Zambia - Telecommunications Project

FILE COP DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1487a-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE POSTS AND TELECOMMUNICATIONS CORPORATION WITH THE GUARANTEE OF THE REPUBLIC OF ZAMBIA FOR A TELECOMMUNICATIONS PROJECT May 8, 1975 This report was prepared for official use only by the Bank Group. It may not be published, qucted or cited without Bank Group authorization. The Bank Group does not accept responsibility for 6e accuracy or completeness of the report. MEASJRES EQUIVALENT 1 Kilometer (1m) 0.621 statute mile FISCAL YEAR January 1 December 31 TITLES AND ACRONYMS ADB - African Development Bank CIF - Cost, Insurance, and Freight DEL - Direct Exchange Line GDP - Gross Domestic Product Gentex - Telegraph exchange switching system used by public telegraph service GNP - Gross National Product GPO - General Post Office of Zambia ITU - International Telecommunications Union PABX - Private Automatic Branch Exchange PTC - Posts and Telecommunications Corporation SIDA - Swedish International Development Authority SNDP - Second National Development Plan of Zambia SSB - Single Sideband Radio System SWEDTEL - Swedish Telecommunication Consulting, AB Telex - Teleprinter Exchange Service UHF - Ultra High Frequency Radio (300 - 3,000 MHz) UNDP - United Nations Development Programme VHF - Very High Frequency Radio (30 - 300 MHz) INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE POSTS AND TELECOMMUNICATIONS CORPORATION WITH THE GUARANTEE OF THE REPUBLIC OF ZAMBIA FOR A TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed loan to the Posts and Telecommunications Corporation (PTC) with the guarantee of the Republic of Zambia for the equivalent of US$32.0 million, to help finance a project for the extension and improvement of the country's local, long dis- tance and international telecommunications facilities. The loan would have a term of twenty years including four years of grace, with interest at 8.5 percent per annum. Parallel financing of approximately US$5.2 million equiva- lent from the African Development Bank and US$2.5 million equivalent from the Swedish International Development Authority would be applied to specific items of the proposed project (para. 36). PART I: THE ECONOMY 2. The last economic report on Zambia (Report No. 4-ZA) was issued on December 26, 1972. An updating mission visited Zambia in October/November 1973. A basic economic mission will visit the country in June/July 1975. The most recent economic data are summarized in Annex I. 3. With its large mineral reserves and wide area of land suitable for crops and livestock, Zambia has the potential for rapid and sustained development. Over the past decade, real gross domestic product has grown at 4% per annum despite levels of investment that have averaged more than 25% of real GDP. However, the annual growth rate during the five years ending in 1969 (5.7%) was considerably higher than the rate since then (2.2%). The economy is characterized by a pronounced dualism between a large modern sector dominated by copper mining and a rural subsistence sector. The national average per capita real income of US$380 (1972) disguises a large differential in incomes between the urban and rural sectors which has led to rapid migration to towns. The rate of unemployment in urban areas has been rising in recent years. 4. The modern sector of the economy continues to be dominated by copper mining which contributes about 40% of GDP and over 90% of the value of exports, shares which have not changed significantly during the past decade. The dominance of copper means that fluctuations in world copper prices have a large impact on the balance of payments as well as on the - 2 - whole economy. Since 1969, when the Government obtained a majority interest in the two major mining companies, it has attempted to promote the growth of copper production through tax incentives and other measures. The Second National Development Plan 1972-76 (SNDP) projected that copper production would rise from 700 to 900 thousand tons over the five year period. However, to date production has not increased due to (a) the failure of a major mine, flooded in 1970, to regain its former level of production; (b) the 1973 border closure with Rhodesia which caused a major rerouting of imports and hence delays in obtaining equipment and parts; and (c) a decline in productivity due to poorer ore grades, declining accessibility of deposits, and the policy of Zambianization of staff which has somewhat reduced the quality of skilled manpower. 5. Since 1965, manufacturing output has expanded at a rate of 13% per annum and its share in GDP (13.2% in 1974) now exceeds that of agriculture (10.5%). In 1965, the Government announced its intention to foster industrial development by direct state intervention and control; today the Government- owned Industrial Development Corporation (INDECO) holds a majority interest in virtually all major manufacturing industries. Private enterprise is only involved in the ownership of small concerns or a minority interest in large concerns, often combined with management contracts. The expansion of output in manufacturing has consisted mostly of import substitution for consumer goods behind the protection of tariffs and quota restrictions; further expansion along these lines is limited by the small size of the market. Since the production of manufactured goods in Zambia is relatively capital-intensive, even the rapid growth of output recorded has not provided sufficient employment opportunities for the growing urban labor force. 