it is also important to combine

quantitative targets with qualitative assessment. In some cases thresholds are only marginally

breached but remain for a long time while in other cases the thresholds may be substantially

breached but remain only for a short period. These situations have to be examined properly to

reach decisions.

7.2.3 In addition to the indicators there are two other factors that need to be examined that will help

to make decisions regarding debt sustainability. The first is the issue of `debt dynamics’ that shows

which variables or factors are contributing more significantly for the debt indicators to rise?

Assessment of such factors will help to formulate policies to address those variables or factors so

that the debt indicators can be brought down to a sustainable level. The second, is the `debt

stabilising surplus’ required to reach steady state conditions that ensures that debt is sustainable in

the medium term.

7.3 Theoretical Background - Debt Dynamics and Debt Stabilizing surplus

7.3.1 Debt Dynamics and Debt Stabilizing Surplus- External

Starting from the basic Balance of payments equation and rearranging and dividing by GDP we can

get the following;

edt= ct-(fdit+eqt)+(1+rt)edt-1

edt = external debt to GDP at time t

ct = current account balance(excluding interest) to GDP

fdit= non-debt creating foreign direct investment to GDP

eqt =equity inflows to GDP

rt = external average interest rate

After a few more manipulations the change in debt can be expressed in domestic currency terms

edt - edt-1 = ct-(fdit+eqt) + rt*edt-1 + g* edt-1 + ρ(1+g)*edt-1

(1+g+ρ+gρ) (1+g+ρ+gρ) (1+g+ρ+gρ)

(1) (2) (3)

Debt Dynamic factors- projections;

(1) = change in nominal interest rate

(2) = change in real GDP growth

(3) = change in price and exchange rate

ct = current account (excluding interest) to GDP

fdit+eqt = foreign direct investment(non-debt creating) and equity flows

g = real GDP growth rate at time t and ρ is the growth rate of GDP deflator in foreign currency

terms.


For debt stabilizing surplus that may be needed in the future

i.e. edt – edt-1 = 0,

This gives, the current account balance (excluding interest payments) minus the capital account

flows equal to

rt* edt-1 + g* edt-1 + ρ(1+g)*edt-1

(1+g+ρ+gρ) (1+g+ρ+gρ) (1+g+ρ+gρ)

7.3.2 Debt Dynamics and Debt Stabilizing Surplus- Fiscal

Starting from the basic government budget equation, the total debt in time t is linked by the

following equation;

pdt = pdt-1 +(r-g)* pdt-1 + prdt – st – pat

pdt = total public debt to GDP at time t

r= average real interest rate on public debt

g= real GDP growth rate

prdt = primary deficit to GDP at time t

st = seignorage to GDP at time t

pat= public assets sales to GDP

Debt Dynamics;

However it is worth mentioning that almost all Low and Middle income countries borrow from

external sources (multilateral and bilateral loans), public debt comprise external debt and domestic

debt. In this regard, consideration should be given to exchange rate and external payments.

Assuming that there are no seignorage income and public assets sales the changes in debt can be

shown to be;

pdt = [r-i (1+g)-g +αe(1+r)] * pdt-1 - prdt

[(1+g)*(1+i)]

i= inflation measured by GDP deflator

α= share of forex debt

e= nominal exchange rate depreciation

Contribution of real interest rate = [r-i (1+g)-g +αe(1+r)] * pdt-1

Contribution of real growth = -g * pdt-1

(1+g)*(1+i)]

Contribution by real exchange rate depreciation = αe(1+r)] * pdt-1

[(1+g)*(1+i)]

Contribution of primary balance = - prdt

Debt Stabilising Primary Balance;

No change in public debt stock to GDP requires, pdt - pdt-1 =0,

Therefore primary balance = [r-i (1+g)-g +αe(1+r)] * pdt-1

[(1+g)*(1+i)]


7.4 Debt Sustainability Analysis- Approach and Comparisons

7.4.1 The DSA will be carried out using the IMF/WB debt sustainability framework template. Since

contingent liabilities affect mostly the public sector debt sustainability, this DSA will be restricted to

assessing public sector debt sustainability. Given the constraints on time, this analysis will use

many of the macroeconomic and fiscal assumptions used in the most recent DSA exercises in

Tanzania.

7.4.2 The two recently completed DSA exercises are i) carried out in September 2013 by the

national authorities and ii) carried out by IMF during an Article iv mission in April 2014. In both of

these DSAs in addition to conventional external and domestic debt, some of the contingent

liabilities and arrears were taken in to consideration when the scenarios were formulated. The DSA

carried out by this TA – which will also include some of the contingent liabilities - will compare the

results with the two completed DSAs, one by the National authorities and the other by the IMF. The

comparisons will be made on the DSA of the public sector debt.

7.5 National Debt Sustainability Analysis 2013

7.5.1 Introduction.

The national authorities- mainly from the Ministry of Finance and the Central Bank- have embarked

on carrying out their own debt sustainability analysis, with support from AFRITAC and MEFMI. This

exercise which is conducted on a yearly basis is envisaged to further strengthen analytical skills

and the capacity of public debt management functions.

7.5.2 Assumptions

i) real GDP to grow by 7percent per annum, largely due to better world economic outlook, increase

in infrastructure, agriculture mineral development including gas;

ii) Inflation is assumed to be contained within 6 per cent per annum;

ii) Increasing efficiency in revenue administration and further widening of the tax base have been

assumed, which gradually improves revenue collection from 17.4 percent in 2012/13 to an average

of 20.0 percent in the medium term and at an average of 21.0 percent for the rest of the projection

period;

iii) Expenditure as a percentage of GDP decreases from 26.1 percent in 2012/13 to an average of

25.8 percent in the medium term thereafter increases slightly to an average of 27.0 percent;

iv) The ratio of fiscal deficit-to-GDP ratio is projected to drop from an average of 5.0 percent in the

medium term to an average of 3.0 percent beyond 2014/15;

v) Maintain domestic borrowing (NDF) at 1% of GDP in the medium term and slow it down in the

long run to be in line with the projected fiscal deficit and strategies for developing domestic market;

vi) External borrowing will finance the remainder of the financing gap. It is assumed that

concessional loans will decrease over the medium term and non-concessional and commercial

borrowing is expected to increase;

vii) In addition to conventional domestic debt (Government securities). Actualised contingent

liabilities, outstanding pension arrears, defaults on parastatal guarantees, credit guarantees and

outstanding litigation claims. The Total amounted to Tsh 4.21Trillions mainly spread over the three

years – 2.4 % of GDP, 2.1% of GDP, 1.9% of GDP over 2014 to 2016.


7.5.3 Results

Table 7.2 Results

Indicators Threshold8

(%)

2013 2014 2015 2016 2017 2022 2032

PV debt to GDP 74 50 30.3 31.2 31.7 31.2 29.6 22.9 16.6

PV debt to budget

revenue

132.5 142.8 140 133 125.2 96.7 69

Debt service to budget

revenue

10.4 13.8 15 14.7 16 12 7.4

Unlike external debt, only one threshold (PV debt to GDP) indicator is compared in public sector

debt sustainability. The results from 2013 to 2032, PV debt to GDP is well below both thresholds;

international (74%) and EAMU protocol (50%). Debt service to budget revenue peaks to 16 per cent

in 2017 and gradually declines to around 7.4 per cent in 2032.Though this scenario which includes

contingent liabilities show a low debt distress position, the Government should maintain high

sustained growth level, low inflation and fiscal deficits, access to low cost financing and managing

its contingent liabilities well to remain within a low debt distress position..

7.6 Debt Sustainability Analysis carried out by IMF (Article IV) 2014

7.6.1 Introduction:

This DSA was carried out during the last IMF Article IV mission that was concluded in April 2014. In

this DSA, the arrears to Public Sector Pension Fund (pre 1999 non-contributory amount) and

certain other liabilities were included.

7.6.2 Main Assumptions

Growth, inflation, exchange rate: Real GDP growth is projected to remain at slightly

below 7 percent over the medium and long term. Inflation would converge to the Bank of

Tanzania’s medium-term target of 5 percent, yielding a nominal growth rate of about 12

percent per annum. The Tanzanian shilling is projected to depreciate against the USD by

3 percent annually in the medium to long run, due to the inflation differential between

Tanzania and the US.

Fiscal deficit: The fiscal deficit is projected to decline to 4 percent of GDP by 2015/16,

and further to 3 percent of GDP from 2020/21 onwards. Revenues excluding grants are

assumed to grow from 18 percent of GDP to 23 percent of GDP by 2033/34.

Aid and FDI flows: External grants are assumed to gradually decline to 2 percent of GDP

by 2033/34. Foreign concessional loans (program and project loans) would slowly decline

to 1 percent of GDP in the long term. Concessional loans are assumed to continue to

come primarily from multilateral creditors (IDA, AfDB, etc.) in the medium term, but would

then be increasingly provided by bilateral – particularly non-Paris Club – creditors, whose

financing terms are not as favourable. After a slight increase due to further offshore natural

gas explorations, net FDI inflows would stabilize at an average of 6.1 percent of GDP in

the long term.

Domestic borrowing: Net domestic financing is kept at a maximum of about 1 percent of

GDP throughout the projection period. New domestic debt is assumed to carry a real

8 Internationally accepted threshold( IMF Guideline) for PV debt to GDP is 74 per cent, while East African Monetary Union

(EAMU) Protocol is 50 per cent which is followed by Tanzanian authorities


interest rate of 10 percent with average maturity of seven years, consistent with recent

experience.

External non-concessional borrowing: ENCB is assumed to finance about half of the

gross foreign financing requirement up to 2019/20 before gradually gaining importance

over concessional sources, reaching 2.5 percent of GDP by 2033/34. The grant element of

new borrowing is projected to decline considerably over the long run. New external

commercial borrowing is assumed to be provided by a combination of export credit

agencies (ECA) and commercial banks (syndicated loans), with the latter source becoming

more prominent in the long run. Consistent with prevailing market conditions, ECA loans

have an average interest rate of 4 percent with a 15-year maturity, whereas syndicated

loans carry a higher average interest rate (7 percent) and shorter maturity (7 years).

