PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
May 20, 2015
Report No.: 96600
Operation Name / First Tanzania Pension Reform Policy Credit (PRPC)Region / Africa
Country / Tanzania
Sector / - General Finance Sector (60%)
- Compulsory pension and unemployment insurance (40%)
Operation ID / P152529
Lending Instrument / Development Policy Lending
Borrower(s) / Ministry of Finance (MoF)
Implementing Agency / Ministry of Finance (MoF)
Date PID Prepared / May 15, 2015
Estimated Date of Appraisal / June 12, 2015
Estimated Date of Board Approval / September 9, 2015
Corporate Review Decision / Following corporate review, the decision was made to proceed with the preparation of the operation.
I. Country and Sector Background
Tanzania’s recent economic developments have been favorable overall. Growth remains fairly stable and inflation has been put under control, though fiscal policy management continues to be a significant challenge. Real GDP growth, which has been successfully maintained at around 6.5 percent over the past decade, is projected to rise to above 7 percent in FY2014/15. Economic expansion has been driven by several fast-growing sectors such as mining, communications, financial services and construction. More recently there has been a surge in manufacturing (agro-processing, food, beverage and tobacco) and basic metal production (primarily for construction materials) as well as retail trade. But in contrast, agriculture - the sector upon which three-quarters of all households depend as their primary economic activity - continues to post slower growth and weaker productivity gains. The rate of inflation, which as of March 2015 stood at 4.3 percent, has gradually declined over the past 30 months due to falling international energy and food prices as well as prudent monetary policy. Due to weak performance in revenue collection and slow disbursement of aid, fiscal policy management continues to face serious challenges, primarily in the form of increased contingent liabilities and arrears accumulated by the Government - including those relating to pension funds.
However, the strong economic growth has not been sufficient to significantly alleviate poverty, which remains relatively high and concentrated in rural areas. Around one-third of the Tanzanians (12 million people) still lived below the poverty line in 2012, with 83 percent of the poor located in rural areas. Recent economic performance has not been enough to provide sufficient economic opportunities to a fast-growing population that is expected to double in the next 15 years.
Existing social protection programs cover only a small portion of the population, with the elderly being recognized as a particularly vulnerable group. Public spending on social protection programs is low by international standards (2.5 percent of public expenditure, or 0.3 percent of GDP). The growing number of elderly (set to double to 10 percent of the population by 2050) is increasingly recognized as a vulnerable group; especially within the context of a rapid urbanization process currently underway that reduces their traditional mechanisms of support.
The mandatory pension sector covers approximately one million workers, or 2 percent of Tanzania’s population, through a fragmented and inefficient market structure. Five small, public, pension funds offer mandatory defined-benefit (DB) pensions for the formal workforce, which captures only two percent (and the highest income segment) of the population. The segmented market structure is inefficient as each fund is too small to realize economies of scale. As a result, up to 19 percent of pension funds’ contributions are used to cover administrative costs. In addition, the unnecessary competition between the funds for new members works to drive administrative costs even higher.
Despite the limited coverage, the pension sector carries sizeable liabilities for the Government, estimated at almost one-third of GDP at the end of June 2014. The Government explicitly guarantees all funds; so actuarial deficits translate into contingent liabilities (around 25 percent of GDP). In addition, a significant share of liabilities to the pension funds (~6.5 percent of GDP) is linked to the benefits for civil servants who accrued pension rights before 1999. The Government is legally responsible for these payments that the Public Service Pensions Fund (PSPF) has made on its behalf. As the Government has failed to fully reimburse PSPF, the amount of arrears has grown over time, reaching an estimated TZS 1.4 trillion (2 percent of GDP) as of June 2014. In addition, the liabilities associated with the future payments of pre-1999 benefits are projected to be close to 4.5 percent of GDP. The Government has also accumulated arrears, in the range of TZS160 billion, on loans provided by pension funds for public projects.
II. Operation Objective(s)
This proposed PRPC is the first of a programmatic series of three operations. The proposed series will support the Government’s reform agenda aimed at addressing the short and medium term vulnerabilities in the pension sector and reducing the associated fiscal risk. The DPO revolves around three policy areas defined as “pillars”: Pillar 1 - Manage the fiscal and stability risks connected to past and future payments of “pre-1999” benefits; Pillar 2 - Ensure the financial viability of the mandatory social security schemes by reviewing pension parameters and reducing administrative costs, thereby allowing for a broadening of the overall pension coverage; and Pillar 3 - Implement a solid regulatory structure for the sector and its investments.
Therefore, the development objective of the series is to reduce the fiscal liabilities from the pension sector and improve its viability and efficiency.
