JOURNAL: PARTICIPATION

JOURNAL: PARTICIPATION

List of Acronyms

1. CED- Community Economic Development
2. MKUKUTA- Kiswahili-Mkakati wa Kukua na Kuondoa Umaskini Tanzania
3. CSO – Civil Society Organisation
4. PRS- Poverty Reduction Strategy
5. AIDS- Acquired Immunodeficiency Syndrome

Table of Contents

1.0 Introduction p.4

1.1The Conceptualisation p.4

2.0 Participation and empowerment p.4

3.0 Participation in policy making p.5

4.0 Participation and democratization p.6

6.0 Conclusion p.6

Bibliography p.7

2.0 Introduction

This journal discusses the concept of participation as deducted from the literature. There will be some conceptual background followed by some discussion on participation, a few examples and a conclusion. As it is the case with all papers the literature will be linked to the CED concept which is being advocated as a possible solution to many challenges affecting the communities.

1.1The Conceptualisation

The Oxford English Dictionary defines participation as ”taking part in something” Participation is a broad concept and has many branches. For example community participation means involving the communities by empowering them so that they “undertake development activities for themselves. Rwegoshora ( 2006), argues that participation in undertaking research enables the research community to have a sense of ownership over the research findings, recommendations and further steps.

2.0 Participation and empowerment

Lothe etal wrote about community participation in health initiatives and related this as an initiative to foster an empowerment process that can bring about social changes that would benefit oppressed and disadvantaged groups in society (Laverack, 2001,)

Participation they say implies that community members commit themselves, develop decision – making skills and act in ways that it will positively affect their lives and help them achieve social goals. Participation they say implies that community members commit themselves, develop decision.

3.0 Participation in policy making

Mugizi, G of Policy Forum in Tanzania was interviewed by the Guardian and she stressed, “We want people to get engaged in the discussion of policy issues and understand how the stated priorities of the government link to the reality.” Gertrud Mugizi who is coordinating the work of the Policy Forum is eager to engage more people in the development of civil society in Tanzania.
“In Policy Forum we are trying to make the MKUKUTA document more accessible and make people relate it to their own lives. It is in fact possible for people to take part in the monitoring of the PRSP (Poverty Reduction Strategy Program) and indeed necessary in order to enhance the accountability of our politicians”.
“It is not an easy document to access, that is why we published a youth friendly version of it in collaboration with Save the Children.

Other examples in Tanzania include the work of CSOs in the community when they involve them in budget tracking, like Haki Elimu and Hakikazi.

A good example of policy implementation is that organized by Hakikazi , a CSO in Tanzania which has shared that it has organized Participatory Monitoring of the PRSP and pro poor expenditure in selected areas of Arusha Municipal and Arumeru District is to give an indication of how poverty reduction strategies are working in the selected areas. Hakikazi catalysis has built the capacity of selected grassroots communities by using Participatory Action Learning Research from February and September 2003. This has empowered 14 Urban and rural Communities to demand accountability by monitoring and evaluating Poverty PRS budgets targets indicators and activities. Each monitoring community selected two PRS priority sectors to monitor and evaluate with Pima cards. Using PIMA (measure) Cards has resulted in ownership of PRS monitoring and Evaluation by the monitoring communities and they have capacity to continue monitoring other areas.

4.0 Participation and democratisation

In the IDS Publication, Participation Team - Overview it is argued that in recent years there has been an explosion of new opportunities through which people can make their voices heard. Much of this is due to the growing democratization process. This is accompanied by a challenge of making real the rights, policies and processes that can deliver the promise of a better world. The Participation, Power and Social Change Team (PPSC) explore concepts and methods of 'participation' and how they can be used to improve the complex interactions between society and policy.

5. 0 Participation and Research

Participation Team – overview also shares that Focusing on research, innovation and learning in rights-based and participatory approaches, the team works in partnerships with diverse collaborators from around the world to generate ideas and action for social change.
Linking theory and action - Exploring and developing theory both for explaining change and for contributing to making change happen. Furthermore, for communities where there is research on medicines and human beings there are “Community Advisory Boards” formed which include the marginalized people, People Living with AIDS, researchers and ordinary community members to raise awareness and to make the community own research processes. This is very important because it enables communities to appreciate research and are able to perceive what it entails.

6.0 Conclusion

The best home for participation is in the community through CED. This concept is centred on participation. Communities which were formerly silent and indifferent are transformed by CED to be active, reflective and contributors of their development processes. CED aims at Moreover, for communities where there is research on medicines and human beings there are “Community Advisory Boards” formed which include the marginalized people, People Living with AIDS, researchers and ordinary community members to raise awareness and to make the community own research processes. It is interesting to see how the communities once given the opportunity and a bit of empowerment could become venues or centres for economic changes.. Slowly and slowly, they will be able to initiate their own development activities and conduct needs assessment on their own and plan for the utilization of their resources on their own. The CED practitioners have a greater role to play now which should be lesser and lesser as the communities build experience.

Bibliography

1. Participation Team – Overview. About the Participation, Power and Social Change Team. Institute of Development Studies

2. Lothe EA, Daniel M, Snipstad MB and Sveaas N (2007) Strength in Broken Places. Marginalisation and Empowerment

3. Rwegoshora, H M M (2006) AGuide to Social Science Research. Mkuki na Nyota Publishers.

FINANCIAL SERVICES IN MOSHI MUNICIPALITY

FINANCIAL SERVICES IN MOSHI MUNICIPALITY,

KILIMANJARO REGION

List of Abbreviations

ATM- Automated Teller Machine

BUMACO - Business Management Consultancy

CDLF- Community Development Loan Fund

CRDB- Co-operative and Rural Development Bank

ELCT- ND-Evangelical Lutheran Church Tanzania- Northern Diocese

IFEM- Inter Bank Foreign Exchange Market

NBC- National Bank of Commerce

NBFIs - Non Bank Financial Institutions

NGO- Non Governmental Organisastion

NIC- National Insurance Corporation

NMB – National Microfinance Bank

NSSF- National Social Security Fund

PADEP- Participatory Agricultural Development and Empowerment Project

PRIDE – Promotion of Rural initiative Development Agency limited

SACCOS- Savings and Credit Cooperatives

SEDA- Small Enterprise Development Agency

TIB- Tanzania Investment Bank

UCB- Uchumi Commercial Bank

Table of contents P age

1.0 Introduction to Financial Systems 4

2.0 Availability of Financial Systems in Moshi Municipality,

Kilimanjaro region. 5

3.0 Informal Financial Services in the Municipality 8

4.0 How to ensure that this community accesses reliable financial

services. 9

5.0 Conclusion. 12

1.0 Introduction to Financial Services

This paper will share the conceptualization, history and level of growth of different financial services which are important for business and investment growth in Moshi Municipality. It will also examine the availability of such services in the Moshi Municipal Community. The last part will provide some concrete proposals on what should be done to ensure that the community of Moshi accesses reliable financial services. The banking and financial history of Tanzania dates back to 1965 when the central bank, the Bank of Tanzania was officially formed by the Act of Parliament.

The term” Financial Services” embraces all services offered by the finance industry encompassing a broad range of organizations that deal with money. Mutasa (2003) defines a “Financial System” as a composition of all financial institutions or intermediaries and financial markets in the economy. Financial institutions or intermediaries in Tanzania have their apex in the Bank of Tanzania which supervises and regulates financial intermediaries. Some of these are “Commercial banks” and others are “Non bank financial institutions”, NBFIs. Services offered by these institutions include payment facilities through banks, life insurance, building loans and other day to day basic needs.

“Financial markets” is another component of financial systems or a mechanism that facilitates the smooth purchase and sale of financial securities such as stocks and bonds, commodities such as precious metal or agricultural goods and other items at low transaction costs and at prices that reflect an efficient market. Types of Financial markets are Capital markets, Money markets and Foreign Exchange Markets. A Capital market is a market for securing long and medium term capital. A Money market is a financial market which deals with short-term finance by lending and borrowing money.

Financial services have indeed been important for business and investment growth in the Moshi Municipal economy through facilitation of payments in the economy, promoting the level and culture of the savings and investments in the economy thus improving the standard of living of the beneficiary community although with some setbacks.

2.0 Availability of Financial Services in Moshi Municipality, Kilimanjaro region.

The Financial Institutions or Intermediaries available in the Moshi Municipal Community include Commercial banks such as the Cooperative and Rural Development Bank, CRDB (1996) Limited, the Stanbic Bank Limited, the Standard Chartered Bank Limited, the National Bank of Commerce, NBC (1997) and Barclays Bank Limited. There are also Medium Sized Commercial Banks such as The Exim Bank Limited and small banks such as the Akiba Commercial Bank Limited, the Kilimanjaro Cooperative Bank Limited and the Uchumi Commercial Bank Limited.

The available Non Bank Financial Institutions (NBFIs)“ or Near banks include the Tanzania Postal Bank, the National Microfinance Bank, Insurance Companies such as National Insurance Corporation, Business Management Consultancy (BUMACO) and Patel Insurance, Also there are Hire Purchase Services which provide credit purchase such as TUNAKOPESHA. The National Social Security Fund and the leasing and Investment institutions like the Kilimanjaro Investment Development Centre. Financial markets in Moshi Municipality include commercial banks and Bureau de change banks. Some financial institutions are discussed below.

Financial Services which offer loans for business and investment in Moshi municipality include, Kilimanjaro Cooperative Bank Limited (KCB) which started issuing loans in 1999 and currently has 4,500 clients. The minimum amount of loan issued is 100,000,000/= and the minimum is 2,000,000/=. The interest charged on loans is between 15 and 21%. This bank has supported business growth for over 10 years which is a big contribution to the community..

Another bank located in Moshi Municipality and supporting business growth and investment is the Uchumi Commercial Bank Limited (UCB Ltd) which is a regional commercial bank, licensed to operate in Kilimanjaro Region, Tanzania since 2005. The bank is owned by over 330,000 average Tanzanians who are members of the Northern Diocese of the Evangelical Lutheran Church in Tanzania (ELCT-ND. UCB Ltd. vision is to have a northern Tanzania in which majority of people have convenient access to affordable financial services, through sustainable microfinance institutions. The bank started issuing loans in 2006 at a minimum of 1,000,000 and a maximum of 50,000,000/=. The interest rate is 18% and the clientele stood at 3,257 on 15^th May 2008.

Its mission is linked to a strong linkage shall be maintained with parish-based savings and credit cooperative societies (SACCOS) serving entire poor communities, irrespective of religious belief. To attain its mission, UCB Ltd. will also participate in the establishment of sustainable community level micro-finance institutions, in partnership with other organizations. As it can be seen this bank is community oriented, already serving more than 3,000 people in 3 years, recruiting approximately 1,000 clients per year. This is another big contribution to the economic growth of Moshi.

The next bank which has supported business growth is the CRDB Moshi branch. CRDB is different from the other national banks in that it primarily provides loans to microfinance institutions such as SACCOS . This is since 2002. It was reported in April 2008 in the Daily news that it has disbursed 1.1bn/- in loans to four Savings and Credit Co-operative Societies (SACCOS) in Kilimanjaro region, to enable the beneficiaries establish income generating projects to the Kilimanjaro SACCOS. The beneficiaries included PADEP and UMAMOSA in Moshi Urban Moshi Municipality which received 509/=million mainly for community based projects. This makes the bank’s participation in supporting business growth to expand faster and with less risk on the banks part. Several women business women have been reported to be reached by this bank. This proves the way this bank is committed to promoting business growth and investment.

Also participating in promoting business and investment is the Akiba Commercial Bank which was officially inaugurated in Moshi municipality on the 14^th of February 2008 as the seventh branch of Akiba Commercial Bank Limited (ACB) . The centre was in operation since 2004 and started issuing loans in 2005. It managed to enroll 653 clients before inauguration. It registered 1,267 clients as at December 31, 2007 and had 3,500 by May 2008 and it is expected that the number will have reached 6,500 in the next five years. A total of 558 clients have received loans totaling 671.6m/= by mid February 2008. ACB has also introduced a Group Loans Product (GLP). The minimum loan issued is 500,000/= while the maximum is 50,000,000/=. The interest rate ranges between 20 and 22%. This is a unique facility that is aimed at improving economic status of small scale entrepreneurs who do not have collateral. It attracts customers who have no saving culture and trains them to be better mangers of business through saving. It is an opportunity to the residents.

The next bank supporting business and investment growth in Moshi is the National Micro Finance Bank offers loans to individuals as well as groups of people and businesses in small enterprise. The primary microfinance product offered and stressed are savings deposits which is the easiest to obtain at NMB and quite reliable as well. NMB’s specific strategy towards microfinance is unique in that they link large corporate customers to microfinance loan customers. The NMB encourages and expands provision of loans to micro and small enterprises for the purchase and inventory and supply of goods. It also collects and pays services to large corporate clients to/from micro and small enterprises and also manages add-on services such as money transfers and payroll services to both the large corporate clients and micro and small enterprises. This bank’s has a huge department handling several types of loans including business promotion loans and supporting business men and women in this community.

Another near bank is the Tanzania Postal bank also located in Moshi offering various types of loans ranging from personal, installments, short-term and micro-credit which is offered to groups. Other Commercial banks such as the NBC, the Exim, the Stanbic and the Standard Chartered have not been analysed in terms of business and investment growth but they are available in Moshi and they deal with money market.

3.0 Informal Financial Services in Moshi Municipality.

These include a separate financial system commonly found in developing countries. A few examples include Savings and Credit Co-operatives (SACCOs). Savings and Credit Co-operatives (SACCOs) within Moshi district have a mixed history. Interview evidence suggests that urban SACCOs in the Moshi district have quite a high level of success. Levels of female participation are very high among alternative financial services provider.

One such successful SACCOS is the WAZALENDO SACCOS which was started in 1972 at the now Moshi University of Cooperative and Business Studies. There are 4 types of loans namely but the business oriented ones the General Loans from 1 shilling to 10 million repaid within 36 months at an interest rate of 1.5%. and the Target Loan at a maximum of 40 million issued once in 5 years and repaid in 60 months.

The ELCT – ND also operates a large scale SACCOS in Moshi municipality

There is a strong demand for financial services among women in Moshi district that manifests itself in the membership levels of local NGO micro financing institutions, which are predominantly female. These include Promotion of Rural Initiatives and Development Enterprises (PRIDE, Moshi) has a female membership level of seventy-five percent. It was opened in Moshi in 1998 after it was established in the country in 1995. It has 6,000 active members and issues a minimum loan of 100,000/= and a maximum of 50,000,000/=. Loan are issued in groups of 5 people and 3 people for Fahari loans. The interest rate ranges between 12 and 18%.

The next one is the Small Enterprise Development Agency (SEDA) a micro finance institution with a branch in Moshi.. According to the Executive Director, Mwangi (2001) SEDA was initiated by World Vision Tanzania as a pilot project in 1995 with the objective of improving the socio – economic and health status of households in poor communities through the development of micro enterprises owned primarily by women. Banking reforms in Tanzania are supportive to private sector growth and investment.

Another informal financial institution found is TUNAKOPESHA Moshi branch which provides hire purchase on credit to several customers mainly on purchase of domestic appliances with a specific interest depending on the number of credit months. Also

There are Insurance services offered are by BUMACO, Patel Insurance and the National Insurance Corporation. All types of Insurance are offered. Another serve is the National Social Security Moshi branch which attends pensioners and people who terminate their working lives. Also there is the Kilimanjaro Investment centre was opened a few years ago to coordinate the industrial investment activities. The main beneficiaries are local people and some are foreigners.

Also not analyzed are the brokers who have an office and run day to day services.

4.0 How to ensure that this community accesses reliable financial services.

Firstly, it is good for these service providers to reconsider the loan conditions. My community of choice is a small town of Moshi with a population of about 150,000. Yet the number of clientele reached and promoting business and investment is approximately less than 20, 000, about 13% of the total municipal population. Despite the presence of such financial institutions, yet there are many people living in Moshi town who are still very poor. They find it difficult to access credit to be used to conduct small businesses and develop economically. Moreover, talking to people on the street revealed that they are discouraged by the high interest rates charged by many financial intermediaries ranging between 15% and 22% which is too high for the poor majority putting into consideration that most businesses are not yielding the expected results.

Secondly, the fact that the financial markets operate freely tend to discourage the booming of business and investment since many people do not utilize the services. Also , the existing ATMs have not solved the challenge of waiting time. Time is an important resource for business people. This is specifically notable at the CRDB, the NBC and the 2 branches of the NMB. Markets for businesses are not quite developed and a lot of resources are wasted hunfting for viable markets and facing competition among several business people.

Furthermore, it is good to spread the services more outwardly to the marginalized people in the municipality. The location of the financial institutions almost all in the Central Business District also is not conducive to the majority of the poor population living in the suburbs of Moshi Municipality who have to board town buses. This leaves many people unaware of the existence of such services and consequently they do not access them. Not much has been done to advertise the services by leaflets posters or a word of mouth until one visits those places.

Futhermore, Gibbon(1999) shares that many business women have not accessed the services of the financial institutions due to lack of collaterals. The institutions have to follow the approach of the Akiba Bank to waive collaterals and install user friendly conditions. Also it could help if the financial institutions could allow negotiations for the community members when accessing credit for business. Alternatively, on either the policy part or regulatory mechanism, the government should set up government-backed women’s, poor men’s or youth credit guarantee programme for individuals growing beyond the micro level.

Next, it is apparent that the Civil Society Organisations which live very close with the community have a role to play by making noise about the need to lower interest rates and also to allow negotiations for people with low financial capacities or the minorities but who want to start business. They could also lobby and advocate for mobile banking services to the sub urban areas. They could also raise awareness about the various services available and the pros and cons of each service and try to follow up and document the response.

Another recommended option which is less cumbersome and supporting communities in Moshi Municipality to access more reliable financial services is what has been suggested in the Community Resilience Manual, Tools and Techniques for Community Recovery and Renewal (2003) on addressing financial gaps by ensuring a continuing accessibility of capital from the conventional institutions such as banks, micro- finance institutions and other companies offering financial services to manage community projects. It is regarded essential for communities to establish relationships with financial institutions. It is like moving banks to communities. This is believed to make project consideration easier although it may not always be the case. This works well if the Community Economic Development Organisation is established.

Another proposal is to establish a Community Development Loan Fund- a locally based and locally capitalised private nonprofit sources of credit for small community projects and support for housing within Moshi Municiaplity where there are pockets of very poor housing.. CDLFs offer credit and equity investments and financial management services. The interest paid by borrowers is 2 to 3 percent of what the CDLF has to pay to its own lenders. Like the J. Kikwete Fund in Tanzania some of the capital is obtained from the government sources. Success has been documented on the Community Loan Association of Montreal (ACEM), in Canada.

The benefits of the CDLFs is that this private nonprofit organization operates without government regulation which banks or credit unions must comply with and are able to serve community clients not reached by conventional financial institutions, and they offer sustainable community service. One challenge is how to get the loans transaction costs without subsidies. The Montreal Community Loan Fund has demonstrated how a community-based financial institution can integrate goals of social business development without reliance on government funding.

Another possibility is the Micro enterprise Loan Fund: For a small town like Moshi, the communities could address their financial gaps by instituting their own loan fund programme for their businesses with minimal requirements for capital and technical support in their locations. It has proved to be a mode of survival for impoverished citizens who cannot afford high interest rates asked by financial institutions. Usually, groups of micro borrowers group themselves for mutual support and cross- guaranteeing each other’s loans this peer lending technique was initiated and it worked in communities in Canada. Lending could also be on individual basis. Peer groups loans are suitable for Moshi Municipality because people live close to one another. The programme is a foundation stone for the economy of a small community although there might be obstacles of establishing and run such a programme successfully. .

5.0 Conclusion.

Apparently, the financial services are of great importance for business and investment growth. Moshi municipal is a growing business town with several financial markets emerging. However there are several people in the municipality not reached by these expanding services. This calls for alternative strategies of ensuring equal access and affordability. There are several people called upon to take action and promote the business and investment sector in the Moshi community. The service providers, the clients, the Civil Society and the government all have a role to play.

As it can be seen the establishment of a Community Economic Development Organisation is a new concept in Tanzania. This means that a lot of preparatory work will be required in terms of raising awareness in the community, sensitizing and training community leaders on the principles of CED namely, people led, participatory, inclusive of the marginal groups and collaborates with the local authorities.

All this is related to ensuring the availability of resources in the community. The Community Resilience Manual: A Resource for Rural Recovery and Renewal (2000) advocates the need for building communities that are resilient whereby, “There is openness to alternative ways of earning a living and economic activity. One indicator is when the community owns a major asset for economic and social benefits of the community. Such an asset could be a Community Development Loan Fund, the Community Revolving Loan Fund or the Micro enterprise Loan Fund

This will have to start in small areas and spiral out to the suburbs of Moshi Municipality. There is also the latest approach to community members supporting one another using the VICOBA system which has worked successfully in rural communities and could be tried out in the sub urban areas of Moshi where some of the population living there could start businesses and investments which cater for the suburban population. All suggestions aim at optimal exploitation of financial services in order hope where there is despair and placing some wealth where there is poverty through a well managed community economy.

References

1. Mutasa, F.L (2003) Principles of Economics. Tanzania Institute of bankers. Dar es salaam.
2. Gibbon, M. F. Short-changed (1999): Gendered Consequences of Implementing Financial Services in Moshi Rural District, Northern Tanzania
3. Centre for Community Enterprise. (2003)Tools and Techniques for Community Recovery and Renewal. www.cedworks.com.
4. Mwangi, Sammy (2001) Small Enterprise development Agency (SEDA) – Tanzania.
5. Uchumi Commercial bank . (2005). Brochure. www.uchumibank.co.tz

CAPITAL BUDGETING TECHNIQUES

CAPITAL BUDGETING TECHNIQUES AND THEIR APPLICATION IN A NON-CORPORATE ENVIRONMENT

Table of Contents Page

1.0 ABSTRACT 3

2.0 INTRODUCTION / BACKGROUND 4

3.0 OBJECTIVES OF THE STUDY 6

4.0 WHY RESEARCHING WITH MUWSA 6

5.0 LITERATURE REVIEW 6

6.0 APPLICABILITY OF CBT ACCORDING TO

LITERATURE 9

7.0 METHODOLGY 10

8.0 FINDINGS AND DISCUSSIONS 12

9.0 RISKS, CHALLENGES AND MITIGATION 13

10.0 CONCLUSION AND RECOMMENDATION 14

REFERENCES 15

ANNEXTURE 16

1.0 ABSTRACT

The study problem is the Capital Budgeting Techniques and their application in a non-corporate environment (public, non for profit organization) Capital budgeting assists management decisions making on the process of making growth of the organization .It is urged that capital budgeting is useful for both non profiting organization and public sector.

The techniques are divided into two types: one, Traditional (non-discounting) that includes pay back method, accounting rate of return (ARR). Two, discounting cash flow that includes net present value (NPV), internal rate of return (IRR) Profitability Index (PI).

The findings out of the study done in MUWSA revealed that public organization does not use capital budgeting techniques since there are not oriented to investment rather are service providers. However they use alternative means or techniques of budgeting like incremental budgeting techniques because it’s a service and welfare oriented institution by its nature

It was also revealed that loans are accessed very occasionally, although decisions for investment are made to ensure operational costs are met.

The reality out of the study witnessed the capacity of the financial managers is not fully exploited in terms of applying all budgeting techniques including CBT. Therefore the study team strongly recommended the need to find some investment opportunities to support some operational costs, fully utilization of available potentials of the financial managers to ensure sustainability.

3.0 INTRODUCTION / BACKGROUND

This paper will try to cover the study on the capital budgeting Techniques and their applications in a non-profit, public organization.

Moshi Urban Water Supply and Sewerage Authority (MUWSA) is a fully autonomous but government owned entity responsible for provision of clean and safe water and collection and disposal of waste water in Moshi, the town of Mount Kilimanjaro. MUWSA was initiated 1^st January 1998

Moshi Municipal is among seven districts in Kilimanjaro region has an area of 58 sq km. It lies approximately 3⁰ 18⁰ S and 38⁰ 20⁰ E on the southern slopes of Mt. Kilimanjaro, 5,895 feet’s above sea level, the rooftop of Africa which is snow. The mountain occupies 6% of the region land area. It is one of the tourist centres of the Kilimanjaro region and the entire north east of Tanzania.Moshi Urban district was originally established as a Germany military 1892 at Old Moshi where by 1911 it moved to the urban center, and in 1988 it was designated as Municipal council.

Mean annual temperature is 25⁰c while. The coolest month is July with 17⁰c, while the warmest month is December 34⁰c Rains are twice annually, the short once October –December and the long ones March to May of about 550 mm.

Population trend 1948 (8,048) people, 1988 (96,838), 1998 (190,000), 2002 (143,799) with a density of 2,497.3 the total number of the households are 35,596 and average population per house is 4.1. In 2006 the population was 160,841. Females 81,787 and Males 79,054.Source:

The Moshi Urban water Authority is the only water supplier in Moshi Municipality and it has a clean water which can be used for drinking without being treated. The organization has a very high laboratory facility which controls the water standard. Kilimanjaro Social Economic Abstract (2006) Source Environment Profile report of Moshi Municipality April 1999)

2.1 Legal establishment

MUWSA was established under the water Ordinance CAP 281 as per the Government Notice NO71 published on 25^th July, 1997.Subject to section 3(1) of the Waterworks Regulations, the Minister for Water MUWSA an Authority from 1^st January 1998 and as amended by the parliament Act No 8 of the United Republic of Tanzania, thereby revoking Government Notice Nos113of 1949, 1982 and 1975 respectively

2.2 Vision

To be the best water and sewage utility in Tanzania.

2.3 Mission

Provision of adequate, sustainable and competitive water and sewage services to support life, social economic development and environment in Moshi, the town of Mt Kilimanjaro

2.4 Service coverage

Water distribution: Currently the service coverage in terms of population is about 95-98%in terms of area coverage. And sewage service; the coverage is 40%, this service most covers the businesses area, the residential area the coverage is very low

Water production: The water production is 24,500m/day as compared to the total demand of 24,50m/day for an estimated municipal population of about 150,000people and its supporting economic base.

3.0 OBJECTIVES OF THE STUDY

The main objective of the study was to put into practice the analytical skills for the research methodology acquired of capital budgeting techniques at the Moshi Urban Water and Sewerage Organization. (MUWSA)

4.0 WHY RESEARCHING WITH MUWSA.

The motivation behind the study into this Government Institution was mainly because MUWSA reflected a stable organization with a solid reputation in Moshi Municipality. The group was convinced also to undertake the study with MUWSA because it is the Sole organization supplying water in Moshi Municipality. The water production is 24,500 cubic meters which is the same as the daily demand covering 150,000 people Furthermore it’s the cleanest and safest water .

5.0 LITERATURE REVIEW

The Capital budgeting techniques which are under study have been defined by other schools of thoughts in financial management. The experience gained from various literature reviews have been used during this specific study at MUWSA.

5.1 Concept of capital budgeting

Capital budgeting techniques involves the entire process of planning expenditures whose returns are expected to extend beyond one year. However Pauline Weetman (1996) defines as process of management accounting which assists the management decision making by providing information on the investment in a project and benefits to be obtain from the project and by monitoring the performance of the project subsequent to its implementation.

Erasmus S Kaijage (1994) defines Capital budgeting techniques as stipulated decision rules that guide management on how to make investment decisions .According to him; they are measures of projects desirability in terms of profitability and economic feasibility. According to him, they are grouped into two categories namely conventional and discounted cash flow techniques. A conventional technique includes the Payback [PB] method and Accounting Rate of Return [ARR] method which are ad-hoc techniques that do not put the time value of money into consideration. The discounted cash flow techniques are those which take into consideration of the time value of money by discounting cash flows [DCFT] at a certain discount rate; the most widely known DCFT are the Net Present Value [NPV], the Internal Rate of Return [IRR] and the Profitability Index [PI] method.

Macmenamim J, (1999) also argued that financial techniques most commonly used to evaluate investment appraisal projects are; payback method, accounting rate of return (ARR), or return on investment (ROI), discounted cash flow (DCF) methods. In applying Discounted Cash Flow (DCF) the following techniques are commonly used; net present value (NPV), profitability index (PI), and internal rate of return (IRR). This is the process of planning and managing the firm’s long term investments. It involves identification of investment opportunities that are worth more to the firm than they cost to acquire. It is a decision on the amount and type of real assets, (buildings, machinery, equipment, etc.), to acquire.

5.2 A Conventional techniques

Conventional techniques which includes pay back (PB) and Accounting Rate of Return (ARR) method. The limitation that a had-hoc and do not put into consideration the time value of money.

5.3 The pay back period (PBP)

This is the length of time required for the stream of cash proceeds produced by an investment to equal the original cash outlay by the investment. According to Kaijage (1994) The PB period is calculating the numbers of years it takes before cumulative forecasted cash flow, equals the initial investment .The PB however has some limitations such as not discounting cash flows and thus giving equal weight to all cash flows regardless of their timing, and only considering cash flows before the pay back period

5.4 Accounting Rate of Return

ARR is an average profit after the depreciation and taxes divided by the average book value of investment. The ratio is measured against a book rate of return for the firm’s whole or against some external yard stick, such as the average book rate for the firm Limitations: ARR does not consider time value of money, hence given more weight to distant cash flow than it should.

5.5 Discount cash flow techniques (DCFT)

According to Kaijage (1994) DCFT are methods that make consideration of time value of money by discounting cash flow at a certain discount rate. This includes Net present Value (NVP), Internal Rate of Return (IRR) and Profitability Index (PI) method

5.6 Internal Rate of Return

IRR is the rate of discount for which the net value of an investment would be exactly zero. The IRR makes the present value of the cash proceeds from an investment equal to the present value of cash outlays required by the investment . IRR is the average rate of return on invested capital which the project is returning to the firm (Bringham et al 1999)

According to Hugh (2001), IRR represent the highest cost of the capital an investor could bear losing money, if all the funds to finance are borrowed and the loan (principal and accrued interest) was repaid by the application of the cash proceeds from the investment as they were earned. The decision rule is to accept project which has IRR greater than the opportunity cost .

5.6 Net Present Value

Is the maximum amount a firm could pay for the opportunity of making an investment without being financially worse off. NVP is the potential increment of wealth over alternative investments. The capital gain will be realized if the expected cash proceeds realized. NVP is interpreted to be the same as increase in the shareholders wealth (Kaijage 1994)

5.7 Present Value Index

Present Value of cash inflows by the present value of cash out flows, the decision is to accept a project with PI greater than one

6.0 APPLICABILITY OF CBT ACCORDING TO LITERATURE

6.1 Use of CBT in Financing Decisions

The capital structure decision, concerns the ways in which the firm obtains and manages the long term financing it needs to support its long‐term investments. It involves two important questions: how much should the firm borrow (amount, maturity, and mixture) and how, and where from, to borrow.

6.2 Working Capital Decision

This is a continuous operating decision that finance manager take in day‐to‐day operations. It involves such questions such as; does the firm have adequate cash or access to cash, e.g. through bank borrowing agreements, to meet its daily operating needs? Which customers should be offered credit and how much should they be offered? How much inventory to carry?

7.0 METHODOLGY

1.) Contracting stage. The group members convene a sharing meeting to sort out the best way to engage as to ensure the best output out of the research process.

This session was done on the 27^th May 2008.

The members agreed on the study objectives and the organizations for the analysis were identified.

o The first choice which came into the group mind was Mkombozi, children center. This was nominated simply because it’s a big organization which covers two regions Arusha and Moshi. The visit to this organization was done and unfortunately that period they were undertaking their annual auditing process. They requested us to revisit them after a week so that we can proceed with the process. The following week the visit was done and just to realize that they not practicing capital budgeting techniques, as they are donor dependent.

o The second organization was Amani street center- this was also visited

The Mkombozi center referred us to Amani simply since they have already

constructed new premises in 2007. Unfortunately they were also not practicing

capital budgeting techniques also they are donor dependent

o Lastly the group sorted out to work with MUWSA. Visiting MUWSA, the first reception was to be asked to write an official letter for requesting the authority to allow the study to be conducted. The group wrote the letter and just to realize a response from the Director that this study was not permitted. One of the group members because of having an individual family relationship with the Director decided to directly visit the director and try to convince him for this study. He lastly allowed the study to be conducted. The experience of this stage took almost two weeks to settle the specific organization to work with.

11). The descriptive type:

The study methodology at MUWSA mainly uses. This was very important for the process since it offered an opportunity to ask more questions for clarification and also to re-check the issues shared. Question for the interview were structured and set for the discussion. The process was conducted mainly by interviewing a cross section of the Accounting section leaders 4 people, the Management 2 people, some board members 1 individual and the beneficiaries of the service water users 5 people. A total of 12 individuals were interviewed.

111). Secondary data Source

This was collected by reading much of the reports and other MUWSA documents. Much of the background and introduction information was collected out of this process.

8.0 FINDINGS AND DISCUSSIONS

I. CAPITAL BUDGETING TECHNIQUES

The water authority does not always use the capital budgeting techniques since it is service oriented they mainly use they the incremental budgeting techniques. They always consider an increment of 5% on annual basis.

Explanations given was service comes first, for instance if a certain area needs water the decisions are not made for the returns or profit, but rather service to be offered. Further it was argued that their investments normally took long time for returns to be realized. The water bills for customers they calculated only to ensure the operational cost are sustained

II. COST OF CAPITAL

This can be defined as the minimum rate of return a firm is required to earn on its investments in order to satisfy investors and maintain its market value.

The Investors required rate of return. The firm project can be financed by debt, such a long-term loan or debtors and equity. MUWSA took a loan from CRDB bank Moshi Branch .The loan was taken simply because there were some local people who needed compensation due to the effect of being transferred from their original traditional land places due to the reality that they were residing on the apex of most of the water sources like Shiri area, Kibosho and slopes of the Uru North village.

The loan collected was5 billion they pay bank 150,000,000/= every month. Interest rate is 14% so pay back period is applied.

III. TAX

Effects of tax: The organization does not pay tax since it enjoys an exemption. They pay normal deductions such as PAYEE, NSSF for the staffs only

IV. DETERMINING THE CASH FLOW

Cash flows are determined using cash budgeting and planning using incremental budget technique within the specified period, such as quarterly or yearly etc. The organization prepares their cash flows taking into consideration the operational costs, so the prices for water for the customers are considered;

V . INFLATION: They also take care of inflation by adding some percentage.

VI . DEPRECIATION

The organization does depreciation to the office assets such as cars, office furniture and the like. They use the straight line method source- from the audit report.

9.0 RISKS AND MANAGERIAL CHALLENGES AND WAYS TO MITIGATE THEM.

o Inconsistent payment of water bills by clients as indicated in the interview and discussions done by the key informant people.

o Increasing running costs for the digging furrows which has no a fixed payment rates. The laborers are the casual laborers who are paid on daily basis and the rates differ according to the nature work which is going to be done.

o The costs for paying the regulatory board which is EWURA is also very high. They have set a percentage for the fees to be paid regardless of the situation that they need to re-examine the revenues.

o The organization foresees risks in terms of anything that can happen to hinder not to deliver the services for example if serious earthquakes comes and destroys the boreholes then it will be a major catastrophe.

o Risk associated with not receiving enough water due to environment degradation such as deforestation and people living near water sources. The frequency of the fire burning in the forests of Mt Kilimanjaro area still remains a major challenge for this process.

o Also another risk is if big consumers like industries if they seize to use their services or clients not paying their bills.

9.1 Mitigation

The way forward in terms of the said risks mainly focus ongoing reminder of clients responsibility taking by paying water bills. Also, the continuous education process which will ensure better understanding of the local people. The community involvement in protecting and conservation process of the environment will ensure the long-term solution to the risks. Enhancing strategic networking with other organizations working with environmental aspects will ensure long term solution. Tree planting programme around the water reserves, boreholes could also form part of the strategic way forward

10.0 CONCLUSION AND RECOMMENDATION.

The Institution is purely service/welfare oriented. It offers safe and clean water to more than 150,000 citizens of the Moshi Municipal. The use of capital budgeting techniques was not consciously considered in this institution. However, the analysis revealed that they use some of the CBT processes such as loan payback, Incremental budgeting techniques.

The institution being a non profit and governmental oriented however, we strongly urged that there is a need to think on other simple investment opportunities to ensure the constant income which can ensure easy tracking of the returns in terms of investment.

Experienced gained from the MUWSA, It was only the struggle to service the bank loan which was reflected by the organization. Ensuring the payback of the loan in a period of 5 years was the main focus of the institutional plans. The means to generate and increase internal income for the institutional sustainability wasn’t well articulated. MUWSA is however strongly recommended to think of a possibility of having a project whose internal rates of return will be greater than the cost for servicing the bank loan.

REFERENCES:

1. Erasmus S. Kaijage (1994); Capital Budgeting Practices in Tanzania

2. Hand outs by Dr Proches Ngatuni – Strategic Financial Decision – Making (part four)

3. James Van Horne (1980), Financial Management and Policy 5e, Stanford University

4. McMenemic Jim, (1999) Financial Management an Introduction, New York

5. Pauline Weetman, (1996) Financial & Management Accounting an Introduction Pitman Publishing

ANNEXTURES

Capital budgeting techniques – questionnaire

This questionnaire is part of the research on the application of the Capital Budgeting Techniques in not for profit organization. It is for the purposes of studies only.

Please feel free to ask any question.

A: Background Information of the Organization

1. What is the name and address of your organization?

………………………………………………………………………………….

2. How would you describe the ownership of the organization?

……………………………………………………………………………………...

3. What is the purpose of your organization?

………………………………………………………………………………………

4. What product or services does your organisation provide? (sales, trade, volume)

………………………………………………………………………………………

5. How many employees does the organization have?

………………………………………………………………………………………

6. What geographical area does the organization covers in its operation?

………………………………………………………………………………………

7. What is the total value of assets owned by the organization?

………………………………………………………………………………………

8. How capital investments are financed (Capital Structure)?

………………………………………………………………………………………

9. How is the water sector governed? Policies, laws, etc)

10. How does the MUWSA differ form other water suppliers in other towns. What are you proud of? What I unique with MUWSA?

B: Capital Budgeting Techniques:

1. Which of the following types of capital budgeting techniques do you use to evaluate investments?

________________ Net Present Value (NPV)

________________ Internal Rate of Return (IRR)

________________ Pay Back Period (PBP)

________________ Profitability Index (PI)

________________ Accounting Rate of Return (ARR)

________________ Other (specify) ………………………………………………..

2. How frequent do you use these techniques?

__________________ Annually

__________________ Quarterly

__________________ Monthly

__________________Other (specify) ………………………………………….

3. Do you use a single or a combination of techniques?

________________ Single (which one?)……………………………………….

________________ Combination (which ones?) ……………………………..

4. Do you consider one of the techniques support? Why?

________________ Yes (why)…………………………………………………

________________ No

5. Is there any techniques relied upon by the organization in making investment decision?

_________________ Yes (which one?) ………………………………………

_________________ No

6. What is the most difficult technique to apply? Why?

……………………………………………………………………………………...

7. How do you apply techniques in different sizes of investments/projects?

………………………………………………………………………………………

C. Cost of Capital (Discount Rate):

Are any of the following used in capital budgeting in your organization?

________ 1. Cost of borrowing (explain)…………………………………………..

_________ 2. Interest Rate (explain) ………………………………………………

_________ 3.Cost of Equity (explain) …………………………………………….

_________ 4.Capital pricing models (explain) ……………………………………

__________ 5. Weighted Average Cost of Capital (explain) ……………………...

_________ 6. Internal Rate of Return (explain) ………………………………….

…………... 7.Other criteria? Or adjustment to above method.

D: Risk Analysis and Control

1. How is the risk considered in project analysis?

………………………………………………………………………………………

2. What approaches are used to mitigate potential impact of risks?

………………………………………………………………………………………

E: Other Variables:

1. How are the cash flows determined?

……………………………………………………………………………………..

2. How are the effects of taxation and inflation adjusted?

…………………………………………………………………………………….

3. How are Interest expenses treated?

……………………………………………………………………………………..

4. How is depreciation treated?

………………………………………………………………………………………

5. What are the problems facing you as a manager in making investment decision?

………………………………………………………………………………………