Contingent Liabilities and Arrears: The government currently has Tsh1.16 trillion (about

2.1 percent of GDP) of past-due payment liabilities it owes to PSPF for pension benefits

related to the pre-1999 non-contributory scheme9. Although the authorities have

acknowledged the outstanding liability and budget for partial repayment each year, the

liability has not been formally recorded in the fiscal accounts and thus was not part of the

domestic debt stock. This DSA assumes that recognition of this liability (and several other

actual liabilities) occurs in 2013/14 and together with other liabilities Government

guarantees of public enterprises (Tsh 912 bn), other outstanding domestic claims (Tsh 892

bn), court orders and other claims total up to Tsh 3479 bn or 5.5 per cent of GDP..

7.6.3 Results

Table 7.3 Results

Indicator 2014 2015 2016 2017 2018 2024 2034

PV debt to

GDP

36.5 36.1 35.4 34.6 34.6 31.4 28.6

PV debt to

budget

revenue

166 161 153.6 155.3 153.6 134.7 110

Debt

service to

budget

revenue

13

16.1 14.2 17.1 17 13.8 14.3

The IMF study results show that PV of debt to GDP is higher than the national DSA study starting at

36.5 per cent in 2014 but gradually declines to 31.4 per cent in 2024. Overall the debt distress

position is favourable. However it is essential that continued efforts are made in fiscal consolidation,

accessing low cost financing and monitoring social security schemes. In addition adverse shocks to

economic growth, high inflation and exchange rate depreciation can impact negatively on debt

dynamics and would result in higher debt level.

9 The figure is based on the government’s estimation. Until June 30, 1999, the PSPF was a non- contributory pension

scheme, with all benefits paid from the budget. The PSPF was transformed into a contributory defined benefit scheme on

July 1, 1999, but benefits continued to be paid from the budget during a 5-year transition period (until June 30, 2004).

From July 1, 2004 onwards, the PSPF has been paying pension benefits related to the pre-1999 scheme on behalf of the

government, for which it has not been reimbursed.


7.7 Debt Sustainability Analysis carried by the TA

7.7.1 The TA has used the same methodology and the DSF templates used by the National

authorities and by the IMF. TA has also used almost all the assumptions made by the National

authorise except in the treatment of contingent liabilities. The identification and the value for

contingent liabilities is given in table 7.7.3 later. The assumptions used in this study are as follows;

7.7.2 Main assumptions (almost the same as the assumptions used by the National authorities)

i) real GDP to grow by 7percent per annum, largely due to better world economic outlook, increase

in infrastructure, agriculture mineral development including gas;

ii) Inflation is assumed to be contained within 6 per cent per annum;

ii) Increasing efficiency in revenue administration and further widening of the tax base have been

assumed, which gradually improves revenue collection from 17.4 percent in 2012/13 to an average

of 20.0 percent in the medium term and at an average of 21.0 percent for the rest of the projection

period;

iii) Expenditure as a percentage of GDP decreases from 26.1 percent in 2012/13 to an average of

25.8 percent in the medium term thereafter increases slightly to an average of 27.0 percent;

iv) The ratio of fiscal deficit-to-GDP ratio is projected to drop from an average of 5.0 percent in the

medium term to an average of 3.0 percent beyond 2014/15;

v) Maintain domestic borrowing (NDF) at 1% of GDP in the medium term and slow it down in the

long run to be in line with the projected fiscal deficit and strategies for developing domestic market;

vi) External borrowing will finance the remainder of the financing gap. It is assumed that

concessional loans will decrease over the medium term and non-concessional and commercial

borrowing is expected to increase;

vii) In addition to conventional domestic debt (Government securities) contingent liabilities due to

supplier arrears, pension arrears to PSPF (pre- 1999 payments due), litigations and guarantees to

public corporations and on-lending (with credit risk) are included in this DSA.

7.7.3 The Table below shows the type and value of contingent liabilities and how it’s used (stocks

and flows) in the DSA.

Table 7.4 Type and value of contingent liabilities and how it’s used (stocks and flows) in the DSA

Type Contingent Liability

Stock value (TSh bn) end

June 2014

Default probability

(%)

Used in DSA (stock or

flows) (TSh bn)

One – off guarantee

Pension Fund Loans

Others

1,570.9

127.9

90.6

100

1423.0

127.9

Standardised guarantees 417.57 Export credit -7

(SME credit – 100)

130.7

Pension arrears (PSPF)

And Actuarial deficit

4,800 100 4,800

Litigations 1,854.55 50 927.3

Total of Contingent

Liabilities

8,770.92 7,408.9

On-lending (credit risk)

Already recorded in debt

database)

562.4 100 562.4

Total – Contingent

Liabilities and on-lending

(Credit Risk)

9,333.32 7,971.3


Source: TA calculations, note that Suppliers arrears and actual liabilities (accounts payables) have not been taken into

consideration as they are assumed to be not contingent but rather actual liabilities and already in the debt database.

7.7.4 Using a stock figure for estimated for contingent liabilities of Tsh 7408.9 bn (not including on-

lending as this is already in the debt database), and assuming that it is paid over the 3 years,

starting from 2014, the Debt Sustainability Analysis gives the following results.

Table 7.5 Results Debt Sustainability Analysis

Indicator Threshold

Global

Threshold

based on

EAMU10

2014 2015 2016 2017 2018 2022 2032

PV debt to

GDP

74 50 44 44 44 43 41 35 37

PV of Debt to

Revenue

207 179.7 201.4 188.9 173.8 147.6 151.4

Debt Service

to revenue

13.9 13.6 17.1 17.4 18.5 13.4 13.9

Source TA calculations.

The result on the PV debt to GDP which is the only indicator that has an accepted threshold is

below both the internationally accepted target and the EAMU target. In general all the ratios are

above the indicators obtained under the national DSA study and the IMF study, since the estimated

value of the contingent liabilities are much higher in the TA study. The comparisons of the 3 studies

and their assumptions on contingent liabilities are shown below in section 7.7.5

7.7.5 Comparative results; Three studies are compared- Baseline scenario

Table 7.6 DSA Assumptions

National DSA assumptions

IMF DSA assumptions

TA DSA assumptions

GDP growth rate 7 per cent per

annum

Inflation 6 per cent initially and falls

to 5 per cent per annum.

Contingent liabilities:

Suppliers arrears;

Pension arrears;

Litigations (actual);

Total = Tsh 4212 (mainly over 3

years from 2013) (2.4%, 2.1%,

1.9% of GDP).

GDP growth rate about 7 per cent

per annum

Inflation around 6 until 2017 and

then around 5 per cent per annum.

Contingent liabilities:

PSPF arrears (pre ‘99);

Guarantees to Public Enterprises;

Domestic claims;

Litigations (expected loss);

Total = Tsh 3479 bn, 5.5 % of GDP

(2014/15), applied as one off.

GDP growth rate 7 per cent per

annum

Inflation 6 per cent initially and falls

to 5 per cent per annum.

Contingent Liabilities:

PSPF arrears (pre 1999)-Tsh

1500bn;

Actuarial deficit- Tsh 3300bn Y;

All Guarantees defaulted - Tsh

1681.6bn;

Litigations – Tsh 927.3bn;

Total = Tsh 7408.9bn over three

years from 2014(3.9%, 3.43%,

3.01% of GDP).

10

EAMU is East African Monetary Union.


Table 7.7 DSA Results for the main threshold (PV Debt to GDP)

PV Debt to GDP

(%) Thresholds

(International,

EAMU)

2014 2015 2016 2017 2018 2022 2032

National DSA 74 50 32 32 31 30 28 21 17

IMF DSA 74 50 37 36 35 35 35 32 30

TA DSA 74 50 44 44 44 43 41 35 37





Short

term/Medium term

Recommendation

1:Preparation of a

Comprehensive DSA.

Ensure that the DSA is

carried out taking in to

consideration the value of


measured as accurately and

comprehensively as possible.

CPAD, other

departments of MoF,

BoT, Statistics etc.

Medium term

Recommendation 2:

improvement of data base on


Data collection, coordination

of information flow and

identification should be

improved.

CPAD, AccGen and

other related

information providers.

Medium term


8 Legislative Framework

8.1 Introduction

8.1.1The main primary legislation that was reviewed is the Act titled ` Government Loans,

Guarantees and Grants Act 1974 (GLGG), revised edition 2004, and associated Regulations. In

addition to this the TA has also examined other types of `guarantees’ related legislations namely i)

Public Private Partnership Act (2010) and Regulations (2011), ii) Social Security Act (2008) (2007)

and iii)Public Corporations Act (1992) and iv)Public Finance Act 2001(revised 2004).

8.1.2 In order to implement the Act and Regulations smoothly, it is important that proper guidelines

and procedures are put in place. Otherwise, good legislative framework will become difficult to

enforce. In view of this and to help the Government to implement laws smoothly and effectively, the

TA has prepared draft guidelines for issuing loan guarantees and on-lending to institutions where

the final borrower has undertaken the responsibility to repay the loan.

8.1.3 In general, the TA strongly advises that the Government must focus on a comprehensive

legislative framework that includes primary legislation and regulations. The government should

ensure that the entire framework is comprehensive in terms of coverage and scope and should

avoid duplications of laws and overlapping mandates. This should be supported with proper and

appropriate policies, guidelines and operational procedures. There are many examples of

developing countries which have good primary legislation but weak and ineffective regulations and

guidelines. It is further observed that many countries also have parallel and duplicating legislations

that can cause confusion when enacting primary legislation.

8.2 Review and recommended revisions

8.2.1 The Primary legislation titled basic Act Government Loans, Guarantees and Grants Act 1974

(revised edition 2004) covers the basics in legal clauses covering guarantees in Part IV. The TA

has examined this Act and would like to make the following recommendations:

Recommendation 1: section 13 only covers loan guarantees whereas it should cover all

guarantees.

Recommendation 2: Section 13 A, under (b), guarantee limit is stipulated as 70 per cent, while

when all other guarantees are included the maximum is 85 per cent. Also, though there is a need to

mention the limit, it is not important to mention a figure such as 70 per cent. The figure for the limit

can be mentioned in the regulations and respective policy guidelines.

