TRADE UNION CONGRESS OF TANZANIA (TUCTA

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WHY WORKERS DEMAND BETTER SALARIES/WAGES, IMPROVEMENT ON BENEFITS FROM THE SECURITY FUNDS AND REDUCTION OF PAY AS YOU EARN TAX?

Prepared by TUCTA Box 15359 Dar Es Salaam Email: tucta.educ@cats-net.com Fax: 2130049/ Phone: 2127281

TABLE OF CONTENTS ABBREVIATIONS........................................................................................................iv LIST OF TABLES..........................................................................................................vi EXECUTIVE SUMMARY...........................................................................................vii 1.0 INTRODUCTION AND BACKGROUND..............................................................1 1.1 Background............................................................................................................1 1.2 Objectives .............................................................................................................2 2.0 MINIMUM WAGE/ SALARY ISSUES IN TANZANIA........................................3 2.1 Minimum Wage Concept ......................................................................................3 2.2 Tanzania’s Minimum Wage Framework...............................................................7 2.2.1 Public Service Management and Employment Policy 1999:..............................7 2.2.2 Standing Orders of Tanzania Government:........................................................7 2.2.3 The Minimum Wage Order as Government Notice No. 223 of 2007:...............8 2.3 Why Improve Minimum Wage/ Salary levels in Tanzania? .................................9 2.3.1 Bridge Gap between Salary/ Wages and Related Allowances Levels: ............10 2.3.2 Improve the Ratio between Wage and Salaries and Public Administration & Gross Domestic Products (GDP) ..............................................................................12 2.3.3 Improve the Ratio between Annual Minimum Wage and GDP Per Capita . . .17 2.3.4 Improve the Ratio between Wage bill and Government Revenue....................19 2.3.5 Improve the Minimum Wages according to Cost of Living and Inflation (Real Wages).......................................................................................................................20 2.3.6 Implement Government Promises to Improve Wage and Benefits after Reforms......................................................................................................................21 2.3.7 Improve the Relation between Minimum wages in the Public Sector and the Private Sector.............................................................................................................23 2.3.8 Improve the Ratio between the Minimum Wage and Consumer Price Index Inflation ....................................................................................................................23 3.0 SOCIAL SECURITY SCHEMES AND BENEFITS ISSUES IN TANZANIA....25 3.1 The Social Security Concept ...............................................................................25 3.2 Tanzania’s Social Security Framework...............................................................27 3.2.1 NSSF Establishment Act no. 30 of 1997 (NSSFA 30/1997):...........................27 3.2.2 Public Service Retirement Act No. 2 of 1999 (PSRA2/1999):.........................27 3.2.3 The National Employment Policy 2008 and Clients Service Charter:.............28 3.2.4 Parastatal Pension Fund Act no. 25 of 2001 (PPFA25/2001):..........................28 3.2.5 Public Service Act no. 8 of 2002 (PAS2/2002) and Regulation on Retirement Benefits:.....................................................................................................................28 3.2.6 The National Social Security Policy of 2003 (NSSP2003): ............................29 3.2.7 The Local Authorities Pension Fund Act No. 9 of 2006 (LAPFA6/2006):......29 3.2.8 The Social Security (Regulatory Authority) Act no. 8 of 2008 (SSRA8/2008): ....................................................................................................................................29 3.3 Why Improve Social Security Schemes and Benefits in Tanzania? ...................34 3.3.1 Improve the Legal Framework of Social Security Funds and Distorted Benefits ....................................................................................................................................34 3.3.2 Improve Performance of Social Security Scheme/ Funds ...............................34 3.3.3 Rationalize and Harmonize the Formulas for All Retirees ..............................35

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3.3.4 Improve Access to Data and formulas for Computation of Security Benefits: ....................................................................................................................................36 3.3.5 Minimize Administrative/ Operational Expenses of the Social Security Funds ....................................................................................................................................37 3.3.6 Fast Track Processing and Payments of the Benefits.......................................37 3.3.7 Reform (Privatize or Merge) the Social Security Funds/ Institutions: ...........38 3.3.8 Improve the Minimum Wages to Commensurate with Social Security Benefits Bill: ..........................................................................................................................38 3.3.9 Establish effective complaint mechanism to enhance efficiency and accountability in the management of pension matters. .............................................38 4.0 HOW TO IMPPROVE WAGES/ SALARIES AND SOCIAL SECURITY BENEFITS IN TANZANIA?........................................................................................40 4.1 Improve Taxation ................................................................................................40 4.2 Reduce Leakages through Allowances ...............................................................43 5.0 EMERGING ISSUES AND RECOMMENDATIONS...........................................50 5.1 Emerging Issues...................................................................................................50 5.2 Recommendations................................................................................................51

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ABBREVIATIONS

AMP ASDP ATE BEST BOT CAG CG CPG CPI DAS DC DG DSM EAC ELRA HBS FB GB GDP GDPD GEPF GN ILO IP LAPFA LGAs LGRP LIA LSRP LSS MDAs MKUKUTA MKURABITA MOFEA MWE MWI NBS NGOs No. NSSF NSSP OPRAS PAD-GDP PAYE

Average Monthly Pension Agriculture Sector Reform Programme Association of Tanzania Employers Business Environment Strengthening in Tanzania Bank of Tanzania Controller and Auditor General Central Government Commuted Pension Gratuity Consumer Price Index Deposit Administration Scheme Defined Contribution Death Gratuity Dar-es-Salaam East African Community Employment and Labour Relations Act Household Budget Surveys Funeral Assistance/Benefits Gratuity Benefit Gross Domestic Product Gross Domestic Product Deflators Government Employees Provident Fund Government Notice International Labour Organization Invalidity Pension Local Authorities Pension Fund Act Local Government Authorities Local Government Reform Programme Labour Institutions Act Legal Sector Reform Programme Leaders Salary Scale Ministries, Departments and Agencies ‘Mkakati wa Kukuza Uchumi na Kupunguza Umaskini’ ‘Mkakati wa Kuratibu Biashara isiyo Rasmi Tanzania’ Ministry of Finance and Economic Affairs Minimum wage Earners Minimum Wage Index National Bureau of Statistics Non Governmental Organizations Number National Social Security Fund National Social Security Policy Open Performance Review and Appraisal System Public Administration – Gross Domestic Product Pay As You Earn iv

PEPFAR PFMRP PMORALG PMS PMUs PO-PSM PPF PPFA PRSP PSMEP PSMU PSPF PSRA RP SGFSRF SOTG SP SSRA TB TCSS TE TOB TPPS TPSF TR TRA TUCTA TZS URT USA US$ VAT WB WS

Public Expenditure and Financial Accountability Review Public Finance Management Reform Programme Prime Minister’s Office, Regional Administration and Local Governments Performance Management System Programme/Projects Management Units President’s Office, Public Service Management Parastatal Pension Fund Parastatal Pension Fund Act Public Sector Reform Programme Public Service Management and Employment Policy Public Service Management Unit Public Service Pension Fund Public Service Retirement Act Retirement Pension Second Generation Financial Sector Reform Programme Standing Orders of Tanzania Government Survival’s Pensions Social Security Regulatory Authority Terminal Benefits Tanzania Civil Salary Scales Total Expenditure Terminal and Other Benefits Traditional Parastatal Pension Scheme Tanzania Private Sector Foundation Total Revenue Tanzania Revenue Authority Trade Unions Congress of Tanzania Tanzanian Shillings United Republic of Tanzania United States of America United States Dollar Value Added Tax Withdrawal Benefits Wages and Salaries

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LIST OF TABLES

Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Table 13: Table 14: Table 15: Table 16: Table 17: Table 18: Table 19: Table 20:

Statistical Requirements for Minimum Wage Determination Minimum Wage and Fringe Benefits in TZS Allowances and other Supplies Gini Coefficient Public Administration and National GDP (in TZS Million) and Ratios Public Administration and National GDP (in TZS Millions) and Wage Bill Ratios Per Capita GDP and Minimum Wage Indices Dependency Ratios by Geographical areas Government Total Revenues, Expenditure and Wages and Salaries (TZS Million) Average Consumption Expenditure in 2000/01 and 2007 (28 days, TZS) Deflators and Minimum Wage Indices Type and Replacement Rates of Pension Scheme Comparisons, Number of Pensioners and Average Monthly Pension (in June 2006) Comparison of Administrative Expenses Proportions of Salaries and Pensions in Budget Expenditure: MDAs and LGAs (in TZS Billions) Summary of Tanzania Social Security (Pension) Funds Contribution of Tax Revenues to GPP (%) Allocation of Allowances by Type (Billion TZS) Top Ten Recipients of Allowances (Billion TZS) Allowance Schedule

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EXECUTIVE SUMMARY

1.0

Introduction and Background

For a long time now, the Trade Union Congress of Tanzania (TUCTA) has been negotiating with the Government on the need to raise minimum wages to a living wage. In 1994, the industrial Court agreed with TUCTA’s suggested living wage of TZS 84,020.00, however, the Government raised the wage from TZS 5,000.00 to TZS 17,500.00 only. Thirteen years later, by 2007, the minimum wage was only TZS 80,760. This situation further demoralized workers. Following the recommendations of the Presidential Commission Report on Wages of the 22nd of January 2007, during the May Day celebration in 2007, the President of the United Republic of Tanzania, Hon. Jakaya Mrisho Kikwete announced that the fourth phase Government was committed to improving wages of public service workers. However, the Government announced a marginal wage increase of TZS 5,220.00 or 6.9 percent from TZS 75,540 in 2006/07 to TZS 80,760 in 2007/08. Later on TUCTA rejected the Government proposal of raising minimum wage from TZS 80,760.00 to TZS 100,000.00 which was to be effective from January 2008. TUCTA demand the living wage (an increase from TZS 75,540.00 in 2006/07 to TZS 315,000.00) in the 2008/09 budget. This was also based on the findings of the National Bureau of Statistics (NBS) that in 2006 established a living wage of TZS 203,000. Overall TUCTA feels that there is a need to press the government to raise minimum wage into a living wage, ease tax burden on workers’ wages/salaries and address the problem of having too many pension funds with vast differences in social security benefits. The main objective of this study is to provide analysis of why do workers demand PAYE tax reduction, better wages/Salaries and ratification of social security benefits in Tanzania. The specific objectives include to: (i) Analyze trends in wages/salaries in comparison to cost of living, real wages and level of inflation. (ii) Establish the basis for the reduction of income tax charged on workers wages/salaries. (iii) Analyze weaknesses and strengths from social security funds so as to achieve equality and non-discrimination to members of all social security funds. 2.0 Minimum wage Issues in Tanzania

Minimum Wage Concept and Framework A minimum wage is a minimum level of payment established by law for work performed. It is related to work, as distinct from that of "minimum income" which is intended to guarantee minimum living conditions regardless of whether a person has an employment from which she//he gets a wage. The ILO Minimum Wage Fixing Convention of 1970 vii

(no. 131), to which Tanzania is a signatory and fully compliant since 1983, provides for minimum wage not to be fixed at a lower rate than that which would ensure the subsistence of the worker and his/ her family. Although the labour legislations (e.g. Employment and Labour Relations Act No. 6 of 2004 (ELRA6/2004) and Labour Institutions Act no.7 of 2004 (LIA7/2004)) do not provide a working definition of the concept of minimum wage, it is decreed by the state following recommendations of the minimum wage boards. The process of setting a minimum wage, however, ought to involve collective (tripartite) bargaining between representatives of TUCTA and employers (e.g. ATE) and the Government (Ministry responsible for Labour and Employment Issues). Tanzania’s minimum wages for public and private sector The Public Service Management and Employment Policy (PSMEP) stipulates that public servants shall be paid in accordance with their skills, competences and responsibilities, within the resources that the government can afford. For public servants, the government shall negotiate pay levels for employees with the relevant Trade Unions on an annual basis and decisions shall be reached amicably. For the private sector, in October 2007, the government announced, based on the recommendations of the sectoral wage boards, an increases of the minimum wages for various sectors effective 1st November 2007 ranging between TZS 65,000 in agriculture to TZS 350,000 in mining. Wages for other sectors eg the industrial sector fall in between (between TZS 80,000 to TZS 150,000 ie industries would pay TZS 80,000 provided they employed more than 300 workers or have exported more than 25% of their products). Why improve minimum wage in Tanzania? Bridge gap between high and minimum salaries/wages and allowances Gap between High and Minimum Wage: Using a single fixed rate to raise wages tends to favour high and middle class workers rather than lower cadre of workers. For instance, a fixed rate of 7.2 percent was used to increase wages in 2007/08. Accordingly, the minimum wage of TZS 75,540 (in 2006/07) was increased by TZS 5,420 (or 7.2% increase) to TZS 80,760 (in 2007/08); while a higher salary scale of TZS 1,795,000.00 (in 2006/07) was increased by TZS 129,000 (or 7.2% increase) to TZS 1,924,000 (in 2007/08). Income inequality: Income inequality: Further analysis reveals that inequality is perpetuated in the Tanzania Civil Salary Scales (TCSS) among the public servants. This is confirmed by the Household Budget Surveys (HBS) revealing Gini Coefficient of 0.300.35, which is too high in a relatively poor society like Tanzania. In this case inequality in income distribution could be addressed through fiscal support in terms of similar (30%-35%) increase in minimum wages/ salaries.

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Inequality in Allowances and Free Supplies: The government discriminates her public servants according to their seniorities. For instance, free units of electricity and phone calls are given to neither a minimum wage earner - a public servant in operational service (TGOS) nor a teacher (TGTS). Instead, for instance, some 1290 units of electricity plus some 450 units of phone calls are given to each of the senior public servants under TGSJTGSM and some 1480 units of electricity plus 650 units of phone calls are given to TGSN-Q, LSS J(1-3) and LSS P (1-6). Improve the ratio between GDP, Public Administration and Wages and Salaries Bill GDP and Public Administration: The PAD/GDP ratio which significantly grew between year 2001 and 2005, remained constant during 2005 and 2008. Indeed, the change/ growth in the PAD/GDP ratio registered a declining trend since 2005 through 2008. This declined trend reveals poor performance of Public Servants, mainly attributed to low remuneration. This implies that the government has to motivate its employees through high minimum wages and salaries as well as allowance. GDP, Public Administration GDP and Wage Bill: The average ratios between the WS and GDP and WS and PAD-GDP are calculated to be 5.2% and 66%, respectively. The change in WS/ PAD-GDP ratio from 8.8% in 2003 and 8.3% in 2008 reveals that the earnings of public servants amount to high percentage of PAD GDP. It is found that wages and salaries represent the primary source of income to public servants who generate PAD GDP. Also, high WS/PAD-GDP ratio may be indicating the income effect as low wages probably has induced some workers to work less, given the indivisiveness and unmarketable nature of the public goods and services they deliver. Due to poor distribution of GDP many Tanzanians are poor (including workers) get very small share of GDP (less than 10% of GDP) while rich Tanzanians (including investors) who are few get more than 80 percent of the GDP. In spite of this it is only workers who get only less than 6 percent share of wages/salaries in GDP are seen as a burden to the national economy. A good and justified approach to the distribution of GDP is for the Government to tax correctly rich Tanzanians so as to increase the capacity to pay well all public servants. Improve the ratio between minimum wage and price The minimum wages index (MWI) and GDP deflators (GDPD); Public Administration Deflators (PAD) and index of retail prices of goods consumed by minimum wage earners in Dar es Salaam (MWE DSM CPI) are considered. The MWE DSM CPI grew (from 10% to 17%) more rapidly than the MWI (from 11% to 15%) between 2007 and 2008 years. The change shows that the growth in nominal increase in minimum wage earned per annum did not correspond to or match with annual price inflation of the goods consumed by minimum wage earners during the period between 2001 and 2008. The declining trend of the MWI/ MWE DSM CPI ratio indicates that the minimum wage (numerator) was increasing at a relatively high rate as compared for MWI. This is attributed to the government’s reactionary lag in addressing inflationary effect.

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Generally, the rise in MWI faster than GDP deflator reveals that real spending power of the minimum wage earners has grown over the period 2001-2008. However, the changes in the ratio between the minimum wage index and public administration deflators have declined since year 2006. This reveals out that the raise in minimum wage has relative been sticky since 2006. The government has to keep minimum wage competitive with changes in macroeconomic fundamentals reflected by the GDP deflators. Improve the ratio between annual minimum wage and GDP per capita The government has to raise the minimum wage in order to match with this trend of per GDP per capita. As noted above in 2006 the NBS established that a worker required a minimum wage of TZS 203,000.00 to be able to meet the basic needs per household of 6 members. Thus, the increase in dependants shows that the government should recognize the need for increase in minimum wage/ salaries to meet the basic needs of a household with at least 6 members. Improve the ratio between wage bill and Government Revenue The Government’s total revenues (TR) almost doubled just in 6 years, between fiscal 2002/03 and 2007/08. However, the TR funds around 60% of the government’s total expenditure. On the other hand, while the ratio between WS and TR has recorded a declining trend, the ratio between WS and Total expenditure (TE) has increased gradually. For instance, the changes in WS/TR ratio has recorded -12% in 2007/08; indicating that despite an annual increase in government’s total revenues, payments of wages and salaries to public servants (who also contribute to increase in TR consists of tax, fines, penalties and other non-tax revenues) is relatively dwindling. Thus, the system of rewarding public service is dysfunctional despite the fact that the public servant cannot be paid in proportion or close approximation to the revenue she/ he generates. Relating the minimum wage, cost of living and inflation (Real Wage) Inflation and exchange rates: Besides the fast economic growth and substantial decline of inflation from 30 percent in the early 1990s to 4.4 percent in 2006/07, the benefits are not so much felt by many Tanzanians particularly due to high market prices of goods and services. In addition, the TZS has depreciated so much from TZS 530 per dollar in the 1990s to TZS 1,280.3 per dollar in 2008. The TZS 80,760 wage is only 25.06 percent of the amount that was recommended by TUCTA which could be sufficient for getting basic needs. The TZS 80,760 is enough to meet the basic needs of 8 days only when compared with the recommended TZS 315,000 which is enough to meet basic needs of 30 days. Further, the TZS 80,760 is only 39.7 percent of the TZS 203,000 wage that was established by NBS for meeting the basic needs of a family of six people (2 adults and 4 children below 18 years) for 12 days only. Thus the government need to realize that raising wages/salaries of lower cadre workers is

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crucial for helping them out of poverty rather than focusing on attracting and retaining professionals in public civil service. Implement Government promises of the benefits from reforms and compensate public servants When the government started implementing reforms in the 1980s, it promised the workers among others, that their wages and salaries would be improved immensely after retrenchment exercises. However, contrary to the expectations of the workers, the promise on better wages/salaries was not fulfilled even after successfully undertaking the retrenchment exercises. At the same time these economic reforms have brought in issues of cost sharing in services including education and health and have removed subsidies as well. Wage and salary improvement would have enabled workers to access social services including education and health which have been privatized thus requiring workers to pay (cost sharing) for certain costs of these services. On the other hand, since early 1990s, investors were promised good business environment including tax exemption, reduction of after profit tax from 30 to 15 percent. All these promises to investors were fulfilled and continue being honored quite the opposite of what happened to workers. Improve the relation between minimum wage in the public sector and private sector The difference between legal wages of public sector and private sector was based on certain valid reasons. The legal minimum salary of rural area (agriculture) of TZS 35,000 and was differentiated with the legal urban area of TZS 48,000. The current minimum wage of TZS 35,000 has been raised to TZS 65,000 (or an increase of 85.7%) The new minimum wage of private sector of TZS 65,000 (effective from January 2008) differs by TZS 15,760 only when compared with the public service minimum wage of TZS 80,760. If the minimum wage of TZS 100,000 start being paid in January 2008 the difference between the two minimum wages will be only TZS 35,000. This is not fair since most of the workers who will be receiving TZS 65,000 per month are unskilled and young people without families or dependants while skilled people in public service who are skilled will be receiving just TZS 100,000 (a difference of only TZS 35,000). Public service servants receiving this salary have qualifications and long experience and deserve significantly higher wages than the young (inexperienced and probably unskilled) are getting at the moment. In order to address this problem it is important for the government to raise the minimum wages of public service servants by the same percentage rise that was used in the private sector (85.7% increase from TZS 35,000 to TZS 65,000) which would result in a new minimum wage in the public service to TZS 150,000. This is a minimum wage which was supposed to be paid to public servants since January 2008. In the same way TUCTA recommends that this new minimum wage be raised to TZS 315,000 in 2008/09.

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3.0

Social Security Issues in Tanzania?

The Social Security Funds: Tanzania has many social security funds which provide different types of benefits. The legal framework indicated that the terminal benefits for retired workers in Tanzania are managed by five different Pension Funds including the National Social Security Fund (NSSF); The Local Authorities Pension Fund (LAPF); Parastatal Pension Fund (PPF); the Public Service Pension Fund (PSPF); and the Government Employees Provident Fund (GEPF). The Social Security Framework: This involves the following pieces of legislations: (i) NSSF Establishment Act no. 30 of 1997 (NSSFA 30/1997); (ii) Public Service Retirement Act No. 2 of 1999 (PSRA2/1999); (iii) Clients Service Charter and the National Employment Policy 2008; (iv) Parastatal Pension Fund Act no. 25 of 2001 (PPFA25/2001); (iv) Public Service Act no. 8 of 2002 (PAS2/2002) and Regulation on Retirement Benefits; (vi) The National Social Security Policy of 2003 (NSSP2003); (v) The Local Authorities Pension Fund Act (LAPFA) and (vi) The Social Security (Regulatory Authority) Act no. 8 of 2008 (SSRA8/2008). The challenges of social security funds: The challenges which cause a range of difficulties include: (i) delay in processing payment of terminal and other benefits (TOB), more than 12 months without receiving their TOB, culminating into big gathering of retired people with complains and condemnations; (ii) Difficulties for relatives to obtain the due pensions and other benefits of the deceased retirees and hence denial of decent standard of living; (iii) adverse effect on the purchasing power of the TOBs given to the retired; (iv) multiple governing laws pertaining to settlement or processing of TOBs of retired employees from either central, regional or LGAs ; (v) huge disparity of TOBs being paid under different schemes applying different formulas despite the fact that all retirees have served or operated under the same government; (vi) Processing and hence payment of TOBs after retirement and hence denial of access to information on how TOB is processed, and (vii) Application of wrong formulas established on unrealistic assumptions and values of variables. Summary of Issues on Social Security Fund System in Tanzania: The recommendations include the need to Reduce the bureaucracy in the processing of terminal benefits (TBs); need for Pension Funds should train and efficiently manage its officials on regular basis on how to process TB payments without unnecessary delay; Merge together the Pension Funds and come up with one strong Pension Fund serving all the public servants in both the CG and LGAs. This will cut operational overhead costs and lead to efficiency and effectiveness in managing pension matters in Tanzania. In addition, the government should increase minimum wages of its servants. As long as the minimum wage keep increasing, the same payroll tax rates permits the government to pay benefits to each generation that exceeds that generations contributions. Ten percent of today’s average minimum wage is, after all, a good deal more money than ten percent of the minimum wage our grandfather earned 30 years ago.

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4.0

How to Improve Wages/ Salaries and Social Security Benefits in Tanzania?

Improve Taxation: Analysis of the various tax revenues from income earners: The share of tax revenue in GDP rose from 10.7 percent in 2000/01 to 13.4 percent in 2007 and 16 percent in 2008. However, Pay As You Earn (PAYE), which increased from 1.4 percent in 2000/01 to 1.9 percent in 2006/07 has been significantly higher than profit tax revenue which increased from 0.6 percent to 1.3 percent during the same period. It should be noted that investors, unlike local workers, pay their income tax after taking into account by subtracting from their gross earning the costs of production which are not taxed. At least things like housing allowance, transport, cost of living, and a portion of income for cost sharing (eg education and health) could be regarded as costs to the worker’s income and hence be left untaxed. Tax Loopholes: The efforts made in expanding the tax base during reform period are commendable. However, the tax base is still small and have many loopholes including exemptions which constraint collection of more tax revenue. In particular therefore there is need to radically revise the present tax exemption policy or at least the recommendations made in the 2008/09 and 2009/09 budgets should be implemented effectively. According to the Public Expenditure and Financial Accountability Review Mission (PEPFAR) in 2004/05 tax exemptions were equivalent to around 22.8% of total tax revenue. In the 2007/08 Budget Speech it was noted that tax exemptions averaged 30% of total tax revenue equivalent to 3.5% of GDP. This is a significant proportion given that the total wage bill is less than 6% of GDP. Further, no attempts have been made to address revenue loss due to trade Mis-pricing of Tanzanian products abroad. In addition, the President of the United Republic of Tanzania, Hon. Jakaya Mrisho Kikwete noted that as much as 30 percent of the public money is disappearing into the pockets of unscrupulous civil servants and their allies. Proposal of new taxation approaches: The government needs to adopt a more progressive income tax structure, one which taxes the wealthy, reduces the relative tax on the middle class workers including teachers, health workers and the like, and does not tax the poor. It should further raise the income tax threshold from TZS 100,000 per month to TZS 315,000 per month which also should be considered as the cost of living and hence not subject to taxation. Furthermore, the respective income tax rates should be reduced from 15% - 30% to 7.5% to a top rate of 20%. VAT tax regimes also need to be reviewed and reduced further from 18% to 15%, to be at par with the VAT rates in other EAC countries. Recently, the Tanzania Private Sector Foundation argued that such a reduction would make goods more affordable and at the same time give more taxes to the government. In the same spirit, grassroots groups are

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calling for a removal of all taxes on kerosene. They are also arguing that the abolition of taxes for airplane fuel will benefit the government leaders and wealthy, not the poor. Reduce leakages through allowances: A significant part of the government revenue is being used on excessive and luxurious expenditure such as luxurious vehicles (Toyota Land Cruiser VX), imported furniture; excessive and expensive internal and external travels; and workshop allowances. In 2008/09 the Government of Tanzania budgeted an impressive TZS 506 billion (USD 390 million) for allowances. This amount is equivalent to the annual (maximum) basic salary for 109,000 teachers, or over two thirds of all teachers. Despite consolidations in the wage bill in 2001/02 and in 2007/08, allowances have proved to be remarkably persistent. In 2009/10 the amount allocated to allowances was equal to 59% of the total wage bill (pensionable and non-pensionable basic salaries plus pensions). Between 2001/02 and 2006/07 the real amount spent on allowances increased more than 3-fold; and allowances in this year’s budget increased by 13%. 5.0 Emerging Issues and Recommendations

Emerging Issues: The study finds that the typical public servant obviously cannot be paid in proportion to the revenue s/he generates. This is because the public outputs are indivisible and cannot be sold in a market in a first place. Thus, the rewards in public service will depend dramatically on proxy variable for performance such as seniority, education and fidelity to the government. Unfortunately, the minimum wage earners have ever since been generally neglected by their immediate governmental bureaucracies. Thus, the central government has to optimally intervene by legislating high minimum wage order. For instance, the Minimum wage (Tanzania Government Operational Scale 1 - TGOS.1) has to be TZS 315,000 as proposed by TUCTA. The demand for labour in the public service is high while the supply for skilled and competent personnel is too small due to low wages and salaries, including minimum wages (TGOS.1). On the contrary, the minimum wages and salaries are relatively high in the private sector, where worker’s marginal revenue product depends both on their marginal physical product and on the price of the product they produce. However, nonwage or non-salary attractiveness, which are pleasant and satisfying in the public service, include the huge amount of allowances. The minimum wages, if aggregated with allowances, can make a lucrative premium to be paid to attract workers to jobs in the Public service. The government is facing revenue deficits mainly caused by a small tax base, leakages in revenue collection as well as mis-use of the collected amount. Overall looking at the Budget revenue collection and expenditure by the government and the resulting huge gap there is need for the government to seriously address the problems in the two sides of the

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government budget. This is the basis for increasing the government’s capacity to pay better wages. Trade Unions have summarized the recommendations by workers in addressing the problems and hence achieving the objective of having but wages to civil servants: Recommendations Raise Minimum Wage to a living Wage and Reduce Taxes on Salaries and Wages: Previously TUCTA had suggested a living wage of TZS 315,000 while the NBS established, way back in 2006, that a family of six people would require TZS 203,000 to meet the basic needs. Adopting this wage would need the Government to have the ability to pay, which can be obtained by collecting more revenue and appropriately allocating expenditures. The living wage should not be taxed while also reducing the tax rates which currently range from 15% to 30% to 7.5% to 20%. Reduce Allowances and Luxurious Expenditures: One of the main ways that would help the government to enhance its capacity to pay better wages is reduce excessive and luxurious expenditures including reduction of allowances which does not reduce workers’ productivity. Allowances like extra duty allowance, sitting allowance, acting allowance, responsibility allowance and honoraria need to looked more critically and put a mechanism for their reduction. In 2005/06, for instance, 21 percent of the wages/salaries budget and 7 percent of the domestic revenues were allowances. If allowances which are paid by donors are added then total amount used for allowances is quite huge. In 2006/07, for instance, TZS 113,318,653,961 were paid as allowances. If these could have been reduced by 60 percent a substantial amount, that is, TZS 67,991,192,376 could have been saved and used to boost the wages/salaries of civil servants. Stop expenditures on luxurious vehicles: This is another area for reduction of unjustified government expenditure and use the money to raise wages and salaries. Specifically this can reduce the number of new luxurious vehicles purchased for MDAs and LGAs. In the period 2001/02 – 2005/06 the government used TZS 155,611,739,573 to buy such vehicles. If there was a 60 percent reduction on these expenditures, a saving a TZS 93,367,043,943 could have been made and used to increase wages and salaries (see also The President’s Commission on improving payments and benefits of public servants, 2006, p.88). Expand Tax Base: Tax revenue collection is still inadequate. There is need for establishing income earned from all income groups in the country and the relations of such earnings to GDP. The wages and salaries share of GDP is around 5.9 percent and such efforts can raise significantly this ratio. Expanding tax base as well as removing tax exemptions, curbing tax evasions will not only increase tax revenue but will build a basis for more rationalized taxation of the incomes of various groups in the country. In this way income tax levied on civil servants’ wages and salaries can be reduced or adjusted without reducing total revenues, much to the relief of civil servants who currently are being highly taxed than the other groups are.

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Improve Linkage between contributions and Social Security Benefits: The social security benefits are generally derived from the workers contributions to the social security funds/ schemes in the country. That is, the higher the contributions the higher the benefits to the beneficiaries (retired or entitled workers). If the levels of contributions are low definitely the benefits will also be too low. Since the current wages/ salary levels are generally low, then it is unfair to impose higher rate of payroll contributions. Thus, the employers are advised to raise their contributions in favour of the retired workers even if this may entail higher prices of their products or services.

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1.0

INTRODUCTION AND BACKGROUND

1.1

Background 1. Public Sector workers in Tanzania have been complaining about the low wages and salaries which were not motivating workers and not enough to meet basic needs. They have also been complaining about high taxes and social security benefits. Thus, for a long time now, the Trade Union Congress of Tanzania (TUCTA) has been negotiating with the Government on the need to address these problems. 2. In a case on wages between the Trade Unions and the Government in 1994, the industrial Court agreed with the demands of the Trade Unions for the monthly minimum wage to be raised to TZS 84,020.00 in line with the cost of living (living wages). The Government, however, didn’t honour the Industrial Court decision. Instead it raised the wages from TZS 5,000.00 to TZS 17,500.00 only in 1994. Thirteen years later, by 2007, the minimum wage was only TZS 80,760 or just 96% of TZS 84,020 which was proposed and agreed in 1994. This situation has further demoralized workers. 3. During the May Day celebration in 2007, the President of the United Republic of Tanzania, Hon. Jakaya Mrisho Kikwete announced that the fourth phase Government was committed to improving wages of public service workers. During the 2007/08 Budget Session the Minister for Public Service informed the Parliament that a Presidential Commission Report on Wages was submitted to the government on 22nd January 2007 and its recommendations guided the setting of Wage proposals for the Budgets of 2007/08-2009/10. However, contrary to the expectations of workers, the Government announced a marginal wage increase of TZS 5,220.00 or 6.9 percent only from TZS 75,540 in 2006/07 to TZS 80,760 in 2007/08. 4. Previously, there have been good recommendations on higher wages from different initiatives, most of which, however, were not implemented and hence wages continue being very low in Tanzania’s public service. It is in this regard that the Trade Unions presented new set of recommendations on minimum wage in the public service. 5. The Trade Unions rejected the Government proposal of raising minimum wage from TZS 80,760.00 to TZS 100,000.00 which was to be effective from January 2008. The Trade Unions restated their demand to increase minimum wage from TZS 75,540.00 in 2006/07 to TZS 315,000.00 in the 2008/09 budget. It was noted that in 2006 the National Bureau of Statistics (NBS) established that a worker required a minimum wage of TZS 203,000.00 to be able to meet the basic needs. Based on this, TUCTA did some further analysis which showed that actually the required basic needs minimum wage is TZS 315,000.00. TUCTA observed that the Government was not seriously committed to raise the minimum wage to such levels, which can enable the employee to meet basic needs. 1

6. TUCTA, further noted that, the Government was concerned with raising the wages/salaries of professionals so as to attract and retain them in the public service; and that it had little or no intention of raising minimum wages to levels that could enable workers meet their basic needs. According to TUCTA this approach is wrong because already the middle and higher cadre of workers were receiving relatively higher wages than the lower cadre workers who were receiving very low wages and could not meet their basic needs. Furthermore, the middle and higher cadre workers were being paid high and several types of allowances unlike the lower cadres who were being paid very small proportion of such benefits. For instance, workers in the salary scale of TGTS (Teachers) who constitute more than 50 percent of all public servants in Tanzania (168,531) were paid only 8 percent of the allowances while workers in the TGS salary scale who constitute 20 percent of all public servants were paid 84.2 percent of the allowances. In addition, workers in the TGOS salary scale who form 13.4 percent of the public servants were only paid 0.4 percent of the allowances. 1.2 Objectives 7. The aim of this analysis is convince the government to raise minimum wage and social security benefits and ease tax burden to employees. Also, there are too many pension funds with vast differences in pensions paid to public and private employees, while bigwigs are paid whopping sums of social security benefits. 8. The main objective of this analysis is to provide analysis of why do workers demand better wages/Salaries, social security benefits and PAYE tax reduction in Tanzania. The specific objectives include to: (i) (ii) (iii) Analyze trends in wages/salaries in comparison to cost of living, real wages and level of inflation. Analyze the social security schemes so as to improve benefits and achieve equality and non-discrimination to members of all social security funds. Establish the basis for the reduction of payroll taxes including (income tax) and raise wages/ salaries and social security benefits to workers through improved revenues and taxation.