III. Rationale for Bank Involvement
This reform agenda is well aligned with the Government’s Social Security Reform Program (2010), as well as with the Country Assistance Strategy (CAS) FY12-FY15 and the CAS Progress Report discussed with the Board of Executive Directors of the World Bank in July 2014 The Government’s 2010 program, as developed by the Social Security Regulatory Authority (SSRA) and the Ministry of Labor, provides a road map for pension sector reform that is articulated into three phases: (i) a extension and harmonization phase (under implementation); (ii) a stabilization phase; and (iii) a growth and prosperity phase. To fulfill Phase 1, a multi-pillar strategy is being implemented by the Government under the leadership of the SSRA and the Ministry of Finance that specifically addresses the “pre-1999” fiscal liabilities, the harmonization of pension benefits across funds, and the rationalization of the funds’ investment portfolios, all in collaboration with the Bank of Tanzania. The proposed PRPC will support the Government in this important reform process. The operation is also aligned with the CAS FY12-FY15 and the 2014 Progress Report, which identify pensions as one of the priority reform agendas in order to strengthen social safety nets and improve the quality of social services.
IV. Tentative financing
Source: / ($m.)BORROWER/RECIPIENT / 0
International Development Association (IDA) / 50
Borrower/Recipient
IBRD
Others
Total / 50
V. Institutional and Implementation Arrangements
The implementation of the DPO series will be monitored by the Government and the World Bank. The implementation of the first operation has been conducted through periodic missions involving relevant GoT offices, which allowed the team to obtain updated data on a regular basis. As part of an overall framework, supervision and preparation of the operations in the series take place in collaboration with other donors and in consistency with the MKUKUTA review mechanism.
VI. Risks and Risk Mitigation
The overall risk of this operation is considered to be substantial. Despite the high political commitment by the Government this operation faces some risks considering the social impact of the reforms and the upcoming elections. Pension reforms are always highly political and usually unpopular; therefore reforms are likely to encounter opposition, even in their final stage, and involve reputational risks that will have to be carefully managed. In particular, existing members of the pension schemes could push back if they perceive their future benefits may be reduced. Transparency, communication and stakeholders’ engagement (led by the SSRA) will be important mitigation measures to explain why the reforms are needed and the problems that will arise if nothing is done. Implementation capacity risks are also substantial and relate to the need to strengthen the supervisory capacity of the SSRA and the governance and investment expertise of the pension funds.
VII. Poverty and Social Impacts and Environment Aspects
Poverty and Social Impacts
The proposed series will improve distributional impacts by: (i) protecting existing and new pensioners; (ii) freeing resources for areas that are essential for poverty reduction; and (iii) extending coverage to the informal sector. In the short term, establishing the viability of the pension funds will be essential to ensure that pensioners and extended families do not fall into poverty. In the medium term, the reduction of contingent liabilities will free scarce budgetary resources for priority social expenditures. Furthermore, those directly affected by the reform are not expected to suffer significant income losses. They will receive longer term pension annuities that will substitute for the current widespread lump sum payments that pensioners normally dissipate in a relatively short time frame and often inefficient manner. Finally, in the long term, the gradual extension of coverage is expected to have a positive impact on the vulnerable elderly employed in the informal sector.
In terms of gender-related reforms, the long-term goal of improving pension coverage should serve to help women. Access to finance is particularly low for women in Tanzania. The Global Findex Database 2012 suggests only 14 percent of adult females have an account at a formal financial institution compared to 21 percent of the male adult population. This is partly due to the fact that women outnumber men in rural areas where access rates to bank products and other forms of finance are particularly low. Furthermore, social protection for the elderly would tend to benefit women more as they make up the majority of the vulnerable in this category.
Environment Aspects
The specific policies supported by this programmatic operation are not expected to have negative effects on Tanzania’s environment, forests, water resources, habitats or other natural resources. The risk of unanticipated adverse effects to the environment and natural resources is low. Tanzania has in place adequate environmental controls and legislation under the mandate of the National Environmental Management Council (NEMC), providing support to line-ministries, including the MoF, in incorporating environmental guidelines. Therefore, further analysis of environmental aspects in not necessary for this DPO.
VIII. Contact point
World Bank
Contact: Andrea Dall'Olio
Title: Lead Economist
Tel: +255 22 2163260
Fax: +255 22 2113039
Email:
Location: Dar Es Salaam, Tanzania (IBRD)
Borrower
Name: Ministry of Finance
Contact: Dr. Servacius Likwelile
Title: Permanent Secretary to the Treasury
Ministry of Finance
Dar es Salaam
Tanzania
Tel: +255- 2111-174/6
Fax: +255-22-2110326
Email:
IX. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop