## Box 1: Spending Reviews in the United Kingdom

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### Context
- During the macroeconomic and fiscal crises after the UK’s ejection from the EU’s Exchange Rate Mechanism in 1992, public investment bore the brunt of expenditure cutbacks.
- Upon coming to power in 1997, the Labour government implemented a set of reforms focused on rebuilding public investment.

### Measures implemented
- Comprehensive spending reviews supplemented by ring-fenced, multi-year capital budgets within each line ministry.
- Reallocation of public expenditure shares away from certain current spending items.

### Outcomes and key statistics
- Public investment rebuilt from 0.5 percent in 1998 to 2.25 percent of GDP today.
- Figure 7 (summary in source): Public Sector Net Investment shown in GBP bn (2007-08 prices) and as % of GDP for 1990/01–2007/08. (Figure referenced in source; numerical series preserved in source.)

### Financing and fiscal reallocation
- The additional investment was “paid for” with a sustained reduction in the share of public expenditure going on:
  - unemployment benefits;
  - government administration; and
  - other current transfers.

### Lessons and implications for public investment policy
- Use of multi-year, ring-fenced capital budgets within line ministries can support a sustained reconstruction of public investment.
- Comprehensive spending reviews can enable reprioritization of resources toward capital spending while offsetting costs through reductions in less productive current expenditure.

*Source: _wp08256 - Box 1: Spending Reviews in the United Kingdom (page 19) — IMF PDF*

### Box 1: Spending Reviews in the United Kingdom ..................................................................19

### Box 1: Spending Reviews in the United Kingdom

### Content identifier
- Title: Box 1: Spending Reviews in the United Kingdom
- Location in document: page 19

### Included items (from source)
- Box title as listed: "Box 1: Spending Reviews in the United Kingdom"
- Adjacent box listed in source index: "Box 2: Medium-Term Debt Strategies" on page 30

### Notes
- This content unit corresponds to the boxed material labeled "Box 1" in the source PDF and is located on page 19.

*Source: _wp08256 - Box 1: Spending Reviews in the United Kingdom (page 19) — IMF PDF*

### Box 3: Lessons from First Time Bond Issuances ....................................................................33

### Box 3: Lessons from First Time Bond Issuances ....................................................................33

### I. INTRODUCTION
- Infrastructure returned to the economic policy agenda after a decade or more of focus on basic services such as education, health, and social protection.
- Country examples and diagnostics cited: United States (aging highways, roads and bridges), Africa Commission, NEPAD, AICD, FONDAD — indicating lack of access to basic infrastructure constrains welfare and growth in sub-Saharan Africa.
- Governments face a common dilemma: how to meet sizeable fiscal costs of providing and maintaining infrastructure networks.
- Approaches used over the past decade to increase fiscal space for infrastructure:
  - fiscal rules;
  - reforms to budgetary procedures;
  - tax policy and administration measures;
  - public-private partnerships (PPPs);
  - innovative financial instruments.
- Choice of approach depends on a country’s economic circumstances, institutional capacity and political preferences.
- Paper’s structure (as described):
  - brief survey of theoretical and empirical evidence on infrastructure, public investment, and growth;
  - assessment of the case for additional infrastructure investment in Tanzania;
  - evaluation of five broad options for mobilizing additional resources for Tanzania: (a) direct private investment and PPPs; (b) expenditure reprioritization and efficiency; (c) domestic revenue mobilization; (d) grants and concessional financing; (e) sovereign borrowing; and
  - general recommendations on combinations of approaches suitable for Tanzania.
- Fiscal space definition referenced: Heller (2005) — “budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position.”

### II. INFRASTRUCTURE, INVESTMENT, AND GROWTH: REVIEW OF THE EVIDENCE
- Relationship between infrastructure and growth:
  - Early neo-classical models (Solow 1956) treated infrastructure as another input implying temporary growth impacts subject to diminishing returns.
  - Endogenous growth models (Barro 1990; King and Rebelo 1990; Barro and Sala-i-Martin 1995) suggest infrastructure accumulation can permanently raise returns to other factors and long-run growth.
  - Surveys by the World Bank (2007) and Straub (2008) conclude majority of studies find a positive relationship between stock of infrastructure assets and economic growth; strongest impacts from telecommunications, road and electricity networks (Calderón and Servén 2004; Canning and Pedroni 2004).
- Relationship between public investment and growth:
  - Mixed empirical results: Ashauer (1989) found significant positive relationship in G7 post-WWII; more recent studies (Barro 1991; Holtz-Eaken and Schwartz 1994; Devarajan et al. 1996) find smaller or negative impacts.
  - IMF (2004) survey found no clear-cut relationship; Straub (2008) found positive link in less than half of studies examined.
- Contextual/mediating factors affecting impact of public infrastructure investment:
  - How investment is financed: evidence (Dessus and Herrera 2000; Adam and Bevan 2005; Gupta et al. 2005; Segura-Ubiergo et al. 2006) that public investment financed by “excessive” taxation, deficits or debt can reduce growth by crowding out private investment.
  - Availability of complementary inputs: studies (Haque and Kim 2005; Adam and Bevan 2005; Bose et al. 2007) show largest impacts when combined with productive public expenditure (education, health).
  - Institutional context: quality of governance (Tanzi and Davoodi 1998; Baldacci et al. 2001; Esfahani and Ramirez 2003; Haque and Kneller 2008) affects long-term impact.
  - Quality of project evaluation, selection and management: Flyvbjerg (2005) documents common large cost overruns and low completion rates due to (i) poor ex-ante cost analysis, (ii) inadequate oversight during construction, (iii) weak ex-post evaluation.
  - Regulatory and operational framework: Estache (2006) finds private competition and independent regulation improve infrastructure quality, strongest when jointly implemented.
- Summary conclusion:
  - Physical improvements in infrastructure coverage, quality and accessibility positively affect welfare and growth across country groups.
  - The impact of public investment is more dependent on financing and spending modalities.

