Papua New Guinea - Second Telecommunications Project

RESTRICTED Report No. PU-85a This report is for official use onlY by the Bank Group and specifically authorized organizations or persons It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibiity for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE SECOND TELECOMMUNICATIONS PROJECT OF THE DEPARTMENT OF POSTS AND TELEGRAPHS PAPUA NEW GUINEA April 7, 1972. Public Utilities Projects Department  CURRENCY EQUIVAILNTS US$1 A$0.8 40 A$1 Us$1 .191 A$1,OO,OOO - US$1 ,1 91, 000 LIST OF ABBREVIATIONS AND TITLES USED IN THE REPORT HF - High frequency radio - up to 30 mHz OTC - Overseas Telecomminications Commiission of Australia P&T - Department of Posts and Telegraphs - responsible for posts and telecommunications services Telex - Telegraph exchange service for subscribers UHF - Ultra high frequency radio - 300 - 3000 mHz VHF - Very high frequency radio - 30 - 300 mHz GLOSSARY OF TECHNICAL TERMS USED IN THE REPORT Carrier - a system of providing a number of circuits over one radio link, coaxial cable or pair of wires Microwave - a system of communications using frequencies over 300 mHz and working on a line of sight propagation basis Multiplex - part of the equipment in a carrier system - see above - which shifts and stacks the different circuits in the frequency spectrum appropriate to the particular carrier system Tropospheric scatter - a system of radio communication at very high frequency or microwave frequencies capable of operating over distances beyond the line of sight by making use of the dispersion of radio waves in the troposphere. Such system is not subject to interference and distortion common on HF radio links where ionospheric reflection is involved. FISCAL YEAR July 1 to June 30 i.e. FY 1973 is July 1, 1972 to June 30, 1973  PAPUA NEW GUINEA DEPARTMENT OF POSTS AND TELEGRAPHS APPRAISAL OF THE SECOND TELECOMMUNICATIONS PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .............................. i.- ii 1. INTRODUCTION ....1.oo .0.. ..ooooo*00o0oo***eoo 2. THE ECONOMY AND THE TEIECOMMUNICATIONS SECTOR .......*. 2 The Territory and Its Economy *e..o.o..o....oo..o...o.. 2 The Telecommunications Sector .........o....ooooo.o..oo 3 Existing Facilities ..o .......*0*0*.*.0**000******* 3 3. THE PROGRAM AND FROJECT .......5..................*.*5 The FY 1973 - 75 Program .........0.0..0..0......0.0..5 The P roj eet a b000000a5 Project- Costs 6 Items Proposed for Bank Financing ...................... 7 Execution of the Project .....................oeo o o,ooo 7 Procurement 8 Disbursements ..0....... , , , ............ ........ 8 h. JUSTIFICATION 9 Local Facilities ........ 9 Long Distance Facilities 9 Telex . ............... . 0 00000 0 *.0 . 0 9 Least-Cost Solution ... 10 Internal Economic Rate of Return 10 5. THE BORROWER .............. . .11 Organization ........ Accounts and Audit l1 Staff .. 12 Training ... ,, 12 This report is based on the findings of a mission composed of Messrs. M. DetLima and J. Brcn., which visited Papua New Guinea in October/' November 1971.  Page No. 6. FINANCES .*................. ... ..... 13 Past Earnings ........................... .-.i 13 Tariffs ................0.................*. 13 Present Financial Position .. ...................... 14 Financing Plan *e.oeooooo..o... oe e.. oe.o.....o...o 15 Future Operating Results ......................... 16 Future Financial Position ......o .................. 17 7. AGREEMENTS REACHED AND RECOMN DTIONS ........... 18  LIST OF ANNEXES 1. International Sector Table - Telecommunications 2. Basic Data as of June 30, 1971, and for 1973-75 Program 3. Statistical Data on Existing Exchanges as at June 30, 1971 4. Growth in Exchange Capacity, Connected Lines and Telephone Stations and Future Growth 5. Summary of Annual Program and Project Costs (1973-75) 6. Physical Program (1973-75) 7. Engineering Consultants - Terms of Reference 8. Schedule of Construction 9. Estimated Schedule of Disbursements 10. Internal Economic Rate of Return 11. Organization Chart 12. Staff Details 13. Actual and Forecast Income and Expenditure 1970-1977 14. Notes on Income and Expenditure Forecasts 15. Telecommunication Tariffs 16. Actual and Forecast Sources and Applications of Funds 1970-1977 17. Actual and Forecast Balance Sheets 1970-1977 18. Notes on Balance Sheet Forecasts MaN 1. Papua New Guinea 33xchanges and Long Distance Network -IBRD--3733  u 0  PAPUA NEW GUINEA DEPARTMENT OF POSTS AND TELEGRAPHS APPRAISAL OF THE SECOND TELECOSMUNICATIONS PROJECT SUM&ARY AND CONCLUSIONS i. The Administration of Papua New Guinea which would be t:i'e Borrower has requested a Bank loan to help finance the further expansion of its telecommunications services. The Department of Posts and Telegraphs (P&T) which is responsible for telecommunications services in the Territory would carry out the project. The Govermnent of the Commonwealth c,f Australia would guarantee the proposed loan of US$10 million. ii. P&T's telecommunications development program for