Recommendation 3: In general the regulations contain some sections on the guarantee process

which clearly should be in policy guidelines or procedures. It is recommended that these sections

are reviewed and clear distinction is made between what should be in the regulations and what

should be in policy guidelines. This TA can provide some advice.

Recommendation 4: A guarantee application must be accompanied by a minimum set of financial

performance in the recent past and the organisational structure of the applying enterprise. It is

advised that a proper credit scoring model is developed (i.e. South Africa has one) and applied


based on various financial performance indicators to see whether the entity applying for guarantee

is potentially capable of repaying the guaranteed loan.

Recommendation 5: Though Part II, under foreign loans, covers some aspects of how foreign

loans should be raised and lent to public corporations and other agencies, it does not clearly define

the whole procedure for `on-lent’ loans. The Act should include a section that clearly covers ` On-

lending’ to public corporations and local authorities. The two categories namely on-lent loans that

are repaid via the budget and repaid by the agency via its own funding sources must be clearly

expressed.

Recommendation 6: TA learnt that in some cases the on-lent loan agreement (subsidiary

agreement) is not prepared. It is important that in all cases the subsidiary agreement (between the

Government and the final borrower) is prepared.

Recommendation7: The Government may wish to consider issues relating to guarantee fee,

recourse action for defaults, etc. The best practices demands that these are stipulated to improve

credibility of the borrower and encounter defaults.

By adopting these recommendations the Government will create a well organised procedure for

offering and managing guarantees. If it finds that some of these procedures are too restrictive for a

particular loan application, then it can waiver or by-pass some of the steps. What is important is to

have a sound procedure that can be followed.

8.2.2 Reporting to Parliament:

The GLGG Act does not include a section on `reporting to parliament’ which in our view is a serious

omission, though it is mentioned in the accompanying Regulations (Part IV, sections 17 and 19).

It is recommended that a section called `Reporting to Parliament’ be included in the revised

Loans, Guarantees and Grants Act.

8.2.3 The reporting can be made via an annual debt report, to be submitted not later than 3 months

after the end of the financial year. The annual report shall include:

List of outstanding loan guarantees and other credit schemes;

List of outstanding on-lent loans where the final borrower is obliged to repay the loans via its

generated income;

A fiscal risk statement that includes any defaults.

8.2.4 Public Debt Limit: At present the law does not stipulate a limit on the gross debt of the

country. This limit usually covers public and publicly guaranteed debt. When the limit on debt is

exceeded, the debt becomes unsustainable which may consequently result in an increase in debt

service and an adjustment to the fiscal balances. Best practice today advises that the public debt

limit should be mentioned in budget or public finance act (i.e. Japan) or a fiscal responsibility act

(i.e. Pakistan, 2005). It is recommended that, if this cannot be included in either of the two acts

mentioned, then it has to be included in the debt management act or in the case of Tanzania, the

GLGG Act.

8.2.5 It is important that the primary legislation should only mention that a limit should be set

without providing any quantitative targets which should be in the supporting regulations. The

primary legislation should clearly define public debt:

Should it include publicly guaranteed debt?

Should the debt measured in terms of gross debt or net debt.


8.3 Guidelines and procedures for loan guarantees and on-lent loans

8.3.1 Guarantee Guidelines and Procedures

8.3.1.1 The first step is to identify priority development projects and programmes that will have

to be undertaken that requires external or domestic funding.

8.3.1.2 The justification for the loan that is to be guaranteed, amount required and repayment

ability of the public corporation must follow the defined approval process set in the

regulations.

8.3.1.3 To assess the repayment ability of a corporation `Credit Scoring Methodology’ will be

employed.

8.3.1.4 Public corporations requesting for guarantees must submit the following financial

information for the past 5 years to the Minister:

Rate of return on capital employed;

Cost as a proportion of income;

Debt to equity ratio;

Profit and Loss account;

Cash flow position;

Balance sheet – Assets and Liabilities.

8.3.1.5 After receiving the above information, the `Credit Scoring’ team from the Ministry of

Finance will add qualitative information such as macroeconomic environment and

industry prospects, corporate governance and quality of management etc.

8.3.1.6 After collating all the information, a risk rating methodology based on scores for each

variable (both qualitative and quantitative) will be employed.

8.3.1.7 All successful applicants will have to obtain a score of 60 per cent or more. The credit

worthiness of an applicant increases with an increase in the score.

8.3.1.8 The Ministry will offer a guarantee to a successful applicant.

8.3.1.9 Depending on the scores, a guarantee fee ranging from 0.25 per cent to 1 per cent on

outstanding debt will be charged for each guaranteed loan. Low scoring borrowers will

pay a higher guarantee fee and vice versa.

8.3.1.10 The financial performance and an up to date repayment schedule shall be supplied to

the Ministry of Finance at regular intervals (i.e. statements every six months)

8.3.1.11 In the event of default by any Government Business Enterprise, Government will take full

responsibility in repaying the loan.

8.3.1.12 The Minister of Finance may take appropriate action including recourse action on the

defaulting enterprise.

8.3.1.13 All expenses related to the processing of the guarantee will be paid by every applicant.


8.3.2 On-lending Procedures

8.3.2.1 The first step is to identify priority development projects and programmes that will have

to be undertaken that requires external or domestic funding.

8.3.2.2 The justification for the loan that is to be guaranteed, amount required and repayment

ability of the public corporation must follow the defined approval process set in the

regulations.

8.3.2.3 Unlike in a direct loan, there are two loan agreements in on-lending arrangements. The

primary loan is signed between the Lender and the Government, and the subsidiary loan

between the Government and the public corporation. The terms and conditions in the

original or primary loan agreement is not always passed on to the final borrower.

8.3.2.4 New terms and conditions for the on-lent loan regarding disbursement, repayments,

maturity etc. may be included. The interest rates for the on-lent loan may be adjusted to

take in to account, on-lending fees and exchange rate risk.

8.3.2.5 To assess the repayment ability of business enterprises a `Credit Scoring Methodology’

will be applied.

8.3.2.6 Public corporations requesting for on-lent loans must submit the following financial

information for the past 5 years to the Minister:

Rate of return on capital employed;

Cost as a proportion of income;

Debt to equity ratio;

Profit and Loss account;

Cash flow position;

Balance sheet – Assets and Liabilities.

8.3.2.7 After receiving the above information, the `Credit Scoring’ team from the Ministry of

Finance will add qualitative information such as macroeconomic environment and

industry prospects, corporate governance and quality of management etc.

8.3.2.8 After collating all the information, a risk rating methodology based on scores for each

variable (both qualitative and quantitative) will be employed.

8.3.2.9 Based on the assessment, only successful applicants will be offered an on-lent loan.

8.3.2.10 Since the Government is taking a credit risk, a fee on the outstanding debt will be

charged ranging from 0.25 per cent to 1 per cent. Less credit risk applicants will pay a

lower fee and vice versa.

8.3.2.11 all on-lending expenses will be paid by the final borrower.

8.4 Other related legislation

8.4.1 In addition to the legislative framework for Loans, Guarantees and Grants, the Public Finance

Act of 2001(and revised edition 2004) and the Public Corporation Act of 1992 (Amended Act of

1993) were also examined. This is to check whether there are overlapping/duplicated or

inconsistent /contradictory legislative articles between these Acts and the Loans, Guarantees and


Grants Act. It is important that there is no overlapping or duplication in the articles of various Acts

that would cause confusion. It is also important to ensure that there are no inconsistencies or

contradictory clauses that may give rise to further confusion.

8.4.2 The Public Finance Act and its associated Regulations (2001) has briefly mentioned

contingent liabilities. The Public Finance Act under Part IV – Preparation and Examination of

Accounts- under 25(1 e) mentions a requirement for a statement on contingent liabilities, but no

details are given. This is adequate provided that details appear in the associated Regulations.

8.4.3 The regulations covers contingent liabilities under Part 111- The Basic Of Accounting And

The Preparation of The Annual Accounts, section 55 (4, vii) - and Part VII- Estimates of Revenue

and Expenditure, section 36 (2, d (iv)). However, the coverage here does not provide sufficient

details of what is the scope and coverage of contingent liabilities. It is recommended that more

details on the coverage of contingent liabilities should be highlighted here. It is also recommended

that when reporting a detailed list of contingent liabilities the regulations should clearly stipulate that

liabilities other than loans and credit guarantees should be included since guarantees are already

covered under Loans, Guarantees and Grants Act.

8.4.4 The other related primary legislation is the Public Corporation Act 1992 (amended in 1993).

The Act covers all related aspects- establishment and administration, performance monitoring,

financial provisions and transitional provisions- well with the exception of pricing or tariff setting for

products like electricity, gas and water. Proper price fixing and tariff setting is important since

restrictions applied in setting prices would damage the prospects of loan and guarantee

repayments.

8.4.5 Though the responsibility of price fixing/tariff setting lies with the Energy and Water Utilities

Regulatory Authority (established by Act in 2001) mandated via an Act (Cap 414). It derives its

powers from the Electricity Act (Cap 131); in the petroleum sector, from the Petroleum

(Conservation) Act (Cap 392); in the water and sewerage sectors, from the Water (Utilisation and

Control) Act (Cap 331), the Waterworks Act (Cap 272) and the Dar es Salaam Water Supply and

Sewerage Authority Act (Cap 273). In the case of natural gas sector, some of the regulated

activities are governed by the Petroleum (Exploration and Production) Act (Cap 328). It is

recommended that Public Corporation Act should include an article highlighting pricing or tariff

setting and referring to EWURA.

8.5 Legislative framework for Pensions and Health Insurance Sectors

8.5.1 The TA has reviewed the legislative framework for pensions and health insurance in terms of

whether the laws and regulations are clear, consistent and adequate for providing guaranteed

benefits to the contributing participants.