### III. ASSESSING TANZANIA’S INFRASTRUCTURE NEED
- Physical indicators of coverage, quality and access:
  - AICD (2008) and World Bank findings for sub-Saharan Africa: less than one-third of households have access to electricity; less than one-fifth to improved sanitation; around 15 percent have access to a telephone.
  - Tanzania specific indicators (from Table 1/AICD/World Bank):
    - Households w/ fixed telephone: 10 (% of households)
    - Mobile subscribers per 100 people: 15
    - Household w/ Electricity: 11 (% connected to network)
    - Roads: 77 (Km per 1,000 km2 of land)
    - Sanitation: 6 (% of the population)
    - Water Source: 33 (% of the population)
  - Comparative notes: Tanzania’s electricity coverage low at 11 percent; rural population within 2 km of an all-weather road only 28 percent (World Bank 2007a).
- Logistics and competitiveness impacts:
  - World Bank Logistics Performance Index: Tanzania ranked well below averages for sub-Saharan Africa and low-income countries on 6 of 7 trade logistics indicators.
  - Power sector losses: Eifert, Gelb and Ramachandran (2005) found losses from power failure averaged 10 percent of sales for median Tanzanian firm vs 1 percent for median Chinese firm.
  - Global Competitiveness Report (2007-08) and MKUKUTA (2005) identify inadequate infrastructure supply as a key constraint and priority for development strategy.
- Public investment in Tanzania:
  - Recorded infrastructure expenditure rose from below 5 percent to around 7 percent of GDP between 2000 and 2004; presumed to have continued growing over the last three years.
  - Per capita infrastructure spending: US$27 per person in Tanzania — less than one-tenth of levels in middle-income comparators cited (Briceño and Foster 2007).
  - Sector composition (2001–2005): dominated by transport and energy; water and sanitation spending growing (Figure 3).
  - Despite higher spending shares, service improvements lag: AICD finds access expansion lagging behind rest of region except for water and, more recently, roads (Briceño and Foster 2007).
  - Electricity access elsewhere in Africa rose from 16 to 23 percent of households between 1990s and 2000s (~50 percent increase); in Tanzania it remains around 10 percent (World Bank 2007b).
  - Rail freight traffic fell from 1,446,000 tons in 2002 to 570,000 tons in 2007 (Ministry of Infrastructure Development 2007).
  - Port delays: 2007 transshipment survey Dar es Salaam–Kampala found more than 50 percent of transit time accounted for by port delays; idle container days rising despite substantial port investment (SSATP 2007).
- Institutional weaknesses reducing impact of spending:
  - Budget classification: systems do not allow ready identification and monitoring of public infrastructure expenditure; some spending occurs outside central government or is not recorded.
  - Project selection: 2006 audit of procurement in 20 public entities found compliance only at 39 percent of procurement regulations; recent scandals highlight transparency and enforcement weaknesses.
  - Budget execution: in 2006-07 about 50 percent of central and local governments’ development expenditure was executed; Tanzania National Roads Authority boosted trunk road execution rates from ~50 percent in 2002-03 to over 75 percent in 2006-07; regional and local road rehabilitation execution remains around 40 percent (Ministry of Infrastructure Development, 2007).
  - Regulatory frameworks: AICD estimates hidden fiscal costs from underpricing and inefficiencies in power sector amounted to nearly 2.5 percent of GDP between 2001 and 2006 (Briceño, Smits, and Foster 2008).
- Conclusion:
  - Sustained increase in infrastructure investment is necessary but insufficient without complementary measures to improve allocation and spending quality.

### IV. MEETING TANZANIA’S INFRASTRUCTURE NEEDS: PUBLIC VS PRIVATE SECTOR
- Two approaches to attracting private finance examined:
  - A. direct private investment (equity in privatized companies; participation in liberalized markets);
  - B. public-private partnerships (PPPs): joint ventures, concessions, design-build-finance-operate arrangements.
- Direct private investment:
  - Potential from opening local capital markets to international flows and rising domestic savings (including pension funds).
  - Estache (2006): private participation in electricity, water and sanitation, telecoms and transport in Africa at or above other low-income countries but below middle-income country levels.
  - World Bank PPI database: private commitments to infrastructure in Africa increased from around US$2 billion to over US$11 billion between 2000 and 2006; South Africa and Nigeria accounted for ~two-thirds of commitments.
  - Despite growth, private investment remains low: between 1990 and 2004 private sector accounted for ~10 percent of infrastructure investment in sub-Saharan Africa, concentrated in telecoms (Ndulu 2007).
  - Even in telecoms, newly privatized companies often relied on partial/full guarantees from external agencies or development banks to attract domestic investors (Shephard et al., 2006).
- Public-Private Partnerships (PPPs):
  - PPPs can share costs, benefits and risks; advanced-country PPPs often are design-build-finance-operate where government specifies services and private partner delivers.
  - Efficient PPPs should transfer substantial project risk to private sector, though this is not always achieved.
  - Success determinants for PPPs in emerging/developing countries: (i) clear legal, regulatory and pricing framework; (ii) professional capacity in finance ministry and sector ministries to draft/scrutinize contracts; (iii) professional project management; (iv) transparent award procedures and enforcement of sanctions (Harris 2003; Guash 2004; Bhatia and Gupta 2006).
  - Gratwick and Eberhard (2007): these conditions are rarely met in Sub-Saharan Africa for independent power projects.
  - South Africa experience lessons:
    - Clear legal and regulatory framework (1999 Public Finance Management Act and Treasury regulations, guidance, manuals);
    - Start small and expand gradually: averaged two new national PPP contracts per year in first three years, reaching six in 2006-07;
    - Build central capacity: dedicated PPP unit in South African Treasury established in 2000 to advise and act as gatekeeper (Burger 2008).
  - Tanzania experience:
    - PPPs are in infancy; mixed initial experience in Dar es Salaam port, Tanesco purchases from independent power producers, and airport concessions.
    - Government developing a PPP policy framework; recommended to develop legal framework and analytical capacity before further PPP expansion.

### V. CREATING FISCAL SPACE FOR INFRASTRUCTURE
- Four broad options to create fiscal space for additional infrastructure investment:
  - A. reprioritization of spending toward growth-enhancing infrastructure and improved expenditure efficiency within given envelope;
  - B. identification of new domestic revenue sources to finance additional infrastructure without worsening fiscal balances;
  - C. attracting additional grants and concessional finance from bilateral or multilateral sources;
  - D. expansion of sovereign borrowing on domestic or international commercial credit markets.
- Given scale of infrastructure challenge, African governments need to explore all four options.
- Evolution of fiscal space in Tanzania (2001-02 to 2007-08):
  - domestic revenue mobilization increased by 50 percent from 11 percent to 16 percent of GDP;
  - external grants doubled as a share of national income from 3.9 percent to 7.8 percent of GDP;
  - external financing on concessional terms more than trebled from 1.4 percent to [text ends in supplied content].
  - Note: Figures for 2007-08 are provisional and based on budgeted figures rather than data on outturn.

*Italic source attribution: Excerpt from the provided IMF working paper content.*

### 4.1 percent of GDP; and

### _wp08256 - 4.1 percent of GDP; and

### Fiscal context and recent fiscal space developments
- bilateral and multilateral debt relief has reduced the country’s annual external debt servicing obligations by between 0.5 and 1.0 percent of GDP.
- Taken together, these factors have allowed government expenditures to increase from 16 to 28 percent of national income over this same period.
- Current levels of domestic revenues and external aid inflows are not particularly high in comparison with those prevailing in similar countries in the region, suggesting scope for further increasing fiscal space along each of these dimensions.
- The remainder of the section discusses scope and options for increasing fiscal space to finance an expansion of infrastructure provision.

### Selected fiscal indicators (Tanzania) — observed patterns
- Within overall public expenditure, the share devoted to public investment (“development expenditure” as classified in the Tanzanian budget) has remained broadly unchanged since 2002-03, and only began to rise in the 2007-08 budget.
- Within “priority spending” as defined by MKUKUTA, the shares of the two items identifiable as infrastructure (water and roads) in total spending have not seen a sustained increase since 2000-01.
- Budgetary funds flowing to the infrastructure sector appear heavily skewed toward current expenditure (such as wages and payments for electricity capacity charges) even by regional standards.
- Tanzania devotes around 10 to 20 percent of infrastructure expenditure to capital investment, despite recommendations (Commission for Africa (2005) and others) that Sub-Saharan African countries should allocate half of their infrastructure budgets to investment.
- Resulting weaknesses: lack of alignment between MKUKUTA, MTEF and the annual budget; frequent overruns on current budgeted spending in the social sector; substantial underexecution of capital spending on infrastructure.