the fiscal years 1973-75, including ongoing works, is estimated to cost US$20.7 million equivalent. The project for which Bank financing is proposed is estimated to cost US$17.2 million equivalent, forming 83% of the total program. The proposed loan of US$10.0 million would cover part ofl' the project's offshore cost estimated at US$12.0 uiillion. The balance of the offshore costs and all the local costs would be met from P&T's internal resources and Treasury advances. iii. The loan now proposed would be the second for telecommmuications in Papua New Guinea. The first, Loan 5h6-PNG, for US$7.0 million was approved in June 196t and was primarily inatended to provide backbone long distance routes in the Territory. Progress has been satisfactory and the project is expected to be completed on schedule in mid-1972. iv. The new project is designed to utilize and expand the facilities provided by the earlier project. It includes the provision of about 13,500 lines of local exchange capacity, the associated distribution plant and subscribers' equipment, about 65o additional long distance circuits on existing routes and telex exchanges with a total of 600 lines. v. Rapid and reliable telecommunications services are essential to the economic development of the Territory, whose scattered population centers are isolated by its rugged terrain and its insular character. The project is technically sound and would be carried out with the assistance of consultants. vi. Procurement of equipment to be obtained under the Bank loan would be by international competitive bidding, except for additionis to existing automatic exchange equipment, with a total cost of US$0.8 million (about 9% of procurement under the loan), where direct compatibility is essential. vii. P&T has taken the first steps to correct weaknesses in its planning and financial divisions and plans to improve them further during the project period. Commercial accounting has been introduced  - ii - as required under Loan 546-PNG. With the assistance of engineering consultants, to be retained for the project period, P&T is capable of carrying out the program and maintaining operating efficiency. viii. More than 50% of the funds required for the program are expected to be generated internally. The fibancial position is satis- factory and since all capital except the Bank loan has been contributed as equity, debt service coverage is not expected to fall below 5 times during the fiscal years up to 1977. ix. The internal economic rate of return of the project is estimnted at about 17%. x. During negotiations, agreement was reached on the points set out in paragraph 7.01. The project would be suitable for a Bank loan of US$10.0 million for a period of 20 years including a grace period of 4 years.  PAPUA NEW GUINEA DEPARTMENT OF POSTS AND TELEGRAPHS APPRAISAL OF THE SECOND TELECOMMUNICATIONS PROJECT 1. INTRODUCTION 1.01 The Administration of Papua New Guinea, through the Government of the Commonwealth of Australia, has requested a Bank loan to help finance a project that forms part of the FY 1973-75 telecommunications development program. 1.02 This would be the Bank's second loan to the Territory for telecommunications. The first one, Loan 546-PNG for US$7.0 milliom, was made in 1968 to help finance the offshore costs of a project to extend and improve the local and long distance telephone services., Progress has been satisfactory on this project, which is expected to be completed on schedule in mid-1972. 1.03 The new project to be undertaken during the FY 1973-75 forms part of a program which provides for the extension of telephone fa.cil- ities upon completion of the ongoing project and for the installat,ion of modern telex facilities. 1.04 The Administration of Papua New Guinea would be the Borrower and would make the funds available on the same terms to the Posts and Telegraphs Department (P&T) which is responsible for planning and operating telecommunications and postal services in the Territory. 1.05 This report is based on information obtained from P&T and on the findings of a mission comprised of Messrs. M. DbLima and J. Brown which visited Papua New Guinea in October/November 1971.  -2- 2. THE ECONOMY AND THE TELECOMMUNICATIONS SECTOR The Territory and Its Economy 2.01 Since 1949, Australia has administered its Territory of Papua and the UN Trust Territory of New Guinea as a single political and economic unit - the Territory of Papua New Guinea. Situated off Australia's northerncoast, the Territory comprises the eastern half of the island of New Guinea and a number of adjacent islands, the largest of which are New Britain, New Ireland, Bougainville and Manus. Forests cover more than 70% of the land area of 183,540 square miles, which is one of great diversity with marn rugged mountain ranges, vast swamps and large rivers making road transport very difficult to develop. For much of the Territory, air transport still provides the means of internal movement. 