Contractor Registration Board of Tanzani

Proceedings of CRB Consultative Meeting on Contractors’ Financial Management Aspects 2008
"Seeking Collaborative Solutions to Contractors Financial Challenges"
CONTRACTORS REGISTRATION BOARD
CRB CONSULTATIVE MEETING ON

CONTRACTORS’ FINANCIAL
MANAGEMENT ASPECTS
2008
PROCEEDINGS
Seeking Collaborative Solutions to Contractors’
Financial Challenges
Karimjee Hall
8th – 9th May 2008
Contents
CONTENTS
Page
Preface…………………………………………………………………………………….
ii
Contractors Financial Challenges & Solution – CATA……………………………… 1
Financial Management Skills Challenges Facing Local Contractors and the Way
Forward – Oswald Urassa ……………………………………………………………... 10
Financing Solutions to Contracting Industry Challenges – Felix Kibodya -

Tanzania Bankers Association ………………………………………………………... 25
SME Credit Guarantee Scheme And its Potential to the Contracting Industry –
Bank of Tanzania .…………………………………. 32
Finance Leasing: A Tool for Financing and Developing the Tanzanian Private
Enterprise – Moyo Violet Ndonde - IFC/ SECO……………………………………. 45
Salient Features of the Proposed Financing Leasing Law for Tanzania – Moyo
Violet Ndonde - IFC/ SECO .………………………………………….……………….. 62
Tax Regime for the Construction Industry – Protas H. Mmanda – Tanzania

Revenue Authority .……………………………………………………………. 73
East African Development Bank – EADB .……………………………………………. 82
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Preface
PREFACE
It is said that ‘To be a success in business, be daring, be first, be different’. It is with the spirit of
ensuring the success of the contractors it regulates, that the Contractors Registration Board has
found it necessary to be daring and the first to organize such a collaborating consultative meeting
between financial institutions and contracting industry stakeholders.
Access to Finance is one of the Challenges that have continued to stifle the growth of contractors.
This is despite the strategic role being played by Contractors. In turning around this predicament,
the Board has adopted to seek a strategic and holistic approach in addressing the issue with an
objective of seeking sustainable solutions through the collaborative efforts of the various
stakeholders.
The objective of this forum is not just to deliberate but also to come up with practical and
sustainable solutions for the financial predicament facing contractors. It is based upon this that the
theme of this meeting has been appropriately named “Seeking Collaborative Solutions to
Contractors’ Financial Challenges”. In this, we expect you our stakeholders to deliberate and
provide the necessary input.
The Proceedings, have included a few, but focused papers on topical issues from a spectrum of the
stakeholders from both the contracting and financial sector. Let me extend our appreciation to the
paper authors, for devoting their time and resources, so as to serve the industry, in this noble way. It
is our hope that these proceedings will stimulate discussions that will go some way in achieving the
intended objectives of enabling financial institutions recognize the contracting industry as a
potential partner to do business through a win-win relationship and provision of innovative,
accessible and tailored products that meet the contractors needs. We also expect contractors to
narrow the gap that they face with financial institutions, by being aware of what they need to do so
as to keep their house in order. We expect employers to be flexible and allow equitable risks through
allowing products such as insurance guarantees which are much more affordable and for which
insurance companies can honour.
We do hope that in line with the theme we will all strive towards seeking collaborative solutions in
addressing the contractors’ financial challenges. I wish you a successful meeting. May Almighty
God continue to guide us all, in our noble objective of Empowering the Contractor.
B. C. Muhegi,
REGISTRAR
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Contractors Financial Challenges & Solution – CATA
Contractors Financial Challenges & Solution
Contractors Association of Tanzania (CATA)

E-mail: [email protected]
1.0. INTRODUCTION
The contracting industry in Tanzania is characterised by small and medium size

contractors, even the so called large contractors when compared with other countries
(developed and some developing) they are still small contractors. In Tanzania
contractors are classified according to the Contractors Registration Act NO. 17 of 1997
into 7 classes that is Class I – VII, Class I being the highest. To-date the number of
registered contractors is 4332. Class VII - V with the limit to undertake a project whose
value does not exceed TZS 450million (approximately $375,000) for a single project. In
2007 the market share by value for local contractors was 30%, while the foreign
contractors enjoying 70%. However the local contractors accounts for about 94% of the
total contractors registered in the country. This trend does not create a conducive
environment for the development of local contractors and contracting capacity.
Then the current characteristic of the construction industry in the country look like
‘’Inverted Pyramid’’ The challenge is how to create a sustainable national contracting
capacity for such a large number of small contractors realizing small share in terms of
monetary value, while few but ‘large’ foreign contractors dominate the industry in
terms monetary value.
The importance of the construction industry to the national economy is well

recognized in so many relevant policy documents e.g. Tanzania Vision 2025,
MKUKUTA 2005-2010, Construction Industry Policy 2003,etc.
To date the construction industry contribute substantially to the national economy

through contractors , it is growing at the rate 11% (average) for the last five years, with
a contribution of about 5.8 % (2006) to the GDP) and 55-65% of the capital formation,
employ about 9% of the workforce in Tanzania. The industry therefore has a strong
operational base and business presence in the local economy.
Additional benefits contribute by the construction sector in Tanzania and worldwide

include:
Creates employment (directly or indirectly by a ‘’multiplier effect’’)

Protects the environment in its day to day activities
Improves infrastructure which leads to growth of economy and reduction of
poverty
Improves living conditions of all citizens in Tanzania
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Contributes to the training and education of workers

To enhance the contribution of the sector to social economic development of the
nation, deliberate efforts to develop the local contractors and contracting industry
capacity have to be made by all the construction industry stakeholders.
These include finding solution to the challenges of emerging construction
enterprises such as inadequate of finance and access to financial support.
2.0. PROBLEMS AND CHALLENGES TO CONSTRUCTION INDUSTRY
Challenges faced by local contractors in Tanzania are similar to those faced by most of
the small and medium enterprises (SME’s) in the country, however there few
differences arising depending on the sector preference the major ones includes:
Inadequate of finance and financial support to contractors

unavailability of adequate plant and equipment
Weak and non – facilitative legal and regulatory framework
2.1. Need for Assistance with Finance and financial support
Contractually contractor must typically pre-finance projects and receive periodic

(interim) payments from clients. Thus they require substantial working capital.
In Tanzania, contractors especially small and medium, but also including large local
contractors have limited financial resources, and encounter difficulties in obtaining
financial assistance from the banks. They also face delay in payments from clients and
unfavourable terms of trade from their suppliers. However the procurement provides
an example of actions which can be taken .It has rationalised its construction
procurements arrangements, provision on payments in the standard form of contract
and the contract administration procedures ( such as certification ) to reduce delays in
payments to contractors , and reduce the levels of risk of the contractors . The practice
yet indicates that very few contractors receive their payments in time. Therefore delays
in payments tend to affects their financial projections and work progress.
As to date no specific bank in the country which provides finance assistance,

specifically targeting to the construction industry demand to provide product such as
Bid Security, advance payments bond, performance bond, Insurance, hire-purchase
and loans at either negotiable or considerable rate. In most case local contractors face a
lot of problems in securing guarantee/security, working capital and asset financing to
run and investing in their businesses.
At the moment the financial policy in the country does not provide preference for the
benefit of local capacity building in the industry. So as to provide opportunities to
increases the capacity utilization and development of local contractors in the industry.
In some countries like South Korea where government and industry established a bank
to provide loans, performance bonds, insurance and hire- purchase assistance to
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contractors both the bank and contractors are doing well. The bank together with other
commercial banks have helped the construction capacity building such that today,
Southern Korea is among the strong and reliable construction services exporters.
For instance in Ghana, Social Security Bank had a successful contractor pre-finance
scheme to assist contractor. Experience has shown from these countries that
contractors require a range of support schemes .Thus; the financial institutions should
be part of a wider network of support institutions which, together, address the needs
of the contractors.
However in Tanzania, the conservative attitudes of the commercial and financial

institutions arsing from the existing financial policies and their antipathy to assist
contractors has led to initiatives to set up trust funds, guarantee funds, and so on, to
address the needs of contractors. However these funds have not yet assist the
contractors as expected during the set up. Despite of the increase in lending to the
construction sector as shown in Table I below, yet the impact it is still minimal and
has not made significant growth in the industry. Therefore the problem of poor access
to finance has remained unresolved.
Sector 2004/05 2005/06

1 Public Sector 0.9% 1.2%
2 Agricultural Production 13.3% 12.4%
3 Mining 1.0% 1.8%
4 Manufacturing 22.40% 20.50%
5 Building & Construction 4.1% 4.6%
6 Transportation 8.3% 7.8%
7 Tourism 2.7% 2.5%
8 Trade 23.8% 23.7%
9 Financial Institutional 4.6% 6.5%
Table 1: Distribution of Private Credit to Economic Activities 2004/05 & 2005/06; source BOT Annual Report 2005/06
3.0. CONTRACTORS OVERVIEW TO THE FINANCIAL INSTITUTIONS
Since trade liberalization in the late 80’s and on going reform in the financial sector, a
number of banks have grown tremendously. Today in the country there are about 30
banks registered to operate in Tanzania to offer banking services.
3.1. Specific Contractors Requirements from Banks
It is true that due the nature of the construction business the works are capital
intensive and sometimes require contractor to have a huge working capital at initial
stage and the entire period of project execution. In this case there is no way a
contractor can turn away from approaching a bank for financial assistance. So that to
enable him to pre-finance the projects prior for receiving interim payments, but also
require investing in the company resources such as purchase of equipments and tools.
The major requirements for contractors from the banks includes
Security Instruments (bid, advance payment , performance and payment bonds)

Working capital
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Asset financing
Despite of the increase in number of banks in the country, yet the availability and
access of finance and financial support to contractors still is a problem, which
continues to affect contractors performance in the industry.
4.0. CONTRACTORS EXPERIENCE TO FINANCIAL INSTITUTIONS
4.1. Inadequate skills to evaluate and manage construction projects
Most of the banks do not have adequate understanding of business in the construction
industry. The nature of the industry performance is not similar to other industries such
as manufacturing or trades; their returns are subject and are affected with delays in
payments either caused by the consultants’ certifications or employer honouring the
payments in time. For this reason it is likely for contractor not to realize income for a
number of months, but yet continue to work on site as the contract require. This in
unlike for the manufacturing industry the business trend is quite differently once
the production begins the two can be realized either cash or goods, which make them
to meet the monthly projection in servicing the bank loan . In this case contractors are
not perceived as a good customer and become unattractive to the bank which further
creates another barrier to fellow contractors in accessing bank loans.
4.2. Underprovided Amount v/s Loans Requested
It has been common practice that it is difficult to receive the amount requested for the
loan, usually contractors receives fewer amounts than the actual requested loan value.
The consequences to contractors have been that brings difficulties in project
performance and does not bring the intended results due to project under financing.
At the initial stage most of the contractors tend to accept it perhaps with the view that
the balance may be obtained, elsewhere from other sources. Eventually the situation
becomes worse and contractors start to experience difficulties in repayment of the total
loan in time.
4.3. Excessive focus on security/ collateral
There is a view that banks still focus excessively on the available collateral as a
determinant of credit the practice continue to weaken the financial status of the local
contractors because this becomes a burden to contractors to meet these huge
conditions.
For instance a contract value of shillings one billion, a contractor is required to pay
10% for performance bond and 15% of the contract price which amount to 25% (i.e.
equivalent TSH 250mil). It is difficult for local contractors to raise such amount or to
own a property which should be mortgaged as collateral.
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This has led contractors to shy away from projects whose conditions require them to
produce such security, before implementing the project, which it deny their capacity
building opportunities
4.4. Long standing perceptions (non- compliance and defaults, etc)
History of non- compliance and defaults in the local market is still a factor in the
resistance to new approaches to credit assessment and decision making ‘’ Guilty until
proven innocent’’.
Unlike other business contractors business is broad open and is clear, because
information on individual firm can be accessed and gathered easily from the clients,
contractors register at Contractors Registration Board as well as from the Associations.
Therefore is matter of close cooperation to monitor contractors integrity and
performance which we believe can save time and reduce credit assessment period.
4.5. High lending Interest rates
The prevailing lending rates for most of the banks are too high and in fact increase a
barrier to local contractor’s especially small, medium and even large local contractors
to seek for bank loans. This is because their business or contracts are not much
profitable to services for bank loan repayments as well as to remain with reasonable
profit margin for office and business operation. The current practice and the trend in
the business indicates that there is a stiff competition in the market which attracts most
of the contractors to offer competitive or a bit low profit margin so as to win the
tender, otherwise becomes difficult to remain in the business.
Therefore the lending rate discourages and does not motivate contractors to opt for the
loans easily and therefore reduces the ability of contractors to invest through bank
loans.
4.6. Delays in Loan Processing
In most cases the contractors seek loans when has a project in hand, the problem
encountered here is that loan processing cycle take longer period even when all the
documents required by the bank has been submitted and approved. The practice
discourages contractors because sometimes either receives the loans at very late time,
when project is stand still or closely to completion. Contracts on Construction projects
have timeframe and contractual liability in which case require contractors to
complete the projects in specified period. Otherwise he has to pay for liquidated
damages for the delays caused to the project in hand.
4.7. Financial Policy
The current financial policy in the country does not provide relief to the industry either
in terms of preference scheme or negotiation at a considerate rate on securities and
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loans. The financial policy demands for full coverage for each product or services to be
provided.
Other regulatory such as PPRA and CRB provides preference to local contractors
capacity building, the idea here is to develop and increase the utilization of the local
contractor in support the growth of the national economy, for instance
A lower class contractor can be permitted to execute projects above the ceiling value
whereby a CRB has provided a dispensation to contractor to perform such project. But
requires contractor to certify to the board its capability and performance. This has
assisted many contractors to upgrade for higher class and have the opportunities to
bid for sizeable projects.
Similarly, the public procurements act has clauses which spell out preference to
projects set only for local contractors, however it has ceiling value. Currently project
value up to shillings one billion is set only to local contractors, but also does not attract
the provision of bid security as previous demanded in place contractor is required to
submit tender securing declaration.
These efforts are made purposely to make sure that there is deliberately way for
assisting to develop the capacity building to our local contractors.
However such preference is not there for local contractors when need to obtain
financial services or products from the banks. It is therefore considered that the
financial policy shall include such preference to take care for capacity building to local
contractors.
Say instead of the contractors incurring full coverage on guarantee for bid security,
advance payments and performance bonds the following can be considered and
adopted as the best alternative in the practice,
Bid security a contractor can provide a guarantee to cover only 25% to 50% of the
total amount.
Advance payments bond a contractors may enter a TRIPARTITE agreement
which shall include the bank, client and contractor or alternatively can cover only
25% to 50% of the required guarantee.
Performance bond contractor may cover say 25% to 75% of the total guarantee
required.
5.0. CURRENT INITIATIVES
4.7. Contractors Assistance Fund (CAF)
The fund was established by the Contractors Registration Board in 2002 with objective
of provision of bid bonds and advance payment guarantees to small contractors in
class four to seven. The fund is small and capital deployed cannot cater for the entire
contractors in the selected group. Due to these limitations the funds does not cover the
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provision of guaranteeing performance bonds which is also a need area in the