6. The performance of the agricultural sector over the past decade has been disappointing. Real output has grown only at about 2.0% per annum and the import bill for agricultural products has risen steadily. The sector consists of medium- and large-scale commercial farmers who produce about 60% of the value of marketed output and small-scale subsistence farmers. Commercial farmers (some 600 of whom are expatriates) are favored by their location on the most fertile soils mainly along the line-of-rail and by freehold possession of their land. Subsistence farmers are scattered over the remainder of the country on land of varying quality held under customary tribal law. 7. The broad economic and social goals of Zambia's two national development plans may be summarized as follows: (a) raising the general level of welfare; (b) diversifying the economy to make it less dependent on copper; (c) raising the level of education and developing a wide range of technical and managerial skills; and (d) narrowing the gap between urban and rural incomes. During the years since Independence, Zambia's economic development has been greatly influenced by external events which altered the pattern of priorities from those set out in the plans and placed a great strain on its limited administrative capacity. Southern Rhodesia's unilateral declaration - 3 - of independence in 1965 and the subsequent border closure in 1973 forced Zambia to undertake inves ment programs to reorient trade routes away from the south and make the country less dependent upon vital imports; this invest- ment program involved an oil pipeline, road, and railway to the north as well as the development of local coal and electricity resources. 8. Zambia has made a major effort to develop its education system. The shortage of skilled and experienced manpower has been a continuing critical constraint on Zambian development. In 1964, there were only about 100 citizens with university degrees and 1,000 with secondary school level certificates. Since then remarkable progress has been achieved in expanding education at all levels. The primary school enrollment ratio has been raised from 42% in 1960 to 85% in 1970. There are now over 800 Zambian university graduates and the annual output front secondary schools has risen to over 6,000. Despite the recent emphasis on vocational and technical training, skilled manpower remains an important constraint to development. 9. The objective of reducing the urban-rural gap has proven far less tractable, however. The rapid rise in African wages in the first five years following Independence virtually eliminated pay differentials between Africans and expatriates for comparable jobs in urban areas. In addition, the prices of most agricultural products set by Government marketing boards were not allowed to rise as rapidly as the prices of manufactured goods. To curb the growing gap, the Government has adopted an incomes policy to limit wage increases to productivity gains while allowing some differentiation of Zambian and expatriate salaries by allowing the payment of "inducement allowances to essential expatriates. Recently, wages have risen less rapidly than in the 1960s although increases appear still in excess of productivity gains. The Government has also raised the prices of some agricultural commod- ities (most notably, the price of maize), but more changes are necessary to raise farm incomes and give farmers a greater incentive to expand production. 10. The Government has not as yet devised a strategy which would increase the welfare of the rural poor by raising their productivity while increasing production to stem the rising import bill for agricultural products. A recent Bank Agricultural and Rural Sector Mission may provide the Zambian Government with some basis for formulating a long-run development strategy. The major elements that have been identified in that strategy are: (a) an improved allocation of Government infrastructure investment and provision of supporting services to rural growth centers chosen on the basis of high land potential, access to transportation, and population density; (b) greater allocation of skilled manpower to the planning and execution of rural development projects and the decentralization of these functions to the lowest feasible level consistent with the existing manpower constraint; (c) an improvement in the efficiency of Government marketing organizations; and (d) an improvement in the level and structure of agricultural producer prices bringing them more in line with the opportunities that Zambia faces in world trade and with regional comparative advantage. 11. Zambia's SNDP, which targeted small increases in Government capital formation over the levels in the First Plan, is now largely of historical interest. Two years of low copper prices and the 1973 border closure led to sharp reductions in Government capital expenditures below planned levels in 1972 and 1973; despite high copper prices, these capital expenditures increased only modestly in 1974, reportedly due to shortages of building materials and bottlenecks in the construction industry which had been depressed for several years because of low Government capital expenditures. In real terms, Government capital expenditures during the first three years were only 75% of the Plan targets. In view of Zambia's current tight financial situation, it is highly unlikely that capital expenditures during the final two years of the Plan will allow overall Plan targets to be reached. 