8.5.2 The overarching legislation that governs the social security related Act is the Social Security

Act (2008) and Amended Act (2012). The amendments made in adequately cover the pensions and

insurance sectors. The following list of Acts and Guidelines are worth noting as they constitute the

overall legislative framework under which all matters related to pensions and insurance are

implemented:

The Social Security (Regulatory Authority) Act (2008);

The Social Security (Amended) Act (2012);

Pension Benefit Harmonization Rules 2014;

The Social Security Schemes Investment Guidelines (2012);


The Social Security Schemes data management Guidelines (2012);

The Social Security Schemes conduct of Actuarial Services Guidelines (2012);

The Social Security Conduct of the Affairs of the Board of Trustees of Schemes Guidelines

(2012);

The Social Security Schemes (Totalization of Contribution Periods) Guidelines, 2014.

8.5.3 Each of the funds had its own Act; National Social Security Fund Act (1997), National Health

Insurance Fund Act (1999), Public Service Retirement Benefits Act (1999) adopted by Public Sector

Pensions Fund, Parastatal Pension Fund Act (2002), Local Authority Pension Fund Act (2006),

GEPF Act (2013). This meant that each Fund was allowed more freedom to choose decisions

without adhering to overall limits and benchmarks. If complete freedom is allowed to make

decisions regarding general administration, contributions and investments decisions without some

limits, then there is a possibility that those decisions made could impact adversely to defined

benefits schemes. Choice of risky investments and lack of adequate contributions can lead to

inadequate revenues for paying pensions, health and other benefits.

8.5.4 In an interview with Tanzania Invest in January 2014, Ms Irene Isaka11

, the current Director

General of SSRA said challenges are being faced in the social security sector due to fragmentation

of legal and regulatory framework, benefits and investment guidelines. TA learnt that reforms in the

social security sector is still on-going in terms unification of clear guidelines and harmonisation of

pension benefits while maintaining sufficient competition among the pension funds. In this regard,

The Social Security Schemes (Benefits Harmonisation) Rules 2014 that is introduced (under

sections 9, 25. 36) of the Amended Act of 2012 is a progressive step. TA recommends that these

reforms are speedily implemented and we understand that some of the harmonisation steps have

been implemented beginning July 2014.

8.6 Legislative framework for Public Private Partnerships

8.6.1 The legislative framework that is to be reviewed under this section is the risks faced in

financing PPPs and the risk sharing arrangements between private and public sector when

guarantees are offered. Typically, in PPP arrangements, most popular guarantees are in the form of

minimum revenue guarantee or concessions. In PPP arrangements when it began in the advanced

countries, private sector brought in its own funds – in the form of equity and debt- for the project.

The typical PPP arrangements will take the modality of Design- Build- Finance- Operate - Transfer

(DBFOT) schemes. However, in developing countries partial funding may have to be provided by

the government in terms loans or it may have to offer guarantees to the private sector to raise

funds. In addition, minimum revenue guarantees have to be offered for example, toll road projects

or bulk concessions (minimum guaranteed purchase of outputs) for power generation projects. In

addition, there may be other financing risks such as resettlement and compensation offered to

communities that have to be resettled due to take over of land by the Government to build

infrastructure i.e. roads, highways and railways.

8.6.2 As the TA is only concerned with the public financing and risk sharing issues, the review of

the legislative framework has been confined to the above mentioned areas. TA has examined the

PPP Act of 2010, PPP regulations of 2011, and the national policy on PPP prepared earlier in 2009.

In our view the Act and the regulations are well prepared with a comprehensive coverage. Overall

the TA has the following concerns that needs to be clarified or addressed:

11

Tanzania Invest Interview with Irene Isaka, Director General of Social Securities Regulatory Authority, Friday 10th

January, 2014.

https://www.ssra.go.tz/English/wp-content/uploads/2013/06/The-Social-Security-Schemes-Totalization-of-Contribution-Periods-Guidelines-2014.pdf


The types of risks faced under PPP are broadly defined as construction risk, demand risk,

financial risk and supply/availability risk. It is recommended that brief statements of the type of

risks that need to be shared are included in the Regulations or policy Guidelines;

The Act does not specify what financing modalities – private debt and equity finance, public

finance, public debt and government guarantees- will be allowed. Therefore it is recommended

that a statement describing what type of modalities will be allowed, should be included;

In the PPP regulation, it is recommended that further details on the risk sharing arrangement

and the financial modalities of the project need to be included. This will enable the Act to be

strengthened further and the implementation easier;

TA has briefly looked at the Land Acquisition Act (1967), Land Act (1999) and Land Dispute

Settlement Act (2002). The provisions made under these are adequate in dealing with

compensation, resettlement and dispute resolution for land take over by the public sector for

PPP projects.

8.6.3 With reference to the PPP Special Bill Supplement (2014), TA’s understanding is that the PPP

Centre shall receive recommendation from the Ministry responsible for finance for matters related to

fiscal risks, affordability and other financial matters; since the two fall under two different ministries

(PMO vs Finance), there is a risk of official bureaucracy intervening although the act has put 15

days as the maximum number of days for such relevant analysis to be taken by ministry

responsible for finance. The TA observes that in many other countries, a PPP Centre would be

housed under the ministry responsible for finance. It is also unclear whether when public finance is

needed to support a PPP project whether this will be done within a national budget appropriation or

outside of it.





Short/medium

term

Additions and modifications to the Government Loans Guarantees and Grants Act (1974 and revised

edition 2004) and Regulations(2003)

Recommendation 1 Section 13 only covers loan guarantees

whereas it should cover all guarantees.

MoF and Attorney

General’s Office

Short term

Recommendation 2 Section 13 A, under (b), guarantee limit is

stipulated as 70 per cent, while when all

other guarantees are included the maximum

is 85 per cent. Also though there is a need to

mention the limit, it is not important to

mention a figure such as 70 per cent. The

figure for the limit can be mentioned in the

regulations and respective policy guidelines.

MoF and Attorney

General’s Office

Short term

Recommendation 3 In general the regulations contain some

sections on the guarantee process which

clearly should be in policy guidelines or

procedures. It is recommended that these

sections are reviewed and clear distinction is

made between what should be in the

regulations and what should be in policy

guidelines.

MoF Short/medium

term

Recommendation 4 A guarantee application must be MoF Medium term




Short/medium

term

accompanied by a minimum set of financial

performance in the recent past and the

organisational structure of the applying

enterprise. It is advised that a proper credit

scoring model is developed (i.e. South

Africa) and applied based on various

financial performance indicators. This will

enable to assess the repayment capacity of

the applicant. This method can also be used

to assess `on-lent’ borrowers.

Recommendation 5 Though Part II, under foreign loans, cover

some aspects of how foreign loans should

be raised and lent to public corporations and

other agencies, it does not clearly define the

whole procedure for `on-lent’ loans. The Act

should include a section that clearly covers `

On-lending’ to public corporations and local

authorities. The two categories namely on-

lent loans that are repaid via the budget and

repaid by the agency via its own funding

sources must be clearly expressed.

MoF Short term

Recommendation 6 It is important that in all cases the subsidiary

agreement (between the Government and

the final borrower) is prepared.

MoF Short term

Recommendation 7 The Government may wish to consider

issues relating to guarantee fee, recourse

action for defaults, etc. The best practices

demands that these are stipulated to

improve credibility of the borrower and

encounter defaults

MoF and Attorney

General’s Office

Short term

Recommendation 8 A section called `Reporting to Parliament’ be

included in the revised Loans, Guarantees

and Grants Act.

MoF and Attorney

General’s Office

Additions to the Public Finance Act (2001 and Revised 2004) and Regulations (2001)

Recommendation 9 The sustainable debt limit (i.e. gross or net

debt of GDP) should be ideally included in

this Act. If not it should be included in GLGG

Act. It should clearly define whether

guarantees are included in the total debt limit

or not.

MoF Short term

Recommendation

10

More detailed coverage of contingent

liabilities should be included. It is also

recommended that when reporting a detailed

list of contingent liabilities the regulations

should clearly stipulate that liabilities other

than loans and credit guarantees should be

included since guarantees are already

covered under Loans, Guarantees and

Grants Act.

MoF Short/medium

term




Short/medium

term

Additions to Public Corporation Act (1992) and amended Act (1993)

Recommendation

11

Should include article highlighting pricing or

tariff setting and referring to EWURA.

EWURA Short/ medium

term

Additions to Pensions Act (fragmented acts at present)several at the moment)

Recommendation

12

Reforms to unify and harmonise pension

acts for ensuring pensions benefit

guarantees.

Ministry of Finance

and SSRA

Short term

Additions to PPP Act (2010) and PPP Regulations (2010)

Recommendation

13

Clarification on institutional responsibilities

and functions in PPP public financing and

fiscal risk allocations.

MoF and Prime

Minister’s Office(PPP

Centre)

Short term

Recommendation

14

In the Act, what types of financing modalities

are permitted should be stipulated. A brief

description of the various risks to be shared

between private and public sectors should

be included.

MoF and Prime


Centre)

Short term

Recommendation

15

In the Regulation, details of risks should be

included.

MoF and Prime


Centre)

Short term

8.8 References of the Main Acts and Regulations reviewed:

1. Government Loans, Guarantees and Grant Act (1974) and revised version (2004), and

Regulations (2003);

2. Public Finance Act (2001), revised edition (2004) and Regulations (2001);

3. Public Corporations Act (1992) and revised Act (1993);

4. Energy and Water Utilities Regulatory Authority Act (2001);

5. Dar es Salaam Water Supply and Sewerage Authority Act (1981, revised in 2001);

6. The Social Security (Regulatory Authority) Act (2008);

7. The Social Security (Amended Regulatory Authority) Act (2012);

8. National Social Security Fund Act (1997);

9. National Health Insurance Fund Act (1999);

10. Public Service Retirement Benefits Act (1999) adopted by Public Sector Pensions Fund;

11. Parastatal Pension Fund Act (2002);

12. Local Authority Pension Fund Act (2006);

13. Public Private Partnership – Act (2010) and Regulations (2010);

14. Land Acquisition Act (1967);

15. Land Dispute Settlement Act (2002);

16. PPP- Special Bill Supplement (2014).


9 Disclosure and Reporting of Contingent liabilities

9.1 Statistical Presentation

9.1.1 This section covers the disclosure and reporting requirements of contingent liabilities. Better

disclosure helps to become more transparent about contingent liabilities and reporting them has to

meet accepted standard practices. There are also different views on whether contingent liabilities

are actually liabilities when they are entered into or become so only when the contingent event

occurs. For example, current accounting standards (accrual such as IPSAS) recognize

contingent liabilities as liabilities if it is deemed to have a more than 50 per cent chance of a default

occurring. This requires reliable measurement and in this case the expected value of the payments

is recognized as a liability on the balance sheet and expense in the income statement. Current

statistical standards (UN-SNA), on the other hand, recognizes contingent liabilities only if and

when the contingency actually materializes and the obligation must be met by Government.

9.1.2 For loan and credit guarantees that fall in to the category of one-off and standardised

guarantees a simple format on presentation (example) for disclosure is given below;

Table 9.1 category of one-off and standardised guarantees for disclosure

Type of Guarantee Loan / Export Credit/SME etc.

Project/sector Identification Energy/Electricity

Creditor IBRD, Pension Fund etc.

Borrower Tanesco

Guarantee Agency Government

Contracted date 31-12-2002

Original Amount USD 300 mln

Loan –currency US dollars

Interest rate 3 %

Original maturity 20 yrs

Balance outstanding USD $ 200mln

Status A narrative on the status of next repayment due i.e.

ability to repay

The above presentation which contains the details of the loan guarantee should be made on every

individual loan / guarantee. This format can be also used for export credits and SME credits. Status

should explain whether guarantee repayments will be met or not. If this can be included then this

format will satisfy both statistical reporting and fiscal risk position. Already similar but more basic

formats are in use (i.e., MoF and Treasury Registrar) but need to be further strengthened in terms

of accuracy, timeliness and details.

The above information should be further supplemented by an aggregate statistical table

representing all the major categories of contingent liabilities of Tanzania and their magnitudes

during the completed fiscal year.


Table 9.2

Types of Contingent Liabilities Amount during Previous Fiscal

year

Amount during the current

fiscal year

One-off guarantees

Standardised guarantees

PPP guarantees issued

Litigations

On-lent loans with credit risk

Other unexpected contingent Claims

The other type of guarantees such as pending litigations, minimum revenue guarantees, unitary

concessions, social security scheme provisions and do not require such detail and at the initial

stage these can be presented and disclosed under a fiscal risk presentation.

9.2 Fiscal Risk Reporting of Contingent Liabilities

9.2.1 In line with IMF’s Code for Fiscal transparency (revised 2013, Section 3 under Fiscal Risk

analysis and management) and IMF’s Public Sector Debt Statistics-Guide for Compilers and Users

(2012, chapter 9 section D Fiscal Risk and Vulnerability) Fiscal risk reporting is becoming more

relevant for better governance. When preparing and attaching a Fiscal Risk statement to the

budget, it is important that it includes the likely fiscal risks caused by contingent liabilities.

9.2.2 A brief definition of fiscal risk can be defined in terms of any potential deviation between

actual and expected fiscal outcomes. These differences can be caused by implicit and explicit

contingent liabilities. As a first step, in preparing a fiscal risk statement that includes contingent

liabilities and submitted as an attachment to the budget document, a list of all contingent liabilities

should be identified and listed. If it is possible, the likely risks of defaults, expected outcomes and

efforts that are to be taken to mitigate it can be expressed in a narrative form, even if it is not

possible to prepare a presentation that contains measurement or quantitative analysis.

9.2.3 The TA recommends that the Government also adheres to standards set in IMF’s Code for

Fiscal Transparency (revised version 2013), especially section III) Fiscal Risk Analysis and

Management (Risk Disclosure sub sections 3.1.2 and 3.2.5) and (Fiscal Coordination sub-section

3.3.4). The Government is advised to adopt these standards using a gradual phased approach. In

terms of timeframes, many advanced countries (i.e. South Africa), monthly, quarterly and annual

reporting are carried out. However, for Tanzania, the TA recommends that at the initial stage it can

prepare the annual financial statement/budget presentation (for the next year) that includes a list of

contingent liabilities and the potential fiscal risks likely to be caused by such liabilities.

9.2.4 As a sample format for presentation the TA proposes the following table:

Table 9.3 sample format for presentation

Type of Guarantee Exposure

(amount of principal outstanding

plus accrued interest

Status

Loan guarantees

Standardised guarantees- export

credits, SME etc.

On-lent loans with credit risk

PPP – Minimum Revenue


Type of Guarantee Exposure

(amount of principal outstanding

plus accrued interest

Status

Guarantee-

PPP- Concession guarantee -

Litigations

Social security payments including

pensions

9.3 Accounting Disclosure of Contingent Liabilities

9.3.1 Although risks associated with contingent liabilities can affect the sustainability of fiscal

position of a government, they are more often not disclosed to decision makers or the information is

presented in financial statements but it is not in understandable form. Adequate disclosure of

contingent liabilities would go a long way towards triggering action to scale down growth in off-

balance sheet items. In this section we highlight disclosure practice of contingent liabilities in the

government financial statements.

9.3.2 The National Board of Accountants and Auditors in Tanzania, since 2004, fully adopted

International Accounting Standards for use by both private and public entities in the country.

Consequently, the private entities and government business enterprises are required to report their

financial statements according to the International Financial Reports Standards (IFRS) while public

entities (including government non-business entities) are required to report their financial

statements according to International Public Sector Accounting Standards (IPSAS). There is also

IFRS for SMEs focusing only on the Small and Medium Enterprises in Tanzania. The Government

of Tanzania since July 2012 adopted the use of accrual basis of Accounting in its reporting of

central government financial affairs. The migration is intended to generate high quality and

internationally comparable financial reports. In 2006 Government of Tanzania had migrated to

cash-basis IPSAS and the financial statements since then to June 30, 2012, have been prepared

under cash-basis IPSAS and audited by the Controller and Auditor General, the National Audit

Office, Tanzania. Some contingent liabilities, particularly litigations were disclosed even then.

9.3.3 Based on the assessment done, the TA has established that that the Government

Consolidated Financial Statements for the period ended June 2013 were for the first time prepared

using accrual basis of International Public Sector Accounting Standards. Local Government

Authorities and government business enterprises were already preparing their financial reports

using accrual-basis IPSAS or IFRS as the case required. The Standards require that an entity that

prepares and presents financial statements under the accrual basis IPSAS apply IPSAS 19 in

accounting for Provisions, Contingent liabilities, and Contingent assets. According to IPSAS 19,

which is applicable for Central Government financial reporting, a contingent liability is:

(a) A possible obligation that arises from past events, and whose existence will be confirmed

only by the occurrence or non-occurrence of one or more uncertain future events not

wholly within the control of the reporting entity; or

(b) A present obligation that arises from past events, but is not recognized because:

i. It is not probable that an outflow of resources embodying economic benefits or

service potential will be required to settle the obligation; or

ii. The amount of the obligation cannot be measured with sufficient reliability.

A legal obligation is an obligation that derives from a contract, legislation or other operation of law.


9.3.4 An entity shall not recognize a contingent liability, a contingent liability is only disclosed,

unless the possibility of an outflow of resources embodying economic benefits or service potential is

remote. Where an entity is jointly and severally liable for an obligation, the part of the obligation that

is expected to be met by other parties is treated as a contingent liability to the entity. For example,

in the case of joint venture debt, that part of the obligation that is to be met by other joint venture

participants is treated as a contingent liability. Government guarantees and litigations of civil nature

against the government are some of the examples that could qualify as contingent liabilities.

9.4 Contingent liabilities of Public Authorities and other Bodies (PAOBs) and

LGAs

9.4.1 The contingent liabilities of PAOBs or LGAs are not under the direct control of the Central

Government. However, any contingent liabilities which the relevant entity might not be able to meet

from within their own resources when they crystallise could fall to the Central Government. The

Central Government should therefore be satisfied that there are adequate arrangements in place to

ensure that the acceptance of contingent liabilities by the entities concerned is consistent with the

entities' defined powers and that, in the event of the contingent liabilities maturing, the bodies would

have the ability to meet the costs from within their own resources. Any contingent liability which the

entities might not be able to meet from within their own resources should be treated in the same

way as the Central Government's own contingent liabilities.

9.5 Accounting treatment of contingent liabilities

9.5.1 The accounting treatment depends on the assessment of the likelihood of adverse outcome;

either likely, medium or unlikely to crystalize for an entity.

Likely

Contingent liabilities that are assessed as likely to result in an adverse outcome and which can be

estimated, are totalled and recorded as an estimated liability and recognised. No disclosure is

provided of either the individual estimates or the total amount of the allowance. In the case where

an accrual is recorded but only covers a portion of the estimated range of liability, the difference

between the amount recorded and the top of the range should be considered for disclosure in the

notes to the financial statements.

Medium

Contingent liabilities where the likelihood of an adverse outcome is assessed as medium or where

the likelihood cannot be determined and for which a potential liability has been estimated are

totalled and disclosed in the notes to the financial statements. The fact that the estimate covers

only a portion of all claims against the Government is also disclosed.

Unlikely

Contingent liabilities that are assessed as unlikely to result in an adverse outcome are provided no

accounting treatment.

The central government has set for itself a 5 years’ transition period from July 2012 to fully comply

with IPSAS and that includes, IPSAS 19 on contingent liabilities. On the other hand, Government

Business Enterprises are guided by IFRS (IAS 37 Provisions, Contingent Liabilities and Contingent

Assets).


In the table below, we summarise a guide that can help determine when to recognise or disclose

contingent liabilities. The Government can use the guide to determine which contingent liabilities

should be recognised, which ones should be disclosed and which ones not to be reported at all.