industry.
However at the current environment it is wise for the fund to extend its services to
cover for the entire contractors and provide further services such as performance bond
and bid security to large contractors so that to enhance the performance of the
industry in the country.
5.2. Construction Industry Development Fund (CIDF)
The CIDF was established in 2002 and the National Construction Council was
appointed as the Secretariat to the Fund .Objectives of the fund includes:
To provide short-term working capital to contractors, consultants and materials

manufacturer.
To provide loans for equipment and tools.
To guarantee loans secured through commercial banks and other institutions.
To manage a construction warranty scheme.
Source of funding for CIDF are mainly from share/equity contribution from its
members and membership fees. The fund today is not operational because the
intended seed capital has not been contributed from the members and fund
stakeholders.
5.3.Contractors Association of Tanzania (CATA)
Contractors Voluntary 0.1% Project Value Contribution to CAF
In 2004 Contractors Association of Tanzania initiated the idea for restructuring of the
existing Contractors Assistance Fund (CAF) to become compulsory, requiring all
contractors to contribute to the fund at a rate of 0.1% of each contract awarded. CATA
idea came out after observations made from members’ contribution that the existing
fund is small, is not growing enough to carter even for intended members in the
selected class, and does not provide more products such as performance bond which is
the main need to contractors and currently the fund exclude large contractors.
This initiative was made to create sustainable fund which can serve a large number
of contractors .But also extend its services to include more products such as bid
security, advance payments, performance bond and loans to small and large
contractors which keep on growing in the industry. The formalization has not yet
completed and the Association is still working on it.
Finally, the current initiatives in the construction industry were taken as part of the
role from the stakeholders and contractors efforts to increase the availability and
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access to finance and do not mean that contractors finance requirements from the
financial institutions are currently not needed.
6.0. THE WAY FORWARD
6.1. Intervention by the Government
Inadequate of finance and financial Support
Review financial and banks lending policies and statutes with the view of enabling
contractors, the majority of whom are SMEs to access loans, collateral and security
from banks.
Set up a preference scheme to financial institutions to take care for construction

industry demand such as bid security, advance payments and performance bond
which shall reduce the burden to local contractors by categorising them into two bands
one of zero rate (to small works contracts) and 25% - 50% to medium and large works
contracts in place for full coverage.
Sanction the application of the TRIPARTITE agreement between the contractor, client
and bank in place of the collateral to become operational to financial institutions, on
the condition that the client shall pay contractors money through customer account in
the bank.
Remove the policy to the financial institutions so as to set a balance between the actual
valuations of the property used for mortgage to attract the same value of the loan
requested.
6.2. Intervention by Financial Institutions
Inadequate of Finance and Financial Support
Involve training expertise with appropriate skills in the construction industry for
proper credit assessment to contractors’ loan application.
Open doors and utilize the current available opportunities in the construction industry
such as Performance Based Management and Maintenance of Roads (PMMR)
construction projects whereby require a joint venture among the contractors,
consultants and financiers (banks ) to bid and eventually execute roads projects jointly.
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6.3. Intervention by Contractors Association of Tanzania (CATA)
Inadequate of finance and Financial Support
The Association should continue to negotiate with banks for easing of conditions in
extending loans, collateral and security and financial instruments to contractors.
Contractors at the same time should improve their financial management so as to
become attractive to banks.
CATA in collaboration with Tanzania Bank Associations to develop a training

program for SMEs targeting to improve the business skills to contractors
CATA and Tanzania Bankers Association to draw up a memorandum of

understanding for future collaboration in areas which focus to members’ interest
7.0. CONCLUDING REMARKS
Construction sector contribution to the national economy has significant impact to the
social economic development and therefore the development of local contractors needs
deliberately efforts from, government, financial institutions and other stakeholders.
The aim is to make the industry more vibrant and continue to assist the local
contractors to have medium and long term solutions on availability and easy access to
finance. The move shall enable the contracting industry to build its capacity and
expand locally, in so doing can export its services in other countries.
Reference:
1) Bairi, Magesa, Capacity Building of the Local Construction Industry Proceedings
of the CRB Annual Consultative Meetings 2006.
2) Tanzania Bankers Association, The role of financial institutions and practical
solutions to addressing financial capacity building for the contracting industry
Proceedings of the CRB Annual Consultative Meetings 2006
3) Contractors Association of Tanzania, Role of Contractors in the Development of
Contractors and the Construction Industry ; The Contractors Perspective, 2008
4) Ministry of Infrastructure and Development, Construction Industry Policy 2003
5) Davis Baitani & Ben M.Mullungu Contractor’s Perspective of the Contracting
Industry and Future Challenges , Proceedings of the CRB Annual Consultative
Meetings 2008
6) Professor George Ofori, Experience, Challenges, Interventions and Opportunities
in Development of Contractors; Proceedings of the CRB Annual Consultative
Meetings 2008
7) B.C.Muhegi, An Overview of the Contractors Registration Board & the
Contracting Industry; Achievement and Challenges, Proceedings of the CRB
Annual Consultative Meetings 2008
8) Bank of Tanzania Annual Report 2005/06
9) Ministry of Planning, Economy and Empowerment , The Economic Survey 2006
10) Public Procurement Act No.21 of 2004 and its Regulations 2005
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Financial Management Skills Challenges Facing Local Contractors and the Way Forward – Oswald Urassa
Financial Management Skills Challenges Facing Local

Contractors and the Way Forward
Oswald Urassa
NMB Bank plc
Abstract
The construction industry contributes about 9.5% of Tanzanian Gross Domestic Product
(GDP). It is regulated by Contractors Registration Board (CRB) which is a Government agency
established in 1997 to perform among other functions the supervision of activities in the
industry. CRB has been in existence for ten years and has done a lot for the industry. Through
consultative meetings, it has been identified that members of the industry face several
challenges for them to be able to effectively contribute to the industry and GDP of the country.
Some of the challenges are as follows; contractors lack equipment, they face unfair bidding
competition arising from lack of skills in procurement procedures and deliberate decisions to
under price contracts. They also lack financial management skills to keep and report on their
financial records as required by various laws which include Companies Act as well as Auditors
and Accountants (Registration) Act. Contractors also lack capital and have poor banking
facilities to assist them in obtaining working capital. Financial record keeping is another
shortcoming. Lack of financial records will not assist contractors in securing finance, be it from
banks, investors or capital markets. It is therefore important to have adequate records for
assessing the performance as well as assisting in securing needed capital. Changing the existing
corporate set up is the only way forward for contactors to survive in the future.
1.0 INTRODUCTION
Construction industry in Tanzania is one of the sectors whose contribution to

GDP is increasing significantly. In Tanzania, the industry is regulated by
Contractors Registration Board (CRB) which is a public institution established
under the Act of Parliament in 1997. The following are the mandates of the CRB:
1.1 To enter and inspect any site for Construction, installation, erection or
alteration works for the purpose of verifying and ensuring that the works
are being undertaken by registered contractors, and that the works comply
with the Contractors Registration Act and its related by-laws.
1.2 To identify and compile information to facilitate institution of legal action
against unregistered Contractors who undertake Construction, erection or
alteration works.
1.3 To ensure that all construction sites are boarded and labour laws,
Occupational health and safety regulations in the construction industry are
adhered to.
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1.4 To investigate cases of misconduct reported against unregistered

contractors. Maintain updated records on trend of defaulters, safety
compliance and occurrence of accidents.
1.5 To advise management on improvements in carrying out enforcement and
regulation activities.
1.6 Inspection of offices and equipments for registration.
2.0 REQUIREMENTS OF THE INDUSTRY
Construction industry is one of the sectors which are handling huge financial
resources in any country Tanzania inclusive. The amounts of money involved in
the industry are significant. Due to the volume and value involved, it follows
that there is a need to have adequate financial skills for the sector to contribute
effectively in the GDP of the country. As mentioned, construction industry
contributes 9.5% of the GDP in Tanzania.
The industry also requires equipment for the sector to perform its role. The
construction equipment are very expensive and will require the contractor to
have adequate capital to be able to acquire them. Appendix 1 itemises some of
the important construction equipment needed and their respective prices. The
conclusion arising from the list is that contractors must have adequate capital to
have most of the equipment needed in the industry. Alternatively, a different
means of obtaining the equipment, either buying or through hire must be in
place for the sector to have its contribution felt in the society. This conference
will have an opportunity to know something about leasing as a means of
acquiring such equipment. In addition to the equipment requirements, the
industry requires the financial management skills to manage the huge financial
resources handled by the sector. Section 30 (1) of the Accountants and Auditors
(Registration) Act which established the National Board of Accountants and
Auditors (NBAA) stipulates that any organisation which has assets in Tanzania
the value of which exceeds TZS 100 million or an annual turnover in Tanzania
exceeding TZS 50 million shall employ at least one Certified Public Accountant.
Section 31(1) further provides that no person shall submit his income tax returns
to the Tanzania Revenue Authority (TRA) unless such returns are prepared by a
Certified Public Accountant. The amount mentioned is insignificant as far as
construction industry is concerned. One contact may cost as much as TZS 2
billion.
3.0 FINANCIAL SKILLS NEEDED IN THE CONSTRUCTION INDUSTRY

Financial skills needed in the construction industry include financial
accounting, cost accounting, budgeting and budget control, procurement and
taxation matters.
3.1 Financial accounting

All contractors are companies registered under the Companies Act of 2002. The
Act defines a company to be an institution with owners (shareholders) who
have given the directors capital to run the company and they (shareholders)
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expect the directors to report back to them on the results of the operations. The
manner in which they report is through the preparation of financial statements.
Section 151(1) of the Companies Act requires every company to keep in English
or Swahili language proper books of account which are sufficient to show and
explain the company’s transactions. Sections 152 through 163 elaborate more on
the financial records needed, the role of auditors and directors of the company
as well as the approval of accounts. Companies registered under CAP 212 will
therefore need to observe these sections. The outcomes of accounting records
kept in he books of accounts are the financial statements, namely the balance
sheet, income statement and cashflow statement. The above statements are
prepared using International Financial Reporting Standards (IFRS)1. Also the
statement of changes in equity has to be prepared to accompany these
statements.
Shareholders rely on the above statements to evaluate the performance of the
company. In order to have more credibility, shareholders appoint auditors to
review the financial statements prepared by directors and report back to them
(shareholders) whether the financial statements present a true and fair view of
the state of affairs of the company. The financial reporting triangle may be seen
as in figure 1 below.
Figure 1: Financial reporting triangle
Shareholders
Directors Auditors
To arrive at the above financial statements requires the company to keep

financial records which are eventually summarised into the above statements.
Companies with annual turnover amounting to TZS 100 million and assets
amounting to TZS 50 million in Tanzania are required under the Accountants
and Auditors (Registration) Act to employ qualified accountants.2 The Act does
not mention whether the firm must employ the CPA or use their services. The
fact that most companies have capital limitations means they are unable to
employ CPAs. Instead, these companies may use the services of CPA on a
retainer basis to assist them in preparing financial statements as well as
assisting the contractors on all taxation matters.
1 Tanzania adopted IFRS from July 2004. Every company must prepare financial statements using IFRS.
Company auditors are required to comment whether the company has adopted the IFRS and if not
qualify the accounts.
2 The Act defines a qualified Accountant as a person who has qualified as Certified Public Accountant
(CPA).
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3.2 Cost accounting

Cost accounting provides data for three major purposes:
3.2.1 Planning and controlling routine operations
3.2.2 Non-routine decision making
3.2.3 Inventory valuation and income determination.
Planning is a delineation of goals, prediction of potential results under
various ways of achieving goals and decision on how to attain these goals.
Controls are actions which implements the planning decision and
performance evaluation that provides feedback of the results. Budgeting
and performance reports are two major accounting tools that help
managers to run the company effectively.
Cost accounting assists managers to identify cost behaviour. The knowledge of
cost behaviour will assist in the decision making process. Some of the costs are
fixed, meaning they are not affected by the decision made and others are variable,
meaning they change with the volume of work. A clear knowledge of these costs
will assist managers in the decision making process.
Cost accounting provides the costs for inventory valuation purposes. Quite often,
companies acquire materials for their day to day operations. During the course of
its operations, some materials may remain unutilised at the end of year. These
materials will be used in the following financial year. As such, they are part of the
inventory (stock). For the purposes of preparing financial statements, these
materials will need to be valued. Cost accounting provides the means of
establishing the value which will be used for balance sheet purposes.
3.3 Procurement system

Most of the contractors’ assignments involve huge sums of money. This calls for
procurement entities to plan for the procurement of goods and services in line
with the requirement of procurement laws. Specifically, section 45 of Public
Procurement Act, 2004, Regulation 40, 46 and 47 as well as 25 and 25 provides the
following:
A procuring entity shall plan its procurement in a rational manner and in
particular shall:
3.3.1 Avoid emergency procurement wherever possible
3.3.2 Aggregate its requirements wherever possible both within the procuring
entity and between procuring entities, to obtain value for money and reduce
procurement costs;
3.3.3 Make use of framework contacts wherever appropriate to provide an
efficient, cost effective and flexible means to procure works, services or
supplies that are required continuously or repeatedly over a set period of
time;
3.3.4 Avoid splitting of procurement to defeat the use of appropriate procurement
methods unless such splitting is to enable wider participation of local
consultants, suppliers of contractors in which case the Authority shall
determine such an undertaking; and
3.3.5 Integrate its procurement budget with its expenditure programme.
13
The purpose of the Act is to ensure that procurement processes achieve

value for money from goods and services procured which can be achieved
through equity, accountability and transparency and open and effective
competition3. Since the assignments involve competitive bidding,
contractors need to have adequate skills to cost the assignment and yet
provide the room for negotiation. The procurement system and law is
expected to have the qualities of a good procurement system. These qualities
are:
• Equity
• Ethics and fair dealing
• Accountability and transparency
• Open and effective competition
• Value for money
3.4 Corporate governance