12. Since 1970, Zambia's economic fortunes have been in sharp contrast with those of the previous period. Through 1969, increases in copper prices put Zambia in a strong financial position. The Government's budget and the balance of payments produced growing surpluses. National savings were more than adequate to finance capital formation while foreign reserves were accumulated. At the same time, Government current expenditures were allowed to grow rapidly to cover rising wages and public employment, subsidies of agricultural inputs and commodities (notably maize and milk), and defense expenditures without endangering the Government's development program. The stagnation of agricultural production did not create a problem because foreign exchange earnings were sufficient to pay for food imports. A number of factors were involved in the change in Zambia's economic climate since 1970: (a) world inflation combined at times with low copper prices has led to a deterioration in Zambia's terms of trade from the levels of the late sixties, and (b) since 1969, legal and illegal capital flight have been increasing probably in response to increased Government intervention in manufacturing and commerical trade. 13. The Government has taken a number of measures to mitigate the adverse developments of the past few years. On the budget side, it has attempted to diversify its tax base away from dependence on copper by restructuring the personal income tax, introducing new excise taxes, and raising the rates on most taxes. However, except in 1972, increases in Government current expenditures have not been curbed. Consequently, there were only small recurrent surpluses in 1971 and 1973 and a small deficit in 1972; only in 1974 (a year of relatively high average copper prices) was the recurrent surplus large enough to finance all of Government capital expenditures. On the balance of payments side, the Government has banned the imports of certain goods and subjected others to quota restrictions, increased customs duties, and levied a temporary surcharge on all dutiable goods while attempting to control capital flight by restricting remittances. Nonetheless, Zambia's balance of payments was in deficit in 1971-73 and showed only a modest surplus of US$47 million in 1974. - 5- 14. Zambia has been hardhit by the current crisis in the world economy. The copper price fell from an April 1974 peak of US$1.37/lb. to US$0.58 in December. In November, the CIPEC countries (Zambia, Zaire, Peru, and Chile) agreed to cut back copper exports by 10% of the amount exported from June through November and more recently to cut production by 5%; at this date, it is too early to determine the long-run effect of these measures on copper prices. During 1974, the prices of imported goods increased by 22% while a loosening of import quotas led to a 17% rise in import volume. At the same time, the value of oil imports (excluding lubricants) tripled over the previous year to US$71 million. As a result, foreign exchange reserves fell from a peak level equivalent to four month's imports (ar the 1974 level) in June to the equivalent of two month's imports last January. In 1975, real GDP is expected to grow at a 4% rate assuming normal weather conditions and some reduction in the current congestion in the ports of Lobito and Dar es Salaam. Domestic expenditure is expected to grow rapidly due to wage increases in the public and private sectors and increases in Government current and capital expenditures. The prospect of rising domestic demand plus a forecast for copper prices 27% below their 1974 average led the Zambian authorities in January 1975 to restrict import licenses in order to stem the deterioration in the balance of payments. Even if this measure is successful in bringing about the 14% decline in import volume the authorities desire, a large gap in the balance of payments will remain which will have to be financed by increased foreign borrowing since the level of foreign exchange reserves is already at an indispensable minimum. The Government has indicated that it might wish to use the 1975 IMF Oil Facility but no formal steps have yet been taken. T5. Over the past two years, the Government has successfully mobilized foreign assistance for its public sector investment program. At the same time, it has stepped up its borrowing from commercial sources. Because of its limited borrowing in the past, Zambia's debt service obligations are relatively low (4.3% of exports of goods and non-factor services in 1974). Thus, there is considerable scope for further borrowing abroad on conventional terms. In real terms, GDP is expected to grow at a rate of about 4% a year over the next decade (3% in the mining sector and 5 to 6% in the rest of the economy). Such a growth rate would lead to an increase in imports of 4.5 to 5% a year in real terms. Exports (mostly copper) are not expected to grow faster than 3% in real terms but, from 1975 on, copper prices are expected