2.02 The population is estimated at 2.4 million (49,000 non- indigenous) and is growing at about 2.6% per year. Average population density is 13 per square mile and varies widely, from 1.5 to 60, with the highest density in the New Guinea Highlands. The Territory's admin- istrative and commercial center is Port Moresby in Papua. The other main towns are Lao and Madang in New Guinea, Rabaul in New Britain, and Kieta in Bougainville. 2.03 In 1970 the GNP amounted to US$640 million and the annual growth rate over the past five years averaged 9.5%. The annual per capita income was US$265. While the economy is based mainly on primary production, the small manufacturing sector is growing rapidly, and its 1970 output reached about US$67 million. Processing of primary products for export is the main manufacturing activity. In 1970 the major exports were copra (US$26 million), coffee (US$23 million), cocoa (US$19 million), and timber and timber products (US$7 million). Rubber is also exported, mostly to Australia. Oil palm, beef cattle and fishing industries are being developed and tea production is being increased. The discovery of large copper ore deposits on Bougainville, and more recently in New Guinea's Western Highlands, marks a turning point in the economic development of the Territory. The Bougainville mining operations are scheduled to commence in mid-1972, with the value of output in copper, silver and gold expected to be about US$200 million per year when full production is reached in about three years time. 2.04 Rapid and reliable telecommunication services are essential to economic development because they provide a means of exchanging information between the producers and the administrative and commercial centers of the Territory. Furthermore, the Territory's exceptionally rugged terrain, insular character, widely scattered population centers and limited surface communications make it necessary for administrative purposes to establish an adequate telecommunications network.  - 3- The Telecormmunications Sector 2.05 The Posts and Telegraphs Department (P&T) is responsible for providing local and long distance telecommunications services within the Territory. When not able to provide suitable long distance service, P&T allows private users to obtain licenses annually from the Governmnent to operate point-to-point HF radio systems. These systems are inefficient and difficult to maintain. Many of them will be discontinued and modern P&T services utilized as they become available. For their special operational needs, the military and civil aviation authorities have established some telecommunication facilities. The Overseas Telecom- munications Commission of Australia (OTC), which has statutory respon- sibility for the external telecommunications services of the Territory, handles international telecommunications traffic at Port Moresby through HF radio and at Lae and Rabaul through the Madang submarine cable terminal. Existing Facilities 2.06 The telephone density in the Territory is 1.0 telephone per 100 persons. Annex 1 gives statistical information on telephones in various countries. The existing exchange and long distance network is shown on the map attached to this report. The telecommunication facil- ities are currently inadequate in quality and capacity to meet the Territory's development needs. Annex 2 sets out basic data on the existing facilities and the expansion program planned for execution during 1973-75 (see also paragraphs 3.01 - 3.02). Local Telephone Service 2.07 As of June 30, 1971, 20 local automatic and 16 manual exchanges were in operation with a total capacity of 14,780 lines and 11,705 con- nected lines. Annex 3 gives a list of the exchanges, their capacity and the number of connected lines. As shown in Annex 4., the growth in connected lines during FY 1969-1971 averaged 14g per annum, with sn average exchange fill of 75%. Long Distance Service 2.08 Long distance service between the main urban and rural centers is provided through HF and VAF radio systeme, but the HF system is sub- ject to fading and interference, and the VHF facilities do not provide adequate capacity to meet traffic demand and growth. Tropospheric scatter radio links have been installed on the Lae-Rabaul-Kieta route; fuLl use of the links will not be possible until the main microwave backbone route (Port Moresby-Lae-Madang-Goroka-Mt. Hagen) become= operational in June 1972. This microwave system and the long distance exchanges which are to be installed after June 1972 will provide widespread long distance dialing facilities which at present are available only between Lae and Rabaul. Thirty outstations are connected to the main centers through point-to-point HF radio systems.  - - Telegraph and Telex Service 2.09 A telegraph network connects various towns by trunk channels provided by VHF/HF radio. These towns are served by 31 telegraph offices. 