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2.0

MINIMUM WAGE/ SALARY ISSUES IN TANZANIA

2.1

Minimum Wage Concept 9. A minimum wage is a minimum level of payment established by law for work performed. This concept of minimum wage is related to work, as distinct from that of "minimum income" which is intended to guarantee minimum living conditions regardless of whether a person has an employment from which she//he gets a wage. The ILO Minimum Wage Fixing Convention of 1970 (no. 131), to which Tanzania is a signatory and fully compliant since 1983, provides for minimum wage not to be fixed at a lower rate than that which would ensure the subsistence of the worker and his/ her family. Accordingly, the National Employment Policy (NEP)1 has Vision that provides for having a society engaged in a sustainable decent gainful employment and decent income for the improvement of the quality of life and social well being for Tanzanians (pp.10). Also, NEP has sound specific objectives among others including to ensure income security and social inclusion and safeguard the basic rights and interests of workers in accordance with International Labour Standards (pp.11). In addition, NEP has sunny policy statement committing the Government to “National adherence to conducive labour standards including living income, health and safety, and adequate social protection which greatly depend on effective and efficient factory and labour inspection and labour administration machinery… The Government will safeguard the basic rights and interests of workers, with regard to international labour standards including those on the forced labour, freedom of association and the Right to organize and bargain Collectively; the Principle of Non-discrimination and Equality of Treatment and Opportunities ill be pursued” (pp.33, section 3.21). 10. The NEP distinguishes employment from unemployment using the concept of minimum wage. For instance, any worker (employed or self-employed) who earns income equivalent to sect oral minimum wage is regarded as employed or vice versa. That is, a person in employment or an employed person means any person who performs legal work for wage or salary in cash or in kind and earns a minimum income equivalent to minimum wage. 11. Although the labour legislations (e.g. Employment and Labour Relations Act No. 6 of 2004 (ELRA6/2004) and Labour Institutions Act no.7 of 2004 (LIA7/2004)) do not provide a working definition of the concept of minimum wage, it is decreed by the state following recommendations of the minimum wage boards. The process of setting a minimum wage should, however adopt and deliver collective bargaining agreement (CBA) involving tri-partite partners including representatives of trade unions (e.g. TUCTA)2, employers (e.g. ATE3) and the

1

The United Republic of Tanzania: National Employment Policy 2008, Ministry of Labour, Employment and Youth Development, August 2008. 2 Trade Unions Congress of Tanzania (TUCTA) 3 Association of Tanzania Employers (ATE)

3

Government (Ministry responsible for Labour and Employment Issues). Minimum wages along with other measures of economic and social policy aim at reducing poverty and meeting basic needs. 12. Tanzania is one of the countries with minimum wages. In the European Union, 20 member states have national minimum wages while some countries such as Norway, Sweden, Finland, Denmark, Switzerland, Germany, Austria, Italy and Cyprus have no minimum wage laws but rely on collective bargaining agreements. In 1938, the USA set statutory minimum wages and in 1960s minimum wage laws were introduced in Latin America. For instance, recent studies suggest that minimum wages bind in Colombia and other Latin American countries, pointing to an important source of downward wage rigidities 4. In India, minimum wages are set by state governments and 27 states have statutory minimum wages for different sectors and skill levels – skilled, semi-skilled and unskilled. Minimum wages in China differ from one province/city to another. These countries set minimum wages to levels which command much higher purchasing power than similar income in Tanzania. This is because they enjoy a competitive advantage owing to the strength of their currencies, combined with modest inflation. 13. The criteria and statistical variables required for setting up of a minimum wages are summarized in Table 1 below. These include (i) Meeting basic needs of worker households (ii) General level of wages (iii) Cost of living and changes therein (iv) Social security benefits (v) Relative living standards of other social groups (vi) Economic factors (economic development, productivity). Some of these variables are used to analyze the demand for high salaries/ wages, among other things. Table 1: Statistical Requirements for Minimum Wage Determination
Criterion I. Meeting basic needs of worker households Types of Statistics Poverty level data in general, and of wage-earning households in particular Objective To measure household income distributions and averages Possible Source • Household Income and Expenditure Surveys Other income distribution sources (e.g. income tax statistics) Observation • Complex and expensive, often only conducted 10-yearly, but a rich data source. Subject to limitations of coverage, definition, stability, etc.

4

John Strauss (ed): Economic Development and Cultural Change, Volume 57, Number 2, University of Southern California, January 2009.

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Criterion

Types of Statistics Average expenditure by low income households on average household goods and services Related data (average household size)

Objective To measure structure of household expenditure (regiment or "basket of goods and services") To measure household income distributions and averages, and data per capita, for different groups of households To measure general level and distribution of wages for different groups

Possible Source Household Income and Expenditure Surveys

Observation Complex and expensive, often only conducted 10yearly, but a rich data source. Readily available in most countries

Labour force and household surveys and censuses

2. General level of wages

Wage distribution and average wages in general and for unskilled workers separately in different industrial groups, locations, and/or occupations

• •

Establishment surveys of wages Household Income and Expenditure Surveys Labour inspection data

• • • • • •

Limited coverage of industry groups. Excludes small businesses. More reliable measures of wage data Complex and expensive, often only conducted 10yearly, but a rich data source Limited coverage and reliability Readily available in most countries Complex and expensive, often only conducted 10-yearly, but a rich data source

3. Cost of living and changes therein

• •

Measures of changes in prices Average expenditure by a specified type of household

• •

To measure price change To measure changes in structure of average household expenditure patterns

• • •

Consumer Price index Household Income and Expenditure Surveys

• •

4. Social security benefits

Level and distribution of benefits paid to different types of beneficiaries

To measure access to social security benefits and other measures to alleviate poverty.

Data derived from social security system.

Subject to limitations of coverage, definition, stability

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Criterion 5. Relative living standards of other social groups

Types of Statistics Data in respect of each of these different groups

Objective To compare living standards of different vulnerable groups

Possible Source • Household Income and Expenditure Surveys Other household censuses and surveys Administrative sources

Observation • Complex and expensive, often only conducted 10yearly, but a rich data source • Readily available in most countries Subject to limitations of coverage, definition, stability, etc • Limited coverage of industry groups. • Excludes small businesses. • More reliable measures of wage data • Need to be based on reliable original Sources for sound estimation.

• •

6. Economic factors (economic development, productivity, employment)

Labour productivity, real value added and output per employee in different industries and regions Wages paid relative to other labour costs (social security expenditure and non-wage labour costs) and to returns to other factors of production (profits, return on investment, etc.) in different industries and regions.

To measure payment levels relative to performance To measure capacity of employers to pay

• •

• •

Establishment surveys of industrial production (value added and value of inputs and outputs) Establishment surveys of industrial production (value of inputs and outputs). Labour cost surveys National accounts statistics.

Source: Private Sector Organizations on Minimum Wage (Appendix II), 2008.

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2.2

Tanzania’s Minimum Wage Framework

2.2.1 Public Service Management and Employment Policy 1999: 14. The Public Service Management and Employment Policy (PSMEP)5 states that all public servants are employed in the same name of the President of the United Republic of Tanzania, who is ultimately accountable for management and conduct of the Public Service. However, the President shall delegate responsibilities for the management of human resources in the Public Service to the Public Service Commission, The Public Service Department and the individual Public Service Organizations. 15. In terms of remuneration, the PSMEP stipulates that public servants shall be paid in accordance with their skills, competences and responsibilities, within the resources that the government can afford. New pay arrangements shall be developed to link salary progression more closely to improved performance, and to enable individual organizations to devise their own pay structures, suited to their operations; and that the government shall negotiate pay levels for employees with the relevant Trade Unions (represented by TUCTA) on an annual basis and decisions shall be reached amicably. That is, trade unions (represented by TUCTA) shall be consulted by the government on matters affecting public servants’ remuneration and their terms and conditions of service. 2.2.2 Standing Orders of Tanzania Government: 16. The Standing Orders of Tanzania Government (SOTG)6 noted that the Minimum Wages for Government employee will be the same as the minimum wages fixed under the Regulation of Wages and Terms of Employment Ordinance (Cap. 300), which was wholly repealed by the Employment and Labour Relations Act No. 6 of 2004 (ELRA6/2004)7. The ELRA6/2004 provides that an employer shall pay an employee any monetary remuneration to which the employee is entitled; and any employer who contravenes the provisions commits an offence (Article 27 (1) and (5). Also, Article 98 (2) of ELRA 6/2004 provides for the Minister responsible for Labour and employment to make regulations for or in respect of all or any of the following matters- (e) regulating the payment of wages. In addition, the third schedule of ELRA6/2004 provides for the Minister responsible for Labour and employment to establish a minimum wage board and a wage regulation order under section 10 fixing a basic minimum wage. Further, the Labour Institutions Act No.7 of 2004 (LIA7/2004) notes that a Wage Board shall take into account all relevant factors including the cost of living, the minimum subsistence level, the remuneration and terms and conditions of employment. After considering a report and recommendations of a wage board appointed in terms of section 35, the Minister responsible for labour and employment may
5

Government of the united republic of Tanzania: President’s Office- Public Service Management and Employment Policy, January 1999. 6 Tanzania Government: Standing Orders, 1994. 7 The Employment and Labour Relations Act No. 6, 2004.

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make a wage order determining the minimum wage and other conditions of employment for employees in any sector and area of the economy. 2.2.3 The Minimum Wage Order as Government Notice No. 223 of 2007: 17. In October 2007, the government announced increases of the minimum wages for various sectors effective 1st November 2007 as per Government Notice No 223 (See Table 2 below). This order has increased the minimum wage to some sectors, ranging between TZS 65,000 to TZS 350,000. For the industrial sector, the increase to TZS 150,000 was more than three times of the then existing minimum wage of TZS 48,000/-. When the fringe benefits were included, the increase was an astronomically four times. However, on 16th November 2007 the Government pushed the effective date from 1st November 2007 to 1st January 2008 and amended GN 223 of 2007 to exempt large enterprises from payment of TZS 150,000. Instead they would pay TZS 80,000 provided they employ more than 300 workers or export more than 25% of their products. Table 2: Minimum Wage and Fringe Benefits in TZS
Section and Area Minimum Wage Leave allowance Transport , Meal, and Housing Allowances Out of Station Allowance per day

Health Services • • Potential Hospitals and Pharmacies 120,000 80,000 45,000 yearly 15,000 yearly Cities, Municipalities and Regional towns 45,000, District HQs 25,000, Villages 15,000. Cities, Municipalities and Regional towns 45,000 Others 15,000

Health Centers, Dispensaries, Small and Medium Pharmacies, and Laboratories Agricultural Services

65,000

Commercial, Industrial and Trading • • Potential Commercial, Industrial and Trading Small and Medium Enterprises 150,000 80,000 1 Month Salary Cities, Municipalities and Regional towns 50,000, District HQs 30,000, Villages 15,000 Cities, Municipalities 45,000 and Regional towns 35,000

Transport and Communications • • • Aviation Services Clearing and Forwarding Telecommunications 350,000 230,000 300,000 200,000 350,000 Meal allowance 120,000 in total Cities, Municipalities and Regional towns 40,000, and Others 50,000

• Inland Transport Mining

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Section and Area

Minimum Wage

Leave allowance

Transport , Meal, and Housing Allowances

Out of Station Allowance per day

Marine and Fishing • • • Passenger and Cargo Vessels Fishing Vessels Vessel builders and Others 225,000 196,000 300,000 100,000 in every two years On transit Allowance 20,000 Cities, Municipalities and Regional towns 40,000, and District HQs 30,000

Domestic Services Including Hotels (a) Domestic Service Employees employed by: • Diplomats and Potential Businessmen Employees employed by Entitled Officers for domestic service provision Others 90,000 100,000/= every two years 100,000/= every two years 50,000/= every two years Cities, Municipalities and Regional towns 40,000, District and villages 35,000 Cities, Municipalities and Regional towns 35,000 and others 30,000 Cities, Municipalities and Regional towns 25,000 Others 20,000

80,000

65,000

(b) Hotels • • Potential and Tourist hotels Medium hotels 150,000 100,000 80,000 105,000 80,000

• Restaurants, Guest House& Bars Private Security Services • • International Potential Security Others

Source: Extracted from Minimum Wage Order (as per GN 223 of 16 November 2007) 18. The government has not been transparent enough on whether the Minimum wage Order (GN 223 of November 2007) provides for both the private and the public service sectors. Also, it is not clear whether the Minimum wage is binding especially in terms of pay taxes levied on the minimum wage. 2.3 Why Improve Minimum Wage/ Salary levels in Tanzania? 19. The key purpose of a minimum wage is social: to prevent very low wages and poverty. This means that a minimum wage should provide sufficient purchasing power to enable a worker to have a basic standard of living, and to enable him to enjoy the benefits of economic growth, and contribute to the economy. When first developed, the minimum wage regulation was for the elimination of extremely low wages, and its application was limited to a number of particularly low paying

9

sectors, or to selected categories of workers. Soon there was a trend towards extending wage protection to more and more groups of workers and in many cases was more universal. The following sections provide some reasons for raising up the current public service minimum wages at TZS 315,000 as recommended by TUCTA. 2.3.1 Bridge Gap between Salary/ Wages and Related Allowances Levels:

20. Wide Gap between High and Minimum Wage: It is noted that the government increases wages across the board using a single fixed rate. This approach currently used by the Government to raise wages tends to favour high and middle class workers rather than lower cadre of workers. For instance, a fixed rate of 7.2 percent was used to increase wages in 2007/08. Accordingly, the minimum wage of TZS 75,540 (in 2006/07) was increased by TZS 5,220 (or 7.2% increase) to TZS 80,760 (in 2007/08); while a higher salary scale of TZS 1,795,000.00 (in 2006/07) was increased by TZS 129,000 (or 7.2% increase) to TZS 1,924,000 (in 2007/08). This increase (TZS 129,000) for high salary is by far higher than the minimum wage of TZS 80, 760. 21. This problem is also found in the aforementioned Commission’s Report on wages and salaries and benefits. For instance, if a minimum wage (TZS 75,540) earner receives a wage increase of TZS 24,460 (or 32.4 percent increase), the new minimum wage will be TZS 100,000 while a high income earner with a wage of TZS 2,145,000 receives a similar increase rate (plus allowances e.g. 30% housing allowance?) the new wage will be TZS 4,000,000 having enjoyed a total increase of TZS 1,855,000. Another example in the Commission’s Report is where it is noted that if a minimum wage (TZS 75,540) receives a wage increase of TZS 124,460 resulting into a new wage of TZS 200,000 then a high wage earner receiving TZS 2,145,000 would enjoy an increase of TZS 2,855,000 so as to earn TZS 5,000,000. Obviously, it is difficult to justify such biased increases favouring workers earning high wages. The Trade Unions insists that such biases and favouratism should be removed immediately because it blows up the total wage bill beyond the ability of the Government to pay. 22. Further analysis reveals that inequality is perpetuated in the Tanzania Civil Salary Scales (TCSS) among the public servants. While the difference within the Tanzania Government Operational Services (TGOS A.1-18, B.1-12 and C.1-12) ranged between TZS65,000 and around TZS190,000, the difference in Tanzania Government General Scale (TGGS A.1-8, B.1-10, C.1-12, D.1-12, E.1-12, F.1-12, G.1-12, H.1-12, I.1-4, J.1-2, K.1-2, L.1-2, TGSM, TGSN, TGSO, TGSP, and TGSQ ranged between TZS65,410 (TGSA.1) and TZS1,800,000 (TGSQ) since 2005/06. Also, the government approved difference in the Tanzania Government Teachers Scale (TGTS) ranged between TZS74, 570 (TGTS A.1) and TZS703, 760 (TGTS H.12) in 2005/06. It is evident that Leaders Salary Scale (LSS) grants higher salaries to the relevant public services engaged in leadership at the national levels although the government does not disclose that information in same staff