to increase more rapidly than international prices generally. In these circumstances, Zambia's foreign borrowing will have to amount to some US$350 million a year over the next decade, in order to cover the expected current deficits on the balance of payments and to provide for a reasonable build-up of foreign reserves. If two-thirds of the required borrowing is on commercial terms (10% interest per annum repayable over ten years) and the remainder on IBRD terms, Zambia's debt service obligations are not likely to exceed 15% of export earnings by 1985. - 6 - PART II: BANK GROUP OPERATIONS 16. The Bank has made seventeen loans in Zambia and IFC has two invest- ments there. Four loans were made for railways and electric power before Zambia became independent and are guaranteed by the UK. Since Independence, four loans have been made for agricultural development, three for education, two for highways, two for power, one for program assistance, and one for urban development. Total lending to date has been about US$400 million (net of can- cellations), of which US$241 million is for electric power, US$47 million for transportation, US$56 million for education, US$25 million for agricul- ture, and US$20 million for urban development. Eight loans are fully dis- bursed, one has been cancelled (No. 627-ZA), and the first loan made in 1953 (No. 74-RN) was repaid in full in February 1972. IFC made its first investment in Zambia in February 1972, providing US$1.1 million for expansion of a shoe manufacturing company. A second IFC investment in the same company, totalling US$1.2 million, was made in June 1973. In 1974, the Bank's share in Zambia's total debt (disbursed and undisbursed) was 32 percent, while the Bank's share in Zambia's total debt service payments was 20 percent. Present projections indicate that these percentages will be about the same in 1985. Annex II contains a summary statement of Bank loans and IFC investments as of March 31, 1975, and notes on the execution of ongoing projects. 17. Progress on Bank operations in Zambia has been adversely affected by the difficulties Zambia has faced over the past decade. The Unilateral Declaration of Independence in Southern Rhodesia in 1965 led Zambia to sever her close economic ties with Southern Rhodesia at a considerable cost, dis- rupting the development program. Shortage of skilled manpower has interfered with progress on some projects, while recent cost escalations have caused dif- ficulties on others, especially the Kariba North Project. Finally, the sharp fall in copper prices in 1971 and 1972 forced the Government to rephase capi- tal expenditures on several programs; this affected the Bank's first education project. The Zambia-Rhodesia border closure in January 1973 created an addi- tional financial burden, but has not caused significant delays to Bank-financed projects. Substantial assistance was provided by various bilateral sources to Zambia during this emergency. To help maintain Zambia's development effort in the face of these financial problems, the Bank made a US$30 million program loan in June 1973. However, the unexpected improvement in Zambia's financial position during the second half of 1973 and the first quarter of 1974, caused primarily by an increase in copper prices, diminished the need for part of this loan. In March 1974, after discussions initiated by the Bank, the Govern- ment requested the cancellation of US$17.5 million of the loan. 18. We propose to continue assisting Zambia in achieving her develop- ment objectives as discussed in paragraph 7. To ensure that our lending program is focussed on the priorities for development, we have undertaken several sector studies, and are planning further missions. Recent missions 7- have studied urbanization, rural-urban migration, and water supplies and sewerage. In addition, a rural sector mission, which visited Zambia in September and in November 1974, has studied rural development and the problems of rural poverty and income distribution. The mission's report is scheduled to be discussed with the Government in mid-1975. A basic economic mission, scheduled for May/June 1975, will study in particular the industrial and mining sectors and manpower planning in its widest aspects. Through these missions we also hope to provide the Government with assistance in the pre- paration of the Third National Development Plan (1977-81). 19. In harmony with Zambia's development plans, we propose to continue our participation in particular sectors and institutions (e.g. power, tele- communications and urbanization) and to assist Zambia in breaking some of her main development constraints (e.g. in agriculture, manpower development, and transport). In line with these objectives, in July 1976, the Bank made one loan for an urban project and one for power development. The former is assist- ing the Government in the upgrading of squatter settlements and in the provision of serviced sites for self-help housing in Lusaka and has been designed to help combat urban problems caused by the rapid drift of large segments of the population to the towns. The other loan provided supplemental financing for the Kariba North (hydroelectric) project for which the Bank has previously made a loan of $40 million in FY 1970 to help meet the heavy cost overruns experienced during construction of the project. The project presently being proposed for telecommunications will be a major step towards meeting the need for improving and extending the country's communications facilities. 