2.10 Port Moresby (Boroko) and Lae are served by two manual telex exchanges, with a total capacity of 120 lines and 100 subscribers. There is unfilled demand because of the shortage of equipment and it is estimated that a further 350 subscribers will require service by 1975. Telex calls have increased from 1,170 paid nminutes in 1969 to 13,251 in 1971. International Facilities 2.11 All international traffic is routed through Sydney, Australia. Madang is connected to 5 manually operated channels on a submarine cable. Lae operates semi-automatically on 16 circuits via Madang. Port Moresby has 15 HF circuits, operated manually at each end. The traffic has risen sharply, from 7,500 calls in 1968 to 206,000 in 1971. 2.12 International telex calls from Port Mbresby and Lae are also routed through Sydney. The traffic has grown rapidly, from 95,300 paid minutes in 1968 to 238,281 in 1971. Quality of Service 2.13 Because of limited investment and technical resources the local telephone network has a number of deficiencies leading to indiffer- ent and restricted service. With the exception of the new Lae-Rabaul link, all long distance routes are severely congested and the service is totally inadequate. Many of the deficiencies in the long distance service will be remedied when the project financed under Loan 546-PNG is conpleted and the microwave system becomes operational in mid-1972. The second project, appraised in this report, is designed to extend and improve the local and long distance services, and by mid-1975 direct long distance dialing facilities will be available to most subscribers. There is a large unfilled demand for telephone service, but this cannot be assessed accurately since potential subscribers are unwilling to apply for service under present conditions and the true level of demand will only become evident as the service is improved.  - 5 - 3. THE PROGRAM AND PROJECT The FY 1973-75 Program 3.01 PT has drawn up and the Government has approved a telecom- munications development program planned for execution during 1973-75. It consists of the following main items: (a) Ongoing works on Loan 546-PNG; (b) Construction of the headquarters administration and other non project buildings; (c) Vehicles and tools (d) The project proposed for Bank financing described below (paragraph 3.03). 3.02 The program's cost is estimated at A$17.4 million (US$20.7 million), including a foreign exchange component of US$12.8 million equivalent. Annex 5 gives the program's and project's estimated eosts for each of the three years; Annex 6 gives the physical content. The program is technically sound and is designed to meet urgent requirements within the limited available technical and financial resources and the financing plan has been drawn up for this program. Daring negotiations agreement was reached that until the completion of the project, the Administration of Papua New Guinea shall ensure that its Posts and Telegraphs Department obtains Bank's agreement to a revised finan.oing plan before committing itself to any capital expenditure not requ:ired for the project if the aggregate of such capital expenditure made or to be made in any one fiscal year should exceed an amount equivalent to US$0.5 million. The Project 3.03 The project proposed for Bank financing forms part of the FY 1973-75 telecommunications development program and includes the following: (a) Installation of about 13,500 lines of local automatic exchange equipment; and recovery of about 3,300 lines; (b) Provision of local exchange cable network and telephone equipment at subscriber premises to connect about 6,100 additional direct exchange '-Ines; (c) Installation of UHF/VHF radio systems, and outstation radio equipment to connect 11 base stations;  - 6 - (d) Installation of multiplex equipment on long distance routes to provide about 650 additional circuits (152,000 channel miles); (e) Extension of long distance automatic exchanges; (f) Installation of telex exchanges with a total of 600 lines and provision of 500 teleprinters; (g) Construction of technical and operational buildings; (h) Engineering consultants to assist PO in the preparation of specifications and bid documents, evaluation of bids, planning, and maintenance and operations procedures (see Annex 7 for the terms of reference). Project Costs 3.o4 The costs of the project are summarized below. A$ (million) US$ (million) % of Local Foreign Total Local Foreign Total Total 1. Local Exchanges Equipment and Subscriber Plant 0.7 2.6 3.3 0.8 3.1 3.9 23 Cables 1.5 1.4 2.9 1.8 1.7 3.5 20 2. Long Distance Facilities Microwave 0.6 2.3 2.9 0.7 2.7 3.4 20 Radio (Outstations) 0.3 1.1 1.4 0.3 1.3 1.6 9 Exchanges - 0.5 0.5 - o.6 0.6 3 3. Buildings 0.9 - 0.9 1.1 - 1.1 6 4. Telex Facilities - 1.3 1.3 - 1.5 1.5 9 5. Consultants - 0.4 0.4 - 0.5 0.5 3 6. Contingencies Quantity 0.2 0.5 0.7 0.2 o.6 0.8 5 Price 0.2 - 0.2 0.3 _ 0.3 2 Total 4.4 10.1 14.5 5.2 12.0 17.2 100 3.05 The estimates for equipment and cables have been worked out from unit costs based on experience with the first loan in Papua New Guinea. The unit costs have been based on the Australian dollar and make allowance for the effects of