Table 9.4 guide to help determine when to recognise or disclose contingent liabilities

Likelihood and measurability

of loss

Loss more likely than

not (probability>50%)

Loss less likely but

more than remote

Loss remote

Loss can be measured Record in financial

statements and disclose

nature of contingency

Disclose nature of

contingency and amount

No disclosure

Loss cannot be reasonably

measured

Disclose nature of

contingency

Disclose nature of

contingency

No disclosure

9.6 Disclosure of Contingent Liabilities in Central Government

9.6.1 As already stated above, the Central Government’s Consolidated Financial Statements for the

year ended 30 June 2013 were prepared based on IPSAS Accrual Basis. To comply with the

requirements of the standards, contingent liabilities in addition to other disclosures were disclosed

in the Consolidated Financial Statements of the Government. The total contingent liabilities

disclosed during the period amounted to TZS 526,244,283,984. The list of litigations included in the

Consolidated Financial Statement for the year ended 30 June 2013 are presented below by entity

and face value. It is important to point out here that the disclosure in CFS was not comprehensive

and therefore the amount disclosed does not represent the total amount of contingent liabilities by

the Government.

Table 9.5 list of litigations included in Consolidated Financial Statement for year ended 30 June 2013

List of contingent liability (litigations) as disclosed in the CFS 30 June 2013 TZS

PM – Office 870,000,000

Ministry of Agriculture 1,474,581,567

Ministry of Education 2,320,346,676

Ministry of Water 7,768,530,893

Ministry of Health and Social Welfare 2,592,000,000

CHRGG 2,095,000,000

Ministry of Minerals 404,268,130,000

Ministry of Natural Resources 22,433,614,827

RAS Lindi 240,713,467

RAS Mara 272,200,000

RAS Singida 17,171,650

RAS Tabora 154,180,013

RAS Tanga 101,918,400

Ministry of Works 80,733,841,991

Ministry of Livestock and Fisheries 902,254,500

Total 3091,145

9.6.2 During the period ended 30 June 2010, contingent liabilities, made up only of litigations and

disclosed were TZS 26,276,783,317. The disclosed contingent liabilities in the Consolidated

Financial Statements were made up of outstanding litigations against Central Government

Ministries and Regional Secretariats. The contingent liabilities disclosure did not include other


classes of contingent liability e.g. various Government guarantees that were in existence during the

reporting year, e.g. loan guarantees, pension guarantees, etc.

9.6.3 SME and Export Credit Guarantee Schemes both managed by the Bank of Tanzania were

disclosed under a separate note (guarantees) in the Consolidated Financial Statements amounting

TZS 799,596,351,406 (SME credit guarantee scheme TZS 499,495,426,401 and Export Credit

Guarantee Scheme TZS 300,100,925,005). Although they were separately disclosed in the financial

statements, these standardised guarantees were not disclosed under contingent liabilities. In

addition, various direct guarantees issued to various PAOBs have not been disclosed in CFS.

Classes of contingent liabilities that have not been disclosed in the CFS are: PPP guarantees,

Pension guarantees, Higher Education student loans, Callable share capital, Indemnities, Joint

venture liabilities, and Environmental and disposal guarantees.

9.7 Disclosure of contingent liabilities in PAOBs

9.7.1 Most PAOBs are preparing their financial statements to comply with International Financial

Reporting Standards (IFRS). International Accounting Standard, IAS 37 which covers Provisions,

Contingent Liabilities and Contingent Assets outlines the accounting for provisions (liabilities of

uncertain timing or amount), together with contingent assets (possible assets) and contingent

liabilities (possible obligations and present obligations that are not probable or not reliably

measurable).

9.7.2 The TA therefore reviewed Financial Statements of some PAOBs to determine the level of

disclosure of contingent liabilities in their financial statements as required by accounting standards.

The team has established that overall, most organisations comply with the requirement to disclose

contingent liabilities, IAS 37 or IPSAS 19. In the table below we highlight some examples of

contingent liabilities that were disclosed by the various PAOBs whose financial statements we

reviewed.

Table 9.6 Examples of contingent liabilities disclosed by various PAOBs financial statements reviewed

Name of PAOBs Disclosures

TTCL Litigations – TZS 11,893 million corporate tax liability claims, TZS 773 million

indirect tax liability claims by TRA; various lawsuits amounting to TZS 33,584

million. Still under dispute.

Tazara In the Tazara FY 2012 Financial Statements, there is a disclosure statement

stating presence of litigations, although no face value has been disclosed.

A statement on potential unpaid penalties and interest for non-payment of PAYE

and pension contributions has been disclosed but there is no estimate of the value

of the contingent liability.

NHIF FY 2012/13, there was no contingent liabilities during the period however,

contingent liabilities are usually disclosed in the Financial Statements.

NSSF FY 2011/12, there is a note of the presence of litigations but the face value of the

claims has not been disclosed.

MSD FY 2012/13, contingent liability disclosed for litigations during the period,

amounting to TZS 144 million. No other contingent liabilities have been disclosed.

NBAA FY 2012/13, contingent liabilities of mainly court cases of TZS 380 million have

been disclosed.

TPA FY 2012/13, TPA had disclosed litigations in Financial Statements, chief being TZS

337,727.1 Million against Mvita Construction Company Ltd. Other litigations are


Name of PAOBs Disclosures

employment cases (TZS 8,556,575,589), Port operation cases (TZS

7,545,517,464), Contract and land related cases (TZS 4,454,000,000) and Others

including defamation (TZS 59,499,000).

There are also unresolved corporate tax disputes with TRA amounting to TZS

72,500,403,472.

Dawasco FY 2012/13 Contingent liabilities related to key performance targets with Dawasa

have been disclosed.

Unpaid Statutory requirements with respect to PAYE to TRA and staff pension

contribution all amounting to TZS 8 billion has been disclosed.

Disputed tax liabilities amounting to 15.5 billion related to income tax, PAYE, VAT,

withholding tax have been disclosed.

EWURA FY2012/13 Some litigations have been disclosed in Financial Statements however,

there are no values that have been attached or the probability of success of the

cases based on past experience.

TAA Contingent liabilities have not been disclosed, however, they have litigations in

court of laws worth disclosing.

LAPF FY 2012/13, LAPF discloses contingent liabilities in its financial statement but there

was no such contingent liabilities during the reporting year.

PSPF FY 2012/13, PSPF disclosed contingent liabilities in its financial statement but

there was no such contingent liabilities during the reporting year and therefore the

note was empty. There were no other contingent liabilities disclosed.

NHC FY 2012/13, NHC discloses contingent liabilities; the total amount claimed in the

various lawsuits approximates to TZS 16,809 million during the reporting year.

TWB FY 2013, disclosed contingent liabilities made up of litigations and of advance

guarantees and performance bond (TZS 173,268,600). The provision was done for

established amounts for probable lost court cases.

Tanesco FY 2012, disclosed litigations by standard Chartered Bank Hong Kong against

Tanesco and IPTL demanding a payment of US$ 71,140,437 for unpaid capacity

charges and increasing at a rate of Us$ 2,659,669 per month since 2008 i.e.

US$258.7 million as of 31st Dec 2012.

Another litigation by Dowans Tanzania Ltd demanding US$65,812,630.33plus

interest of 7.5% per annum rom 15 November 2010. “The directors believe that in

the event that the company is obliged to settle the potential liability, the GoT

through the Ministry of Energy and Minerals shall finance it with immediate effect”.

9.7.3 How to Report Contingent Liabilities

Although most government entities disclose contingent liabilities in their financial statements, the

information that is provided is not always appropriate enough to help in decision making. The

disclosed information in financial statements is expected to be meaningful enough to provide

information for assessing potential fiscal impact of contingent liabilities, information should be

presented to explain the government’s policy and rationale in support of contingent liabi lities, and

information should disclose stock of contingent liabilities in comparable years. Based on IPSAS 19

and best practice from other countries, the following information for each item of contingent liability

is required:

Brief description of the nature of the contingent liability and the expected timing of payments;


An indication of uncertainties about the amount or timing of these payments including the major

assumptions made concerning future events;

The possibility of any reimbursements; and

Amount at the beginning and end of period and the breakdown of the changes during the

period, including cause.

The government should present an estimate of the financial effect of each class of contingent

liabilities; if it is not possible or practicable then that fact should be stated clearly. The Government

is therefore recommended to fully adapt to the requirements of IPSAS 19 when disclosing

contingent liabilities. In Addition, PAOBs should also be required through TR to fully comply with

IPSAS 19 or ISA 37 as the case may be. In the medium to long term, the capacity of NBAA (The

National Board of Accountants and Auditors) should be strengthened to enable it monitor

compliance of all public interest entities to accounting standards i.e. IPSAS 19, IAS 37.





Short/medium

term

Recommendation 1:

Individual loan guarantee and

on-lent loan with credit risk

Details of each loan

guarantee, credit guarantee

and on-lent loan (with credit

risk). Proposed table format

9.2.1 a.

MoF (Budget, Debt

and Acc Gen)

Short term

Recommendation 2:

Aggregate statement of

Current and previous year on


Disclosure /reporting of

aggregate amounts of

previous and current year of

major categories of

contingent liabilities 9.2.1 b.

MoF (Budget, Debt

and AccGen)

Short term

Recommendation 3:

Aggregate fiscal risk

statement

Fiscal risk due to contingent

liabilities for the forthcoming

year. Exposure and probable

outcome. an attachment to

the national budget.

MoF (Budget and

Debt)

Short term

Recommendation 4: The

Government should fully

adapt to the requirements of

IPSAS 19 when disclosing


The disclosed information in

financial statements is

expected to be meaningful

enough to provide information

for assessing potential fiscal

impact of contingent liabilities,

information should be

presented to explain the

government’s policy and

rationale in support of

contingent liabilities, and

information should disclose

stock of contingent liabilities

in comparable years.

MoF (AccGen) Medium term

Recommendation 5:

Treasury Registrar should

TR should monitor disclosure

of contingent liabilities by

MoF (TR) Short term




Short/medium

term

ensure comprehensive

disclosure of Contingent

liabilities for PAOBs

PAOBs by requiring full

compliance of IPSAS 19 or

ISA 37 as the case may be

for all organisations under its

mandate.

Recommendation 6:

AGC should compile annually

all litigations for disclosure

purposes and share it with

Accountant Generals Office

The AGC develop a computer

database to keep all

litigations that face the GoT

and which might crystallise

into liabilities. There should

be a specific requirement that

such information is submitted

to Accountant General

annually.