### A. Expenditure reprioritization and efficiency — tools and country experience
- Two public financial management tools used to alter intersectoral allocation and impact of public expenditure:
  - expenditure reviews: comprehensive program reviews designed to improve efficiency of public expenditure and create fiscal space; used in countries such as Canada, Chile, France, the Netherlands, South Korea and the United Kingdom.
  - medium-term expenditure frameworks (MTEFs): enable governments to “lock in” savings identified in lower productivity/priority sectors and reallocate them to higher productivity/priority sectors over a period of years; common feature in Africa.
- Example: Uganda’s National Budget Framework Paper envisages a real reduction in expenditure on security, justice and governance from 39 percent of the national budget in 2008 to 36 percent in 2011 to allow scaling up of pro-poor expenditure on rural development, energy, road infrastructure and human development over the next 3 years.
- Tanzania-specific observations:
  - Tanzania’s annual Public Expenditure Review (PER) and Medium-term Expenditure Framework (MTEF) could provide the basis for strategic prioritization of expenditure within a growing expenditure envelope.
  - Lack of comprehensive data on infrastructure expenditure over time prevents definitive conclusions but three observations (see Selected fiscal indicators) suggest infrastructure stock has not received adequate priority over the last five years.

### Box 1 (United Kingdom): Spending reviews and public investment outcomes
- During the macroeconomic and fiscal crises after the UK’s ejection from the EU’s Exchange Rate Mechanism in 1992, public investment bore the brunt of expenditure cutbacks.
- Upon coming to power in 1997, the Labour government used comprehensive spending reviews supplemented by ring-fenced, multi-year capital budgets within each line ministry to rebuild public investment from 0.5 percent in 1998 to 2.25 percent of GDP today.
- This additional investment was “paid for” with a sustained reduction in the share of public expenditure going on unemployment benefits, government administration and other current transfers.
- Figure 7 (summary): Public Sector Net Investment shown in GBP bn (2007-08 prices) and as % of GDP for 1990/01–2007/08.

### PFM strengthening and specific recommendations for Tanzania
- Public infrastructure investment needs to be clearly identified within the budget classification, expenditure monitoring and accounting systems covering central and local government as well as state-owned enterprises.
- Public Expenditure Reviews need to become a more integral part of the expenditure allocation process, with reviews given the explicit objective of prioritizing the infrastructure element of expenditure within and across sectors, with offsetting savings identified in lower priority or less efficient areas.
- The recent initiative to formulate a medium-term public investment plan is welcome but needs to be fully integrated into a more credible MTEF which can provide the basis for the preparation of the annual budget.
- Project execution rates need to be increased through improvements to project management and procurement practices and an enhanced dialogue with the donors who finance a large share of infrastructure investment.
- The 2004 procurement law and establishment in 2005 of the Public Procurement Regulatory Authority are positive steps; recent audits of procurement practices in spending entities are also positive.

### B. Domestic revenue mobilization (introductory points)
- For countries with low levels of domestic resource mobilization, new sources of revenue can provide sustainable financing for infrastructure expansion.
- Additional domestic revenue for infrastructure investment can be realized through:
  - introduction of new taxes,
  - expansion of the base of existing taxes,
  - improvements in tax administration.

*Source: _wp08256 - 4.1 percent of GDP; and*

### introduction or expansion of user fees. While the direct earmarking of additional tax revenues

### introduction or expansion of user fees. While the direct earmarking of additional tax revenues

### User fees, environmental taxes, and earmarking
- Countries resort to direct earmarking of additional tax revenues to infrastructure where there are:
  - institutional weaknesses which would result in a particular sector being under-resourced if it were funded through the general budget process; or
  - political economy considerations, such as the need to secure public support for a new transport tax by promising that its proceeds will be reinvested in alleviating congestion.
- Governments across developed, emerging and developing countries are using environmental taxes and user fees to:
  - mobilize revenues for infrastructure investment;
  - incentivize more efficient use of infrastructure services; and
  - protect environmental resources.
- Examples:
  - Developed countries: targeted transport taxes to raise revenue for maintenance and expansion of transport hubs and networks (e.g. air passenger duties), congestion charges, and carbon emission permits.
  - Tanzania and parts of East Africa: road funds financed through fuel levies and vehicle duties as sustainable financing for road maintenance.
- Policy consideration:
  - Given rapid growth in revenue from these sources, governments need to consider whether resources raised would be better utilized if free to be allocated to other areas.