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circular issued in July 2005. The gap between lower and higher salaries/ wages is huge in all salary scale. For instance, a salary of TZS1.8Million (TGSQ) is equivalent to salaries for 30 workers in TGOS.A and TGSA.1). And, the ratio would be too high if other benefits are taken into account. Application of the fixed rate increase in salary/ wages will sustain/ widen the gap among public servants who face similar cost of living in the same market economy. 23. Inequality in Allowances and Free Supplies: Table 3 shows that the government discriminates her public servants according to their seniorities. For instance, free units of electricity and phone calls are given to neither a minimum wage earner - a public servant in operational service (TGOS) nor a teacher (TGTS). Instead, for instance, some 1290 units of electricity plus some 450 units of phone calls are given to each of the senior public servants under TGSJ-TGSM and some 1480 units of electricity plus 650 units of phone calls are given to TGSN-Q, LSS J(1-3) and LSS P (1-6). The monetary value of these free supplies is huge and could settle a significant number of minimum wages and further widen the gap among the public servants. Again, on basis of seniority, the public servants in TGOS are entitled to smallest amount of per diem as indicated in Table 3 below. These are additional measures of income inequality which are perpetuated by the government on the basis of Tanzania Civil Salary Scales (TCSS). Table 3: Allowances and Other Supplies
Salary Scale Levels TGOS A-C TGS A-C D-G H-Q J-M N-Q TGTS A-C D-G H LSS J (1-3) P (1-6) Free Electricity units p.m. 0 0 0 0 1290 1480 0 0 0 1480 1480 Free Phone Units p.m. 0 0 0 0 450 650 0 0 0 650 650 Subsistence Allowances - Per diem range US Dollar, $ Euro, € Pound, £ 180-220 140-170 90-110 180-220 140-170 90-110 200-260 150-200 100-130 220-300 170-230 110-160 180-220 140-170 90-110 180-220 140-170 90-110 180-220 140-170 90-110 200-260 150-200 100-130 220-300 170-230 110-160 220-300 170-230 110-160 220-300 170-230 110-160

Source: The United Republic of Tanzania: The Staff Circulars 1996-2005, PO-PSM (Library). 24. The best approach to reduce gaps among public servants in terms of salaries/ wages, free supplies and allowances should be focused on raising minimum wage to the level which can enable a minimum wage worker to meet the basic needs. In this regard TUCTA has been recommending a new minimum wage of TZS 315,000 since the financial year 2008/09. The new minimum wage as proposed by TUCTA would imply over 300 percent increase. Meanwhile salaries for middle and high workers should be adjusted at lower (less than 300 percent) and declining rates as per salary scales, e.g. 58%, 50%, 45%, 40%, 30%, 28%, 25%

11

and 20%, respectively. This approach would help to reduce the observed gap between minimum wage and higher salaries (which at the moment stands at excessively high ratio of 1:28). The excessive gap is unfair because workers of all cadres face the same cost of living in the same market economy. Further, the increase in the total wage bill resulting from wage increases will be manageable and hence remain within the Government’s ability to pay. 25. Income and Consumption Inequality: The consumption expenditure measure can also be used to examine income inequality. Table 4 shows the Gini coefficients for all three Household Budget Surveys (HBS) revealing that there is inequality in income or expenditure distribution within the poor (including working poor). The Gini Coefficient of 0.30-0.35 is too high in a relatively poor society like Tanzania. That is, inequality in income distribution a society which is too poor is a social problem to be addressed through fiscal support in terms of similar (30%-35%) increase in minimum wages/ salaries. Table 4: Gini Coefficients
Dar es Salaam 1991/92 2000/01 2007 Other urban areas Rural areas Mainland Tanzania

0.30
0.36 0.34

0.35
0.36 0.35

0.33
0.33 0.33

0.34
0.35 0.35

Source: Household Budget Survey, NBS, 2008. 2.3.2 Improve the Ratio between Wage and Salaries and Public Administration & Gross Domestic Products (GDP)

26. GDP8 and Public Administration: The Public Service9 significantly contributes to GDP. The public service is classified as public administration which produces public goods covering a variety of activities in central, regional and local governments as well as compulsory social security funds (e.g. NSSF, PPF, PSPF and GEPF). The government engaged public servants in the production of nonmarket goods and services that enhance peace and order among other things through compulsory transfers of taxes, fines etc. The key principle guiding the Public Service include that work shall be defined in terms of the results achieved rather than the process. For instance, an estimation of Public Administration GDP
8

Gross Domestic Product (GDP) can be estimated using various approaches. One of the approaches includes adding up incomes (Income Approach) earned by different individuals/entities in the country. Such incomes include: (i) Wages and salaries earned by workers for providing their labour power (ii) Incomes earned by capital owners who are paid interests and dividends (iii) Incomes accruing to investors who are paid profit after tax (iv) Incomes earned by landlords and owners of houses who are rent on land/houses (v0 Incomes earned by traders and other business people who are paid proprietors income from their registered businesses. 9 The Public Service of the United Republic of Tanzania is constituted of the political service; Civil service; Operational service; Local Government service; Health service; Teacher’s service; Police, Prisons, and immigration service; Judiciary service, Parliamentary Commission’s service, and the executive agencies and other public institutions service.

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(its growth indicator) is based on number of employees (employment size) in this activity derived directly from Government accounts. That is, the value added is derived as a total of personnel emoluments, pensions, gratuities and a portion of traveling allowances. Data used is obtained from Public Service Management Unit (PSMU) on a quarterly basis, budget documents, financial statements, Consumer Price Index (CPI) and Index of Minimum Wages.

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Table 5: Public Administration and National GDP (in TZS Million) and Ratios
Year 2001 2002 2003 2004 2005 2006 2007 2008 GDP at constant (2001 prices) 9100274 9752178 10423734 11239735 12068090 12881126 13801921 14828345 Growth in GDP 7.2% 6.9% 7.8% 7.4% 6.7% 7.1% 7.4% Public administration GDP (PAD-GDP) 640649 699561 766760 871169 970786 1033488 1102951 1180158 Growth in PAD-GDP 9.2% 9.6% 13.6% 11.4% 6.5% 6.7% 7.0% PAD/GDP % Ratio 7.0% 7.2% 7.4% 7.8% 8.0% 8.0% 8.0% 8.0% Change in Ratio 1.9% 2.5% 5.4% 3.8% -0.3% -0.4% -0.4%

Source: The Economic Survey, June 2009 27. Table 5 shows the relationship between public administration and national GDP. The growth in PAD-GDP was attributed to increased financing of public service reforms programme (PSRP), new employment (at higher remuneration) to replace retirees and increased recruitment in the Police Force (URT)10. The PAD/GDP ratio which significantly grew between year 2001 and 2005, remained constant during 2005 and 2008. Indeed, the change/ growth in the PAD/GDP ratio (last column) has registered a declining trend since 2005 through 2008 (That is, while the GDP growth increased at increasing rate, the PAD-GDP or value added as derived as a total of personnel emoluments, pensions, gratuities and a portion of traveling allowances as increased at a declining rate). This declined trend reveals poor performance of Public Servants, mainly attributed to low remuneration. This implies that the government has to motivate its employees through high minimum wages and salaries as well as allowance. Although the growth in National GDP was higher than the growth in PAD GDP, the PAD/GDP ratio has remained constant since 2005, revealing out the rising trend in PAD performance and hence justification for remuneration. 28. GDP, Public Administration GDP and Wage Bill: Table 6 depicts the average ratios between the WS and GDP and WS and PAD-GDP are calculated to be 5.2% and 66%, respectively. The change in WS/ PAD-GDP ratio from 8.8% in 2003 and 8.3% in 2008 reveals an issue. That is, the earnings of public servants amount to high percentage of PAD GDP. It is found that wages and salaries represent the primary source of income to public servants who generate PAD GDP. Also, high WS/PAD-GDP ratio may be indicating the income effect as low wages probably has induced some workers to work less, given the indivisiveness and unmarketable nature of the public goods and services they deliver. It is necessary to acknowledge that rising wages would indeed cause public servants to work longer hours and hence high contribution to PAD-GDP. Contrary, it may be too difficult to institute high minimum wages if the earners/ recipients (the public servants) do produce (marginal revenue product) less than the minimum wage. Obviously, forced overpricing of unskilled labour contributes to unemployment.
10

The United Republic of Tanzania: The Revised National Accounts Estimates for Tanzania Mainland, Base Year 2001, National Bureau of Statistics – MPEE, 2008.

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Table 6: Public Administration and National GDP (in TZS Millions) and Wage Bill Ratios
PAD GDP 699561 766760 871169 970786 1033488 1102951 1180158 Wages & Salaries 341982 397770 462954 589709 656789 975094 1134709 Ratio WS/ GDP 3.5% 3.8% 4.1% 4.9% 5.1% 7.1% 7.7% Ratio WS/ PAD 48.9% 51.9% 53.1% 60.7% 63.6% 88.4% 96.1% Δ% WS/GDP Ratio 8.8% 7.9% 18.6% 4.3% 38.6% 8.3% Δ% WS/PAD Ratio 6.1% 2.4% 14.3% 4.6% 39.1% 8.8%

Year 2002 2003 2004 2005 2006 2007 2008

GDP 9752178 10423734 11239735 12068090 12881126 13801921 14828345

Source: The Economic Survey, June 2009 29. Further analysis shows that for long time the Government has been setting aside a wage bill equivalent to around 5 percent of the GDP. However, during the 2007/08 budget this ratio was not used. One of the outstanding problems in this area is lack of information on how much share of GDP goes to the other groups of income earners (besides the workers) in the country. This needs to be made transparent so that it becomes clear who gets what and who gets, probably unfairly, more than others. This would also form the basis of establishing appropriate levels of taxes to various income earners including who should have tax reduction or be given subsidy in enhancing public services e.g. education and health. Without such transparency it becomes very difficult to agree with the explanation that the Government does not have ability to pay better wages for all public servants. Adequate and accurate data/information on these issues is critical for any rational decision on wages/salaries, taxation and the budgets needs to contain such data/information. 30. In general, only little information is available on incomes of various groups except public servants. These include capital owners who are paid interests and dividends; investors who get profit after tax; house and land lords who get rents; owners of projects and businesses who are paid proprietors income. Without addressing this problem inequalities will continue in the society with some people getting good income but pay less tax are living luxuriously while those who are not well paid and yet are heavily taxed (Public service workers) living in poverty. 31. In this regard assessing the wage bill by looking at the ratio of wage bill to GDP is not appropriate since not all income earners contributing to GDP are providing adequate and correct information on their earning or as a proportion of GDP. This poses a challenge on the capacity of government to collect tax revenue from these other income earners, which would enhance government revenue and hence ability to pay good wages. It is stressed here that the government needs to ensure that it collects all relevant tax revenues from these other income earners. Failure to do so perpetuates the problem of lack of ability to pay good wages to public servants.

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32. Due to poor distribution of GDP many Tanzanians are poor (including workers) and get very small share of GDP (less than 10% of GDP) while rich Tanzanians (including investors) who are few get more than 80 percent of the GDP. In spite of this it is only workers who get only less than 6 percent share of wages/salaries in GDP are seen as a burden to the national economy. A good and justified approach to the distribution of GDP is for the Government to tax correctly rich Tanzanians so as to increase the capacity to pay well all public servants. 2.3.3 Improve the Ratio between Annual Minimum Wage and GDP Per Capita

33. The minimum wage as a percentage of per capita GDP is one of the common measure used and acceptable internationally. This ratio compares whether a minimum wage earners consume what he contributes to the GDP. Table 7: Per Capita GDP and Minimum Wage Indices
2001 522,00 0 276,74 1 189% 2002 582,00 0 310,99 1 187% -0.8% 2003 636,00 0 353,49 6 180% -3.9% 2004 690,00 0 396,15 4 174% -3.2% 2005 750,00 0 441,06 3 170% -2.4% 2006 843,00 0 478,10 0 176% 3.7% 2007 937,560 547,081 171% -2.8%

Total Annualized MW per worker GDP Per capita Ratio MW p.a/ Per Capita %Δ in ratio

Source: Calculations based on Minimum wage per person figures/ data from PO-PSM and Economic Survey data, 2009. 34. Table 7 shows that the annual minimum wage earned by a public servant is above 100% of the per capita income but has increased at a declining trend almost for the entire decade of 2000s. For instance, the respective ratio declined from 189% in 2001 to 171% in 2007. This implies that annualized minimum wages per person increased more slowly than the GDP per capita. Thus, the government has to raise the minimum wage in order to match with this trend of per GDP per capita. This is important to achieve MKUKUTA goals on poverty reduction (including reduction of the poverty of the poor working public servants). Further we note that the beneficiaries of the minimum wage earners (public servants) who are living in towns or urban areas suffer from high inflation mainly due to high demand for goods and services by rural-urban migrants. In Tanzania the urban migration rate is estimated to be around 5% per annum. 35. Also, public servants like any other members of the society, live with dependants, members of the household who are under the age of 15 or 65 years and above. Table 8 shows that the proportion of dependants is highest in rural areas (0.46) and lowest in Dar es Salaam (0.28) in year 2007. Overall, the proportion of dependants has increased in rural (from 0.42 in 1991/92 to 0.46 in 2007) and other urban areas (from 0.34 in 1991/92 to 0.46 in 2007) while decreasing in Dar es Salaam (from 0.30 in 1992/92 to 0.28 in 2007). This reflects high cost of living in

17

Dar es Salaam resulting into retaining dependants in rural areas (older and younger members) of the household elsewhere.

18

Table 8: Dependency Ratio by Areas
HBS 1991/92 HBS 2000/01 HBS 2007 %Δ in 91/00 %Δ in 00/07 Dar es Salaam 0.30 0.30 0.28 0.0% -6.7% Other urban areas 0.34 0.36 0.38 5.9% 5.6% Rural areas 0.42 0.45 0.46 7.1% 2.2% Mainland Tanzania 0.40 0.42 0.43 5.0% 2.4%

Source: Household Budget Survey 2007 36. The increase in dependency has eroded the purchasing power of the minimum wage earners including the public servants. As noted above in 2006 the National Bureau of Statistics (NBS) established that a worker required a minimum wage of TZS 203,000.00 to be able to meet the basic needs per household of 6 members. Thus, the increase in dependants shows that the government should recognize the need for increase in minimum wage/ salaries to meet the basic needs of a household with at least 6 members. 2.3.4 Improve the Ratio between Wage bill and Government Revenue

37. Another approach for measuring GDP is to add all expenditures including government (and its institutions) expenditure; and expenditures of private companies; and individuals in investment and expenditures (Expenditure Approach). 38. Table 9 shows that Government’s total revenues (TR) have almost doubled just in 6 years, between fiscal 2002/03 and 2007/08. However, the TR funds around 60% of the government’s total expenditure. On the other hand, while the ratio between WS and TR has recorded a declining trend, the ratio between WS and Total expenditure (TE) has increased gradually. For instance, the changes in WS/TR ratio has recorded -12% in 2007/08; indicating that despite an annual increase in government’s total revenues, payments of wages and salaries to public servants (who also contribute to increase in TR consists of tax, fines, penalties and other non-tax revenues) is relatively dwindling. Thus, the system of rewarding public service is dysfunctional despite the fact that the public servant cannot be paid in proportion or close approximation to the revenue she/ he generates. If this trend is not addressed the efforts to collect more revenues will be paralyzed and public servants would be demoralized too. Table 9: Government Total Revenues, Expenditure and Wages & Salaries (TZS Million)
Total Revenue (TR) Total Expenditure (TE) Wages and Salaries (WS) WS/TR Ratio WS/TE Ratio Δ in WS/TR Ratio 2001/2 1,042,955 1,466,137 341,982 33% 23% 2002/03 1,217,517 1,989,538 397,770 33% 20% 0% 2003/04 1,459,303 2,516,943 462,964 32% 18% -3% 2004/05 1,773,710 3,248,352 589,709 33% 18% 5% 2005/06 2,124,844 3,972,608 656,789 31% 17% -7% 2006/07 2,739,022 4,474,680 976,094 36% 22% 15% 2007/08 3,634,581 5,208,996 1,134,709 31% 22% -12%

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Δ in WS/TE Ratio

-14%

-8%

-1%

-9%

32%

-0.1%

Source: The Bank of Tanzania and Ministry of Finance and Economic Affairs, June 2009. . 2.3.5 Improve the Minimum Wages according to Cost of Living and Inflation (Real Wages) 39. Inflation and exchange rates: Besides the fast economic growth and substantial decline of inflation from 30 percent in the early 1990s to 4.4 percent in 2006/07, the benefits are not so much felt by many Tanzanians particularly due to high market prices of goods and services. In addition, the TZS has depreciated so much from TZS 530 per dollar in the 1990s to TZS 1,280.3 per dollar in 2008 (Bank of Tanzania, 2009: Table A10)11. 40. Workers receiving TZS 80,760 wage are facing difficulties to make ends meet. This wage rate is only 25.06 percent of the amount that was recommended by TUCTA which could be sufficient for getting basic needs. The TZS 80,760 is enough to meet the basic needs of 8 days only when compared with the recommended TZS 315,000 which is enough to meet basic needs of 30 days. Further, the TZS 80,760 is only 39.7 percent of the TZS 203,000 wage that was established by NBS for meeting the basic needs of a family of six people (2 adults and 4 children below 18 years) for 12 days only. Thus the government need to realize that raising wages/salaries of lower cadre workers is crucial for helping them out of poverty rather than focusing on attracting and retaining professionals in public civil service. 41. Consumption Expenditure: Table 10 shows the average levels of consumption expenditure per 28 days by stratum for 2000/01 and 2007 at current prices. Mean expenditure per capita in Tanzania in 2007 was 20,288 Shillings. The median – which shows the value below which half of the population falls – was substantially lower, because a small number of high values have more effect on the mean. 42. In both periods (2000/1 and 2007), mean per capita expenditure in Dar es Salaam was around 2.5 times higher than in rural areas; and around 1.5 times higher than in other urban areas. Differences in average consumption expenditure per household were slightly smaller because rural households tend to be larger: compared to rural areas expenditure in Dar es Salaam was 2.2 times higher in 2000/01, but only 1.8 times higher in 2007. This suggests that an average consumption basket has increased in price by a factor of 1.95 during 2000/01 – 2007 period. This is well above the increase in the consumer price index. The Fisher Index has the benefit of taking into account changes in consumption patterns that have occurred over the period.12 Across the population as a whole,
11 12