changes in exchange rates in the probable countries  of supply up to date. Prices for exchange, long distance and telex equip- ment have tended to be fairlysteady over the past few years; in respect of cables, a contingency provision of 10% has been included in the cost estimates to provide for copper price variations. No separate pr-!ce contingency for foreign exchange has therefore been provided. A contin- gency allowance of 5% has been provided in the project?s foreign costs to cover quantitative increases in equipment and cables when final designs are prepared. A contingency allowance of 10% has been provided in the local costs to cover possible additional labor costs due to increases in equipment quantities and labor rates. Items Proposed for Bank Financing 3.06 The estimated foreign currency costs of goods to be imported for the project is US$12 million. Goods, principally switching ecquipment, of a total value of US$2 million have been earmarked for procuremont by P&T with its own resources and Treasury advances; some Of these goods are in process of installation and the others are being procured. The proposed loan would provide the balance of US$10 million for the following items: US$ millio3n Local Exchanges Equipment and subscriber plant 1.8 Cables 1.7 3.5 Long Distance Facilities Microwave 2.7 Radio (outstations) 1.3 4.0 Telex Facilities 1.5 Consultants 0.5 Contingencies 0.5 10.0 Execution of the Project 3.07 Annex 8 gives the timetable for executicn of the project; the proposals are realistic. P&T's staff will draw up the specifica- tions and will plan, lay and commission the cables. The engineering consultants (paragraph 5.03) will assist P&T in preparing the specifi- cations and bid documents, evaluating bids, and carrying out acceptance tests of all equipment. Suppliers of the main items of equipment will be responsible for their installation and performance.  Procurement 3.08 All equipment to be obtained under the project with Bank financing will be procured through international competitive bidding, except certain additions to existing automatic exchanges where on grounds of compatibility, and in order to use existing common equipment facilities, standardization is justified. The existing automatic exchange equipment was obtained after calling bids from L. M. Ericsson (Australia) Ltd., Telephone Equipment Industries (Division of Plessey UK) and STC Au,tralia (an IT&T Company). P&T proposes procuring the exchange additions from these suppliers, by competitive bidding. The total estimated cost is Us$0.8 million or about 9% of the procurement to be financed by the Bank. The prices to be paid will be those currently prevalent for such equipment and will be subject to the Bank!s approval prior to the placement of orders. P&T do not pay any custom duties for imported equipment. Disbursements 3.09 Annex 9 gives the estimated loan disbursements during the 1973-75 period. Disbursement would be for the CIF cost of equipment, the foreign costs of its installation, and consultants' fees. As the project as designed does not meet all the estimated demand, any unused balance of the loan should be used to finance additional equipment, similar to that already procured under the loan, after consultation with the Bank.  - 9 - 4. JUSTIFICATION 4.01 The project is intended to extend and improve the local and long distance services in the Territory and to meet as much of the latent demand for service as is possible within the constraints of the limited fiaancial and personnel resources available. On completion of the project at the end of FY 1975, the telephone density will have increased from the present figure of 1.0 telephone per 100 population to 1.5. Local Facilities 4.02 As of June 30, 1971, there were 11,706 connected subscribers in the Territory, and this figure is expected to increase to 13,60)O by June 30, 1972. Between 1968 and 1971 the annual subscriber growth rate averaged 1L4%. 4.03 The demand for telephone service has been limited by the lack of adequate long distance facilities, and the small present waiti.ng list is only an indication of the fact that potential subscribers are rLot prepared to apply for connection until the service is improved. 1'he ongoing project will result in a major improvement in the long di.stance service, and a survey carried out by P&T indicates that there will. be a marked upsurge in demand when the new facilities come into service in June 1972. However, precise forecasts of demand are not possible in the present situation, and P&T has planned for an average subscriber gyrowth rate of 13% per annum in the period up to 1975. This is a reasonable planning basis. Long Distance Facilities 4.04 The Territory's present long disteaace facilities are inadequate and congested, and will remain so until the completion of the bacscbone r,crowave route in June 1972. It is not possible to forecast futire traffic growth accurately under these conditions, but estimates have been made taking into account (a) the expected