### Tanzania: recent revenue mobilization progress
- Key facts and indicators:
  - Domestic revenues increased from 11 percent of GDP in 2002/03 to 16.8 percent of GDP at end 2007/08.
  - The Tanzanian Revenue Authority’s corporate business plan sets the objective of increasing the revenue-to-GDP ratio to 20 percent over the medium-term.
  - Contribution of the Large Tax Department (LTD) has been particularly notable.
- Opportunities for additional revenue:
  - Capacity enhancement of the LTD and implementation of best practices for medium-sized taxpayers.
  - Reforms to the fiscal mining regime currently under study.
  - Revisions to frameworks for non-tax revenues from natural resources such as fishing and forestry.
  - Excise-side: fuel levies, transit charges and other fees earmarked to Tanzania’s Road Fund currently only cover around half of the annual maintenance cost of the road network. (Ministry of Infrastructure Development, 2007)
  - World Bank estimate: if current problems with fuel duty evasion could be solved, resulting revenues would be sufficient to cover maintenance of the existing road network and some investment in its expansion. (Briceño and Foster 2007).
- Infrastructure service charging and regulation:
  - Tariffs should be established at levels that ensure cost recovery and an agreed rate of return.
  - Regulators must ensure public utilities (state-owned or concessioned) are operated efficiently to provide appropriate quality service at least cost.

### Grants and concessional financing
- Policy principle:
  - Countries should exhaust all potential sources of concessional finance before turning to more expensive funding to meet infrastructure needs.
- Aid-for-trade trends and commitments:
  - Between 2002 and 2005 total “aid-for-trade” commitments rose by 6.8% per year in real terms, from less than US$ 15 billion to over US$20 billion.
  - Within aid-for-trade, aid to economic infrastructure represented 54% of the total and grew 12 percent real over this period.
  - Bilateral and multilateral donors committed to doubling aid-for-trade to over US$40bn by 2010 at 2005 ministerial summits.
- Multilateral financing (IDA):
  - Share of IDA credits going to infrastructure increased from 18 percent to 33 percent over the last decade.
  - Sub-Saharan Africa increased its share of IDA-financed infrastructure assistance from 38 percent to 62 percent.
  - Over the next three years, proportion of IDA resources for infrastructure is expected to increase by a further 15 to 20 percent in nominal terms, from US$4.4 billion per year to US$5.3 billion per year, with US$3.0 billion earmarked for Sub-Saharan Africa.
  - Tanzania is well-placed to take advantage of this scaling up as the country with the highest projected needs among IDA members in Africa. (IDA 2007)
- Bilateral financing:
  - Examples of scaled-up bilateral support: United States committed to double and the UK to treble trade-related assistance between 2005 and 2010 aid-for-trade.
  - Emerging Africa Infrastructure Fund: $365 million facility established by Dutch, British, Swedish and Swiss governments for long-term debt financing for private sector-based infrastructure projects.
  - Tanzania: Millennium Challenge Corporation committed US$700 million over the next five years to improve transport, energy, and access to safe drinking water.
  - China: official Chinese infrastructure finance commitments to sub-Saharan Africa rose from around US$500 million in the early 2000s to over US$7 billion in 2006 before falling back to around US$4.5 billion last year (Foster et al. 2008).
- Transparency and integration:
  - Terms and conditions of bilateral credits must be transparent and fully reported and loans fully integrated into the rest of the debt portfolio for debt and risk management purposes.
- Tanzania’s aid absorption and budget support:
  - External support has more than doubled as a share of national income from 5 to 12 percent over the last seven years.
  - Proportion of external assistance provided in the form of general budget support rose from less than one-third to over one-half between 2004-05 and 2006-07.
  - Execution rate for forecasted general budget support exceeded 95 percent over the past three years.
  - One-third of support is still provided as project aid, of which only a quarter are systematically captured by the country’s expenditure monitoring systems.
- Recommendation:
  - Recipient countries should consider a range of scaling-up scenarios and coordinate closely with donors and between finance ministries and central banks to manage domestic liquidity impacts and sterilization choices.

### Additional sovereign borrowing on commercial credit markets: principles and cautions
- Options for private finance for infrastructure:
  - Borrowing on domestic capital markets by issuing treasury bills and bonds.
  - Borrowing from external capital markets by issuing sovereign bonds.
- Reasons for caution about “borrow to invest” in the public sector:
  - Government definition of investment covers durable assets but is not strictly analogous to financial market concept of investment that generates future income; public investment often includes expenditures that do not generate financial returns and can entail future costs (e.g., maintenance, staffing).
  - Even if public investment promotes growth, without tax policy and administration reforms future growth may not generate fiscal dividends necessary to repay borrowing.
  - Private investors share rewards and bear risks; public project managers cannot benefit financially and taxpayers may shoulder cost overruns, weakening incentives for good project selection and management.
  - Private investors perform extensive evaluations and choose highest financial returns; finance ministries may lack time and resources for sophisticated appraisals and cannot restrict projects solely to those with highest economic/financial returns.
- Historical caution:
  - Much unsustainable debt in sub-Saharan Africa during the 1970s and 80s resulted from ill-chosen and poorly executed infrastructure projects, with inadequate maintenance and elusive development impact.
  - Former HIPCs should be especially wary about jeopardizing debt sustainability.