Governor Bank of Tanzania: Monetary Policy Statement, June 2009 Further detailed description of the Fisher Index and its benefits see Deaton, A. and Tarozzi, A. “Prices and Poverty in India” (1999), Princeton University (mimeo). A Fisher Index is used to adjust for price variation both over time and across different geographical areas. It can be thought of as representing a sort of ‘average’ consumption pattern between the two populations being compared. The index is calculated

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mean real expenditure levels have increased by around 5 percent between 2000/01 and 2007, suggesting that overall household real incomes of minimum wage earners have been eroded. However, this seems to have been driven largely by the increasing demand due to urbanisation and a consequence of the fuel price shocks in 2007. Table 10: Average Consumption Expenditure in 2000/01 and 2007 (28 days, TZS)
Measure 2000/01 Mean expenditure per capita Median expenditure per capita Mean expenditure per household 2007 Mean expenditure per capita Median expenditure per capita Mean expenditure per household Dar es Salaam 21,415 16,203 92,767 41,279 32,047 150,885 Other urban areas 14,185 11,407 63,657 27,100 21,388 118,582 Rural areas 8,456 6,825 42,999 16,418 13,408 82,715 Mainland Tanzania 9,997 7,434 49,428 20,288 15,047 96,709

Source: HBS 2007, National Bureau of Statistics 2009. 43. Expenditure on Services: Workers are now incurring a lot of expenses to educate their children at all levels of education (primary, secondary and tertiary). They also face cost sharing when getting health services. The noted huge differences of wages and salaries between higher and lower cadre workers have serious implications on accessing these services. Workers earning higher wages/salaries and allowances and per diems have the capacity to ensure quality education (obtained locally and abroad) for their children while workers earning lower wages/salaries and without allowances and per diems can not afford to do so for their children and some of them fail completely to pay for these services. Their children end up with poor quality education or simply fail to complete their studies. The government has built many secondary schools at ward level, the intention being to expand enrolment. However, these schools attended mainly by children of lower cadre workers and low income earners in the country, are faced with critical shortages of classrooms, laboratories, teachers and books. 2.3.6 Implement Government Promises to Improve Wage and Benefits after Reforms

44. Reforms in 1980s: When the government started implementing structural adjustment reforms in the 1980s, it promised the workers, among others, that their wages and salaries would be improved immensely after retrenchment exercises. However, contrary to the expectations of the workers, the promise on better wages/salaries was not fulfilled even after successfully undertaking the retrenchment exercises. At the same time these economic reforms have brought in issues of cost sharing in services including education and health and have removed subsidies as well. That is, all costs have to be paid by individuals
using the price and quantity information from the surveys.

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including those minimum wage earners. This situation has rendered the minimum wage earners in a difficulty way of life. Further, the money obtained from savings after retrenchment and thereafter was grossly misused on luxurious vehicles bought for higher cadre civil servants; imported furniture; and excessive internal and external travels by government leaders; instead of improving the wages and salaries of all workers. It is noted here that this behaviour was not common before reforms in the 1980s. 45. Reforms in 1990s: Since early 1990s, investors are promised good business environment including tax exemption, reduction of after profit tax from 30 to 15 percent. All these promises to investors were fulfilled and continue being honored quite the opposite of what happened to workers. Wage and salary improvement would have enabled workers to access social services including education and health which have been privatized thus requiring workers to pay (cost sharing) for certain costs of these services. 46. Reforms in 2000s: In the 2000s, the government has been implementing core reforms including the Public sector reform programme (PSRP), Legal Sector Reform Programme (LSRP), Local Government Reform Programme (LGRP), Business Environment Strengthening in Tanzania Programme (BEST), Public Finance Management Reform Programme (PFMRP), Second Generation Financial Sector Reform Programme (SGFSRP) and Agriculture Sector Reform Programme (ASDP). These reforms have built the capacity of the government covering institutional capacities, human capacities and organizational capacities. The human capacities have significantly improved to the extent that most of the reform activities and external programme managers and Zonal Reform Teams who worked under Programme/ Projects Management Units (PMUs) have been mainstreamed in the normal government business operations. Also, the public service management which is implementing the performance management system (PMS) is highly satisfied with the performance of majority of public servants (including minimum wage earners) in so far as no sanction is taken on the employee in accordance to the level of agreed performance target in line with the requirements of regulation 22 of the Public Service Regulation 200313. 47. The overall impact of these reforms to the public administration GDP is high growth, mainly attributed to increased financing of public service reforms and new employment to replace retirees (e.g., ZRTs or PMUs) for both local and central governments. For instance, public administration raised growth from 6.5 percent in 2006 to 7.0 percent in 2007. In 2008 and 2009 it maintained at a growth of 7.2 percent, further it is expected to improve to 7.5 percent in 2010. Such achievements should challenge the government to raise salaries and wages including the minimum wages to its public servants. That is, policies to improve jobs and earnings prospects must be central to the elimination of working poverty. Catherine Saget has analyzed the relationship between the minimum wage and the poverty lines of one US$ per day during the 1990s for 31 countries. A regression
13

The United Republic of Tanzania: The Staff Circulars 1996-2005, PO-PSM Library.

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analysis of the data she used suggests that higher minimum wages are associated with lower levels of poverty and that countries with higher minimum wages are those committed to the reduction of poverty. There are also those that have adopted and are implementing pro-poor policies. 2.3.7 Improve the Relation between Minimum wages in the Public Sector and the Private Sector

48. The difference between legal wages of public sector and private sector was based on certain valid reasons. The legal minimum salary of rural area (agriculture) of TZS 35,000 and was differentiated with the legal urban area of TZS 48,000. The current minimum wage of TZS 35,000 has been raised to TZS 65,000 (or an increase of 85.7%) (See Table 2 above). 49. The new minimum wage of private sector of TZS 65,000 (effective from January 2008) differs by TZS 15,760 only when compared with the public service minimum wage of TZS 80,760. If the minimum wage of TZS 100,000 start being paid in January 2008 the difference between the two minimum wages will be only TZS 35,000. This is not fair since most of the workers who will be receiving TZS 65,000 per month are unskilled and young people without families or dependants while skilled people in public service who are skilled will be receiving just TZS 100,000 (a difference of only TZS 35,000). Public service servants receiving this salary have qualifications and long experience and deserve significantly higher wages than the young (inexperienced and probably unskilled) are getting at the moment. 50. In order to address this problem it is important for the government to raise the minimum wages of public service servants by the same percentage rise that was used in the private sector (85.7% increase from TZS 35,000 to TZS 65,000) which would result in a new minimum wage in the public service to TZS 150,000. This is a minimum wage which was supposed to be paid to public servants since January 2008. In the same way TUCTA recommends that this new minimum wage be raised to TZS 315,000 in 2008/09. 2.3.8 Improve the Ratio between the Minimum Wage and Consumer Price Index Inflation

51. The Minimum wages in the Public service are paid to Tanzania Government Operational service Scale (TGOS1). These constitute a significant proportion in the wage bill. Table 11: Deflators, Consumer Price and Minimum Wage Indices
GDP Deflators/ Broad Price Index/ Benchmark %Δ in GDP deflators Pub Admin GDP Deflators %Δ in PAD GDP deflators Minimum Wage Index 2001 100 100 100 2002 107 7% 108 8.0% 112 2003 116 8% 113 4.6% 122 2004 124 7% 124 9.7% 132 2005 132 6% 132 6.5% 144 2006 139 5% 139 5.3% 162 2007 152 9% 150 7.9% 180 2008 170 12% 168 12.0% 207

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%Δ in MWI MWE DSM CPI %Δ MWE DSM CPI Ratio-MWI/MWE DSM CPI %Δ in MWI/PAD %Δ in MWI/ MWE DSM CPI

100 1.00

12% 103.8 4% 1.07 3.7% 7.4%

9% 109.8 6% 1.11 4.1% 3.3%

9% 116.8 6% 1.13 -1.4% 2.0%

9% 126.5 8% 1.14 2.5% 0.4%

12% 141.1 12% 1.14 6.8% 0.8%

11% 154.8 10% 1.16 3.0% 1.4%

15% 180.9 17% 1.14 2.7% -1.4%

Source: Calculation using data from Economic Survey, June 2009. 52. Table 11 indicates the trend of the minimum wages index (MWI) and GDP deflators (GDPD); Public Administration Deflators (PAD) and index of retail prices of goods consumed by minimum wage earners in Dar es Salaam (MWE DSM CPI). The MWE DSM CPI grew (from 10% to 17%) more rapidly than the MWI (from 11% to 15%) between 2007 and 2008 years. The change shows that the growth in nominal increase in minimum wage earned per annum did not correspond to or match with annual price inflation of the goods consumed by minimum wage earners during the period between 2001 and 2008. The declining trend of the MWI/ MWE DSM CPI ratio indicates that the minimum wage (numerator) was increasing at a relatively high rate as compared for MWI. This is attributed to the government’s reactionary lag in addressing inflationary effect. 53. Generally, the rise in MWI faster than GDP deflator reveals that real spending power of the minimum wage earners has grown over the period 2001-2008. However, the changes in the ratio between the minimum wage index and public administration deflators have declined since year 2006. This reveals out that the raise in minimum wage has relative been sticky since 2006. That is, the government has to keep minimum wage competitive with changes in macroeconomic fundamentals reflected by the GDP deflators. For instance, the government shall raise minimum wage to appreciate gains in labour productivity as resulting from the Public Service Reform Programme (PRSP) that has significantly improved the mindset of the public servants towards resultsorientation performance system (Open Performance Review and Appraisal System – OPRAS). 54. The determination of the minimum wages and salary levels is explicitly a social judgement but it should apply also to the standard of living approach as well as minimum rights to resources including basic needs such as food, housing, and clothing. The goal should be that public workers are entitled to the minimum income to attain a specified level of consumption (or a right to consumption of specific goods).

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3.0

SOCIAL SECURITY SCHEMES AND BENEFITS ISSUES IN TANZANIA

3.1 The Social Security Concept 55. The Social Security system has simply taken the payroll tax payments of the current working generations and handed them over to the current retired generation. The benefit checks that our grandparents receive each month are not, in any real sense, the dividends on the investments they made while they worked. Instead, they are the payroll taxes that we or our parents pay each month. For instance, social security Funds collects payroll taxes and use the funds to pay social security benefits including pension to the retired workers. 56. On the face of it, the payroll tax in the name of social security contribution to any social security institution seems like a proportional tax, but it is actually highly regressive for two reasons. First, only wages and salaries are subject to the tax. Income form interest and dividends is not taxed this way. Second, because there are upper limit on social security benefits, earnings above a certain level are exempted from the tax. That is, above a certain level/ limit, the marginal tax rate on earnings is zero. . 57. The ILO’s Social Security (Minimum Standards) Convention 1952 provides guidelines for setting minimum benefits of a Social Security Scheme. It stipulates the contingencies to be covered including: (i) old age – retirement at ) (ii) invalidity (iii) employment injury (iv) survivors (v) medical care (vi) sickness (vii) unemployment (viii) maternity and (ix) family allowance. Table 12 shows the types of pension and recommended replacement rates. Table 12: Type and Replacement Rates of Pension Type of Pension Recommended Replacement Rate Retirement (at old age ≤65 years old with due 40% of the income of a middle regard to working ability) income worker who has worked for 30 years Survivors Invalidity Sickness 45% Unemployment Maternity Invalidity and Incapacity to work 50% Source: Author 58. The Tanzania’s social security institutions are responsible for the payment of a range of gratuities and pensions in respect of retirees/ pensioners14 and other benefits for the service of retirees. For instance, the pension funds are responsible for payment of the following types of benefits:
14

A pensioner means a person who is in receipt of a pension awarded to him by government under the pension ordinance (Cap. 371) having retired from the service on attaining the compulsory age of retirement.

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59. Old Age or Retirement Pension (RP): These are terminal benefits are lump sum based on total balances at the end of employment period. RP is a benefit payable to a retiree of civil service or executive agency who was a fund member until he retires at either an age of 55 or 60 years on a compulsory or voluntary basis. 60. Gratuity Benefit (GB): This benefit is granted as a lump sum immediately employment ends to the member. For instance, the PPF provides GB to members with fewer than 120 months of contributions. Also, PPF grants Commuted Pension Gratuity (CPG) as a lump sum immediately on employee ceasing employment. 61. Survivals’ Pension (SP): This benefit is payable to dependants of a civil service or agency employee, who was a fund member and who dies without prejudice to the relevant law of inheritance. For instance, PPF grants the benefit as for monthly old-age pension for 36 months to the deceased member’s dependants. 62. Death Gratuity (DG): This is a benefit payable to legal dependants of a civil service and executive agency employee member, who dies while working and before attaining a statutory retirement age. The legal representatives are paid a gratuity of an amount not exceeding either the annual pensionable emoluments or commuted pension gratuity whichever is greater. For instance, the PPF grants death gratuity as a lump sum to the administrator of the deceased’s estate; it is either the deceased member’s annual pensionable emoluments or a commuted pension gratuity. Also, PSPF pays death benefits as 1/540 times complete number of months of service times last annual salary times five. 63. Sickness and health insurance benefit: This is a benefit for payable for improving health status of the members. For instance, the NSSF provides health care services to the insured person, a spouse and up to four children. The National Health Insurance Fund (NHIF) provides medical coverage to government pensionable employee. Medical services are provided through accredited medical providers who have entered into agreement with the NHIF. 64. Invalidity Pension (IP): is a benefit payable to a civil service and executive agency employee member who while doing official work is incapacitated and becomes unable to earn income. 65. Funeral Assistance/ Benefit (FB): This is a benefit payable as a funeral grant given to family members of a deceased fund member, to enable the family meet funeral expenses of the deceased member. For instance, the NSSF refunds the funeral costs at the rates determined by the Board. 66. Education benefits: This benefit is payable to support educational progression of the members. For instance, the PPF provides payment directly to the schools bank

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account at the beginning of each academic year. Each child is granted an amount not exceeding 1/12 of the deceased member’s annual pensionable emolument. 67. Withdrawal15 Benefits (WB): Withdrawal benefits are lump sum based on total balances at the end of employment period. For instance, marriage benefits are benefits paid to a female member who gets married and consequently, gives up her gainful employment. Also, maternity benefits are withdrawal paid to a female member who gives birth. Unemployment benefits are withdrawals paid to members who have lost or decides to give up her gainful employment. Emigration Benefits are withdrawal paid to member who decides to immigrate to another country. 3.2 Tanzania’s Social Security Framework 3.2.1 NSSF Establishment Act no. 30 of 1997 (NSSFA 30/1997): 68. The NSSF was establishment by Act No. 30 of 1997 by conversion of the then National Provident Fund (NPF) system which was established in 1964 into a pension scheme covering employees in the private sector. The NSSF is the largest pension scheme in Tanzania as it has been to cover employees in the private sector (informal economy) on a voluntary membership basis. The contribution rate to NSSF is 20% of gross salary, shared equally between employee and employer. 3.2.2 Public Service Retirement Act No. 2 of 1999 (PSRA2/1999): 69. The PSRA2/1999 was enacted to provide for the establishment of the Public Service Pension Fund (PSPF) and to repeal some older laws, such as the Pension Ordinance of 1954 which was enacted to regulate retirement benefits to civil servants in Tanzania Mainland. The PSPF started operating in July 1999 and has been responsible for payment of benefits to any civil servant who retires from service since July 2004. This means the PSPF started operating with a potentially substantial unfunded liability. The PSPF covers the permanent and pensionable employees of central government taking into account the years the years of service into the pension formula. 70. In Tanzania, employees under operational service are normally provided under the National Social Security Fund (NSSF) scheme. The payroll tax of 20% of salary that is levied is divided between employees and employers, each paying roughly half the amount. Also, the Public Service Retirement Act No.2 of 1999 (PSRA2/1999) establishes the Public Service Pensions Scheme, to provide for contributions to and payment of pensions, gratuities and other benefits in respect of the Public Service of officers in the Government and to provide for the related matters. According to PSRA2/1999, all employees who are confirmed in a pensionable office are members and the government (the employer of member of
15

Withdrawal due to marriage, maternity, giving birth, emigration or unemployment.