20. In the industrial sector, a project was appraised in February 1975 that will involve assistance to the recently formed Development Bank of Zambia, which provides medium and long-term financing for industrial, tourism, transport and large corporate agriculture projects. Our involvement in Zambia's power sector will be continued with a project presently being prepared that will comprise the construction of the third stage of the Kafue River hydro- electric scheme. A continuation of our efforts to assist the Government to meet the pressing needs of the urban poor should take shape in the near future through a second squatter upgrading and site and services project in cities other than Lusaka. The project is now being identified in the context of a dialogue between the Government and the Bank on the sector priorities and needs highlighted in the report of our urban sector survey mission. In the agriculture sector, a second forestry project is in the preparation stage. The project will help to finance the second phase of the Government's affores- tation program to provide raw materials for wood processing industries in Zambia. Two other projects in this sector - a mixed farming project and an intensive development zone project - were fully prepared and appraised but were withdrawn by the overnment because of its own doubts as to its capacity to implement them effectively. The Government is presently re-examining its strategy for rural development and in this regard, the forthcoming report of our recent rural sector survey mission is expected to be of assistance. We expect that the report will serve as a focus for discussions between the Government and the Bank on the needs of the sector, and on the Government's plans for organizing its support for the sector. It is hoped that these discussions will lead to the identification of Bank projects directed towards small farmers. - 8 - 21. Further Bank involvement is also foreseen in the education sector. Previous Bank loans have provided substantial assistance to Zambia in achiev- ing the tremendous advances made in increasing the number of skilled Zambian graduates. To determine future strategies, the Government is preparing an education sector plan. Upon its completion, we expect to review with the Government the scope for further Bank assistance in this sector. In other sectors, projects are being planned for roads, possibly emphasizing road maintenance and staff training as well as construction, and water supply. The latter is expected to focus on the development of water supply systems in provincial towns. PART III - TELECOMMUNICATIONS SECTOR 22. The Borrower, the Posts and Telecommunications Corporation (PTC), a statutory corporation with responsibility for all aspects of public telecom- munications and postal services in Zambia, was established in only recently. It succeeds the General Post Office (GPO), a department of the Ministry of Power, Transport and Works, which had been set up to provide both public telecommu- nications services and postal services, but did not have the requisite control over all activities necessary to enable it to function like a commercial enter- prise. While the GPO was responsible for the day-to-day operation of the telecommunication service and the execution of works, the Ministry retained the planning and partly the engineering functions through a planning unit provided by Swedish consultants (SWEDTEL). The GPO was also subject to the financial and administrative regulations of the civil service, and the detailed planning, engineering, execution, and supervision of its building works were entrusted to various Government departments. The Government, aware that these arrangements did not provide the autonomy necessary for the GPO to function properly, converted it into a statutory corporation. The new corporation will separate adequately the postal and telecommunications services with respect to investment, finance, and accounts (refer para. 30), and has the necessary control over all activities required to enable it to function as a commercial enterprise. The Government has retained only the usual powers, which include approval of tariffs, budgets, and development plans. 23. As of January 1974, the total number of telephone stations 1/having access to the public telephone transmission network operated by the PTC comprised 43,000 stations connected to exchanges operated by the PTC and 16,000 stations connected to privately-owned and operated exchanges -- a total of 59,000. About 2,200 of the private telephone stations are connected to exchanges operated by mining companies. Including private stations, the telephone density in Zambia is about 1.3 telephones per 100 population which is relatively high in comparison with other countries in Africa, but which is well below Zambia's -requirements as indicated by the existence of a large waiting list for telephone connections (para. 25). Apart from the Borrower, the Ministry of Information, National Guidance and Culture, with its affiliated broadcasting service, and the Civil Aviation, Railways, Police and Defense services have specialized telecommunication networks for their own purposes. The Zambia Broadcasting Service operates 1/ One or more telephone stations may be connected to a direct exchange line. -9- broadcast and television stations, but leases the interconnecting circuits from the Borrowc. The Borrower is currently responsible for allocation of radio frequencies, controlling sites of radio stations and licensing of all private telecommunication facilities. 