growth in traffic d1ue to iammediate improvement in quality and reliability of service on co;npletion of the microwave system, (b) the expected increase in connected sabscribers, (c) the progressive introduction of subscriber trunk dialing faciL:ities and (d) the effects of the Bougainville copper mining operations. The projoct is designed to meet the estimated demand through FY 1976 b;y the provision of about 600 extra long distance circuits, an average a.:rfual increase of 45%. This high rate of increase starts from a very lotw base since long distance facilities before the first Bu.A project were virtually nonexistent. Telex l.0o5 The annual rate of growth of telex subscribers averaged 140% from 196U to 1971 and with 83 subscribers as of June 30, 1971, the equip- ment was working at almost full capacity. P&T proposes to replace the  - 10 - existing manual exchanges at Lae and Port Moresby (Boroko) with automatic equipment including automatic working to Australia. This improvement and the provision of adequate long distance circuits will create a heavy demand for service, and the project provides for an annual subscriber growth rate of 45% of FY 1973-1975, with 350 subscribers connected by June 30, 1975. Least-Cost Solution 4.06 Fundamental decisions determining the Territory's network structure were taken in 1965 when a national development plan was pre- prepared by a planning group from the Australian Post Office. National numbering, switching and transmission plans were selected, and radio was chosen as the only practicable means of providing long distance service in view of the topography of the Territory and the difficulties of road access. Within this basic framework, major works in the first loan project were designed on the basis of present value studies of engineering alternatives over a typical 20-year period. This project provides for additions of local and long distance facilities to exist- ing installations and routes which were planned during the last project period to provide least cost system development. Internal Economic Rate of Return 4.07 The internal economic rate of return on the project, at present.tariffs, is 17.3% (see Annex 10). A sensitivity analysis (paragraph 5 of Annex 10) has been carried out showing the rate of return dropping to 14.8% if there is a one year delay in completing the project and a reduction of 10% in attributable revenues. Since this return is based on current tariffs, it is a minimum estimate of the internal economic rate of return.  - 11 - 5. THE BORROWIER 5.01 The Posts and Telegraphs Department (P&T) operates as a Government department under the jurisdiction of the Administrator of Papua New Guinea. P&T is responsible for the planning, acquisition, construction and operation of telecommunication and postal facilities within the budget allocation approved by the Papua New Guinea Adm:.nistration. Organization 5.02 P&T's chief executive is the Director, who is responsible to the Administrator of Papua New Guinea. The Director is assisted by the First Assistant Director - Telecanmunications, who is responsible for the overall operations of the Telecommunications Branch, which coirprises three main groups (Construction, Planming, Operations). This organiza- tional set-up, which is similar to that of many other telecomnunications entities, is satisfactory. Until about three years ago the technical sections were weak, due mostly to staff shortages and inexperience. P&T has taken steps to. correct these deficiencies by the recruitment of expatriates and increased emphasis on the training of local technicians. An organization chart is at Annex 11. 5.03 While P&T can operate and maintain the telecommunication facil- ities satisfactorily, its staff does not have the capability to plan major works, draw up specifications and bid documents, evaluate bids and supervise construction. To assist the staff in these functions, P&T has for the ongoing project retained Preece, Cardew & Rider as technical consultants; they are financed under Loan 546-Pm . Being satisfied with thlese consultants, P&T proposes to retain them for three years longer to assist in carrying out the new project. During negotiations agreennent was reached that the Borrower shall employ engineering consultanits accept- able to the Bank upon terms and conditions satisfactory to the Banc to assist the Borrower in the (a) preparation of specifications and tbid docu- ments; (b) evaluation of bids; (c) planningj and (d) maintenance aad operations procedures. Accounts and Audit 5.04 Under Loan 546-PNG, P&T agreed to introduce commercial account- ing and to maintain separate accounts for its postal and telecommunication operations. This has been done and acceptable accounts have been prepared for fiscal years 1970 and 1971. The Ff1970 accounts were seriously delayed, however, and problems concerning the apportionment of expenses and revenues in the FY 1971 accounts have only recently been resolved with the auditors. The introduction of commercial accourting revealed treak- nesses in the accounting organization which are being resolved foLlowing the recommendations of a Bank supervision mission in March 1971 by orga- nizational changes including the creation of new senior posts, rea.location of duties, improvement in the quality of staff and strengthening of' the internal audit division.  - 12 - 5.05 P&T's accounts are audited by the Auditor General of the Commonwealth of Australia, as agreed in the terms of Loan 546-PNG. This arrangement is satisfactory and an undertaking that certified accounts and the auditor's report will be sent to the Bank no later than six months after the end of the financial year is included in the proposed loan agreement. Staff 5.06 P&T's telecommunication staff totals about 1,150, of whom 948 are telephone employees. With 24,000 working telephones in the Territory, the employee ratio comes to 39 per 1,000 telephones. Given the relative- ly large number of manual exchanges, the present stage of telecommunication development and the inexperience of the local telephone staff, this ratio is reasonable. 5.07 Annex 12 gives details of the number of employees in each function and a breakdown between local and overseas staff. During 1973-75, the number of overseas staff will continue to increase (new expatriate staff are now recruited on a temporary basis) along with the increase in total staff and operations. But from 1976 onward, as local staff are trained, it is expected there will be a gradual decrease in the nunber of overseas staff, with more local staff taking over higher responsibilities on the expiration of contracts of expatriates. Taining 5.o8 In 1960, P&T established a training college with residential facilities to train operating, clerical and lower-grade technical staff. P&T has had difficulty in recruiting an adequate number of staff for training in the technician fields, due to the limited availability of educated staff and the great demand for them in other Government depart- ments. However, good results have been achieved in training the few who are available. The shortage of educated staff is likely to ease within the next few years as the Government's drive to expand the Territory's education programs makes more of them available. 5.09 The Australian Post Office assists P&T with specialist advice and training, and also provides experienced personnel for the operation of telecommunications in the Territory. 5.10 With the steps being taken to recruLit high-level technical staff from overseas and to recruit and train other technical and non- technical local staff, P&T should have adequately trained personnel for the operation and maintenance of the facilities being added under the ongoing project and those projected for the 1973-75 expansion.  - 13 - 6. FINANCES 6.01 Until July 1969, P&T operated under the normal governmeint grant system, transferring its revenues to the Territory Revenue Fund and meeting expenditures from annual appropriations. The shortage of available capital severely restricted development, and during the period 1965-1969 the Territory Treasury was able to provide only about A$1 million each year for capital works in addition to an average subsidy of A$0.5 million to cover the telecommunications operating deficit. In fiscal year 1970 commercial accounting and a greater degree of financial autonomy were introduced and the first major expansion program waEs launched with the support of Loan 546-PNG. In FY 1971 P&T achieveid its first operating surplus. It is now expected that rapid further inprove- ment in P&T's profitability will ensure that no further development capital or operating subsidies will be required from Treasury after FY 1973 and that by FY 1977 P&T will be in a position to pay 8% arnual interest (A$2 million) on government equity and finance a substantial part of future development programs (see paragraph 6.09). Past Earnings 6.02 Income statements for FY 1970 and 1971 are shown in Annex 13. The rate of return on net fixed telecormmnications assets was negative in FY 1970 and 4.4% in FY 1971. Under Loan 546-PNG, P&T undertook as an objective to achieve a rate of return of 8% per annum as soon as practicable after the end of the project (1972). Progress toward this objective is discussed in paragraph 6.13. Tariffs 6.03 Telecommunications tariffs are fixed by regulations issued by the Administrator of the Territory, and details of the current charges are given in Annex 15. Annual rentals vary from A$26, for a private subscriber connected to a small automatic exchange with metered lozal calls, to A$91 for a business subscriber connected to a large manual exchange with free local call facilities. With the gradual extension of automatic working and subscriber trunk dialing, rentals will be standardized at A$39 per annum for both residential and business sab- scribers with all calls metered and charged. No loss of revenue will result from the change. Local calls are charged at A07 per call, and toll call charges range from A