Attorney Generals

Office and MoF

(AccGen)

Short to medium

term


10 Institutional Arrangements for Managing Contingent Liabilities

10.1 Introduction:

10.1.1 In many of the more advanced countries, the contingent liabilities are managed within an

Asset/Liability management framework or a Treasury management framework. On the other hand,

in most developing countries, contingent liabilities are managed on ad hoc basis with no specific

reference to its institutional responsibility or proper terms of reference in terms of scope and

coverage. It is also evident that in developing countries the main or in some cases the only

contingent liability that is recognised is loan guarantees. Even under such narrow coverage, much

work is needed in monitoring and managing such guarantees. As other types of contingent liabilities

become gradually recognised with wider scope and complexity, more focused attention will be

needed to monitor and manage these contingent liabilities.

10.1.2 Over time many developing countries have come to recognise the increasing number and

the impact of explicit contingent liabilities such as other credit schemes, unfunded pensions, PPP

guarantees, litigations, indemnities schemes. Implicit guarantees such as natural disasters and

bank failures/bail outs to protect savers have also been recognised.

10.1.3 There are two sets of questions to be addressed. The first is related to governance and

administration issues which mainly cover the legal framework, guidelines to offer guarantees,

recording, budgeting, accounting, reporting/disclosure. The second is related to institutional

responsibilities and coordination for information sharing and decision making. In the past, it was

much easier since the only contingent liability that was acknowledged and dealt with was loan

guarantees. This function was conveniently placed in a debt management unit within the Ministry of

Finance.

10.2 Recommended Institutional Structure and Responsibilities:

TA proposes a Front, Middle and Back Office (F_M_B) structure:

Figure 10.1 Recommended Institutional Structure and Responsibilities

Front Office Middle Office Back Office

Guarantee negotiations;

On-lent negotiations.

Credit risk analysis and valuation of guarantees and on-lent loans; PPP Finance and risk analysis; Interpretation of Actuarial studies; Analysis of potential defaults of other contingent liabilities.

Initial recording of loan guarantees and on-lent loans; Collating other data from institutions i.e. TR, BOT; Preparation of data for fiscal risk and contingent liabilities report.


In brief, the Front Office functions are related to negotiations and assessing the various financing

opportunities in the form of guarantees and on-lending arrangements, export credit guarantees etc.

The Middle Office functions include analysing the options and recommending the most desired

option for negotiation and funding programmes and projects. The Back Office functions include

recording, receiving various contingent liabilities reports that are prepared by outside agencies,

contributing to fiscal risk reports and disclosure of contingent liabilities.

10.3 Terms of Reference and Responsibilities

Front Office

1. Negotiating for on-lending type loans and guaranteed loans, export credits, bond issuance etc.;

2. Participating in Fiscal risk reports due to contingent liabilities and general statistical reports

(jointly with Middle and Back Offices and other departments in the Ministry of Finance);

3. Staff should regularly update their skills and competence to meet the requirements to fulfil their

responsibilities and specific tasks.

Middle Office

1. As contingent liabilities such as guarantees and on-lending arrangements face credit risks it is

important that credit risk analysis are carried out. This will involve various analytical techniques

such as default calculations, simulations and scenario analysis;

2. Under PPP arrangements, ability to calculate risk sharing proportions between the public and

private sector;

3. Ensure that Debt Sustainability Analysis and Medium Term Debt strategy preparations include

contingent liabilities. Establish benchmarks for indicators that include relevant contingent

liabilities;

4. Ability to analyse other reports – actuarial valuation reports for pensions funds, litigations from

Attorney General’s Chambers, Auditor Generals reports, PPP performance reports etc.;





Back Office

1. Recording on-lent and guaranteed loans;

2. Ensuring that guarantee letters and on-lending agreements (both the main and subsidiary) and

other contractual obligation letters and notices are stored in a safe place;

3. Receive and act as a registry for all the other reports that cover other types of contingent

liabilities (see information flow arrangements in section 10.5);

4. Provide data and information on contingent liabilities for DSA and MTDS exercises;





The TA recommends that a small staff complement of three (3) be allocated to manage and monitor

the contingent liabilities. Since there is not a dedicated contingent liabilities management unit, the

responsibilities and functions can be carried out by the relevant debt management staff with

cooperation with other departments in the Ministry of Finance.


10.4 Contingent Liability Committees

TA recommends that two committees are set up to monitor and manage the contingent liabilities.

First to establish a Management committee that is responsible for making decisions and the second

to establish a technical committee that supports the management committee, providing advice and

consultancy based on sound analysis and assessments.

Members of the Management Committee

Senior member (at least Deputy PS level) Ministry of Finance- Head of Committee;

Head of Contingent liabilities Division;

Senior member of the Accountant Generals Department;

Other senior members from relevant institutions depending on the type of contingent liability

being considered.

Members of the Technical Committee

Senior member (at least Deputy Commissioner level) Ministry of Finance – Head of Committee;

Contingent Liabilities division technical staff;

Other Ministry of Finance technical staff depending on the type of contingent liability being

addressed;

Technical staff from Accountant General’s Department;

Outside agency technical staff depending on the contingent liability issue being addressed.

10.5 Information Flow arrangements

10.5.1 It is important that a central place is designated to receive all statistics and information on all

the various types of contingent liabilities that is managed outside the Contingent liabilities unit within

the Ministry of Finance. As stated earlier, contingent liabilities unit or a broader unit of liabilities

management (including debt liabilities) will be mainly involved in managing on-lent loans and

guarantees. However the inclusion of other contingent liabilities where the management is carried

out outside the MoF will mean that information flow and coordination should be strengthened. The

following diagram shows the likely flows need and the responsible institutions.


Figure 10.2 Information Flow arrangements

10.5.2 TA recommends that the collection of information and reports be carried out at the Back

Office. After collection of the information it can be distributed to the Front and Middle Offices as

required. This information flow must be formalised in terms of timeliness of supplying data and its

quality and consistency. The timeliness of reporting can vary from week, month, quarterly to annual.

Various periodic reports will be compiled by the contingent liabilities unit and distributed to the

various interested parties.

Interim arrangements for monitoring and reporting of contingent liabilities

10.5.3 The TA’s view is that it will take some time to establish a new Contingent Liabilities Unit in

accordance with the Front-Middle-Back office arrangement with qualified staff and to formally create

all the necessary information channels that will help to fulfil all the related functions of contingent

liabilities. However, in view of some of the critical work that need to be started, in the interim, it is

suggested that one staff from CPAD and one staff from Acc Gen’s Office (each giving 50 percent of

their work time) be allocated to carry out these functions. The TA identifies the following functions

be performed with defined targets to be achieved by next year’s national budget (2015/16)

submission in June.

1. Strengthening on-going legislative framework on guarantees;

2. Introduction of guarantee and on-lending guidelines;

3. Identifying and listing all loan and credit guarantees which will include data collection;

4. Preparing fiscal risk statement for contingent liabilities.

Back Office

Attorney General's Office

Litigation cases pending and latest evaluation report

Parent Ministry and Corporation

-performance Report and Finanacial statements

SSRA

Actuarial Valuation Reports Bank of

Tanzania

Export Credit Guarantees and SME guarantee

reports

MoF

AccGen Office

Budget Office

Treasury Registrar






Short/medium term

Recommendation 1: Interim

structure with responsibilities

A small functional unit with

2 staff, one from CPAD

and other from AccGen (50

% of the work time)

CPAD and AccGen of

MoF

Short term

Recommendation 2: set up a

clear institutional structure

To monitor and manage

contingent liabilities. Clear

Terms of Reference,

responsibilities and

functions


Unit to established in

the MoF

Medium term

Recommendation 3:

Strengthening capacity and

skills

Recruit the appropriate

staff, provide relevant

training


Unit to established in

the MoF

Medium term


Annex 1: People contacted and their organisations

1. Prof Adolf Mkenda – Deputy PS,

Ministry of Finance

2. Ms. Dorothy Mwanyika – Deputy

PS, Ministry of Finance

3. Mr. Bwire Magere – Debt Office,

Ministry of Finance

4. Mr. Alice Matembele – PER

Secretariat, Ministry of Finance

5. Mr. Sigsbert Kavishe – PER

Secretariat, Ministry of Finance

6. Mr. Elias Mwakibinga – Treasury

Registrar Office

7. Mr. William Bohunire – Treasury

Registrar Office

8. Mr. Peter Gwagiro – Treasury

Registrar Office

9. Mr. Guy Anderson – East AFRITAC

10. Mr. Tawafiq Ramtoolah – East

AFRITAC

11. Mr. Fazeer Sheik Rahim – East

AFRITAC

12. Mr. Samuel Mayiku – PPP Unit,

Ministry of Finance

13. Dr. Frank Mhilu – PPP Unit, Ministry

of Finance

14. Ms. Virginie De Ruyt – European

Union

15. Ms. Victoria Cunningham – World

Bank

16. Ms. Fatuma Kimario – Bank of

Tanzania

17. Mr. Ismail Lasekwa – Accountant

General’s Office

18. Mr.Phillip Mlewo – Accountant

General’s Office

19. Ms. Tatyana Bogomolova – WB,

Pensions Study

20. Ms. Barbara Calvi – WB, Pensions

Study

21. Mr. Sergi Biletsky – WB, Pensions

Study

22. Mr. Thomas Baunsgaard – IMF,

Resident Representative

23. Mr. Jeff Delmon – WB, PPP Advisor

24. Mr. Idan Makala – Treasury

Registrar Office

25. Mr. Elikana Ally – Treasury

Registrar Office

26. Ms. Irene Kisaka – SSRA, Director

General

27. Ms. Lightness Mauki – SSRA

28. Mr. Reuben Mmasa – Accountant

General Office

29. Ms. Frida Mwakifanmba – RAHCO

30. Mr. Cyprian Mugemuzi – RAHCO,

Director of Finance

31. Eng. Felix Nlalio - RAHCO

32. Eng. Omari Aminiel – RAHCO

33. Mr. Fuad Abdallah – RAHCO

34. Mr. Alfred Missana – MoF

35. Mr. Nuru Ndille – MoF

36. Mr. Laurent Mwigune – Tanzania

Airports Authority

37. Mr. Msoke – Tanzania Airports

Authority

38. Mr. Joachim Magambo – Tanzania

Airports Authority

39. Ms. Asteria Ndunguru - Tanzania

Airports Authority

40. Mr. Cosmas Sasi – PPF

41. Mr. Arun Che – PPF

42. Mr. Celestine Some – PPF

43. Mr. Godbless Rosian - PPF

44. Mr. Fortune Magambo – LAPF

45. Ms. Rose Meta – LAPF

46. Ms. Anatolia Anatory – Accountant

General Office

47. Mr. Msafiri Mtepa – Ewura

48. Ms. Rosemary Lyamuya – Dawasco

49. Mr. Leone Mtego – Dawasco

50. Mr. Elias Kalowa – Dawasco

51. Mr. C. Magori – NSSF

52. Mr. Ludovick Mrosso – NSSF

53. Mr. S. Riwa – NSSF

54. Mr. Chedrick Komba – NSSF

55. Mr. Abdallah Mseli – NSSF

56. Mr. Sais Kyejo – Dawasa

57. Dr. Joctan Matogo – Ewura

58. Ms. Mponji – Ewura


59. Ms. Irene Nzagi – Ewura

60. Mr. Siame – Tanesco

61. Ms. Amina Muhaji – CRDB

62. Mr. Xavery Makwi – CRDB

63. Mr. Sosthenes Biseko – CRDB

64. Mr. Richard Mwakalukwa – NMB

65. Mr. Mark Wiessing – CEO, NMB

66. Mr. Deusdedith Rutazaa – NHIF

67. Ms. Christina Ilumba – NHIF

68. Mr. Michael Mhando – NHIF

69. Mr. Ally Othman – NHIF

70. Ms. Grace – NHIF

71. Ms. Jane Kijazi – NHIF

72. Mr. David Sikaponda – NHIF

73. Mr. Mziray – NHIF

74. Mr.Dome Malosha – CHC

75. Mr. Methusela Mbajo – CHC

76. Mr. Albert Semhindo – CHC

77. Ms. Germana Ibreck – CHC

78. Ms. Clara Kanza – CHC

79. Ms. Luciana Maganga – CHC

80. Mr. Badru Ami – Air Tanzania

81. Mr. Ernest Kituri – Air Tanzania

82. Mr. Wenceslaus Mkenganyi –

NBAA

83. Mr. Remi Urio – NBAA

84. Mr. Adam Mayingu – CEO, PSPF

85. Mr. Masha Mshomba – PSPF

86. Mr. Godfrey Ngonyani – PSPF

87. Mr. Maftah Ibrahim – PSPF

88. Mr. Andrew Mkangaa – PSPF

89. Mr. Abdul Mwinyi – PSPF

90. Mr. Godlove Mville – TTCL

91. Mr. Felix Maagi – National Housing

Corporation

92. Mr. Cosmas Kimario – National

Housing Corporation

93. Mr.Kisiraga Jasper – TRL

94. Mr. Hoseah Albert – TRL

95. Mr. Aloyce Mshilli – TRL

96. Ms. Barke M.A. Sehel – Attorney

General Chambers

97. Mr. Michael Luena - Attorney

General Chambers

98. Ms. Sia Mrema - Attorney General

Chambers

99. Ms. Ndeonika Mwaikambo -

Attorney General Chambers

100. Mr. Kamwaya Evans – Tazara

101. Mr. Gisbert Sambala – Tazara

102. Mr. Justin Kabela – Tazara

103. Mr. Chiduga Christian – Tanzania

Ports Authority

104. Mr. I. Masoud - Tanzania Ports

Authority

105. Ms. Koku Kazaura - Tanzania Ports

Authority

106. Mr. Mathayo - Tanzania Ports

Authority

107. Mr. A. Massawe - Tanzania Ports

Authority

108. Eg. Madeni Kipande – CEO,

Tanzania Ports Authority

109 Mr Jean Jose Padou, Canadian

Cooperation Office,

110 Mr JP Fanning, Economic and

VfM Advisor, DFID


Annex 2: Questionnaires

a. Questionnaire: Banks and Funding Agencies

This questionnaire is for Banks like CRDB and NMB which gives export credits and loans to Small

and Medium size Enterprises and Pension funds like PSPF under some form of Government

guarantees.

1. Policies and coverage of lending

2. Application and approval process

3. Credit assessment techniques

4. Past 5 years performance record

5. If defaulted – type of projects, sector

6. Default rate calculation and amounts

7. Remedial or Recourse actions taken

8. Detail data – sector, project, debt outstanding, annual repayments etc

b. Questionnaire: Regulatory Bodies

This questionnaire covers Regulatory bodies such as DAWASA, EWURA and SSRA.

1. Regulatory role and policies

2. Completed, on-going and near future reforms

3. Price fixing/tariff setting

4. Disclosure requirements

5. Remedial actions/recourse/penalties

c. Questionnaire: for Public Corporations receiving loans under government guarantee

Section 1:

The purpose of this section is to understand what factors enable some corporations to easily pay off

the loan and while others find it difficult to repay. These factors fall in to the following categories:

1) Financial and economic factors;

2) organisational factors;

3) technological factors;

4) legal factors.

A questionnaire will be set and sent in advance before interviews are held. Table below shows the

variables and indicators under each factor.

Factors Past 5-10 years

Financial Capital structure, Balance sheet, profit and loss account, liquidity,

financial performance ratios

Economic Demand and price variables

Technological Application of modern technology, quality, capital output ratios,

Organisational Management structure, Political interference

Legal/regulatory Price determination, minimum quantity


This questionnaire also allows us to introduce a `credit rating system’ that would help the

government to assess whether to offer a guarantee or not. South Africa, an advanced country in the

region and Standard and Poor’s -the international rating agency- use such methods to assess the

credit risk. Strengthening credit assessment process would enhance the ability to pre judge the

likelihood of a guarantee being honoured on time.

Section 2:

This section covers specific loan features, terms and conditions and status (prompt payments,

default, under litigation etc.). Questions will be also asked about any identified plans for the future

such as debt restructuring, arrears clearance, divestiture/privatisation and liability take-over by

Government. A draft questionnaire is given below:

1. Disaggregated data to be collected on on-going guarantees and on-lending. These are

guarantees/ on lent loans that have been given in the past 15 years and being serviced.

Table A.2.1 guarantees/ on lent loans that have been given in the past 15 years and being serviced

Sector

Project and purpose

Creditor


Guarantee or On- lending

Guarantee Agency/On-lending

Agency

Type of Guarantee

Contracted date

Original Amount

Original & Remaining Maturity


Interest rate

Balance outstanding

Probability of default Assessment

There are 13 items to be filled by each selected individual public enterprise, private enterprise or

government agency that has received a guarantee:

i. Sector denotes an economic sector for example Electricity or power.

ii. Project denotes the project for which loan has been guaranteed for example power

generation plant at Dar Es Salaam.

iii. Creditor is the Institution offering the loan i.e. World Bank or EU.

iv. Identify whether guarantee or on-lending arrangement.

v. Borrower is the final borrower i.e. Tanzania Electricity Corporation, Dar es Salaam.

vi. Guarantee agency; Government or other appointed agency like Central Bank.


vii. Type of guarantee i.e. loan guarantee or if a PPP arrangement then could be Minimum

Revenue Guarantee. Also whether guarantee is legal or letter of consent/comfort/no

objections etc.

viii. Contracted date; When was the loan contracted and agreement signed.

ix. Original amount: the original amount of the loan contracted.

x. Original and remaining maturity.

xi. Loan currency repayments: in what currency should the loan repayments (both interest

and principal) be paid.

xii. Interest rate charged; the rate at which interest is paid.

xiii. Balance outstanding; the remaining principle to be paid.

xiv. Probability of default assessment: what are chances of being defaulted in the future and

reasons.

2. Disaggregated information to be collected on new guarantees/ on lending applied or offered but

not disbursed yet

Table A.2.2 Disaggregated information to be collected on new guarantees/ on lending applied or offered

but not disbursed yet

Sector

Project and purpose

Creditor


Guarantee or on-lending

Guarantee/on-lending Agency

Type of Guarantee

Original Amount

Original Maturity


Interest rate

Status

History – previous Guarantee/on lent

loans

The information requirement is similar to Table 1 except for some of the details are not required

(items 7, 12 and 13). Additions are:

i. Status – Applied for loan guarantee or for an on-lending loan and under consideration or

guarantee/on lending offered but not yet disbursed;

ii. History of previous guarantee or on lending – has the borrower received any guarantee or

on lent before and was it fully honoured or honouring (on-going repayments).


3. Disaggregated information to be collected on defaulted guarantees and on-lent loans

Table A.2.3 Disaggregated information to be collected on defaulted guarantees and on-lent loans

Sector

Project and purpose

Creditor



Guarantee/ on lending Agency

Type of Guarantee

Original Amount

Original Maturity


Interest rate

Defaulted amount

Resolution/Restructuring options under

consideration

Enterprise agency status

Similar to Table 2, without status and history of earlier defaults, but with the following additions: i) Defaulted amount and when defaulted ii) Resolution/Restructuring: How it is going to be solved iii) Enterprise: Is the enterprise being considered for divestiture/privatisation etc.

4. Contingent liabilities that are undergoing through or pending litigation process

Table A.2.4 Contingent liabilities that are undergoing through or pending litigation process

Sector

Project and purpose

Creditor



Guarantee/ on lending Agency

Type of Guarantee

Original Amount/ Amount under

litigation

Litigation status

Which Jurisdiction

Probability of outcome

1. Litigation status: on-going or pending and also whether for pending ones all other potential

settlement/recourse action has been investigated.

2. Under which jurisdiction or country laws that litigation is taking place.

3. Probability of outcome: win or loss for Government agency.


The contents of this publication are the sole responsibility of ECORYS Consortium and can in no

way be taken to reflect the views of the European Union.

Contingent Liabilities Study · 2015. 8. 13. · Tanzania - Contingent Liabilities Study Nov. 2014...

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