24. As of January 1975, the PTC's network consisted of 47 local tele- phone exchanges of which 29 were automatic and the remainder manual. The total installed capacity of these exchange As about 35,500 lines (34,700 automatic and 800 manual), and their fill is an acceptable 75 percent on average. The long distance telecommunications network consists of a backbone microwave system connecting the Copperbelt Province and Lusaka that serves about 90 percent of all telephone subscribers in the country, and also VHF/UHF radio systems and open-wire lines. The principal towns along the line-of-rail through the Copperbelt, Central, and Southern Provinces are served by automatic trunk switching exchanges in Lusaka, Kitwe, Ndola, and Livingstone. Telegraph service is available in about 70 towns and telex service is presently provided to about 400 subscribers by means of exchanges in Lusaka, Kitwe, and Ndola. International telegraph and telephone services to overseas destinations are facilitated by an earth satellite station, commissioned in late 1974, while services to Nairobi and Dar es Salaam are by HF radio, and to Malawi and Rhodesia by land-line carrier. 25. In recent years the pace of domestic telecommunications develop- ment in Zambia has fallen far behind that of general economic development. Consequently, the Borrower's existing exchanges, long distance network, and telegraph service are inadequate in both quality and quantity to meet Zambia's development needs. The local telephone service is poor because existing facilities are overloaded and in many cases old and unreliable. Similar problems exist with the long distance network and telegraph service. Both telex and international services, however, are reasonably satisfactory apart from shortages of facilities. As of January 1974, there was a waiting list of 8,400 applicants for local telephone service, about 32 percent of the direct exchange lines in service (25,900). In addition, there is a latent demand in both the areas currently served and the areas not yet served that is estimated at about 3,000. Total demand is estimated at 37,000 lines at the beginning of 1974 and is conservatively forecast to increase at 9 percent per annum through 1980 to about 68,000 lines. Demand for long distance ser- vice is also expected to increase annually through 1980 by about 15 percent. As of January 1974, the demand for telex connections stood at 504, including a waiting list of 100 applicants, and is expected to grow at nearly 10 percent per annum in the coming years leading to a demand of about 1,000 at the end of 1980. Demand for international telephone and telex service is forecast to grow annually at 25 percent and 19 percent respectively over the project period (1975-1980), partly as a result of better quality service to be provided by the new international and long distance facilities now planned. 2/ Percentage of installed capacity of a telephone exchange actually in service. Generally this percentage ranges between 70 and 80 percent in national net- works since there must be some spare capacity for immediate requirements. - 10 - PART IV - THE PROJECT 26. A report entitled "Zambia; Appraisal of a Telecommunications Project" No. 729a-FA dated April 14, 1975, is being distributed to the Executive Directors separately. A loan and project summary is provided as Annex III. 27. In 1972, the Government commenced discussions with the Bank regard- ing assistance to the telecommunications sector and a project pre-appraisal mission visited Zambia in December 1972. The project was appraised in the field in November and December 1973 and negotiations were held in two stages - in October 1974 and March 1975 - as the Government wished to consider certain issues. The Zambian delegation was led by Mr. L. J. Mwananshiku, Permanent Secretary, Ministry of Finance and Planning, and Mr. P. Siwo, Permanent Secretary, Ministry of Power, Transport and Works. The Borrower 28. The organizational structure of the PTC is along the normal lines for an entity operating both postal and telecommunication facilities. The headquarters is presently divided into five divisions: Telecommunications, Posts, Finance and Accounts, Personnel and Administration, and Training - the last three divisions dealing with both postal and telecommunications services. 