### Safeguarding long-term fiscal sustainability: considerations before expanding sovereign borrowing
- Governments need to:
  - assess sustainability of current debt burden and consequences of expanded sovereign borrowing for future fiscal sustainability;
  - consider expansion of borrowing within a comprehensive medium-term strategy for sovereign debt management;
  - explore domestic credit markets as a source of long-term financing; and
  - for international capital market access, consider:
    - the fundamental objectives of any sovereign bond issuance;
    - the absorptive capacity of the domestic macroeconomy;
    - the absorptive capacity of the infrastructure sector itself; and
    - the government’s capacity to manage exchange rate risk associated with substantial foreign currency-denominated liabilities.

### Current debt position and implications for Tanzania
- Debt and fiscal indicators:
  - Net present value of Tanzania’s external debt fell from around 70 percent of GDP in the late 1990s to around 15 percent today.
  - Domestic debt levels are around 15 percent of GDP.
  - Total cost of public sector debt service was about 10 percent of domestic revenue in 2006-07.
  - IMF and World Bank Debt Sustainability Analysis concluded Tanzania’s overall sovereign debt burden of around 30 percent of GDP appeared sustainable and robust to a range of macroeconomic scenarios, contingent upon continued access to borrowing on concessional terms.
- Policy implications:
  - Decisions on the scale and timing of any expansion in sovereign borrowing need to be part of a revised medium-term macroeconomic and fiscal strategy that is robust and credible.
  - Example: Ghana issued a US$750 million sovereign bond and then announced a new fiscal responsibility law to shore up fiscal credibility.
  - Near-term consideration: potentially inflationary impact of injecting additional liquidity into the domestic macroeconomy and the appropriate monetary policy response.
  - Medium- and long-term: fiscal and budgetary frameworks must account for and accommodate additional future risks and obligations.
- Revenue-side caution:
  - Repayment of additional sovereign borrowing at market rates requires utilization that ensures a rate of return in terms of growth and tax receipts.
  - Example: Ghana’s projected oil-related fiscal revenues of 3 to 4 percent of GDP over the medium-to-long term are critical to meeting 8.5 percent coupon payments on the bonds.
  - Tanzania lacks a similarly clear potential source of future revenues at this moment.
  - Realizing full revenue potential from infrastructure expenditure requires structural reforms to the infrastructure sector and improvements in revenue administration.
  - Recommendation: exercise caution before accessing commercial credit markets and prepare a contingency plan if additional revenues do not materialize.

### Medium-term debt management strategy (MTDS)
- Key points:
  - Any additional liabilities—external sovereign bonds, domestic bank lending, or PPP arrangements—should be decided within a comprehensive MTDS.
  - Tanzania was among the first low-income countries to publish an MTDS but it needs updating in light of recent macroeconomic, fiscal and financial developments.
  - Most countries update debt strategies at least annually to reflect changes in the macro environment, market conditions and consistency with the wider medium term fiscal framework.
  - Tanzania’s published debt strategy history:
    - First External Debt Strategy in 1999 (launch of HIPC initiative).
    - Updated at HIPC Completion Point and expanded in 2002 National Debt Strategy to cover external and domestic liabilities.
  - Fundamental changes since then—acceleration of economic growth, influx of foreign aid, improved revenue mobilization, deepening of domestic credit market, and comprehensive sovereign debt relief—have not yet been reflected in an updated National Debt Strategy.
  - Recommendation: update the National Debt Strategy to provide context and framework for any consideration of expanding sovereign borrowing for infrastructure investment.

*Source: _wp08256 - introduction or expansion of user fees. While the direct earmarking of additional tax revenues*

### Box 2: Medium-Term Debt Strategies

### Box 2: Medium-Term Debt Strategies

### Key elements of an MTDS
- The IMF’s recent paper on Sovereign Debt Management recommended that an MTDS should comprise the following key elements:
  - i. the government’s strategic objectives for debt management, including how it proposes to strike the balance between covering its fiscal deficit, filling balance of payments needs, sterilizing foreign currency inflows and developing domestic capital markets;
  - ii. an assessment of the current debt positionand scenarios for future debt dynamics based on different assumptions for key macroeconomic, fiscal and financial variables;
  - iii. the macroeconomic and fiscal contextfor debt management, including the government’s financing requirements as set out in any medium-term fiscal or budgetary framework that may be in place;
  - iv. an indication of the government’s desired portfolio composition including between concessional and non-concessional terms, external and domestic markets, foreign and domestic currency, fixed and variable interest rates, marketable and non-marketable securities and, long- and short-term repayment periods;
  - v. a financing plan for the immediate fiscal period under baseline assumptions which also specifies the scope for flexibility in implementation, including ranges for risk indicators within which debt managers can use their discretion to adapt to economic shocks or volatility in fiscal flows such as external aid; and
  - vi. a discussion of the institutional and market-development factors conditioning the success of the strategy including debt monitoring and reporting systems, and legal constraints.