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the PF) is obliged to contribute 15% and employee 5% of his/ her salary. All members of the operational service pay the payroll tax at a fixed percentage rate (now about 20%) that is divided between employees and employers, each paying 5% and 15% of salary, respectively. This means that a the government (MOFEA) is paying an employee a gross monthly wage of, say, TZS 100,000 will deduct TZS 5,000 (5% of TZS100,000) from that worker’s check, add an additional TZS15,000 of its own funds, and send TZS20,000 to the government (relevant Pension Funds). The collected payroll tax is euphemistically referred to as contributions for social insurance though these contributions are far from voluntary. The proceeds from this particular tax are set aside in trust funds for use in paying benefits to social security recipients and others. 3.2.3 The National Employment Policy 2008 and Clients Service Charter: 71. The National Employment Policy 2008 admits that employment related social protection services have been limited to social security services and particularly to formal wage employees and urban dwellers. Thus, it makes the policy statement that “Social Protection services and social security schemes will be promoted to cover the unprotected workers, marginalized and vulnerable social groups in the formal and non-formal sectors as guided by the social protection instruments” (pp.35 section 3.23). 72. Also, the PO-PSM is committed to execute the following objectives which contribute to social security benefits: (i) to formulate and supervise the implementation of policies governing the public service (ii) to coordinate reforms (iii) to supervise for public service regulations, code of ethics and conduct in public service, reforms of systems of public service delivery, employment services records and other documents in the public service. 3.2.4 Parastatal Pension Fund Act no. 25 of 2001 (PPFA25/2001): 73. The PPFA25/2001 amended the PPF Act no. 14 of 1978 to provide pensions and related benefits to its members, who initially were workers in Parastatal agencies. The PPFA25/2001 is made of two schemes: (i) the traditional parastatal pension scheme (TPPS) covers the employees of parastatals organizations and public institutions or private companies in which the government owns shares or registered private companies not covered by any other social security fund. (ii) The deposit administration scheme (DAS) covering employees who do not qualify for membership of the TPPS or employees already covered by any scheme who want a supplementary scheme. This scheme is a defined-contribution (DC) plan. 3.2.5 Public Service Act no. 8 of 2002 (PAS2/2002) and Regulation on Retirement Benefits: 74. Public Service Act no. 8 of 2002 and Regulation on Retirement Benefits provides for granting of retirement benefits to Public servants other than those employed in

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the Local Government Authorities. However, if the worker is transferred from one fund to another, the terminal benefits in respect of service he is transferred from, be frozen and shall be payable on his retirement on grounds allowing payment of terminal benefits. Also, a transferred member is allowed to continue his membership in the scheme he was formerly governed with or join and contribute to the sachem governing the services to which he is transferred. The benefits payable under these regulations are any benefits payable under any law providing for the grants of ant pension, compensation, to persons in respect of their service as public servants to their widow, widowers, children, dependants or personal representatives of such persons in respect of that service. 3.2.6 The National Social Security Policy of 2003 (NSSP2003): 75. The government developed the National Social Security Policy in 2003 (NSSP2003). This policy identifies and addresses three shortcomings in the current social security system, including: (i) fragmentation and lack of coordination social security entities resulting into differences in contribution rates, benefit structures, qualifying conditions as well as plans and priorities; (ii) Lack of mechanism for portability of benefit rights; there is no established mechanism that can allow benefit rights of a member to be transferred from one scheme to another; and (iii) Inadequacy of benefits paid in terms of quality, indexation to the current levels of earnings and number of benefits offered by most of the existing schemes fall below the ILO Minimum standards. The government is committed itself to ensure that social security schemes are managed efficiently. 3.2.7 The Local Authorities Pension Fund Act No. 9 of 2006 (LAPFA6/2006): 76. The Local Authorities Pension Fund Act No. 9 of 2006 (LAPF9/2006) converted the Local Authorities Provident Fund which began in 1944 into a defined-benefit pension scheme which offers retirement benefits similar to those of PSPF since July 2005. Specifically, LAPF9/ 2006 provides for collection of the contributions from local government employees and any other institution or person who wishes to be a member and payment of pensions, gratuities and other benefits. 3.2.8 The Social Security (Regulatory Authority) Act no. 8 of 2008 (SSRA8/2008): 77. Social Security (Regulatory Authority) Act no.8 of 2008 to implement NSSP of 2003. It deals with established mandatory schemes, and the establishment of supplementary and private schemes. It introduces competition amongst mandatory schemes and mechanisms for the establishment of minimum benefits. Also, it introduces indexation of benefits, portability of benefit rights of member from one scheme to another and reviews of taxation policies after consultation with the MOFEA. 78. The legal instruments have generates different social security funds and schemes in Tanzania. Table 13 summarizes these Social Security Schemes and Benefits.

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Table 13: Comparisons of Tanzania Social Security Schemes and Benefits
Item Act and Year of establishment (Precursor) GEPF SSSS PPF 1978 (AN.14), amendments 1998 (% CF, PF), 1992 (CPG), 2002 (AN.25 - Pvt) Board of Trustees, MOFEA Employees and Employers of (i) Parastatal Organizations and Public Institutions (ii) Restructured Parastatals (iii) Companies in which the Govt has Shares (iv) Private Sector Coys not covered by any Pension Fund NSSF AN.28 of 1997 (NPF) PSPF AN.2 of 1999 LAPF AN. 9 of 2006 (Local Authorities Provident Fund) Board of Trustees, PMO-RALG

1942

1966

Governing Body

Board of Manageme nt and MOFEA

Board of Trustees, NIC

Board of Trustees, MOLEYD

Board of Trustees, MOFEA Employees from the CG and its Agencies as established by Acts of Parliament who are under the Permanent employment with retirement benefits. NOT All Public Servants are PSPF members.

Membership

Every nonpensionabl e employee who is not depositor

Senior Academic Staff of the UDSM

Employees and Employers of (i) Private sector (ii) GoT- MDAs not covered by the PSPF (iii) Selfemployed and (iv) All others not covered by any Pension Fund

Employees and Employers of (i) LGAs and Institutions (ii) LAPF (iii) LG Loan Board (iv) Any other institution or person who wishes to be a member

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Item

GEPF

SSSS

Contributions (Employee-Employer (% of gross salary)

10%-10%

5%-5%

Benefits

Provident scheme and gratuity

Endowme nt scheme, old age retiremen t, death and withdraw al

Conditions for full benefits Coverage Pension Factror(s) PF

Age: 55, 60 max; maturity: 15 years

Age: 55, 60 max; maturity : Annually

PPF 5%-5% for Parastatals, 10%-10% Private Sector (Flexible limits are negotiable) Traditional pension scheme (PPS), Old age (retirement), gratuity, disability/ invalidity, death gratuity/ funeral grant, survivors/ dependants pension, withdrawal, education, deposit admin. Scheme (DAS), defined contribution scheme Age: 55, 60 max; maturity: 10 years 1/960 for 1978 – 30th June 1988 and

NSSF

PSPF

LAPF 5%-15% for LGA and 10%-10% for others

10%-10%

5%-15%

Old age (retirement), gratuity, invalidity, death gratuity/ funeral grant, survivors pension, withdrawal, medical insurance and maternity

Old age (retirement), gratuity, in Validity, death gratuity/ funeral grant, survivors pension.

Old age (retirement), gratuity, invalidity, funeral grant, survivors pension, withdrawal, marriage, maternity, emigration, and/or unemployme nt, medical (Insurance)

Age: 55, 60 max; maturity: 15 years 1/720 – 1/600

Age: 55, 60 max; maturity: 15 years 1/540

Age: 55, 60 max; maturity: 15 years 1/540

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Item

GEPF

SSSS

Commutation Factor (CF) Basis for Calculations Total monthly Annual salary Not yet available –as done solely by NIC

PPF 1/600 for 1st July 1988 onwards 12.5 Annual Pension Emolument APE=Annualiz ed Highest Monthly Average for best 5 years CPG= APE x PS x PF x 25% CPG 25% MP= APE x PS x (1/12) x 75% guaranteed for only 36 months and thereafter as long as the pensioner is alive (Approx. 25-30% of the HMS

NSSF

PSPF

LAPF

18 AME based on the Best 5 years of the last years

15.5

15.5

Computation (SA= 1/540 x no. of complete months served x last annual salary) CPG Formula Initial Lump sum (% of Total Pension) Monthly Pension (MP)

Total monthly

Specified Amount SA=PF x PS x LAS CPG = AME x 24 Months . CPG MP= 30% x AME, Min. RR is 30% and Max. RR is 67.5% of average Insurable earnings Minimum 80% of Min. Statutory Wage monthly salary currently (2008) CPG = 0.5 x SA x CF CPG 50% MP= 50% x SA x (1/12) or MP=SA/2x1/ 12 for as long as the pensioner is alive

Specified Amount SA=PF x PS x LAS CPG = 0.5 x SA x CF CPG 50% MP= 50% x SA x (1/12) or MP=SA/2x1/ 12 for as long as the pensioner is alive

One off lump sum None

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Item

GEPF

SSSS

PPF

NSSF about 33200/Gratuity = CPG as oneoff payment

PSPF CPG/ Gratuity =SA/2x15.5 as one-off payment

LAPF

Gratuity

Accrued Total Contributio ns

None

GB= 5 x APE x PS x PF as one-off payment

CPG/ Gratuity = 5 x SA as oneoff payment

KEY:
AME=Average Monthly Earnings (NSSF) APE=Annual Pension Emolument (PPF) CF=Commutation Factor (PPF) CPG=Commuted Pension Gratuity (PPF) GB=Gratuity Benefits HMS=Highest Monthly Salary (PF) LAS=Last Annual Salary (PSPF, LAPF) MP=Monthly Pension PF=Pension Factor (PPF, PSPF, LAPF) PS=Pension Factor (PPF, PSPF, LAPF) SA=Specified Amount (PSPF, LAPF)

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3.3

Why Improve Social Security Schemes and Benefits in Tanzania?

3.3.1 Improve the Legal Framework of Social Security Funds and Distorted Benefits 79. The legal framework indicated that the terminal benefits for retired workers (including public servants) in Tanzania are managed by five different Pension Funds (with the distribution of pension member of each scheme as percentage of total coverage) are given as follows: (i) Public Service Pension Funds (PSPF17%), (ii) Local Authorities Pension Fund (LAPF) and Government Employees Provident Fund (GEPF-45%), (iii) National Social Security Fund (NSSF-31%), and (iv) Parastatal Pension Fund (PPF-6%). These social security funds/ institutions are governed by multiple laws pertaining to their establishment, operations or processing and settlement of benefits to employed and retired workers. These multiple laws are hardly reinforcing each other and are sometimes regarded as dividing unionized workers. Also, the multiple laws provide for different levels of social security benefits to employed or retired workers. Some of the weaknesses are reflected in the social security benefits. 3.3.2 Improve Performance of Social Security Scheme/ Funds 80. Payment of Social Security Benefits: The central government (CG) and PMORALG are main employers and custodian or overseers of these funds and are responsible for the payments of the terminal benefits (TB) to public servants. Table 14 shows the proportion of pension in budget expenditures. The pension/total expenditures accounted for 2.6% in 2008/9 and more than doubled to 6.1% in 2009/10. This implies that if pension is financed by payroll taxes, then the rate should have increased for more than double. However, this has not been the case for the government and instead more workers have been recruited and their payroll taxes have settled the pension bill. Table 14: Proportions of salaries & pensions in Budget Expenditure: MDAs & LGAs (in TZS Billions)
Recurre nt 3608.2 1118.5 4726.7 4385.0 1926.1 323.1 1740.3 185.8 4.2% 9.6% 10.7% 3.9% 2008/09 Developm ent 2133.8 357.6 2491.4 1042.0 24.9 88.2 23.6 1.3 0.1% 5.2% 5.5% 0.1% Total 5741.9 1476.1 7218.0 5427.0 1951.0 411.3 1763.9 187.0 3.4% 9.6% 10.6% 2.6% Recurre nt 4999.6 1689.0 6688.6 6607.2 2359.8 265.5 1784.7 575.3 8.7% 24.4% 32.2% 8.6% 2009/10 Developm ent 2301.7 526.5 2828.2 1300.9 13.2 60.6 11.7 1.6 0.1% 12.1% 13.7% 0.1% Total 7301.3 2215.5 9516.8 7908.1 2373.0 326.1 1796.3 576.9 7.3% 24.3% 32.1% 6.1%

MDAs LGAs Total Recurrent PE Allowances Basic Salaries Pension Pension/Recurre nt Pension/PE Pension/Salaries Pension/ Total

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MDAs Recurrent PE Allowances Basic Salaries Pension Pension/Recurre nt Pension/PE Pension/Salaries Pension/ Total LGAs Recurrent PE Allowances Basic Salaries Pension Pension/Recurre nt Pension/PE Pension/Salaries Pension/ Total

3608.2 3279.9 1089.7 285.7 904.0 185.8 5.7% 17.1% 20.6% 5.1% 1118.5 1105.2 836.3 37.4 836.3 0.0 0.0% 0.0% 0.0% 0.0%

2133.8 859.9 23.0 63.1 21.9 1.1 0.1% 4.8% 5.0% 0.1% 357.6 182.1 2.0 25.1 1.8 0.2 0.1% 10.0% 11.1% 0.1%

5741.9 4139.8 1112.7 348.8 925.9 186.8 4.5% 16.8% 20.2% 3.3% 1476.1 1287.2 838.3 62.5 838.1 0.2 0.0% 0.0% 0.0% 0.0%

4999.6 4840.2 1207.0 219.6 681.9 525.1 10.8% 43.5% 77.0% 10.5% 1689.0 1767.1 1152.8 49.9 1102.8 0.2 0.0% 0.0% 0.0% 0.0%

2301.7 1031.3 10.3 23.4 9.0 1.3 0.1% 12.6% 14.4% 0.1% 526.5 269.6 2.9 37.2 2.6 0.3 0.1% 10.3% 11.5% 0.1%

7301.3 5871.5 1217.3 329.1 690.9 526.4 9.0% 43.2% 76.2% 7.2% 2215.5 2036.7 1155.7 87.0 1105.4 0.5 0.0% 0.0% 0.0% 0.0%

Source: Ministry of Finance and Economic Affairs, 2009. 81. The sharp rise in average tax rates from 10.6% (2008/9) to 32.1% (2009/10) reflects the improved collection of payroll taxes and the big sum of money accrued from the investment of the PFs. That is, the government has paid a large amount of pension to pensionable retired servants from its consolidated fund. Also, it ideally means the MDAs have hired more high-earning workers whose contributions to PFs are significantly high. In the LGAs, the contribution to LAPF is relative small. This is attributed to low earning (including minimum wage earners) workers and to employment of non-pensionable workers, and/or temporary workers. In addition, the ratio of total contributions (pension) to the wage bill (basic salaries) is an indicator of the average payroll tax rate, which is generally high. 3.3.3 Rationalize and Harmonize the Formulas for All Retirees

82. There is huge disparity of terminal benefits being paid under different schemes applying different formulas despite the fact that all retirees have served or operated under the same government. Table 15 shows the differences in the average monthly pensions to pensioners. While PPF paid the lowest average monthly pension (TZS 37,560) PSPF paid the highest pension (TZS 85,825) to old age pensioners. Also, the figures show that the bigger the number of either invalidity or survivors’ pension the lower the payment of average monthly pensions (AMP) and vice versa. For instance, the PPF’s 255 survivors were paid higher AMP (TZS 80,553 each) while 484 PSPF’s survivors were paid lower

35

AMP (TZS 57,093 each). The same applied to the payment of invalidity pension whereas 257 pensioners were paid AMP of TZS 47,563 while 58 pensioners were paid AMP of TZS 80,041. This reveals out that the respective Social Security Funds have set a maximum budget (lump sum) for payment of each type of pension. Thus, any increase in a number of pensioners the lower the average monthly pension (AMP) will be. This is unjust approach to administer distributive justice to pensioners. Table 15: Scheme Comparisons, Number of Pensioners and Average Monthly Pension (In June 2006) Fund PPF PSPF NSSF Government (LAPF + GEPS) Source: ILO, 2010. Type of Pension Invalidity Survivors Old age Invalidity Survivors Old age Old age Total # of Pensioners 257 255 14077 58 484 5849 1277 Average Monthly Pension (TZS) 47,563 80,553 37,560 80,041 57,093 85,825 52,904 40,165

83. In terms of labour force distribution, the social security sector is divided into the following coverage: (i) The self-employed in agriculture and elsewhere account for about 93.5% of the labour force, (ii) public and other formal sector employees’ account for 6.5% of total employment. The public and other formal sector employees include mandatory public social security protection arrangements (institutions include NSSF, GEPF, SSSS, PPF, PSPF, LAPF) and private schemes which are not community based (with insignificant coverage). 3.3.4 Improve Access to Data and formulas for Computation of Security Benefits:

84. Data and Information: The data and information for computation of the social security benefits have to be readily available for computation of social security benefits to the entitled workers or retirees. Also, the beneficiaries have the right to know the data and assumptions used in the processing and hence payment of terminal benefits after retirement. That is, they should not be denied of the access to information on how their terminal benefits are processed. 85. The Pension Factor: This is a key issue in the computation of pension and it has to be realistic. Ideally, the pension factors reflect the estimated number of months employees are required to work before retirement. For instance, the pension factor such as 1/540 may be applicable for a worker who was employed for 45 years. Since majority of Tanzanians start get employment at age of mid twenties or

36

thirties, the PF should be revised accordingly. For a retiree who worked for 30 years the PF should be 1/360 instead of 1/540. A bigger denominator deflates the amount payable in terms of pension or gratuity to the pensioners. 86. The Commutation Factor: There is need to improve the estimated Commuted Factor (CF), which reflect the probability to live after retirement. For instance, it may not be realistic to estimate that a retiree will live in a range of 12.5 (20% of working period) to 18 years (30% of working period) while others live beyond the pre-set period. It is advised that all the retirees should be entitled to benefits to life (to (including their burial). 87. Indexation: There Social security schemes should automatically increase the security benefits in conformity with the increase in Consumer Price Index (CPI) relative to the base period (or a quarter of a year or base year). That is, the size of the security benefits increase should be determined by the percentage rise in the CPI between the quarters or years (period) of measurements (base year is 2001). 3.3.5 Minimize Administrative/ Operational Expenses of the Social Security Funds 88. Table 16 shows that most of the social security funds operate at high ratio of administrative expenses to contributions beyond the recommended rate (15% of total contributions). For instance, the NSSF recorded highest administrative expenses ratio at 20.3% with coverage of 31% of total members in Tanzania. The figures show inefficiency especially when compared with PSPF which administers more than half of NSSF’s members at a ratio of 4.1% (almost 5 times less than the NSSF). The NSSF is regarded as extravagant in terms of payments of inflated advertisements, supporting of social entertainments (sports) and failure to comply with its NSSP 2003 and NSSFA 30/1997. On the other hand the PSPF is regarded as efficient due to collection of a single check for all its members from the MOFEA. The PPF is relatively inefficient if compared to PSPF. Overall, the administrative expenses to contributions ratio is too high and has to be reduced in favour of payments of benefits to members/ workers. Table 16: Comparison of Administrative Expenses
Social security Scheme NSSF LAPF PPF PSPF GEPF GPS (LAPF and GEPS) Ratio of expenses to contributions 20.30% 18.80% 14.50% 4.10% 9.80% 18.8+9.8=28.6% Members - % of total Coverage 31% 6% 17% 45%

Source: ILO 2010. 3.3.6 Fast Track Processing and Payments of the Benefits

89. The government has not to a large extent fulfilled its responsibilities of ensuring the processing of terminal benefits of retirees on time and without recourse to

37

duress. For instance, the delay in processing payment of terminal and other benefits (TOB) takes more than 12 months without receiving their TOB, culminating into big gathering of retired people with complains and condemnations. Thus, it is important for these SSS to reduce the bureaucracy in the processing of terminal benefits (TBs). The TBs of retirees’ workflow has to be reviewed and a flow chart to identify areas of unnecessary requirements that can be discarded in order to avoid bureaucracy has to be in place. Also, the Pension Funds should train and efficiently manage its officials on regular basis on how to process TB payments without unnecessary delay. In addition, public servants/ employees have to be trained on keeping their personal and work records and retirement procedures. Further, in Prepare schedules to remind workers who are about to retire in the near future at least three years schedule indicating the date of retirement of staff and the necessary documents prevailing necessary information and data for efficient decision making on TB matters. 3.3.7 Reform (Privatize or Merge) the Social Security Funds/ Institutions: 90. The government is advised to privatize the social security system to introduce competition which will result into lower payroll contributions and taxes and hence increase in minimum wage levels (benefits). That is, the social security system in Tanzania should allow some private pension funds to operate in Tanzania economy. These private pension trust funds will receive pay in money from employees while they are working, invest them for contributors, and contributors withdraw it bit by bit in their retirement years. 91. Also, the Social security institutions have to be merged into a one-stop shop serving all the public servants in both the central and local governments and all private sector workers. This will cut operational overhead costs and lead to efficiency and effectiveness in managing social security issues/ matters in Tanzania. Before merging, the Pension Funds should plan, assess and monitor their resources by way of regular actuarial valuation to ensure that members (workers) sustain adequate retirement’s benefits and counseling services. 3.3.8 Improve the Minimum Wages to Commensurate with Social Security Benefits Bill: 92. The government should increase the minimum wages of workers so that it affords to settle the social security bill in the economy. As long as the minimum wage keep increasing, application of high payroll tax rates permits the government to collect adequate contribution to pay benefits to each generation that exceeds that generations’ contributions. Ten percent of today’s average minimum wage is, after all, a good deal more money than ten percent of the minimum wage our grandfather earned 30 years ago. Also, the minimum wage should be set at a level which afford/ absorbs the adverse effect on the purchasing power of the terminal and other benefits given to the retired and employees, respectively. 3.3.9 Establish effective complaint mechanism to enhance efficiency and accountability in the management of pension matters. 38

93. The Client Service Charters should be established, incorporating all core activities and the whole process of terminal benefits, timings and who will be accountable has to be established. Also, address and provide solutions to all the difficulties faced by the retirees or their relatives to obtain the due pensions and other benefits of the deceased retirees. Persistence of such difficulties will deny decent standard of living of relatives of the deceased retirees.

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4.0

HOW TO IMPPROVE WAGES/ SALARIES AND SOCIAL SECURITY BENEFITS IN TANZANIA?

4.1

Improve Taxation

4.1.1 Analysis of Taxes Imposed on Different Incomes Including Wages/ salaries 94. In Tanzania the Income Tax Act, 2004 came into effect in July 2004. This act restructured the income tax system in line with modern requirements and repealed the previous Income Tax Act, 1973. Tax is levied on income from employment, income from business and income from investment. Taxable persons include entities and individuals. An entity can be a corporation or a trust, and a corporation is loosely defined to mean any incorporated or unincorporated body of persons or association. For partnerships the individuals within the partnership are taxed on their share of the income. Taxation is on worldwide income for residents (or for individuals, of residents of more than two years) while taxation of non-residents is on Tanzanian source income only. The corporate tax rate is 30% and beginning in the 2008/09 budget the corporate tax rate has been lower at 25% for the companies listed in the Dar-es-Salaam Stock Exchange and issuing to the public at least 30% of its share capital. The individual tax threshold is TZS1200000 per annum, and the rates are from 15% to a top rate of 30%. Various provisional and final withholding taxes are applied to ease the collection of tax. 95. In the 2008/09 Budget Speech the Tanzanian Government announced a number of measures in an effort to increase domestic revenue collections by broadening the tax base in areas that are not yet harnessed, strengthening revenue collection procedures and minimizing tax exemptions. The efforts paid off a little bit as tax revenue collections increased from TZS4.7 trillion or 15.9% of GDP in 2008/09 to TZS 5.1 trillion or 16.4% of GDP in 2009/10. Despite these achievements tax revenue collection further efforts are required to improve performance of tax revenue collection and expenditure in Tanzania. 96. The share of tax revenue in GDP rose from 10.7 percent in 2000/01 to 13.4 percent in 2007 and 16 percent in 2008 (Table 17 below). Table 17: Contribution of Tax Revenues to GDP (%)
Item Domestic Revenue Tax Revenue Import Duty Value Added Tax (VAT) VAT on Domestic Goods and Services VAT on External Goods and Services Excise Duty Excise Duty on Domestic Products Excise Duty on Imports Income Tax PAYE (On Wages) Profit Tax
2000/01 2000/02 2000/03 2000/04 2000/05 2000/06 2000/07

12.0 10.7 1.2 3.9 1.6 2.4 2.0 0.9 1.1 2.5 1.2 0.6

12.1 10.9 1.0 4.1 1.7 2.4 2.1 0.8 1.2 2.5 1.4 0.6

12.1 11.0 1.1 4.2 2.1 2.5 1.9 0.8 1.0 2.7 1.3 0.8

12.3 11.9 1.2 4.5 2.2 2.8 1.9 0.8 1.1 3.2 1.6 1.0

13.6 12.4 0.9 5.6 2.3 3.4 1.8 0.8 1.0 3.6 1.8 1.2

14.1 12.9 1.3 5.6 2.4 3.3 1.7 0.9 0.8 3.9 1.9 1.3

14.5-16.0 13.4 1.1 4.9 2.5 3.1 1.0 2.2 3.9 1.9 1.3

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Other Taxes Non-Tax Revenue

1.1 1.3

1.1 1.2

1.1 1.1

1.1 1.0

1.2 1.2

1.2 1.2

1.4 1.4

Source: Bank of Tanzania: Economic Bulletins Note: Data for land and building rent and taxes is not available although undocumented information show that there is a lot of untaxed income that is being earned by owners of land and buildings e.g. in Kariakoo area in Dar-es-Salaam. 97. Information presented on Table 17 also reveal that tax revenues from wages, Pay As You Earn (PAYE), which increased from 1.4 percent in 2000/01 to 1.9 percent in 2006/07 has been significantly higher than profit tax revenue which increased from 0.6 percent to 1.3 percent during the same period. It should be noted that investors, unlike local workers, pay their income tax after taking into account by subtracting from their gross earning the costs of production which are not taxed. At least things like housing allowance, transport, cost of living, and a portion of income for cost sharing (e.g. education and health) could be regarded as costs to the worker’s income and hence be left untaxed. 4.1.2 Tax Loopholes and ways to curb them and Potentials for Reducing Taxes on Workers Wages/Salaries. 98. The efforts made in expanding the tax base during reform period are commendable. However, the tax base is still small and have many loopholes including exemptions which constraint collection of more tax revenue. In particular therefore there is need to radically revise the present tax exemption policy or at least the recommendations made in the 2008/09 and 2009/09 budgets should be implemented effectively. 99. According to the Public Expenditure and Financial Accountability Review (PEPFAR) Mission in 2004/05 tax exemptions were equivalent to around 22.8% of total tax revenue. In the 2007/08 Budget Speech it was noted that tax exemptions averaged 30% of total tax revenue equivalent to 3.5% of GDP. This is a significant proportion given that the total wage bill is less than 6% of GDP. Further, the tax exemption figure in Tanzania is highest in East African Countries compared to Kenya’s 1% of GDP and Uganda’s 0.4% of GDP The main beneficiaries of tax exemptions include large investors in mining, donor supported projects and diplomatic missions as well as faith-based organizations and NGOs. 100. Recently, there have been attempts to address exemptions. The revenue collected from some of the exemptions on fuel and other petroleum products are, however still small compared to the revenue already lost over the last ten years and social costs arising from this tax revenue loss. Further, no attempts have been made to address revenue loss due to trade mispricing of Tanzanian products abroad. It is estimated that the government is foregoing at least TZS 128.8 billion a year in tax revenue lost to foreign Countries and Multinational Companies. According to international trade statistics Euro stat and US Census board, Tanzania lost approximately TZS 52 billion in revenue due to illicit means and

41

trade mis-pricing of Tanzanian products sold to foreign countries between 2005 and 2007. 101. In February 2010, the government endorsed, as a tradition, the Guidelines for Preparation of Medium Term Plan and Budget Framework for 2010/11 -2012/13. According to the Guidelines the Government has signaled its intentions and priorities over the medium term. The Government, will for instance, spend approximately TZS 10.4 trillion in 2010/11 while tax revenues will only cover about half of it (TZS 5.4 trillion); and because of this the Government will have to borrow more including from external sources. In the meantime, the Tanzania Revenue Authority (TRA) is implementing its third Corporate Plan (2008/092012/13) and has committed itself to raise TZS 6.2 trillion for the 2010/11 Budget. This figure is certainly higher than what the Ministry of Finance and Economic Affairs expects in tax revenues in 2010/11. However, even if the TRA was able to collect that amount, it would still not be enough to cover the TZS 7.3 trillion that have been projected in the recurrent expenditures which includes expenditures on personal emoluments. In spite of this huge revenue deficits there is no clear indication of how new Tax payers will be identified and the narrow tax base expanded. This problem is in addition to the problem of leakages which was also recently acknowledged by the President of the United Republic of Tanzania, Honourable. Jakaya Mrisho Kikwete who noted that as much as 30 percent of the public money is disappearing into the pockets of unscrupulous civil servants and their allies. Further the reports of the Controller and Auditor General (CAG) consistently show that billions of shillings are spent in ways that do not quite represent best value of money. 4.1.3 Proposals of new Income Tax Levels from Workers Wages/Salaries 102. In spite of the increased contribution from excise taxes, income tax and VAT remain the top sources of revenue. We argue the government to adopt a more progressive income tax structure, one which taxes the wealthy, reduces the relative tax on the middle class workers including teachers, health workers and the like, and does not tax the poor. In this regard it would be ideal to raise the income tax threshold from TZS 100,000 per month to TZS 315,000 per month which also should be considered as the cost of living and hence not subject to taxation. Further, the respective income tax rates should be reduced from 15% 30% to 7.5% to a top rate of 20%. 103. VAT tax regimes also need to be reviewed to ensure that they do not become a major burden on the poor. In this case, VAT could be reduced further from 18% to 15%, which also would be at par with the VAT rates in other EAC countries. Recently, the Tanzania Private Sector Foundation argued that such a reduction would make goods more affordable and at the same time give more taxes to the government. In the same spirit, grassroots groups are calling for a removal of all taxes on kerosene. They are also arguing that the abolition of taxes for airplane fuel will benefit the government leaders and wealthy, not the poor.

42

104. The government also intends to move forward with the formalization programme (MKURABITA) whereby businesses in the unregulated sector of the economy will be encouraged to get land titles in order to be able to use their land as loan collateral for banks, and to regularize their operations according to the law. The major goal of MKURABITA, however, is to expand the tax revenue coming from the informal sector. 105. Moreover, it will be important to track which actors will be “captured” in the informal economy, the wealthy producers and traders or the low and middle income people struggling to survive in an increasingly hostile environment. 4.2 Reduce Leakages through Allowances 106. For long time the argument on the need to increase the share of wage bill in government expenditure has been related to the size of government revenue. In most cases the allocation of wage bill has been based on share of wage bill in government revenue set at around 35-45 percent. A number of reasons show that this approach has contributed a lot in oppressing lower cadre workers who get poor wages, viz: (i) The wage bill share in the government budget includes allocation to various allowances which are largely not paid to lower cadre workers. (ii) The wage bill share includes also tax revenue which is collected back to the government revenue. About 18 percent of the wage bill constitutes income tax. Thus, if these allowances and income tax are removed from the wage bill the situation will changes leaving the wage bill below the reported 35 or 45 percent of government budget. 107. There is also a need to tax the MPs’ gratuity. According to a recent discussion by the TPSF, an MP was being paid about TZS 6.9 million (about $5,292) per month. The amount excludes Bunge Sitting Allowances, and allowances obtained through MPs membership in various Boards. For example each MP earns TZS 135,000 as daily sitting allowance during parliamentary sessions. Out of the total earning by an MP only TZS 1.8 million is their taxable basic salary. 108. Besides, Tanzania Private Sector Foundation (TPSF) notes that a new proposal MPs that would make an MP earn nearly TZS 15 million, if all factors were considered. The proposal is to raise their pay package to TZS 12 mill per month. The TPSF is further proposing that the law makers’ gratuity standing at a flat rate of TZS 20 million after the end of each term be taxed. They want the Government to repeal a section in the Income Tax Act of 2004 that grants a tax exemption on law makers’ gratuity. They note that Tax payers would foot a bill of TZS 6.4 billion as gratuity handouts to the 320 MPs ahead of the 2010 General Election. If this amount were to be taxed at 30 percent, the Government would save about TZS 2 billion.