The good governance is critical for the survival and success of companies. Most
contractors are family owned which makes them unsustainable. For contractors
run as family to survive, they need to build up a corporate management structure
that embraces good corporate governance principles. Different organisations have
developed principles of good corporate governance4. These are summarised
below:
3.4.1 Principle 1: Authority and Duties of Members [Shareholders]

Members or shareholders [as owners] of the corporation shall jointly and
severally protect, preserve and actively exercise the supreme authority of
the corporation in general meetings. They have a duty, jointly and
severally, to exercise that supreme authority of the corporation to:
• Ensure that only competent and reliable persons, who can add
value, are elected or appointed to the Board of Directors;
• Ensure that the Board is constantly held accountable and
responsible for the efficient and effective governance of the
corporation so as to achieve corporate objectives, prosperity and
sustainability.
• Change the composition of a Board that does not perform to
expectation or in accordance with the mandate of the corporation.
3.4.2 Principle 2: Leadership

The Corporation shall be headed by an effective Board that exercises
leadership, enterprise, integrity and judgment in directing the Corporation
so as to achieve continuing prosperity and to act in the best interest of the
Corporation in a manner based on transparency, accountability and
responsibility.
3 External auditors are required to review whether procuring entities complied with the PPRA Act in the
course of their audit.
4 Adopted from Principles for Corporate Governance of Kenya.
14
3.4.3 Principle 3: Appointments to the Board

Appointments to the Board shall, through a managed and effective
process, ensure that a balanced mix of proficient individuals is made and
that each of those appointed is able to add value and bring independent
judgment to bear on the decision-making process.
3.4.4 Principle 4: Strategy and Values

The Board shall determine the purpose and values of the corporation,
determine the strategy to achieve that purpose and implement its values in
order to ensure that the corporation survives and thrives and that
procedures and values that protect the assets and reputation of the
corporation are put in place.
3.4.5 Principle 5: Structure and Organization

The Board shall ensure that a proper management structure [organization,
systems and people] is in place and make sure that the structure functions
to maintain corporate integrity, reputation and responsibility.
3.4.6 Principle 6: Corporate Performance, Viability and Financial

Sustainability
The Board shall monitor and evaluate the implementation of strategies,
policies and management performance criteria and the plans of the
corporation. In addition, the Board shall constantly review the viability
and financial sustainability of the Corporation and must do so at least once
every year.
3.4.7 Principle 7: Corporate Compliance

The Board shall ensure that the Corporation complies with all relevant
laws, regulations, governance practices, accounting and auditing
standards.
3.4.8 Principle 8: Corporate Communication

The Board shall ensure that the corporation communicates with all its
stakeholders effectively.
3.4.9 Principle 9: Accountability to Members

The Board shall serve the legitimate interests of all members and account
to them fully.
3.4.10 Principle 10: Responsibility to Stakeholders

The Board shall identify the corporation’s internal and external
stakeholders; agree on a policy or policies determining how the
corporation should relate to, and with them, in creating wealth, jobs and
the sustainability of a financially sound corporation while ensuring that
15
the rights of stakeholders [whether established by law or custom] are

respected, recognized and protected.
3.4.11 Principle 11: Balance of Powers

The Board shall ensure that no one person or group of persons has
unfettered power and that there is an appropriate balance of power on the
Board so that it can exercise objective and independent judgment.
.
3.4.12 Principle 12: Internal Control Procedures
The Board shall regularly review systems, processes and procedures to
ensure the effectiveness of its internal systems of control so that its
decision-making capability and the accuracy of its reporting and financial
results are maintained at the highest level at all times.
3.4.13 Principle 13: Assessment of Performance of the Board

The Board shall regularly assess its performance and effectiveness as a
whole and that of individual members, including the Chief Executive
Officer. A summary of the major findings together with a statement
confirming that the Board has carried out a self-assessment exercise should
be made to the annual general meeting.
3.4.14 Principle 14: Induction, Development and Strengthening of Skills

of Board Members
The Board recognizes the need for new members to be inducted into their
roles and for all directors to develop and strengthen their governance skills
in light of technological developments, changing corporate environment
and other variables. The Board shall accordingly organize for the
systematic induction and continuous development of its members.
3.4.15 Principle 15: Appointment and Development of Executive Management

The Board shall appoint the Chief Executive Officer and participate in the
appointment of all senior management, ensure motivation and protection
of intellectual capital crucial to the corporation, ensure that there is
appropriate and adequate training for management and other employees
and put in place a succession plan for senior management.
3.4.16 Principle 16: Adoption of Technology and Skills

The Board recognizes that to survive and thrive it has to ensure that the
technology, skills and systems used in the corporation are adequate to run
the corporation and that the corporation constantly reviews and adopts the
same in order to remain competitive.
3.4.17 Principle 17: Management of Corporate Risk

The Board shall identify key risk areas and key performance indicators of
the corporation’s business and constantly monitor these factors.
16
3.4.18 Principle 18: Corporate Culture

The Board shall define, promote and protect the corporate ethos, ethics and
beliefs on which the corporation premises its policies, actions and
behaviour in its relationships with all who deal with it.
3.4.19 Principle 19: Social and Environmental Responsibility

The Board shall recognize that it is in the enlightened self-interest of the
corporation to operate within the mandate entrusted to it by society and
shoulder its social responsibility. For this reason, the Corporation will not
fulfill its social responsibility by short-changing beneficiaries or customers,
exploiting its labour, polluting the environment, failing to conserve
resources, neglecting the needs of the local community, evading taxation
or engaging in other anti-social practices.
3.4.20 Principle 20: Recognition and Utilization of Professional Skills and

Competencies
The Board shall recognize and encourage professional development and,
both collectively and individually, have the right to consult the
corporation’s professional advisers and, where necessary, seek
independent professional advice at the corporation’s expense in the
furtherance of their duties as directors. [This is in addition to and not a
substitute to directors’ personal duty to acquire competence, training and
information that would help them make informed, independent and astute
decisions on issues relevant to the corporation.]
3.4.21 Principle 21: Recognition and Protection of Members’ Rights and

Obligations
Members of the Corporation have a right to receive any information that
would materially affect their membership, to participate in any meeting of
members and to participate in the election of directors and be facilitated to
fully participate in all other resolutions of interest to them as members.
4.0 CHALLENGES FACING THE CONSTRUCTION SECTOR IN TANZANIA
The construction sector in Tanzania has significant challenges as highlighted

below:
4.1 Lack of equipment – most companies do not have adequate equipment for
the purposes of performing their construction works.
4.2 Lack of capital – for contractors to be able to undertake most construction
works, they need equipment and capital. Most of them lack capital to
acquire the needed equipment which are very expensive.
4.3 Poor and lack of appreciation of financial record keeping – most of the
companies in the construction industry have poor financial management
and record keeping of their financial records.
17
4.4 Reluctance to use professional accountants in managing the companies –

very few construction companies use the services of accountants and
financial experts in their day to day operations.
4.5 Limited access to banking sector to access working capital – most

construction companies do not have access to banking services for their
working capital requirements.
4.6 Rigorous procurement procedures – almost all construction works involve
tendering. Since most companies do not have competences in tendering,
they end up under-pricing their quotations and sometimes operate at loss or
they are forced to compromise quality.
5.0 MANAGING THE ABOVE CHALLENGES
In order to minimize the effects of the above shortcomings, the government and
financial community has developed various means of addressing the
construction industry challenges. These include:
5.1 Leasing – this is specifically to avail the opportunity to the construction
industry the ability to acquire heavy duty construction equipment to the
sector which will minimise financial requirements for construction
companies needed to acquire the assets. More discussion on Leasing will be
made by the International Finance Corporation (IFC).
5.2 Additional means of enhancing capital – most of the construction companies

are registered as private companies. Their shareholding structure involved
mainly two to three shareholders who are also the executive directors of
these companies. The limitation of the shareholding prohibits the capital
expansion initiatives which may be needed as the business grows. The
limitations arise from the following facts:
5.2.1 The numbers of shareholders owning these companies have
limited capital to invest additional funds in the company. If
external shareholding was to be allowed, additional capital could
have been raised relatively easily. New shareholders will also
bring new ideas in the company and enhance the modernisation of
the company and they will facilitate opening up of the company to
even more shareholders through public ownership. The stock
exchanges will therefore be an opportunity for these companies to
raise additional capital if they meet the listing requirements
attached as Appendix 2. Contractors will have the possibility of
using either shares or bonds to raise the needed capital.
5.2.2 Lack of good corporate governance structure – investors will only
commit their funds in companies whose governance structures are
well defined and they are working. Improving the manner in
which these companies are run will provide an avenue for
investors to join the company. This is more so in case the company
wants to invite a foreign investor. The challenges can be met by
18
adopting the formal organisation structures which include a

proper separation between shareholders, the board and
management of these companies.
5.3 Meeting the challenge of financial reporting – contractors will be forced to

appoint financial experts to assist them in the management of their
companies. This can be either on full time basis (for those companies with
high turnover (estimated at TZS 5 bn and above per annum5) or retain them
to assist in financial record keeping, preparation of financial statements and
compilation of tax matters. There are simple accounting packages which can
assist contractors in their financial record keeping problems at reasonable
costs.
5.4 Meeting the procurement hurdles – procurement has become more complex
as the value of the assignments increase. It is also more complex as a result
of increased competition, the amount of money involved in the sector and
the need to obtain value for money in all construction activities. Contractors
will be required to maintain standards in their work. This calls for proper
costing of the assignments during procurement stage as well as continuous
review of costs in order to operate at a profit. Contractors who will survive
in the future will be those who are aware of the demands of the procurement
laws and they can price their services appropriately. This is even more so as
the procuring entities face the challenges posed by the five pillars of good
procurement system. Procuring entities are expected to adhere to
procurement laws. Competitive bidding places more demands to contractors
in executing their assignments to give value for money to their clients. The
process also has a lot of procedures and documentations needed to be filled
as well as rigorous evaluation process. Contractors with the requisite skills
are the ones who will survive the competition without compromising the
quality of the assignment as well as not being involved in corrupt practices.
5.5 Establishing a good banking relationship – this is meant to support

contractors with working capital requirements as well and bid performance
bonds which most of the assignment requires the contractor to put in place
before the contract is awarded. This is one of the constraints faced by many
contractors, especially those in lower grades (class 4 and above). The practice
is to have performance bond equivalent of 10% of the value of the contract.
This amount will be significant as the value of the contract increases. Good
banking relationship will also assist in the provision of working capital and
bridging the finance gap existing in the course of the execution of contracts
by contractors.
5 These are the views of the author.
19
6.0 ROLE OF DIFFERENT PLAYERS

As mentioned earlier, the construction industry plays a key role in the economy.
Its contribution to GDP is 9.5%6. The number and value of registered projects
with CRB for 2007 amounted to 2,084 and TZS 572.49 billion respectively. This is
by all standards huge resources which went to the construction industry. Given
the significant amount involved. This calls for the attention of all players to
ensure that the sector contributes further to the economic growth of the country.
Each player has to contribute to the success of the sector as follows:
6.1 The Government – the Government through CRB plays a role of facilitating
contractors through research, development of industry standards and
regulation of conduct by members. A gathering such as this one is one such
initiatives by the Government to ensure high standards in the industry and
effective contribution to the economy. The decision by CRB to establish
Contractors Assistance Fund (CAF) and other initiatives to assist local
contractors are the roles played by the Government to facilitate increased
contribution by local contractors to the national development. The CAF
started with TZS 300 million and it is currently valued at TZS 1.3 billion. The
Government has also facilitated the passing of Financial Leasing Act, 2008
which will contribute to the reduction of equipment shortages experienced
by contractors in Tanzania.
6.2 Contractors – these are the key players in the industry. Their role is to
address the shortcomings addressed in section 4 above for them to have an
effective contribution to the economy. Contractors should think out of the
box to exploit all the avenues needed to face the above challenges. They
need to improve their governance structures, enhance accountability and
transparency as well as financial management skills for them to win the
confidence of providers of capital. Contractors should also honour their
obligations as far as CAF is concerned.
6.3 Financial institutions – these institutions may play a role of promoting the
industry once challenges identified above are addressed by contractors.
Financial institutions use depositors’ funds to do their business. The
existence of an environment which will enhance the assurance that the funds
advanced will be repaid will provide the room for financial institutions to
support the industry. Financial institutions will also provide working capital
requirements to meet emergency expenditure such as bid security, and
performance bond needed for contracts undertaken by contractors.
6Tanzania experienced modest economic growth during the year. GDP grew by 6.7% in September 2007
– 6.7%, and an average of 7% since 2001. Main contributors to this growth include Telecommunications
(19.2%); Mining (15.6%); Financial Intermediation (11.4%); Trade (9.5%); Construction (9.5%) and
Manufacturing (8.5%).
20
7.0 CONCLUSION
Contractors play a key role in the national development. Enhancing their

capacity is of paramount importance for their contribution to the national
development to be seen. There is a need to forge a partnership among all
stakeholders to achieve the desired results. These include the role played by the
Government, financial institutions, clients as well as contractors themselves.
Each has a role to play. More radical changes are needed in the ownership
structure of these companies to put them in an environment which facilitates
maximum contribution to GDP. Only will other investors and banks see the
changes in the governance structure and financial reporting that they will be
willing to invest in your companies.
References
1. Tanzania Procurement Journal Vol. 1. No 3 March 2008
2. The Contractor
3. www.usedequipment.com
4. International Financial Reporting Standards (IFRS)
5. Horngreen T, Cost Accounting
6. DSE Rules book
7. Auditors and Accountants (Registration) Act
8. Public Procurement Act, 2004 and its Regulations, 2005
9. Principles of Corporate Governance for Kenya
21
Appendix 1: Selected Construction equipment costs
1. Cat D9R US$ 327,000*

2. Volvo L70C US$ 39,000*
3. Excavator US$ 31,500*
4. Caterpillar US$ 75,000*
5. Link belt equipment US$ 79,000*
6. Grove equipment US$ 22,500*
7. Extec equipment US$ 62,500*
* price for used equipment
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Appendix 2: Summarised listing requirements

S/N CRITERIA MAIN INVESTMENT MARKET SEGMENT ENTERPRISE GROWTH MARKET SEGMENT
O.
1. Track record of existence At least three years None. But if the applicant has no track record, has to show that funds are required
to support a project which has been fully researched and costed.
2. Profitability Track record Profits after tax attributable to shareholders in at least two of the None
last three financial years.
3. Issued and paid-up capital At least TZS 500 million TZS 200 million
4. Incorporation Status Issuers must be incorporated in Tanzania as public companies or Issuers must be incorporated in Tanzania as public companies or else where the
else where the companies law is in conformity with the law of Companies law is in conformity with the law of Tanzania (for cross-listing
Tanzania for cross-listing companies. companies).
5. Net Tangible Assets At least TZS 500 million. The company shall have at least 50% of its net assets situated within Tanzania.
6. Issuer Type All companies from different economic sectors. Growth companies of all sizes.
7. Method of offering new issue of Public offering, underwriting or combination of both. Public offering, underwriting, private placement or combination of all.
shares
8. Business Operations The applicant seeking listing should have at least one identifiable Detailed profile of planned operations including the following: 5 years business
core business which is controlled by the listing company. plan and independent technical feasibility report for companies with less than 12
months of operating history.
9. Public shareholding spread At least 25% of the listed shares. In this case public shareholders At least 20% of its shares must be held by public.
will own not more than 1% for individuals and not more than 5%
for institutions.
10. Minimum number of shareholders Not less than 1000 shareholders excluding employees of the At least 100 shareholders
upon listing Issuer.
11. Period moratorium Not necessary. If the Issuer has less than three years track record, promoters to be locked-in for
up to 3 years.
12. Utilization process of proceeds Disclose the estimated amount of the proceeds from the offer (net Disclose the estimated amount of the proceeds from the offer (net of the expenses
of the expenses of the offer) broken down into each principal of the offer) broken down into each principal intended use. If the anticipated
intended use. If the anticipated proceeds will not be sufficient to proceeds will not be sufficient to fund all of the intended uses, disclose the
fund all of the intended uses, disclose the amount and sources of amount and sources of other funds needed. Where specific uses are not known for
other funds needed. Where specific uses are not known for any any portion of the proceeds, disclose the general uses for which the proceeds are
portion of the proceeds, disclose the general uses for which the proposed to be applied. State the minimum amount which, in the reasonable
proceeds are proposed to be applied. State the minimum amount opinion of the directors of the relevant corporation, must be raised by the offer.
which, in the reasonable opinion of the directors of the relevant
corporation, must be raised by the offer.
13. Nominated Advisors Not necessary/required. Must have a Nominated Advisor at all time of listing.
14. Directors and Management Disclosure of age, qualification and relevant experiences for the Suitable senior management with relevant experience of one year prior to listing.
preceding five years.
15. Financial Statements Must be IFRS compliant and must have been audited by Must be IFRS compliant and must have been audited by authorized auditor.
authorized auditor.
16. Auditors Registered by NBAA and approved by CMSA. Registered by NBAA and approved by CMSA
17. Same Management At least 2 years before listing. No need. Emphasis should be on competence of the Management team.
18. Audit Committees Issuers must have audit committee as per CMSA guidelines on Issuers must have audit Committee as per CMSA guidelines on Corporate
Corporate Governance. Governance
23
S/N CRITERIA MAIN INVESTMENT MARKET SEGMENT ENTERPRISE GROWTH MARKET SEGMENT
O.
19. Working capital adequacy Directors of the Issuer to give opinion on adequacy of working Directors of the Issuer to give opinion on adequacy of working capital for at least
capital for at least 12 months. 12 months.
20. Certificate of comfort from relevant Issuers to obtain comfort letter from relevant regulators Issuers to obtain comfort letters from institutions regulating their operations.
regulators supervising their day to day activities.
21. Articles and Memorandum of They must provide for public issuance of securities as well They must provide for public issuance of securities as well as protection of
Association protection of minority shareholders, transferability of shares, minority shareholders, transferability of shares, borrowing powers of directors,
borrowing powers of directors, corporate governance principles. corporate governance principles.
22. Composition of board of Directors The Issuer must have at least one third of the Board members as At least one third of the board members must be non executive directors.
non executive directors.
23. Prospectus approved by a regulator Prospectus to be approved by the Authority. Prospectus to be approved by the Authority
24. Compliance to other Corporate All applicants to undertake to comply with other corporate All applicants to undertake to comply with other corporate governance principle
Governance Issues governance principle as per CMSA guidance as improved from as per CMSA guidelines for corporate governance as improved from time to time.
time to time.
25. Clear dividend policy The Issuer to disclose clear dividend policy. Issuer to disclose clear dividend policy.
26. Publication in the Press Applicants to prepare abridged Prospectuses. Applicants to prepare Abridged Prospectuses.
Source: DSE Handbook
24
Financing Solutions to Contracting Industry Challenges – Felix Kibodya - Tanzania Bankers Association
Financing Solutions to Contracting Industry Challenges
Felix Kibodya – Tanzania Bankers Association

Advocate Chairman, Tanzania Bankers Association In-house Legal Counsel
1.0 Background:
The primary function of banks the world over is to play an intermediation

role i.e., to collect funds (through borrowing) from surplus households and
invest the funds (through lending among others) to deficit units. In this way,
banks are considered the harbinger or buttress of economic development of
any country.
Tanzania embarked on fundamental transformation of its economy almost

two decades ago. Not surprising, top on the agenda in the economic reforms
was the need to overhaul the financial system. In view of pivotal role it plays
in the country’s economy, the banking sector was the first to undergo reforms.
Implementation of the reforms followed recommendations of the Presidential
Commission on the need to modernize the banking sector dubbed the
“Nyirabu Commission”. The Commission recommended inter alia enactment
of modern legislation to regulate banking business in a liberalized market.
Consequently, the Banking and Financial Institutions Act, 1991 was enacted.
In 1995 the bank of Tanzania Act was enacted to replace a previous legislation
that was enacted in 1965. After almost 15 years of experimenting, the two
legislations were repealed and replaced in 2006.
The two laws referred to above are supplemented by a number of regulations

the most important ones in this context are the Concentration of Credit and
Other Exposure Limits as well as the Management of Risk Assets. On this
score, all banks are duty bound to comply with the dictates of the two laws
and regulations as well as directives given by the Bank of Tanzania – the
regulator. Failure to comply attracts penalty such as fine, disqualification of
directors and officers involved and in extreme situation, withdrawal of the
banking license.
Following the liberalization of the banking sector in 1991, the country has
witnessed a number of both local and foreign banks being established in the
country. To-date, there are 33 banks operating in the country. This figure
does not compare favourably with neighbouring countries such as Kenya (78)
and Uganda (46). On the upside, Tanzania has the lowest incidences of bank
failure in the region (only three) since 1991 which implies that the banking
sector in Tanzania has matured and is resilient to shocks.
25
2.0 Access to Finance:
One of the challenges facing the Tanzania banking sector is the perennial
complaint about the inaccessibility of financial products to the productive
sector. Recent statistics released by a credible institution indicate that only 6%
of Tanzanians (both retail and corporate) have bank accounts. On the other
hand credit is available to only 3% of the population! As a result of this
financing gap, businesses including contractors have resorted to other but
expensive financing sources.
3.0 Relationship between Banks and Contractors:
Contractors play crucial role in the economic development of a country. In

order for a contractor to successfully perform this role, he needs to create,
nurture and maintain close relationship with his banker. It is very
unfortunate that this is not always the case with developing economies like
Tanzania.
It is the objective of this presentation to identify (from the bankers’

perspective) some of the challenges facing contractors in accessing finance. It
is our view that after identifying the challenges we will then attempt to reflect
on appropriate financial solutions.
As mentioned earlier, we are all in agreement as to the importance of

contractors in the economic development of a country. For instance, the
construction boom we are currently witnessing is clear indication of the
emergence of a middle class in our society. This class has both the appetite for
and propensity to invest for the future. In GDP terms this group has
significant contribution. Moreover, the mini-revolution that is happening in
the industrial sector is another clear indication of the evolution of the
contractors’ business.
4.0 Current Products offered by Banks:
At the moment, banks in Tanzania offer very limited range of financial

products to contractors. The following are some of the vanilla type of
products:
• Bid bond
• Performance Guarantee
• Advance payment guarantee
• Over draft facility
• Term loan
Bid bond usually is applied by a contractor during the process of submitting
bid documents. One of the common experiences in the banking industry is
that such request is brought “under a certificate of emergency” i.e., at the
26
latest hour. This problem is prevalent in all classes of contractors and bankers
are yet to discover the reason!
Performance bond is a bank guarantee given to a third party (employer of the
contractor) that the contractor (customer of the bank) will complete a
specified contract and will fulfil its terms.
Advance payment bond refers to a guarantee given by a bank to a third party
securing advance payment made by the said third party (contractor and
customer of the bank).
Over draft facility refers to credit facility granted to a contractor (customer of
the bank) through a cheque account in which the account is allowed to go into
debit to a specified limit (over draft limit). Interest is charged daily on the
debit amount. This facility is suitable for short-term or working capital
requirement. It is cheaper than term-loan because in the latter, interest
accrues on the entire loan amount.
Term Loan is credit granted to a customer on condition that it is repaid in
instalments or all at once on a given date at an agreed rate of interest. Tem
loans are used to finance capital investment or item of a long-term nature.
As it can be noted from the definition of the typical financial products

available to contractors, relationship is key. Bank-customer contract is
founded on a relationship which in turn creates “track record”. In sum, a
banker needs both comfort and audit trail of its customer’s performance and
such comfort is reflected in the customer’s account turnover. The turn over is
evidenced by bank statements. It is for this reason banker’s are hesitant to
advance credit or any form of accommodation to a customer without or with
very little account history with that bank.
In the same token, bank-customer relationship referred to above will be

harmed if a customer decides to maintain relationship with more than one
bank. “Split banking” is preferred by customers who desire to “hide” their
financial requirements. As a result, the primary bank ends up not having a
complete picture of the financial performance of its customer. Disclosure of
financial requirement is advantageous to the customer in that it enables the
bank to leverage its costs by taking into account additional services it will
give to a customer such as LC fees, guarantee charges etc. On the other hand,
by preferring only one bank, the bank acting as financial adviser to the
customer is in a better position to determine both the type and quantum of
financial requirement of its customer. For instance, a customer who seeks to
acquire plant and machinery may be advised to do a finance lease or term
loan and not an over draft. Like wise, a customer may be either under or over
funded or worse still wrongly funded (e.g., by a loan instead of equity).
One area is still wanting in Tanzania is property finance through mortgage

facility. The Land Act was amended in 2004 as a result of outcry from the
banking industry that the law was an impediment to instead of creating an
enabling environment in facilitating property development especially home
ownership. Notably, contractors in their capacity as property developers did
27
very little to voice their concern. Perhaps the silence is attributed to the fact
that contractors were not seen as crucial stakeholders in property
development in Tanzania.
In a developed economy, property developers maintain very close business

tie with banks. Banks play dual roles i.e., front office marketing/sales point
and financier. Property developer (who in some cases is the contractor) holds
ownership of the property. This synergy is yet to be developed in Tanzania
due to a number of reasons including poor land delivery mechanism,
inadequate legal system and lack of suitable funding base (long-term finance).
5.0 Contractors’ Precarious Position:

Most contractors who approach banks for financing suffer from two strategic
weaknesses. The first one is their inability to properly evaluate both the
financial and management capacity of the employer. On the other hand,
banks are renowned for the “thorough” or stringent procedure they use in
evaluating a loan applicant. The same is not the case with contractors when
applying for a job. As a result, once the contractor had secured a given
project say with a local authority, he approaches a bank for financing.
Inevitably, the bank will request for “financials” of the employer say, of the
past three years. The second strategic weakness flows from the first. The
contractor finds himself running from one financier to another ostensibly to
attract financing within limited time oblivious of the banking requirements
for important information. As a result of this rush, the contractor ends up
missing the financing or accessing it very late thereby making him vulnerable
to penalties.
Associated to the rushing for time is the problem of contractors submitting

inadequate and sometime misleading information to his bankers. For, we
should remember that despite the urgency in sourcing finance, banks as risk
managers must make an informed credit decision. They cannot make that
decision if information sought is not forthcoming or misleading information is
given. Lack of proper information has resulted into delays by banks in
arriving at a proper credit decision. As a result, banks are blamed for delaying
granting credit without examining the reasons causing the delay.
6.0 Lack of Capacity:

A quick survey of significant projects executed by contractors in Tanzania
shows that major projects are awarded to foreign contractors. We are aware
of the outcry by local contractors that they are not accorded with adequate
attention by empowering them through “constructive preference”. It must be
said that big contractors have easy access to finance due to a number of
factors such as management competence, adequate capital goods which act as
security and favourable bank track record. For instance, a commercial bank
(whose funding is mainly short term) is likely to favourably consider a
28
financing request by a contractor Class 1 of a reputable international brand

instead of a request by a contractor of similar class but who lack the three
ingredients mentioned above.
The inherent weak position of local contractors is aggravated by competition

(including undercutting) among themselves. Internal competition works to
the benefit of giant contractors and who are foreign owned entities. It is our
view that small and medium size contractors should always consider either
merging or forming consortium that is capable of competing with the giant.
The CRB should consider this aspect as one of critical importance if intends to
lift the small contractor from the precarious position referred to above.
Lack of capacity should also be viewed in terms of the equity of the company.
Construction companies the world over are funded both by shareholders
funds and loan capital. As such, the company whose funding is
predominantly bank finance is likely to become financially stressed because
loan finance is costly compared to equity. The challenge under these
circumstances is how a company can attract equity instead of bank finance?
This is a one million dollar question with no easy answers. However suffice
to say that there are known methods of raising equity through both private
and public means.
7.0 Management Quality:

Management is the lifeline of any business. Experience in the banking
industry shows that businesses managed by professionals of the industry
involved are prone to troubles including inability to grow. For instance, not
all engineers are good in human resources or financial management. Yet
small and medium size contractors are managed either as family business or
as one-man show. When a company managed in this form approaches a bank
for financing, the first question to be asked is the organisation structure of the
company together with succession plan. The rationale behind this request by
banks is for the purpose of determining the extent to which the company has
underwritten the risk of management incompetence and those associated with
one man’s show such as sickness, death or intense family squabbles. It is
important therefore that construction companies adhere to sound
management principles and practices.
8.0 Security:
As was mentioned at the beginning, banking business is governed by the
Banking and Financial Institutions Act, 2006, Bank of Tanzania Act, 2006 and
regulations made thereunder. One of the regulatory requirements is that
banks must demand security to cover for their advances or commitments
(e.g., guarantees). The prudential threshold is that security must have value
that cover 125% of the exposure. The 25% is intended to cater for interest that
will accrue and legal costs. The regulations further provide for clean lending
29
(up to 5% of the core capital) and partially secured lending (up to 10% of the
core capital). There is also an aggregate ceiling to unsecured and partially
secured facilities. Security is required as part of risk management. In other
words, banks do not lend against security but on the soundness of the
business to repay the loan i.e., cash flow lending. Security/collateral merely
is a fall back position. Again, realization of security being a costly legal
process is not favoured by bankers.
A number of contractors seeking financial accommodation from banks find

themselves disqualified due to lack of or inadequate collateral. As a result,
collateral requirement has now become one of the complaints levelled against
banks. The typical security offered by contractors is landed property and
plant and machinery. Landed property is charged through the creation of a
mortgage whilst plant and machinery is charged by a debenture or chattel
mortgage.
Demand for security to the small and medium size contractors is more
pronounced than say to a first class international contractor. Whether a
company should be granted unsecured or partially secured loan (even the
type of collateral to be accepted) will depend of the financial and reputation
standing of the company. For instance, a first class international contractor
would view reputation damage as a very serious matter. Here it is relevant to
mention that there are a number of cases where banks found themselves
holding forged/duplicate registration cards of trucks and earth moving
machinery owned by local contractors. Typically, it is common to find that
the equipment involved has been offered as security to more than one bank.
The underlying point here is that reputation damage is not held in high
esteem by certain local contractors.
Integrity is the hallmark of trust bankers have to their borrowing clients.

Unfortunately, once clouds of shadow start gathering, distasteful behaviour
of some contractors has, more or less, pushed the cost of credit to the roof
leaving behind a feeling that bankers are administering “collective
punishment”. For it must be remembered that access to finance is dependent
on two drivers namely; cost of funds and risk premium. The risk attached to
the collateral play a very important factor in restricting credit facility to
contractors. The risk is further aggravated by costly and inefficient court
system.
9.0 Finance Leasing:

Absence of finance leasing arrangement /product is one of the severe
limitations for the acquisition of capital assets by contractors. The recently
passed finance leasing bill to be accompanied by appropriate tax breaks will
no doubt alleviate the problem of contractors being poorly equipped. In the
absence of finance lease, contractors have resorted to expensive term finance
and which had the effect of overloading company’s balance sheets whilst
30
creating a strain in their cash flows. This however is a subject that is being
dealt with by another speaker to this conference.
10.0 What are the appropriate financing solutions?

The answer is not straightforward. Financial solutions vary from one person
to another depending on financial requirement of each person. In general
however, contractors require a combination of financial products. For
instance, overdraft is imperative when working capital is required. On the
other hand, finance leasing, equity or term loan or a combination of the two
appears to be the most suitable financial product where acquisition of capital
goods is required.
The most important factor to be borne in mind is the need by the contractor to
fulfill all the conditions that would enable him to access the financing.
Conversely, the contractor should be able to determine the type of finance
that his business requires at a particular time and this demands him to
establish a candid relationship with his banker in order to enable the later to
arrive at an informed credit decision. Contractors should consider banks as
their right hand men and not impediment to the success of their business.
Finally, contractors should recognize that they are now operating in a very
different environment – a competitive environment where no body owes
anybody a living. To survive in a competitive market, contractors must
properly equip themselves financially, organization-wise and in capacity
terms so that they can deliver to the satisfaction of the client. A contractor
who is always in default in his projects is likely to default in the obligations to
his banker so is the contractor who is always applying for extension of time or
one who is changing his banker the way we change our clothes.
31
SME Credit Guarantee Scheme and its Potential to the Contracting Industry – Bank of Tanzania
SME Credit Guarantee Scheme and its Potential to the

Contracting Industry
Bank of Tanzania
CREDIT GUARANTEE
SCHEME
Small and Medium Enterprise Credit Guarantee Scheme (SME – CGS)
SME CREDIT GUARANTEE SCHEME AND ITS POTENTIAL

TO THE CONTRACTING INDUSTRY
Bank of Tanzania
32
FINANCIAL SECTOR REFORMS

The government is implementing financial sector reforms which aim at to optimizing
financial sector contribution to investment and growth of the economy
1st Generation Reforms – 1993
2nd Generation Reforms - 2005
OUTCOMES
Enactment of the Banking and Financial Institutions Act of 1991.
Liberalization of the banking sector from 2 commercial banks to 36 in 2008
Rapid growth in lending to the private sector from TZS 24 billion for the year 1990 to
TZS 1,656.8 billion in 2005/06
Amendments of BOT Act 1995 and 2006 which had objective to strengthening the
monetary policy and banking supervision roles of BOT .
The enactment of the Foreign Exchange Act of 1992 that allowed individuals and
companies to hold foreign currency.
Liberalisation of the insurance sector which led to a surge in the number of operating
insurance companies from 2 state owned companies to 11 private owned by June 2007.
Enactment of the Capital Markets and Securities Act of 1994. led to the establishment of
the Dar es Salaam Stock Exchange – Currently there are 10 listed companies
REFORMS Contd…….
Introduction of the Tanzania Interbank Settlement System (TISS)
that modernize the payment system and facilitating final and
timely transfer and settlement of inter-bank Settlement funds.
Reviewed Land Act, No 4/1999 as well as Village Act No.5 of 1999

which encourage the increase property based lending by banks
and financial institutions. ( Mortgage Lending)
33
Review of the Financial Sector
During 2003/04 a review observed that, the Tanzania financial

system plays a limited role in the economy and its current
depth and efficiency falls short of what is needed to support
economic growth: The following gaps were identified;
Lack of Long Term Development Finance (LTDF).
The two major sectors; Agriculture and SME are still
lagging.
Legal and judicial reforms to remove the main obstacles to
lending.
Enhancing access to financial services
Practice to open special windows for SMEs.
Credit Reference Bureau
Other Structural challenges
Nascent capital market

Lending rates that allow SME borrowing
Poor outreach to rural areas
Judicial reforms lagging behind financial reforms
Strong partnership between banks and second tier financial
intermediaries lacking.
34
Review of the reforms gaps contd…
Access to finance by categories

R e c e ivin g L o a n
O p e ra t in g B a n k
s e rvic e s
ac c ount
2%
9%
N one of the
a b o ve
54%
R e c e ivin g
s e rvic e s b u t n o
lo a n
35%
FINNSCOPE SURVEY 2007
Second Generation Financial Sector Reforms
2nd Generation Financial Sector Reforms (SGFSR) launched in 2004

identified some areas that need further reforms while consolidating the
gains made during the first generation reforms.
SGRS consist of the followiong components;
Legal and Judicial reforms,
Monetary Policy,
Banking Sector,
Financial Markets,
Pension Sector,
Insurance Sector,
Micro and rural financing,
Land and Employment.
35
2nd Generation Contd……

The 2nd Generation reforms put a special emphasis on LTDF as it is
instrumental in facilitating the investment process and in accelerating
economic growth. The delivery mechanism being contemplated under
the reforms include;
Mortgage financing by
Improving legal framework through amendments of the Land
Act and
Introduction of the Condominium Law
Enactment of Leasing Law
Strengthening of the existing Credit Guarantee Schemes
Export Credit Guarantee Scheme (ECGS) and
SME- credit Guarantee Scheme (SME-CGS).
Establishing the Development Finance Guarantee Facility (DFGF)
Establishment of the Long Term Finance Facility
Transformation of TIB into Development Financial Institutions
CREDIT GUARANTEE SCHEME
Global view ;
Government direct /directed lending
programmes are in eclipse
It is clear that, market failure exists for SME
lending
There are 2000 schemes in more than 100
countries ( almost all OECD countries
Almost all offer partial credit guarantee with risk
sharing ranging from 50% to 80%
A well designed and well targeted policy
intervention might improve welfare
36
CGS OPERATIONS
1 Funding Govt/Donor/
Private
2 Management Govt/Private
3 Credit Private
Assessment
4 Recovery Govt/Private
Types of Guarantee Schemes
Public Guarantee Schemes

Private Operated Schemes
Mutual Guarantee Institutions (MGI)
Independent organisations of small
entrepreneurs willing to share their debt risk by
granting collective guarantees to loans issued to
their members.
Guarantee is usually backed by money deposit
with lending bank as a general pledge/collateral
against guaranteed loans
37
OBJECTIVES OF THE GUARANTEE SCHEME
– Additionality in bank lending and fostering

economic growth through increased access to
credit
– Additionality means extra or additional loan

that could be made because of guarantee.
Apart from extra loans additionality can take a
variety of forms; getting loans at better
interest rates, longer terms or by getting larger
loans than they would otherwise have obtained
Government Strategies
The government in its efforts to create a conducive

environment for SMEs to access finance has
established Export Credit Guarantee Scheme ECGS
(2002), SME-CGS (2005) and DFGF (During
2008/09)
Managed by BOT under Agency Agreement on
transitory arrangement pending establishment of
an independent institution
The Scheme issues credit guarantees to financial
institutions for on lending to SMEs.
The objective is to cover shortfalls in the collateral
thereby facilitating granting of credits to SMEs.
38
Eligibility Requirement under

SME-CGS
The Scheme will offer guarantee coverage only for
loans with durations between 1 to 5 years.
The maximum guarantee amount is TZS 250,000,000
being 50% of the maximum amount of eligible loan of
TZS 500,000,000.
The Scheme will guarantee both investment and
working capital loans. However the guarantee for
working capital covers productive sector such as
agriculture, manufacturing, construction and mining
but excludes retailers and traders
Eligibility under SME-CGS

Be a formally registered business and majority
owned by Tanzanian(s)
Be ready to offer any enforceable collateral

including personal guarantee.
The Scheme shall not prescribe methodology to

evaluate the credit worthiness of the borrower
and/or the project and the lending decision will
remain with PFI.
39
SME-CGS Performance
Description Small and Medium Enterprises-Credit
Guarantee Scheme (SME-CGS)
Objective To promote SME by facilitating access to
finance through credit guarantee
Commencement Date September 2005
Capital TZS 2.0 billion of which TZS 500 million has

been paid up
Maximum Guarantee Cover 50%
Value of guaranteed loans TZS 6,280,920,000.00
Value of guarantee issued TZS 2,998,163,876.00
Extent of Guarantee (Average) 49.1%
GUARANTEE ISSUED
PFI No of Guarantee Issued (50% Percentage
loans of approved loan (TZS
millions)
TIB 4 574,459,876.00 19.16
TWIGA 8 510, 480,000.00 17.03
AZANIA 5 445,000,000.00 14.84
FBME 13 434,250,000.00 14.48
CRDB 2 350,000,000.00 11.67
BOA BANK 5 289,250,000.00 9.65
EXIM 3 192,254,000 6.41
NBC 3 128,970,000 4.3
CF UNION 2 32,500,000.00 1.08
STANCHART 1 32,000,000.00 1.07
TPB 1 9,000,000.00 0.30
TOTAL 48 2,998,163,876.00 100
40
Sector Distribution of the Guarantee issued
%
Transportation Service sector
0% 2% Agriculture
Manufacturing 16%
28%
Communication
Tourism 8%
11%
Construction
Health
Fishing Education 18%
1%
1% 15%
SME-CGS Performance contd….

Guaranteed Loan No of Amount in TZS Percentage
Category Applications (millions)
TZS (MILLIONS)
5 - 100 27 1,615,990,000 25.73
101 - 200 14 2,129,500,000 33.90
201 - 500 7 2,535,430,000 40.37
TOTAL 48 6,280,920,000 100
Guaranteed Loan Maturity
1 year 9 1,157,258,000 18.42
2 year 11 879,000,000 13.04
3 year 16 1,301,690,000 20.72
4 year 2 355,000,000, 5.16
5 year 10 2,647,972,000 42.16
TOTAL 48 6,280,920,000 100
41
Constraints facing SME-CGS
Low capital base

SME Entrepreneurship
Bankable Proposals
PFI preparedness
Product awareness/appreciation
Product specification/differentiation
Collateral
Capacity building
- SME financial literacy
- PFIs Credit officers
Business Development Services
Constraints facing
Construction industry
Lack of a designed product that cater to the

needs of PFI and Guarantor
Nascent leasing finance market
Reliance by commercial banks on traditional
collaterals. (contractors contracts could also
be used as collaterals)
Bank lending strategies which do not meet
SME requirements.
Size of contracts relatively higher than SME-
CGS capacity. (Max loan TZS 500 million)
42
How to overcome constraints

faced by Construction Industry
Develop a Mutual Guarantee Fund to facilitate capital formation and

loan access .
Act as a facilitator in the bank-borrower relationship
Negotiate interest rate reduction
Value of MGF derives;
Access to inside information of its member
Close monitoring of the firm’s business conditions after the
loan disbursement.
Mutual responsibility of all member firms
Design a product which will be accepted by both PFIs and the

Guarantor.
Recommendations
1. The industry to initiate the establishment of

mutual guarantee fund.
2. To design a product that will cater various need in

the construction industry and also accepted by
both PFIs and guarantor.
43
ASANTENI
44
Finance Leasing: A Tool for Financing & Developing the Tanzanian Private Enterprise – Moyo Violet Ndonde – IFC/ SECO
Finance Leasing: A Tool for Financing and Developing the

Tanzanian Private Enterprise
Moyo Violet Ndonde

Operations Officer – SECO – IFC Leasing Program
Financial Leasing:
A Tool for Financing and Developing the Tanzanian Private
Enterprise
By Moyo Violet Ndonde, Operations Officer, SECO - IFC Leasing

Program
45
The Leasing Process
Definition
• Financing of all types of equipment.

• In Tanzania the legal framework for leasing is governed by English common law, contract
and other written law affecting the lease transaction.
• IFC has proposed a law on financial leasing.
46
Financial Leasing Penetration in Tanzania
Leased Equipment under Finance lease 2005-06
Construc tion
Equipment
20% Produc tion
Equipment
3%
Tr ansport
Equipment
77%
Financial Leasing Market Growth
Le asing Market Growth

$42,672
49,000
42,000
$29,455
000 US$ 35,000
$21,444
28,000
21,000
14,000
7,000
-
2004 2005 2006
47
Principles of A Financial Leasing Agreement
It is a rental contract, in which the customer chooses the equipment it wishes to purchase and
the related supplier of the equipment. The leasing company purchases the equipment on behalf
of the customer (lessee) and puts it at his disposal under an irrevocable contract for lease
whereby the rent and period of lease is set in advance.
The leasing company commits to lease the equipment to the customer under the terms of such
rental period for an amount that is agreed in advance (taking into account the residual value of
the equipment) (and usually there is a unilateral commitment to sell the equipment) if the
customer/lessee wishes to purchase the equipment.
Such sale takes place only in case the customer would have accomplished all his obligations
deriving from the contract (reimbursement payments (rents i.e., amortization) in observance
of the of lease payment dates.
What Type of Equipment?
Transportation equipment : pick up, Car, Tractor truck ….

• Equipment for Buildings and Public Works : Loader, Grader, Tracked excavator, Crane….
• Industrial Equipment : Production machine (plant and machinery), equipment …
• Medical equipment :Scanner, Ultrasound scanner..
• Computer and Office Automation Equipment : PC, server, offices…
48
Who are the target customers for leasing companies?
• SMEs
• Professional people
• Industrialists
• Traders
Such customers have to be already working.
Renting period
• Transportation equipment: 36 months (3 years)

• Equipment for Buildings and Public Works : 36 - 48 months (3 - 4 years)
• Industrial Equipment :36- 60 months ( 3-5 years)
• Medical Equipment : 36-48 months (3-4 years)
• Computer and Office Automation Equipment :
12 to 24 months.
49
Key steps of a Financial Leasing operation
• The Lessee chooses the equipment he needs and negotiates the price and purchase
modalities with his Supplier as well as the delivery modalities and the required warranties.
• The lessor studies the request made by the customer/Lessee. The customer/Lessee should
submit an exhaustive file in accordance with the needs expressed by the Lessor e.g. current
cashflows indicating credit worthiness etc.
• In case of approval by the Lessor, a leasing contract is submitted to the client for signing,
following which the purchase order is handed to the supplier for invoicing, payment, and
delivery of the equipment.
10
Key Steps of a Leasing Operation
The Lessor raises an invoice for the rents that are agreed in the financial leasing agreement.
The lessee is called upon to pay the invoiced rent on a monthly basis incorporating all taxes
payable for the equipment and insurance charges.
Upon expiry of the total period of the leasing agreement (i.e., repayment schedule of the
credit), the customer becomes the owner of the equipment if he wishes. That is after
amortizaion - payment of the residual value. Thus he moves from a Lessee status to an
owner status.
11
50
Let’s Recap
What ?
Who ?
How ?
How much ?
12
What?
Financing for:
• Equipment for Buildings and Public Works : Loader, Grader, Tracked excavator, Crane ….
• Industrial Equipment : Production machine, equipment …
• Medical equipment: Scanner, Ultrasound scanner..
• Transportation equipment: Pick up, Road tractor truck, Crew cab…..
• Computer and IT Equipment :
PC, server, offices
13
51
Who?
SMEs.
Professionals.
Industrialists.
Traders.
14
How?
The Customer chooses the equipment from the Supplier.

The leasing company finances the purchase by paying the Supplier
The supplier delivers the equipment to the lessee.
The customer pays rents and becomes owner at the end of the period if he wishes
(repayment installment plan).
15
52
How Much?
The cost depends on

9 The rental period:
• 12 months
• 24 months
• 36 months
• 48 months
Or more
9 And the participation of the customer in financing: First high rent (down payment).
16
How Much?
• The financed amount,

• The financed equipment
• The residual value.
• Example :
• Amount : 118,000 shillings
• Period : 36 months
• Linear rents
• 36 rents : 4,046 shillings
• RV : 1%
17
53
Why opt for Financial Leasing?
• Rapidity :
¾ Decision
¾ Setting up of the Credit
¾ Payment Of Supplier
• Flexibility :
¾ Simplicity -
¾ No particular guarantee/security/collateral
¾ Recovery of VAT on rents through capitalization of VAT in the rentals.

• Depreciation per the Tax policy for the equipment.
18
Presentation of a financing case:
Our friend Jonass is an SME who wants to purchase a new loader. He goes and meets his
Supplier i.e. Mantrac Tanzania Ltd., and wants to know whether the latter can grant him
credit or whether Jonass has to see his bank or, better, he adopts this new formula: leasing
By opting for this new financing alternative:
Jonass is going to get new equipment every 3 or 4 years. This reduces the number of days
for maintenance and repair, which allows him to improve his turnover and to better respond
to the needs of his customers.
19
54
Financing case Cont/d
• Jonass :
• has thus a new loader.
• PAYS for his pick up over 3/4 years and depreciates it over the depreciation period per
Tax depreciation policy.
• Once he becomes the owner, he may sell his equipment, which brings him an amount, from
which he may make an important down payment for his next pick up, which allows him to
reduce the rent charge as he wishes, and to improve his working capital by means of the
balance.
20
Financing case
• Jonass no longer needs to wait until he has saved the whole amount to purchase his
equipment.
• Jonass will be able to increase his equipment and obtain more contracts.
• Whereas His Supplier :
• is going to be paid cash.
• will be able to sell in minimum one equipment every 3 - 4 years.
• will be able to win the loyalty of the customer (Jonass).
• Will no longer wait until his customer has saved the amount to purchase an equipment but
may, at the price of one loader, sell him three ones (down payment + leasing).
21
55
Who & What Can Be Financed?
Who :
Any working company or person who has a registered trade (Tax identification number etc).
What:
Truck, Pick-up, loader, cranes
Facility Equipment, Computer Equipment…
22
How & Who Can be Financed?
How?
• Simplicity/ less documentation.

• No specific guarantee.
Who?
¾ Customer with a good reputation
¾ Justified need.
¾ No start ups.
¾ He already has other vehicles or equipment
23
56
How Much?
¾ How much
This depends on:
• The down payment.
• The value of the asset.
• The leasing period.
24
Frequently Asked Questions in Financial Leasing
• What is the Rate?

• There is no rate: it is a profit margin
• What is the minimum down payment?
this depends on the customer’s payment capacity (cash flow) which determines the rent that
the customer/Lessee can pay and thus the down payment provided.
• What is the maximum period?
The lease period depends on the equipment financed, its age and, last, on the real monthly
cash flow of the customer. It is a period that may be negotiated between the lessor and the
lessee.
25
57
Frequently Asked Questions
Leasing is a financial product which managed to develop everywhere in the world, and I
think that Tanzania may only draw advantage from such experiences. Indeed, it is one of
the financing means that contributed most, in developing countries, to the development and
growth of the private sector and especially of SMEs .
26
Other Financial Lease Structures for Contractors
Back to Back Lease
One contractor company takes a financial lease/s from a bank/leasing company and
provides the equipment on hire (operational lease) to a pool of contractors. In doing so, he
collects rental from the pool of contractors and repays the bank/leasing company. The
amortization of the cost of equipment should match or exceed the rentals he collects from
the pool of contractors.
Sale and Lease Back
A Contractor that already possesses equipment sells his equipment to a leasing company
and leases the equipment from the Lessor (leasing company). This may solve his working
capital needs.
27
58
Other Structures for Leasing Companies
• Contractors form their own leasing company!
The leasing company may have to be capitalized through owners equity (CRB members) or
from loan capital from banks/financial instututions. The Contractors leasing company may
obtain guarantees from Government or other International Financial institutions.
28
Risks, Hazards, & Issues for the Financial System:
Funding sources for banks & leasing companies – Construction equipment is expensive!
Banks are public deposit taking institutions and need to match their assets and liabilities
maturities.
Banks and leasing companies may lack appropriate personnel – human resources and
asset management capabilities are required to run a leasing business. Our leasing program
teaches banks how to do so!
How do leasing companies originate leasing deals? By forming alliances with vendors,
and clients of vendors.
29
59
Risks, Hazards & Issues for the Financial System
Banks & leasing companies need adequate Credit Acceptance criteria: Criteria used
to approve lease applications by leasing companies – e.g. 3 C’s – Character, Capacity &
Collateral.
Pricing & structuring of lease deals: Banks and leasing companies need to use
innovative lease structures to suit lessee’s cash flow needs and requirements. E.g. rental
payments in arrears, in advance.
Documentation: Leasing companies need appropriate documentation to support the

lease transaction.
30
Risks, Hazards & Issues for the Financial System
Appropriate legal framework, regulation, and environment (‘external risks’ for leasing
companies): legal environment/ framework may pose financial risks & hazards,
depreciating nature of assets etc – solution may be a leasing law to allocate financial
risks!
Foreign currency risks: Leasing companies may be borrowing in foreign currency, deals
are priced in local currency – solution may be local currency lending for banks and
leasing companies!
Interest rate risks: If leasing companies are exposed to change of their cost of funds
without possibility of adjustment of their receivables, they must hedge their exposure to
higher interest rates, or have a reserve for the potential loss .
31
60
Risks, Hazards & Issues (perceived or real).
Government does not pay contractors on time!
Contractors don’t deliver on time!
Contractors should not get special treatment (guarantees)!
32
Thank you
33
61
Salient Features of the Proposed Financing Leasing Law for Tanzania – Moyo Violet Ndonde – IFC/ SECO
Salient Features of the Proposed Financing Leasing Law for

Tanzania
Moyo Violet Ndonde

Operations Officer – SECO – IFC Leasing Program
Salient Features of The Proposed Financial Leasing Law For Tanzania
Consultative Meeting on Contractors Financial Management
8 – 9 May 2008
By Moyo Violet Ndonde, Operations Officer, SECO – IFC Leasing Program,
62
Objectives Of the Proposed Financial Leasing Law
A substantive law on financial leasing that aims to:
Stimulate capital investment and hence economic growth.
Provide certainty for financial lease providers and for domestic and international investment in leasing
companies/banks.
Clarify inconsistencies in the existing legal framework for financial leasing.
Process of the Financial Leasing Law
IFC provides Technical Assistance to the Government of Tanzania under the

framework of FSAP (2nd Generation of Financial Sector Reform), and based on IFC’s
experience in developing financial leasing legislation around the world – including the
Ghana Finance Lease Law, for Central Asia Republics (Uzbekistan, Kazakhstan etc),
Ukraine, Rwanda, and elsewhere.
The Process involved an initial study of the leasing market as of July 2005, which
included a review of the legislative, regulatory and taxation framework for financial leasing
and leasing market statistics. Financial sector discussions of the findings of the ‘05 study
were conducted at roundtables, followed by a leasing conference in 2005, and extensive
consultation with various stakeholders (i.e., leading commercial banks in leasing). The
draft law was circulated by Bank Of Tanzania to stakeholders in February, 2006.
IFC draft proposals were presented to the Tanzania Bankers Association’s Technical
Team. The engagement of TBA was pursued through presentations, articles and
discussions.
63
Process of the Financial Leasing Law
Comments were received from stakeholders (commercial banks) and responded to by IFC.
Proposals (both taxation and legal) were submitted, tabled, championed and discussed with
the Technical Team for Long Term Development Finance Team (LTDF), charged with
supervisory powers for leasing reform.
The draft law was discussed with private sector representatives in September, 2006.
Additional comments were received from leading commercial banks later in the process,
and were discussed with relevant stakeholders. These proposals were later incorporated in
IFC proposals but not so as to change the substantive proposals of IFC’s work.
Substantive Provisions:
Part 1 – Preliminary Provisions: Short Title & Interpretation
Applies to finance leasing transactions and variations thereof – sale and lease back, back
to back lease, secondary leases, and sub-leasing.
Provides definition sections that define key and essential terms – “asset” “ assignment”
“sublease” “secondary lease” “sale and lease back” “hire purchase” etc.
Note that the issue of whether an “ asset” should include “immovable property/ assets”
and the logic and rationale therefor were also discussed.
64
Substantive Provisions
Part II - Formation of Financial Lease agreement
Characteristics of A Financial Lease Agreement for legal purposes:
The Asset is acquired from a third party (Supplier/vendor). ‘Third party’ means a different
legal entity from the lessor even where they are related.
The option to purchase may or may not be there – but in practice a financial lease will seek
to amortize the cost of the asset.
The Lessee specifies the asset without relying on the skill of the Lessor.
The Supplier shall know why the Lessor is acquiring the asset i.e., in consequence of a
financial lease with a Lessee.
The dual nature of the financing of, and investment in, an asset is recognized in the law.
That a Financial lease is both a credit agreement and a rental agreement is recognized.
Part II Cont/d
Formalities of Agreement – capacity to contract, offer and acceptance etc in a financial

lease agreement shall be in accordance with usual principles of contract law.
Pre –leasing formalities may or may not be utilized. The parties may make a statement
prior to the leasing contract being finally made – option of parties.
The Subject matter of a financial lease agreement may be existing assets or assets to be
acquired ( if the assets are to be acquired then pre – leasing formalities may be required).
65
Part II – Formation of Lease Agreement Cont/d
Calculation of Lease rentals
To take into account amortization of all or substantially the whole cost of the asset.
The rentals should also take into account the Lessor’s interest or profit.
Irrevocability of Lease contract – Once the lease and supply agreement are created, they
become irrevocable.
Part III – Parties and Obligations of parties to Financial Lease Transaction
Defines Parties: (a) Lessor, (b) Lessee and (c’)Supplier are parties to the “transaction”
and (a) Lessor and (b) Lessee, are parties to the “financial lease agreement”.
Defines rights & obligations of parties. Examples:
Lessor obligations: - To grant quiet possession of the asset; and to be diligent in obtaining
good title. However there is no Lessor liability for defects or fitness of the asset for the
lessees purposes.
Circumstances for Lessor’s liability are provided for (e.g. to pay supplier on time, for
willful infringement of the Lessee’s peaceful enjoyment of the asset).
66
Part III – Parties, and rights and obligations of the parties Cont/d
No Liability on the Lessor for third party injury and death arising from the lessees’ use of
asset.
Duties of Supplier: For quality and fitness of assets. The supplier shall owe the Lessee the
same duties as he owes the Lessor regarding the assets (merchantability). The Supplier
shall not liable for the same damage to both the lessor and lessee regarding defect in the
asset. The Lessee can take action against the supplier, even in the absence of privity of
contract (i.e., direct “legal” relationship with the supplier).
Lessees: Utmost obligation is to pay the lessor for his investment in the asset. The Lessor
intends to recover its full investment and profit. Lessor shall require the lessee to take
insurance cover, inform him (the lessor) of any damage to the asset, and to maintain the
asset in good condition, fair wear and tear excepted.
10
Part III Cont/d – Repossession
The right of the lessor to recover rentals is paramount. Where there is breach of the
agreement the lessor has the right to repossess the asset.
If the financial lease agreement does not state a period for remedy by the Lessee of a
breach of the agreement in order for the Lessor to initiate repossession, the statutory period
for the remedy shall be 30 days.
The right to repossession, and repossession itself does not prevent the lessor from taking
other remedial steps, e.g. for recovery of the full investment amount. In addition, the lessor
can sue the lessee for damages.
11
67
Repossession –Cont/d
For shortfall.
Where repossession occurs, immediate payment of future rentals for the remaining term of
the lease is required. But this amount can be decreased by the fair value of the asset
repossessed.
12
Part IV – Third Party Claims & Interests in Financial Leases
Provides for assignment of lease receivables and of the lease contract by the Lessor, as well
as the conditions for the assignment. This is in order to promote growth of financial leasing
and the market so that Lessors can obtain new credit lines.
Assignment of the financial lease agreement is the Lessors’ right, but such assignment
should not interfere with the Lessee’s quiet enjoyment of the asset. Assignment of lease
receivables by the Lessor to a third party is absolute.
The Lessee may sublease the asset only upon the consent of the Lessor.
13
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PART IV – Third Party Claims And Interest in Financial Leases (Sections 14- 20)
The Lessee should not create encumbrances over the leased asset in favour of third party
creditors i.e.,– should not mortgage the leased asset to a creditor. If a mortgage is created
during the currency of lease, it shall be void.
The Lessee shall be responsible for third party damage/s to the asset during the lease
period, and shall have the right to take legal action against third parties to recover damages.
Where assets subject to financial lease become attached to land e.g., “plant and
machinery”, the asset shall not become part of the land (compare with English common
law). Where the lessee has creditors, the asset shall not form part of his (the Lessee’s)
property and the creditor cannot attach the property during a liquidation/bankruptcy of the
Lessee’s estate).
14
Substantive Provisions Cont/d
Part V – Registration of Interests (Section 20)
An existing registry shall be designated for registration of “assets” that are under financial
lease. Registration is of the asset or of the interest in the asset and not the financial
lease agreement.
Assets/interests in assets that are registered with the registry – serve as notice to third party
purchasers or creditors etc, even if such parties have not actually checked the registry
(English common law principle).
BUT
This should be compared with the requirements of an existing Chattels Transfer Act, 1931
where under this Act, registration of the asset is not mandatory if the assets are marked e.g.
“Mercedes Benz”, “Scania” etc.
15
69
Part VI - Supplementary Provisions
Lessor may require information as to where the leased asset is kept.
The Parties (Lessor & Lessee) may agree on other matters not in the law. – Provided that
these are not in breach of the mandatory provisions of the law. Matters that can be varied
include – events of default, rights, liabilities and duties of the parties.
Recovery of damages – the principle is for recovery of damages that will put a party in the
position it would have been had the agreement been performed, but not to constitute a
penalty (English/ Common Law).
Application of the Financial Leasing Law – (a) If the asset is within Tanzania, or (b) the
lessee’s centre of interests is in Tanzania, or (c’) if the leasing agreement provides that
Tanzania law should apply.
16
Other Laws for Amendment and/ or Harmonization
Hire Purchase Act – To avoid confusion between a Financial Lease and a Hire – Purchase.
Both financing mechanisms should be available for financiers should they wish to use
either. Our experience is that H-P is not preferred or is mainly used for small and consumer
type assets.
Sale of Goods Act - To harmonize the duties of a supplier/vendor in a financial leasing
transaction with provisions of suppliers/ sellers obligations under the Sale of goods law.
Chattels Transfer Act – To provide clearer provisions regarding registration of interests
in leased assets.
Companies Act - To provide that leased assets shall not become the property of the lessee,
and the lessee cannot charge the asset under lease to creditors.
Tanzania Investment Act – To provide that leasing is an investment activity, or that
certain types of equipment leasing are investment activities e.g. agriculture, construction or
transportation depending on the sector contribution to GDP. To clarify in the law matters of
financial leasing for holders of a Certificate of Incentives issued by the TIC.
17
70
Other Laws for Amendment
Business Registrations Act - To spell out licensing procedures for non – bank financial
leasing companies.
Bankruptcy Act - To provide that assets under finance lease do not belong to the lessee,
and cannot be attached by the lessees’ creditors when undergoing bankruptcy proceedings.
Civil Procedure Code Act – To provide for a summary procedure (expedited process) for
recovery of debts that arise from financial lease contracts, and for repossession of
moveable assets under financial lease.
Road Traffic Act – To provide clearly that the users (Lessees) shall be liable for use of the
leased assets and damages that may occur, and not the Lessors.
Banking and Financial Institutions Act – Review prudential guidelines for leasing, if
appropriate. E.g. ratios for investment in moveable property for bank lessors.
Land Act – To provide for financial leasing of immovable property (if preferred) and that
leased assets that become attached to the land shall not form part of the land.
18
Concerns Raised by Stakeholders
The law should state expressly that amortization will include return of capital and an
element of profit or interest for the Lessors – This was done.
The Lessor should not be liable for his negligence to obtain good title to the leased
asset - This was not accepted by stakeholders, meaning that the Lessor should exercise
diligence in obtaining good title to the assets he leases.
Notice for Repossession should be 30 days – A compromise solution was found as stated
in the section on repossession.
General credit law as opposed to “ financial lease” law is good for the country –
Though this may be the ideal situation, the IFC mandate was for financial leasing. In any
event, a credit law in IFC’s experience would be for consumer protection, whereby a
financial leasing law is in order to promote capital investment.
19
71
Thank you
20
72
Tax Regime for the Construction Industry – Protas H. Mmanda – Tanzania Revenue Authority
Tax Regime for the Construction Industry
Protas H. Mmanda
Director for Taxpayer Services & Education - Tanzania Revenue Authority
1.0 INTRODUCTION
This presentation is based on the taxation regime as it relates to the
construction industry in Tanzania together with the other players in the
industry. Our focus is on the main types of taxes administered by Tanzania
Revenue Authority (TRA) as they impact on the construction sector. The
presentation touches on the tax incentives available to contractors and other
players as provided under the tax laws such as Income Tax Act, Value Added
Tax and Customs Tariff Act. The main purpose of the incentives is to
encourage investment in the country.
We shall also discuss briefly some of the problems faced by the construction
industry and the impact of the problems to the government revenue collection
and the associated problems of taxing the industry. We shall briefly look at
some challenges and tax implications on the industry and finally we shall
conclude our discussion by proposing some recommendations which may
minimize the problems and difficulties which the industry is facing.
2.0 ABSTRACT
The aim of this paper is to discuss the structure of the construction industry in
Tanzania and how it operates. The impact of the rapid advancement in
technology to the construction industry, the operating systems and
procedures have direct link with the taxation system. This paper also
considers the impact of the sub-sectors in the industry on their contribution to
the Gross National Product (GDP) where the construction industry
contributes 9% of employment in the economy. The sector has posed tax
administrative problems not only in Tanzania but in many other countries of
the world due its many stakeholders with their numerous transactions.
Identification of areas of revenue risks associated with the tax exemptions
under the current taxation laws such as Income tax; Value added Tax and
Customs and Excise are important in improving the taxation and investment
policy of the country.
Construction industry is one of the industries which need heavy capital

investment in terms of plant and machinery. This equipment requires
substantial amounts of financial resources to acquire them and thus pose a big
challenge to small contractors. The industry also faces a technology challenge
that will enable it meet the international standards in order to effectively
participate in the perfect competitive global market. Considering these
73
challenges, the taxation regime in Tanzania introduces tax concessions

through exemptions, capital allowances as replacement costs as well as tax
relief’s as a way of encouraging growth of the sector which has been growing
steadily during the past ten years contributing 5% to the GDP. It is now
second fastest growing sector after mining.
3.0 MEANING AND TAXATION REQUIREMENTS
Tax is a compulsory contribution in monetary terms made to the government

by individual persons, natural and artificial, resident persons and non
residents in the course of conducting business, investment and employment
according to their level of earning ability. In return, the government ploughs
back the taxes to people by providing services such as health, infrastructure,
and provision of services to its people in terms of education, and maintenance
of law and order to the citizen. Therefore it is imperative for every person in
the society to discharge his/her obligation of contributing equitably to the
government coffers in terms of tax.
4.0 TAX REGIME AND CONTRACTORS
Construction industry is a fundamental economic sector which is

characterized with backward and forward linkages with other sectors through
physical structures which are necessary for social and economic development.
The industry has been growing steadily during the past decade as supported
by the number of the new structures being developed in our urban areas.
The industry employs human labour thus creating employment where the
government collects tax from the employment income (PAYE).On the other
hand the projects generate profits where corporation tax is collected. In
addition, the industry creates a number of secondary activities which also
generate tax revenue to the government.
Considering the significance of the industry in the economic development, the

government has put in place a tax regime which encourages investment in
this capital intensive sector by providing a number of tax incentives in terms
of capital allowances and deductions on plant and machinery as well as tax
exemptions and tax relief on construction materials and equipment.
4.1 Local investors and Tax incentives
The government through its investment and taxation policies has been
reviewing its policies by providing a number of tax incentives with a view to
creating a conducive environment for encouraging local and foreign investors
to invest in the country. These incentives are given through Income Tax,
Value Added Tax (VAT) and the Customs and Excise. Whoever meets the
requirements stipulated in the respective laws will get the incentives.
However beneficiaries of tax exemptions in the construction industry under
74
the present tax regime are the clients or owners of the construction projects.
Contractors are not beneficiaries of the incentive unless they are investors in
the priority sector.
4.2 Incentives under the Income Tax Act
The Income Tax Act provides for income based tax incentives which are in the
form of Wear and Tear allowances on the assets employed in construction.
These allowances are grouped or pooled in eight classes of assets which
eligible persons including contractors can enjoy. Under the present
investment policy, tax incentives have been targeted to particular sectors of
the economy which include the infrastructure. E.g. road construction, bridges,
railways etc.
Holders of certificate of incentive including those in the construction industry

are entitled to the incentives in this sector.
4.3 Determination of Taxable Income.
In determining the amount of tax payable by a construction project, the tax

amount is based on the percentage of job completed and this is arrived at by
comparing the total expenditure allocated to the contract and actual amount
incurred before the end of the year of income with the estimated total contract
expenditure as determined at the time of commencement of the contract.
The determination is authenticated by the certificate of completion which is

issued periodically by the consultant.
4.4 Points of taxation on construction projects
Construction projects like other businesses pay income tax on their profits.
Taxation of short term projects do not pose tax administrative problems
compared to long term contracts whose tax point may differ with the time
when certificates of completion are issued. The certificate of completion is
issued by the consultant at each completion stage as per the agreement clause.
This is the authority to show that the job has been completed to the required
level. Therefore income tax is payable as a percentage of the contract
completed during each year of income.
A more or less similar collection problem is experienced with VAT. The

problem is based on the time of supply of the goods or service and the time of
paying VAT. According to the VAT law section 6 (1) the time of supply is
based on either of the following events:-
Goods are supplied to the customer
Tax invoice is received for all or part of the supply
Payment is received for all or part of the supply
75
Service is rendered or performed whatever time shall be the

earliest
In the construction industry, a certificate may be issued but a tax invoice may
deliberately be delayed depending on the cash flow of the contractor as
issuance of certificate attracts VAT payment immediately. In some contracts,
payment is effected long after the certificate has been issued. Under this
delay, TRA issues tax demand notice as soon as the certificate is issued before
contractors have received payments to pay the demanded taxes.
Experience shows that, over inflating of quantities and value of materials,

capital goods and equipment is common among dishonest clients and
quantity surveyors/contractors. In this case, a huge amount of VAT is
refunded to the contractors which is a loss of government revenue. The over
valuation also has a negative impact of income tax due over valuation of the
property thus attracting more wear and tear. Tax administration relies on the
bills of quantity of building materials prepared by a registered quantity
surveyor and certification made thereon. Some clients may apply for tax
exempt quantities that exceed the actual requirements for an intended
construction project and sell them in the ordinary market or use them on non-
exempt projects.
4.5 Incentives under the Value Added Tax.
Construction industry enjoys VAT exemptions provided that the contractor or

client is registered with VAT or is anticipating undertaking a project worth
shs 40m and above per annum. Imported generic capital goods and
construction equipment are exempted from VAT under the EACMA 2004.
Importation or supplies of goods or services to projects funded by the

Government relating to infrastructure and utilities development are VAT
relieved under the third schedule of VAT. Item 10 (1) of the schedule further
grants VAT relief to registered religious, charitable community based or non
profit driven organization for supply of goods or services for use of the
organization or institution (commonly known as NGOs) for execution of its
functions of its functions which include construction project in the area of
health, education, water supply, infrastructure or any other project relating to
advancement of the community. The construction industry is the beneficiary
of these projects
4.6 Tax Incentives under the Customs tariffs Act
The government has granted lucrative tax incentives to both local and foreign
investors through tariff reduction on imported capital goods including plant
and machinery which are regarded as vital in revamping the economy. These
generic goods which include construction equipments are normally assigned
zero percent (0%) import duty and this incentive is available to all
76
stakeholders in the industry. Such capital goods are like caterpillars,

bulldozers, excavators etc.
5.0 STRUCTURE OF THE CONSTRUCTION INDUSTRY
The industry brings in a number of players in a construction project. There are

the project clients, contractors, consultants, quantity surveyors, architects sub-
contractors and project Managers. All these players earn income from one
project and as such they are supposed to pay relevant taxes. In order to
collect taxes from them there is a need for maintaining proper records on all
the transactions at all levels and the records must be maintained in a
transparent manner. Collection of taxes from each of them has become a
challenge to TRA as at some stage it is difficult to trace some them or their
employees. For instance, casual labourers employed by a sub-contractor my
escape tax due to inadequate record keeping by the sub-contractor. Once a
labourer is paid it is difficult even to trace him later in order to recover tax
from him. This is also a challenge not only to TRA but also to the sub-
contractor.
6.0 TAX CONTRIBUTION BY CONSTRUCTION INDUSTRY
The contribution of the construction sector (by Large Taxpayers Department)

to the government revenue has been increasing during the last six (6) years as
shown on table 1 below. Corporation tax which is paid out of the profits
earned has been leading followed by PAYE. VAT on the materials and
services rendered was the third contributor in the sector and this can be
explained by the fact that most of the big and high valued construction
projects which belong to the government are financed by external financiers
who are exempt from VAT payment on the materials purchased.
Table 1 Tax collection (Tshs in billions) by Large Taxpayers Department
TAX COLLECTION BY LTD (2001/02-2006/07)
TOTAL TSHS
Year VAT COR. TAX PAYE SDL W/TAX S/DUTY
20001/02 1,342, 665 1,189 112 25 3,335
2002/03 2,592 1,378 1,714 1,718 4 7,408
2003/04 3,737 1,559 2,037 492 1,111 2 8,939
2004/05 2,533, 6,402 4,256 1,027 1,085 4 15,309
2005/06 3,494 4,723 6,298 1,544 1,728, 13 17,802
2006/07 5,242 13,588 10,021 2,611 3,487 93 35,043
Source: TRA Research and Policy Department.
Table 2
Analysis of revenue collection from construction industry
Year Construction(LTD) Grand total
20001/02 3,335.00 976,608.00
2002/03 7,408.37 1,145,161.00
2003/04 8,939.73 1,319,306.00
2004/05 15,309.72 1,679,008.00
2005/06 17,802.73 2,040,393.00
2006/07 35,043.57 2,345,510.79
Source: TRA Research and Policy Department
77
Figure 1
Revenue collection(Tshs)
2,500,000.00
2,000,000.00
1,500,000.00 Construction(LTD)
1,000,000.00 Grand total
500,000.00
-
20 /02
20 /03
20 /04
20 /05
20 /06
7
/0
1
02
03
04
05
06
00
20
Figure 2
Revenue collection(tshs in bn)
2,500,000.00
2,000,000.00
1,500,000.00 Construction(LTD)
1,000,000.00 Grand total
500,000.00
0.00
20001/02
2002/03
2003/04
2004/05
2005/06
2006/07
7.0 EQUIPMENT LEASING AND HIRING.
Leasing transactions have become an important means of financing the

acquisition of capital assets. It involves rentals payable for the use of the
leased asset by the lessee to the lessor.Leases are ‘financing devices’. If a firm
leases plant and machinery for the purpose of a construction business then
the transactions in the lease agreements are subject to taxation. However
some times it is difficult to get the agreement between the lessor and lessee for
tax verification.
78
According to the Income Tax Act 2004 leases are taxable to the extent of the
rentals receivable by the lessor. Leasing transactions are also taxable service
under the VAT law.
Leases are classified as ‘operating’ or ‘finance’ leases. Where all the risks and
benefits incidental to the ownership of the leased asset effectively remains
with the lessor, the lease is an ‘operating’ one but when all the risks and
benefits effectively pass to the lessee it is a finance lease.
With a finance lease the lessee pays rent to the lessor who does not deal with
the management of the asset. Decision to lease plant and machinery must be
evaluated carefully as there are financial risks associated with such a decision
Risks associated with leases according to Income Tax Act 2004

• Possibility of losses from idle capacity.
• Technological obsolescence.
• Variations in returns due to economic conditions
• Uninsured damage.
Finance or operating leases attract income tax on the rental received y the
lessor of the asset. In calculating the taxable income lessors are free to deduct
all the allowable expenditures in arriving at the chargeable income.
Deduction of depreciating allowance depends on who is the beneficial owners

of the asset and not necessarily the legal owner.
Not all construction firms can own machinery as many of them have weak
capital base. Recent statistics show that we have 4,432 construction firms and
out of these only 21% of them are in class I & II. These large firms are
financially strong and can manage to purchase the required plant and
machinery compared to small and medium enterprises that constitute 79% of
the industry. In order for these small firms to survive in the industry, they
must hire equipment from large firms.
The leasing arrangement has helped small firms to grow and enable them to
get high valued construction projects. On the other hand the equipment
leasing charges tend to erode the profit element from the contracts receipts
ending up into small profits or even losses hence depriving the government
from getting the relevant tax revenue from the majority of small and medium
contractors.
79
8.0 CHALLENGES AND TAX IMPLICATIONS FOR THE CONSTRUCTION

INDUSTRY.
Taxation of the construction industry poses a number of challenges which

affect the tax collection process.
(i). There is a lack of transparency in the process of sub-contracting work.
• Some agreements may not readily be available to verify the
subcontracted work.
• Sub-contracted work may be awarded to individuals or firms who
are not registered with TRA.
• There are no records of employees employed by sub-contracted
firms leading to loss of PAYE.
(ii). Sometimes the final retention money which is 2.5% can easily escape
taxation especially when it is paid to small firms.
(iii). In Tanzania most of the construction is undertaken informally by firms

or individuals who are not registered with TRA. The industry is
dominated by SMEs (79%) construction firms.
(iv). Statistics show that 21% of the construction of firms are in Class I and II
who command 80% of the monetary value of the works. These are
mostly foreign firms which are awarded government contracts.
(v). Use of cheap construction materials not only reduce the quality of the
properties constructed but also VAT on the materials used and property
tax from the buildings
(vi). TRA relies on the Bills of Quantity prepared by Quantity Surveyors. The
correctness of the bills of quantity have a tax implication.
(vii) Abuse of the tax exemptions by dishonest contractors and clients.
(viii) Fraudulent recovery of input VAT
9.0 RECOMMENDATIONS
(i). Consideration should be given to the problem of ‘tax point’ under
Income Tax and ‘Point of supply’ under VAT to be given a further
analysis so as to sort out the tax payment problem by contractors.
(ii). Construction Registration Board (CRB) and the related stakeholders in

the construction industry to assist in ensuring that all informal
contractors including individuals are registered with the relevant Boards
thus facilitating TRA with data.
(iii). All stakeholders in the industry to fully disclose all the payment made or
received so as to assist TRA to collect the required taxes.
80
(iv). Introduce a Contractors registration scheme that obliges main

contractors to register their sub-contractors and submit such information
to TRA periodically.
(v). Establish equipment leasing firms that will lease plant and machinery to
small construction firms so as to assist them to contribute to the labour
market and taxes to the government.
(vi) Contractors Registration Board to consider registering the informal

operators in the industry in a special class of Community Based
Contractors as these undertake most of the construction work in rural
areas.
10.0 CONCLUSION
i. Construction industry has grown steadily during the last decade

contributing significantly to the GDP growth and therefore to
employment creation.
ii. Taxes from the sector also grew significantly but at a lower rate than
the economic growth late in the industry. This is due to many firms
being engaged in tax exempt government donor funded civil works.
iii. There is a need for maintaining proper record of the entire stakeholder
in the industry.
iv. Consideration for establishing equipment leasing firms to assist local
contractors.
81
East African Development Bank
Country Office
EAST AFRICAN DEVELOPMENT BANK
A PRESENTATION AT THE CONSULTATIVE MEETING ON

CONTRACTORS’ FINANCIAL MANAGEMENT ASPECTS.
8TH – 9TH MAY 2008
DAR ES SALAAM, TANZANIA
82
EAST AFRICAN DEVELOPMENT BANK (EADB)

Background
¾ Established under the Treaty for East African Co-operation on 6th June
1967.
¾ A new Treaty amending and re-enacting the Charter was signed by the
Member States and came into force on 23 July 1980
• to confer legal force to the Charter independent of the Treaty for East
African Co-operation
• to amend the Charter to make possible a wider membership of the
Bank as well emphasize its consulting and promotion functions.
Location
Head Office: Kampala, Uganda
¾ Representative Offices: Nairobi, Kenya
Dar Es Salaam, Tanzania.
Rwanda & Burundi joining soon

Objectives of EADB
¾ To provide financial assistance to all productive sectors of the economy in
order to promote the development of the Member States;
¾ To supplement the activities of the national development agencies of the
Member States by joint financing operations, technical assistance and the
use of such agencies as channels for financing specific projects;
¾ To cooperate with other public, private, national or international institutions
and organisations, which are interested in the development of EADB
Member States;
¾ To promote the development of the region and undertake such other
services as may advance the objectives of the Bank.
¾ To provide consulting, promotion, agency, and other similar services.
83
KENYA TANZANIA UGANDA ADB
SBIC
AFRICA HOLDINGS FMO
EADB
SHAREHOLDERS
COMMERCIAL
BANK OF AFRICA DEG
NAIROBI
STANDARD BARCLAYS BANK

NORDBANKEN AB
CHARTERED BANK INTERNATIONAL
STOCKHOLM
LONDON LONDON

OUR DIVERSE PRODUCTS AND SERVICE FOR SMEs
EADB has a wide range of financial products and services to suit a wide
range of clients including SMEs. These include:
¾ Medium and Long Term Loans: The loans are offered in either foreign
and/or local currency,depending on the client needs. Loans range from USD
50,000 to 15,000,000.
¾ Short Terms Loans: Offered for procurement of raw materials, spare parts
and small auxiliary equipment from USD 50,000 to 400,000.
¾ Equity Investments: In the form of risk capital offered to selected enterprises

for an agreed period after which the Bank divests. (USD 500,00 maximum per
entity)
84

PRODUCTS/SERVICES continued
¾ Asset Leasing: The Bank offers asset lease finance for acqusition of equipment and
machinery from USD 20,000 (to Maximum limit that depends on client needs)
¾ Real Estate and Property Development: The Bank finances commercial real estate
and property development.
¾ Agency for Donor Funds: The Bank offers agency services whereby it collaborates
with external donors to manage on their behalf funds channeled to projects in East
Afrca.
¾ Loan Guarantees: On a selective basis, the Bank provides guarantees in whole or in

part in respect of loans made by other financial institutions for investments in the
Members States.
More towards SMEs

• Financing SMEs is EADB’s primary function.
• Bank to support projects on both ends of the spectrum.
Micro Projects USD 1,000 – 50,000

• Bank has institutional limitation (No branch network)
¾ Working with smaller banks, MFI’s etc by providing lines of credit
¾ Already working with SIDO.
85
Areas of Finance
• Agriculture and Agro-processing;
• Hotel and Tourism;
• Manufacturing, Industry and Mining;
• Construction – USD 20M (10% of gross portfolio)
• Infrastructure (Energy, Information and Communication
Technology, Transport and Commercial Real Estates); and
• Services (Education, Health and Finance).
WHY USE LEASE FINANCE?

• Accessibility especially for SMEs - cash flow based Vs Security
based lending
•Minimum collateral requirement - leased assets are primary
security.
•Duration - medium term up to 5 years
•Alternative source of finance - free other borrowings for working
capital
•Minimum capital outlay required
•Easy cash flow budgeting- (Repayments suited to cash flows)
•Rentals can be tailored to meet the lessee’s cash flow pattern
•Flexibility and shorter processing time
•Controlled funds usage - diversion is eliminated
86
POSSIBLE WAYS OF COLLABORATION
• Supply linkages with equipment vendors

• Backing/recommendation from CRB to improve risk
grading of individual contractors.
• Repayment arrangements with contracting authority-
TANROADS etc & the Banks.
• Honoring of obligations by contractors.
WHY EADB ?
• Industry Knowledge & expertise.

• Biggest regional out reach- For expansions & EAC
formation
• Promotion of best practices- regional out reach
• Developmental orientation.
• Institutional approach
87

You too can benefit :
CONTACT:
7th Floor, NSSF Waterfront House
P O Box 9401 Dar es Salaam
Tel: +255 22 2113195; +255 754 444224
Fax: +255 2113197
88

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Proceedings of CRB Consultative Meeting on Contractors’ Financial Management Aspects 2008

"Seeking Collaborative Solutions to Contractors Financial Challenges"

CONTRACTORS REGISTRATION BOARD

CRB CONSULTATIVE MEETING ON

Contractors Financial Challenges & Solution – CATA……………………………… 1

Financing Solutions to Contracting Industry Challenges – Felix Kibodya -

Tax Regime for the Construction Industry – Protas H. Mmanda – Tanzania

East African Development Bank – EADB .……………………………………………. 82

Contractors Financial Challenges & Solution

Contractors Association of Tanzania (CATA)

The contracting industry in Tanzania is characterised by small and medium size

The importance of the construction industry to the national economy is well

To date the construction industry contribute substantially to the national economy

Additional benefits contribute by the construction sector in Tanzania and worldwide

 Creates employment (directly or indirectly by a ‘’multiplier effect’’)

 Contributes to the training and education of workers

2.0. PROBLEMS AND CHALLENGES TO CONSTRUCTION INDUSTRY

 Inadequate of finance and financial support to contractors

2.1. Need for Assistance with Finance and financial support

Contractually contractor must typically pre-finance projects and receive periodic

As to date no specific bank in the country which provides finance assistance,

However in Tanzania, the conservative attitudes of the commercial and financial

Sector 2004/05 2005/06

3.0. CONTRACTORS OVERVIEW TO THE FINANCIAL INSTITUTIONS

3.1. Specific Contractors Requirements from Banks

The major requirements for contractors from the banks includes

 Security Instruments (bid, advance payment , performance and payment bonds)

4.0. CONTRACTORS EXPERIENCE TO FINANCIAL INSTITUTIONS

4.1. Inadequate skills to evaluate and manage construction projects

4.2. Underprovided Amount v/s Loans Requested

4.3. Excessive focus on security/ collateral

4.4. Long standing perceptions (non- compliance and defaults, etc)

4.5. High lending Interest rates

4.6. Delays in Loan Processing

4.7. Financial Policy

5.0. CURRENT INITIATIVES

4.7. Contractors Assistance Fund (CAF)

provision of guaranteeing performance bonds which is also a need area in the

5.2. Construction Industry Development Fund (CIDF)

 To provide short-term working capital to contractors, consultants and materials

5.3.Contractors Association of Tanzania (CATA)

Contractors Voluntary 0.1% Project Value Contribution to CAF

6.0. THE WAY FORWARD

6.1. Intervention by the Government

Inadequate of finance and financial Support

Set up a preference scheme to financial institutions to take care for construction

6.2. Intervention by Financial Institutions

Inadequate of Finance and Financial Support

6.3. Intervention by Contractors Association of Tanzania (CATA)

Inadequate of finance and Financial Support

CATA in collaboration with Tanzania Bank Associations to develop a training

CATA and Tanzania Bankers Association to draw up a memorandum of

7.0. CONCLUDING REMARKS

Financial Management Skills Challenges Facing Local

Construction industry in Tanzania is one of the sectors whose contribution to

1.4 To investigate cases of misconduct reported against unregistered

2.0 REQUIREMENTS OF THE INDUSTRY

3.0 FINANCIAL SKILLS NEEDED IN THE CONSTRUCTION INDUSTRY

3.1 Financial accounting

Creates employment (directly or indirectly by a ‘’multiplier effect’’)

Contributes to the training and education of workers

Inadequate of finance and financial support to contractors

Security Instruments (bid, advance payment , performance and payment bonds)

To provide short-term working capital to contractors, consultants and materials