### A. Domestic Capital Markets — findings and considerations
- Broad money to GDP increased from 16 percent in 2001 to 26 percent in 2007 in Tanzania.
- Tanzania’s domestic credit market remains shallow by comparison with similar countries in the region.
- The government was able to raise domestic financing of around 2 percent of GDP in 2005/06, but this was at the cost of substantial increases in T-bill yields.
- Recent reforms and market developments:
  - The Bank of Tanzania reduced the frequency of treasury auctions from weekly to bi-weekly.
  - Maturities were consolidated around the five most popular.
  - Transparency and predictability of auctions were improved.
  - Publication of an annual auction calendar and clarification of the rights of foreign institutions to participate in government securities markets through resident commercial banks could help deepen the domestic debt markets, further develop the yield curve and boost prospects of secondary trading.
  - Continuation of regular direct dialogue with stakeholders (banks, insurance and pension companies) can support market development.
- Challenges for financing infrastructure via domestic markets:
  - Infrastructure projects typically require long-term borrowing in large volume to match asset and liability maturities.
  - Using short-term securities to finance long-term investments creates rollover and liquidity risks that can be unacceptably large for a developing country.
  - Tanzania’s government securities have tended to be mainly at the short end of the market, concentrated on T-Bills and some short-term bonds with maturities of one or two years.
  - While issuance of longer-term securities has had some success on a smaller scale, raising substantial volumes at the longer-end of the yield curve may be difficult where the outstanding stock of treasury bonds is low and yields are high.
  - Large-scale government borrowing in the domestic market may crowd out the private sector and impair access to credit for the real economy.
- Figures referenced:
  - Figure 11: Broad Money/GDP in Selected African Countries (shows Tanzania’s increase from 16 percent in 2001 to 26 percent in 2007).
  - Figure 12: Tanzania Treasury Bonds Volumes and Yields (illustrates outstanding stock (left scale) and yield (right scale) across maturities 182 days, 360 days, 5 years, 7 years, 10 years).

### B. External Sovereign Borrowing — findings and considerations
- Given limitations of its domestic debt market, Tanzania might look to external sovereign debt markets as a source of infrastructure finance.
- Recent regional precedent:
  - Gabon, Ghana, Mauritius, and the Seychelles have issued US-dollar denominated sovereign bonds on international markets with maturities of between 5 and 10 years and coupon rates of around 8 to 9 percent.
  - The current macroeconomic difficulties in some of these countries highlight risks involved in entering global capital markets.
- Considerations before issuing on international markets:
  - Size, terms and timing of any issuance require careful assessment in light of domestic market constraints and fiscal policy implications.
  - Lessons from recent first-time issuers should inform how to structure any initial sovereign bond offering.
  - Fiscal policy issues need to be considered before approaching international bond markets for the first time.

*Source: Box 2: Medium-Term Debt Strategies, _wp08256.*

### Box 3: Lessons from First Time Bond Issuances

### Box 3: Lessons from First Time Bond Issuances

### Lessons for first-time sovereign bond issuers
- Recent years have seen a number of first-time issuers successfully place sovereign bonds on international capital markets, and 2007 saw the highest ever volume of bond issuance (US$2.8bn) by African governments.
- Don’t issue more than you need:
  - Larger size bond issues tend to be more liquid and if large enough can enter into the bond indices, both of which are generally attractive to investors and can result in better pricing for the issuer.
  - Governments should not issue more debt than they require for liquidity purposes, or that can be put to near-term use; otherwise they can find themselves paying high “carrying” costs and bearing high levels of exchange rate and repayment risk.
- Chose a repayment structure that minimizes rollover risk:
  - Small countries and issuers who anticipate going to the markets relatively infrequently should consider an amortizing structure, rather than a single bullet repayment at maturity as a means of reducing refinancing/rollover risks.
- Don’t rush to market:
  - First time issuers should take time to build potential demand before issuing, by properly introducing the country to international investors through pre-deal roadshows and, obtaining one or two credit ratings before issuance.
  - Patiently building an investor base can help government to issue at lower interest rates than would have been achieved by rushing to market.
- Choose the lead manager competitively and not just based on fees:
  - Countries should seek competitive offers from potential lead managers and consider not only the fees they charge but also the attractiveness of their plans for marketing and distributing the new bonds, their commitment to provide market support after issuance, and their willingness to fully or partially underwrite the market risk associated with the issuance.
- Get a second opinion:
  - First time issuers who have also sought the opinion of independent financial advisors, and/or international financial institutions, have found it beneficial, resulting in most cases in better structured bonds and better deal execution.
- Be clear about use of proceeds:
  - If the object of the bond issuance is to pay down expensive government debt or to fund infrastructure projects, demonstrating this to investors can help fetch better terms than countries might get for a bond issue for “general governmental use.”
- Exploit all potential markets:
  - Too frequently, issuers who have had sufficient data to satisfy listing requirements for global bonds decided not to list solely on the basis of modest additional cost or additional time to come to market. In cases where there is a potential retail market, this can result in “over pricing” of the issuance.

### Tanzania-specific considerations
- First:
  - Tanzanian authorities need to consider what their fundamental objectives are in pursuing an international sovereign bond issue and whether these might be pursued more cost-effectively through other means.
  - If the main objective was to raise Tanzania’s profile among international investors, a less risky and more effective approach might be through a set of high profile legal or regulatory reforms aimed at moving the country up international competitiveness and transparency ratings, such as the World Bank’s Doing Business Survey.
  - If the aim was instead to establish a presence and a rating on the sovereign bond market in particular, then the best approach might be a small placement which tested demand and helped Tanzanian debt management authorities to build their capacity in managing external liabilities.
- Second:
  - If the main objective of a sovereign bond issue is indeed to raise a large amount of capital for investment in infrastructure, the capacity of the economy to absorb a large and rapid inflow of financing needs to be considered.
  - The impact of the capital inflows on inflation and the real exchange rate is likely to be limited, as the funds will be used mostly on imports such as construction equipment and materials, without a large impact on domestic demand.
  - In the presence of supply constraints (for example, a lack of skilled contractors and essential plant and equipment already constraining the road sector’s capacity), authorities should consider whether a series of smaller issues rather than one large bond placement would enable them to more effectively match the financing with their spending capacity.
  - Borrowing large additional sums without a well developed pipeline of high-return projects ready to be implemented would leave Tanzania government in the position of paying significantly higher interest than they are getting on their investments.
  - Project delays of several years are common among donor-funded infrastructure projects in Tanzania as in other countries in the region. An outstanding external bond issue would raise the opportunity cost of those delays significantly.
  - Tanzania’s first Joint Infrastructure Sector Review (2007) pointed out supply constraints in the road sector already constraining capacity.
- Third:
  - The scale and terms of any borrowing need to be assessed in the light of not only the government’s long-term fiscal sustainability but also the economy’s future export potential and ability to cope with exchange rate risk.
  - Tanzania’s export performance has improved considerably in recent years, but the country’s current account deficit is forecast to continue to widen over the next few years as a result of rapidly growing aid-financed imports.
  - If Tanzania proposes to incur substantial future foreign currency-denominated debts, meeting the repayment schedule may require adjustments in the real economy to realize the necessary foreign exchange.
  - Proactive management of foreign currency reserves will be required to meet the additional liquidity risk associated with the need to meet coupon and bullet payments on any foreign-currency denominated debt.
- Overall recommendation for Tanzania:
  - While none of the above factors rule out an international sovereign bond issue as a means of raising finance to meet Tanzania’s infrastructure and development needs, all argue for caution, patience and careful planning before entering the market.

### Conclusions: avenues to increase fiscal space and guidance for bond issuance
- Identified lower-risk avenues to increase fiscal space for infrastructure spending:
  - encouraging greater private participation in their sector either through direct investment or public-private partnership arrangements;
  - better prioritizing of expenditure, including by placing greater emphasis on infrastructure expenditure in the countries PER and MTEF processes, and improving the execution and management of infrastructure projects;
  - further improving in domestic revenue mobilization through improvements to tax policy and administration, and an expansion of user charging toward cost recovery levels for infrastructure services;
  - maximizing inflows and impact of aid and concessional finance, including from rapidly growing bilateral sources and current and future rounds of IDA lending; and
  - reforms to sovereign debt management to deepen and boost the efficiency of domestic credit markets and allow participation of foreign financial institutions.
- Experience with first-time issuances by low and middle income countries counsels:
  - patience:
    - Authorities should not rush to the market but allow time to get adequate credit ratings, chose a lead manager competitively, undertake pre-deal roadshows to build demand, and get a second (or third) opinion about the structuring of the bond and the execution of the deal;
  - prudence:
    - Authorities should not jeopardize their hard-won debt sustainability by going for a large issue which raises more liquidity than they can put to use in the near-term and leaves them with substantial “carrying costs.” Authorities should also structure maturity and repayment terms to minimize refinancing and rollover risk; and
  - planning:
    - Authorities need to be certain that they have a mature pipeline of infrastructure projects which yield a high rate of return, not just in terms of output but also in terms of tax revenues and foreign exchange.
    - This will require any bond issue to be preceded by significant reforms to public financial management, revenue administration and the governance and regulation of the infrastructure sectors themselves.

*Source: _wp08256 - Box 3: Lessons from First Time Bond Issuances*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08256.pdf_