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109. In addition, a significant part of the government revenue is being used on excessive and luxurious expenditure such as luxurious vehicles (Toyota Land Cruiser VX), imported furniture; excessive and expensive internal and external travels; and workshop allowances. Money spent on such expenditures could be saved and used to boost the wages and salaries of workers. 110. In the fiscal year (2008/09) the Government of Tanzania budgeted an impressive TZS 506 billion (USD 390 million) for allowances. This amount is equivalent to the annual (maximum) basic salary for 109,000 teachers, or over two thirds of all teachers. 111. Despite consolidations in the wage bill in 2001/02 and in 2007/08, allowances have proved to be remarkably persistent. In 2009/10 the amount allocated to allowances was equal to 59% of the total wage bill (pensionable and non-pensionable basic salaries plus pensions). Between 2001/02 and 2006/07 the real amount spent on allowances increased more than 3-fold; relative to last fiscal year, and despite the economic crisis, allowances in this year’s budget increased by 13%. 112. Few would question the justification for the best way to pay allowances to public servants who stay in remote areas or to reimburse real expenses incurred for someone transferred from one location to another. Yet when allowances are only loosely related to actual cost incurred and when they are high relative to basic salaries, they become incentive instead of reimbursement. And when allowances become an incentive, the pursuit of allowances is likely to induce and reward behaviour that is counterproductive to the provision of quality services by public servants. 113. This practice of allowances is unaffordable, displaces other priority expenditures and undermines the Government’s objective of quality service provision. By reducing allowances the government could save money, enhance the salaries of public servants and better align staff incentives with the provision of quality products and services. Table 18: Allocation of Allowances by Type (Billion TZS)
Allowances/Expenses Per Diem and Daily Allowances National Expenses Ration Allowance Training Sundry-Expenses Extra-Duty Honorarium and Sitting Allowances Constituency Leave Travel Moving Expenses Housing Other Compensations 2007/08 99.0 89.8 26.2 34.7 24.6 16.8 23.8 9.0 9.2 10.2 12.2 16.5 2008/09 105.0 102.0 26.8 31.5 34.1 21.1 35.7 9.7 10.9 7.3 19.5 40.1 2009/10 154.6 109.0 60.5 43.4 44.9 26.9 20.1 20.0 13.2 9.3 0.7 0.0 Change 47% 7% 126% 38% 32% 27% -44% 106% 21% 27% -96% -100%

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Subtotal Total Allowances

372.0 423.2

443.7 506.4

502.6 571.1(*)

13% 13%

(*) For 2009/10 total allowances is estimated based on subtotal (88% of total allowances) Source: Budget Books 114. Table 18 shows the main allowances by type. It demonstrates how about two third of all allowances are spent on four items alone: per Diems and daily allowances, national expenses (to pay for parades etc.), ration allowance (for the police and prison service) and training allowance. It also demonstrates some clear trends with per diem and daily allowances as well as ration allowances increasing rapidly (over 50%-100% over a two year period). 115. A distinction that is oftentimes made in assessing allowances is between remunerative and duty enhancing allowances whereby duty enhancing allowances are thought to improve productivity and service delivery, while remunerative allowances have a less clear association with quality service delivery. In this interpretation, duty enhancing allowances comprise expenses for training, while remunerative are expenses for housing. In practice the distinction is less clear cut as much depends on the purpose and “context” of the allowance. 116. A housing allowance provided to a civil servant who agrees to stay in a remote area is productive and enhances the quality of service delivery if without such an allowance public servants will not work in isolated areas. Yet the housing allowance as it was provided in 2008/09 (TZS 19.5 billions in 2008/09 – enough to pay 4,400 teachers) only accrues to higher level officers in PGSS/PTSS/PHTS/PUTS scales 17-21 and is clearly remunerative. 16 Training allowance provides another illustration that can enhance productivity if the training provides new skills that are used in the job. Yet, when skills are not put to practice because training is given to someone who is bound to retire or switch jobs, or because there are no incentives to put the new skills to work, then training allowances become remunerative. 117. Indicative of many allowances being remunerative rather than duty enhancing is the observation that while the majority (approximately 70%) of civil servants work as teachers and nurses in front line service delivery activities, the bulk of allowances (70%) accrues to the 30% of civil servants working at Central Government. In other words, the average civil servant working in one of the Ministries of Central Government receives more than five times as much in allowances as the civil servant delivering services at community level. 118. The President’s Office and Cabinet Secretariat are by far the largest beneficiary of allowances (Table 19). Table 19: Top ten Recipients of Allowances (Billion TZS)
16

A housing allowance is provided to officers earning a basic salary of between TZS 1.3 and TZS 3.0 million per month. They are entitled to a house for which they do not pay rent, or in lieu if a house is not available an allowance equal to 30% of their basic salary.

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2007/08

2008/09

2009/10

Annual Change

1 President’s Office & Cabinet Secretariat 2 The National Assembly Fund 3 Ministry of Home Affairs – Police Force 4 Ministry of Education and Vocational Training 5 National Service 6 Ministry of Home Affairs – Prison Services 7 Accountant General’s Department 8 PMO RALG 9 Ministry of Agriculture, Food Security and Cooperatives 10 Ministry of Natural Resources and Tourism Source: Budget Books.

114.1 20.8 27.8 22.2 2.0 11.9 11.3 6.3 13.8 2.5

133.1 26.3 26.5 27.3 2.4 10.5 12.8 5.8 9.4 5.2

148.7 36.8 33.3 32.3 29.4 16.5 16.5 13.5 12.3 11.0

12% 40% 26% 18% 1125% 57% 29% 133% 31% 112%

119. Allowances are more likely to negatively affect incentives for quality service delivery when they are high relative to basic wages and when they are only loosely connected to actual costs incurred. Table 20: Allowance Schedule Cities and District and Other Areas Municipalities Towns Travel within Tanzania TZS (USD amount in brackets) Assistant Directors, Principal Officers, 80,000 ($62) 65,000 ($50) 45,000 ($35) Directors, Principal Secretaries and above Senior Officer and Middle Officer 65,000 ($50) 45,000 ($35) 35,000 ($27) Executive Secretaries to below 45,000 ($32) 30,000 ($23) 25,000 ($19) Travel Outside Tanzania TZS (USD amounts in brackets) Assistant Directors, Principal Officers, 546,000 ($420) Directors, Principal Secretaries and above Senior Officer and Middle Officer 474,500 ($365) Executive Secretaries to below 403,000 ($310) Source: Government of Tanzania, PO-PSM, 20 June 2008. 120. Relative to basic wages and salaries of individual civil servants, allowances are very high. For instance, a receptionist (Scale TGS A) earns a maximum monthly salary of TZS 129,300, a finance management officer (Scale TGS D) TZS 384,850 and a principal accountant (Scale TGS G) TZS 818,560. So a middle level officer attending a 3-day workshop outside Dar-es-Salaam, “earns” about a third of his/her monthly salary, an amount that is provided tax free. Relative, to say minimum wage civil servants, or the (food) poverty line, per diems are particularly high. A civil service spending a day in the rural areas easily pockets a per diem to cover expenses for food and beverages that is 10 to 20 times larger than the food poverty line for a family of five. 121. Table 20 reveals that allowances are higher than minimum daily wage, rural poverty line and rural food poverty line. This is clear when one compares Per Diem for other areas (higher cadre) of TZS 45,000; Per Diem for other areas 46

(middle cadre) of TZS 35,000; and Per Diem for other areas (lower cadre) of TZS 25,000 with Minimum Daily Wage of TZS 4,586; Rural Poverty Line (family of five) of TZS 2,621; and Rural Food Poverty line (family of five)17. 122. Allowances for foreign travel are particularly high (The amount received out compete per diems provided by this other generous provider of per diems: The United Nations which provides per diems to the tune of US$ 378 for those visiting New York of $ 356 for those visiting Paris) and a civil servant going on a 5-day trip abroad easily doubles his or her salary, even if this the highest paid civil servant around (those at the maximum of salary scale TGS Q receive TZS 2,760,000 per month). 123. With such high allowances, it should only be expected that incentives for quality service delivery become skewed in favour of a proliferation of committee meetings, decision making by committees (rather than responsible individuals) leading to delayed decision making and increased bureaucratization. With incentives wrongly aligned, civil servants are likely to be more interested in attending the next capacity building activity, report writing workshop or field trip, and are more likely to spend the time on the job to claim allowances and to secure the next workshop than to provide quality products or services. 124. Prime Minister Pinda has lamented wasteful spending on unnecessary workshops, luxury cars and the like e.g. the TZS2 billion allocated to the Open University of Tanzania was equal to the budget on allowances for only two senior government officials, given to them just to attend some useless meetings. 125. High allowances also lead to excessive travel and unnecessary trips away from duty stations e.g. In an annual meeting of the IMF and the World Bank, whereas other East African countries sent delegations of 5 to 7 people, Tanzania sent a delegation of 25, thus, almost exceeding the combined delegations of Burundi, Rwanda, Uganda and Kenya. 126. There are also costs due to the practice of inflating training and workshop costs while keeping the auditors satisfied e.g. The hotel with the lowest quote is selected and the hotel is asked to prepare a pro-forma invoice of the quote + 25%. 127. If allowances are reduced to (still respectable) 30% of the wage bill, it would free TZS 285 billion in the Government’s budget. In addition, another TZS 100 billion could be saved from reducing use of business class tickets, transport costs and accommodation, bringing total potential savings to TZS 385 billion or almost US$300 million. This is an enormous amount that could be used to reduce taxes and borrowing, to hire additional teachers and nurses, to buy vaccines and bed nets or to invest in roads, bridges, water, and electricity generation.

17

National Bureau of Statistics: Per Diem, Minimum Wage, and PO-PSM, Poverty line, 2009.

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128. The saved resources could also be channeled into higher salaries for civil servants, who because of the cost savings would become better off than they are now with allowances. 129. In addition it is important to establish how much was saved from the recent decision not to purchase luxury vehicles, furniture, paying per diems and conducting workshops in expensive hotels. 130. Apart from such luxurious expenditures, as noted above, other income earners (besides workers) are left to continue with similar luxurious expenditures of their share of GDP and without paying appropriate taxes on such expenditures. For example, foreign investors and business people importing have, in certain cases, been evading paying taxes. Box 1: How to Raise salaries (inclusive of allowances) while saving costs To justify paying allowances, civil servants have to attend activities at locations outside their office. Typically activities attended by officers of the main Ministries are hosted at major hotels at the outskirts of Dar-es-Salaam or in other urban areas (e.g. Morogoro, Kibaha or Bagamoyo) so as to earn ‘out of station’ allowances. When events are held there, participants have to spend the night and have to be provided with transport. Such expenses can easily match, if not exceed what is paid in allowances. For instance, a typical 5 day event lasting from Sunday evening to Friday afternoon, entitles a senior civil servant to TZS 325,000 in allowances. If the event is hosted at the White Sands Hotel and Resort at the outskirts of Dar-es-salaam, it costs TZS 780,000 in accommodation (half board conference package for 5 days) plus an additional transport expenses if the officer arrives in his own car. So a week long capacity building event or workshop roughly doubles the TZS 380,000 salary that a typically senior civil servant earns. Yet at a cost twice his salary. In other words, if the same event was held at the Ministry and no allowance was paid while the hotel expenses was channeled into the officer’s salary, then the Ministry would save money (the allowance) while the salary of the officer would triple. 131. Government revenue has been increasing fast from TZS 35 billion in 1995 to TZS 2.6 Trillion in 2006/07 which is 15.7 percent of GDP. In 2007/08, government revenue were expected to reach TZS 3.5 Trillion (equivalent to 18.1 percent of GDP) and further in 2009/10 government revenue were projected to reach TZS 4.4 Trillion (equivalent to 22.6 percent of GDP) (Minister’s Budget Speech, 2007/08). Compared with TZS 35 billion in 1995 it is seen that government revenue increased tremendously. These rapid increases, contributed mainly by public servants, have, surprisingly, not benefited these workers. The government has on several occasions been explaining that it does not have adequate revenue resources to pay living wages as demanded by workers and their trade unions

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5.0

EMERGING ISSUES AND RECOMMENDATIONS

5.1

Emerging Issues 132. The study finds that the typical public servant obviously cannot be paid in proportion to the revenue s/he generates. This is because the public outputs are indivisible and cannot be sold in a market in a first place. Thus, the rewards in public service will depend dramatically on proxy variable for performance such as seniority, education and fidelity to the government. Unfortunately, the minimum wage earners have ever since been generally neglected by their immediate governmental bureaucracies. Thus, the central government has to optimally intervene by legislating high minimum wage order. For instance, the Minimum wage (Tanzania Government Operational Scale 1 - TGOS.1) has to be TZS 315,000 as proposed by TUCTA. 133. The demand for labour in the public service is high while the supply for skilled and competent personnel is too small due to low wages and salaries, including minimum wages (TGOS.1). On the contrary, the minimum wages and salaries are relatively high in the private sector, where worker’s marginal revenue product depends both on their marginal physical product and on the price of the product they produce. However, non-wage or non-salary attractiveness, which are pleasant and satisfying in the public service, include the huge amount of allowances. The minimum wages, if aggregated with allowances, can make a lucrative premium to be paid to attract workers to jobs in the Public service. 134. The social security benefits in Tanzania are too low. Also, they operate in an ambiguity to the extent that they are not transparent enough to the intended beneficiaries. For instance, they do not grant adequate benefits to the expectation of the contributors (employed and retired workers). That is, majority of the contributors to the social security schemes cannot easily know how much they will get in terms of social security benefits and for how long. While the retirees are promised to be supported for life, some have been disappointed by their social security schemes which stopped issuing benefits checks in their favour after 15-18 years of retirement. Also, the formulas which are adopted to compute for their terminal benefits are biased against employees. For instance, both the pension factors (PF) and commutation factors (PF) which are key variable for computation of terminal benefits, are deliberately set at low levels (minimized) to cut down the Monthly Pensions (MP) and commuted pension gratuity (CPG), respectively. Further, lack of indexation of the terminal benefits renders their purchasing power insignificant. 135. The government is facing revenue deficits mainly caused by a small tax base, leakages in revenue collection as well as mis-use of the collected amount. Overall looking at the Budget revenue collection and expenditure by the government and the resulting huge gap there is need for the government to seriously address the problems in the two sides of the government budget. This is the basis for increasing the government’s capacity to pay better wages. Trade 50

Unions have summarized the recommendations by workers in addressing the problems and hence achieving the objective of having but wages to civil servants. 5.2 5.2.1 Recommendations Raise Minimum Wages to Living Wage and Reduce Payroll Taxes

136. The government is advised to raise minimum wage to a living wage of TZS 315,000. This is the amount which TUCTA has suggested over and above the NBS proposal. The NBS established, way back in 2006, that a family of six people would require TZS 203,000 to meet the basic needs. Adopting this wage would need the Government to have the ability to pay, which can be obtained by collecting more revenue and appropriately allocating expenditures. The living wage should not be taxed while also reducing the tax rates which currently range from 15% to 30% to 7.5% to 20%. 5.2.2 Improve Linkages/ Relationship between Contribution, Social Security Benefits and 137. The social security benefits are generally pegged or based on the workers contributions, which are related by social security laws to monthly wages/ salaries on which social security contributions have been paid. The higher the contributions the higher the benefits to the beneficiaries (retired or entitled workers). Since the levels of payroll contributions are too low the security benefits are also too low. Since the current wages/ salary levels are generally low, then it is unfair to impose higher rate of payroll contributions. Thus, the employers are advised to raise the current wages/ salaries (even if may entail higher prices of their products or services) so that their respective payroll contributions for the social security benefits be enhanced. Also, the social security schemes are advised to broaden their coverage (increase membership) to collect more contributions for settlement of increasing bill of social security benefits. In addition, the social security benefits should be calculated by applying varying percentages to succeeding indexed wages/ salaries. The formula for computation of social security benefits (such as Monthly Pension and Commuted Pension Gratuity (CPG) should be adjusted to reflect annual changes in wages/ salaries. It is conventionally acceptable that the overall increase in the social security benefits will improve the purchasing power of the security benefits and hence improve the living standards of the intended beneficiaries. 5.2.3 Reduce Allowances and Luxurious Expenditures

138. One of the main ways that would help the government to enhance its capacity to pay better wages is reduce excessive and luxurious expenditures including reduction of allowances which does not reduce workers’ productivity. Allowances like extra duty allowance, sitting allowance, acting allowance, responsibility allowance and honoraria need to looked more critically and put a

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mechanism for their reduction. In 2005/06, for instance, 21 percent of the wages/salaries budget and 7 percent of the domestic revenues were allowances. If allowances which are paid by donors are added then total amount used for allowances is quite huge. In 2006/07, for instance, TZS 113,318,653,961 were paid as allowances. If these could have been reduced by 60 percent a substantial amount, that is, TZS 67,991,192,376 could have been saved and used to boost the wages/salaries of civil servants. 5.2.4 Stop expenditures on luxurious vehicles

139. This is another area for reduction of unjustified government expenditure and use the money to raise wages and salaries. Specifically this can reduce the number of new luxurious vehicles purchased for MDAs and LGAs. In the period 2001/02 – 2005/06 the government used TZS 155,611,739,573 to buy such vehicles. If there was a 60 percent reduction on these expenditures, a saving a TZS 93,367,043,943 could have been made and used to increase wages and salaries (see also The President’s Commission on improving payments and benefits of public servants, 2006, p.88). 5.2.5 Expand the Tax Base

140. Tax revenue collection is still inadequate. There is need for establishing income earned from all income groups in the country and the relations of such earnings to GDP. The wages and salaries share of GDP is around 5.9 percent and such efforts can raise significantly this ratio. Expanding tax base as well as removing tax exemptions, curbing tax evasions will not only increase tax revenue but will build a basis for more rationalized taxation of the incomes of various groups in the country. In this way income tax levied on civil servants’ wages and salaries can be reduced or adjusted without reducing total revenues, much to the relief of civil servants who currently are being highly taxed than the other groups are.

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