29. PTC's staff employed for telecommunications activities totals about 1,600, giving a reasonable staff ratio of about 35 per 1,000 telephones installed. Both the Director of Telecommunications and the Director of Finance are well experienced and qualified. Senior engineering and financial staff also are generally well qualified, experienced, and capable of managing present and prospective operations. However, most of the senior executives and technical staff in the telecommunications division are expatriates (about 200). The policy of the Government is to Zambianize posts filled by expatriates as soon as qualified and competent nationals are available. The Postmaster-General is a Zambian and a further step towards Zambianization has been taken recently at the management level with the appointment of a Zambian to an Assistant Director's post. In the past,recruitment of skilled Zambians from the University of Zambia and the Zambian Institute of Technology has been slight but is expected to increase in the future with the growing number of graduates. A new modular and job-oriented training system, recently adopted by the Borrower's training school at Ndola, should make it possible to train enough skilled technical staff to meet future requirements. Recruitment of lower grade staff has already improved considerably with the increased number of secondary school graduates. To determine its manpower and training requirements more closely for the next five to six years, the Borrower is undertaking a study of its needs. The study is scheduled to be completed by December 31, 1975. The Borrower will discuss the results of the study with the Bank before implement- ing its recommendations. - 11 - 30. The PTC's accounting system, which it inherited from the GPO and which is based on the accrual concept, presently has a number of deficiencies in that: (i) it does not provide for separate accounts of the postal and telecommunications operations which are necessary to assess the financial performance of each service and which are required under the legislation establishing the Corporation; (ii) it lacks a work order system, which is required to improve the efficiency of cost control and manpower planning, and (iii) it lacks an effective budgetary control system. Since the PTC does not have the necessary staff to overcome these deficiencies, it has retained financial/accounting consultants to make recommendations for a new ac- counting system, and to assist in its implementation. The consultants will also review the billing system which is presently satisfactory but may need some modifications with the expected growth in volume of services over the next five years. It has been agreed that the Borrower will take all necessary steps to ensure that the study is completed by September 1975 and that those recommendations of the consultants that are mutually acceptable to the Borrower and the Bank will be implemented according to an agreed time- schedule (Section 5.06, Loan Agreement). It has also been agreed that, begin- ning with the accounts for FY1975, annual audits will be performed by an inde- pendent auditor acceptable to the Bank and that the requisite reports will be submitted to the Bank within eight months after the close of each fiscal year (Section 5.02, Loan Agreement). 31. Past financial performance of the posts and telecommunications entity as a whole and of its telecommunications operations separately has been satis- factory with estimated rates of return in 1971 of 10 percent and 20 percent respectively, and in 1972 of 11 and 17 percent respectively. The postal service, however, is being operated at a loss and in the past the surplus from telecommunications operations has been used to cover postal deficits. As this does not promote operational and developmental efficiency or good financial management, the two services need to be financially separate and transfers of funds should only be made after the implications have been critically analyzed. Assurances have been obtained that telecommunications funds will be used by the Borrower for other purposes only when these funds are not needed for telecommunications operations, debt service and investment requirements (Section 5.08, Loan Agreement). Moreover, in the event of deficits arising in other activities carried out by the Borrower, the Guarantor has agreed to take steps satisfactory to the Bank to cover these deficits (Section 2.04, Guarantee Agreement). Project Description and Costs 32. The proposed loan, the Bank's first for telecommunications in Zambia, would assist in financing part of the Borrower's telecommunications development program to be implemented over the period 1975-1980. The program aims at meeting most of the demand for additional telecommunications service, removing the present congestion of the network and improving the quality of service, extending higher quality service to rural centers, and providing improved international telecommunications links. The facilities to be provided under the program are based on the use of common control switching equipment for telephone exchanges and microwave links for the long distance network. This will provide for the least cost system development. - 12 - 33. The program consists of both ongoing works and the proposed project. Under the ongoing works, 19 new cross-bar exchanges are expected to be commis- sioned in 1976-1977 that will replace old lines and add an additional 13,000 lines; the Lusaka cable network is to be improved and expanded by the end of 1975; and the telex network is being expanded and modernized through the provision of a new 800 line electronic exchange expected to be commissioned in early 1976. The proposed project consists of the new works to be imple- mented during the period 1975-1980 and comprises the following main items: (i) installation of local exchange equipment for about 31,000 lines in 60 towns throughout Zambia's eight provinces, of which 7,900 would replace worn out equipment, and about 23,100 lines would be a net addition; (ii) expansion of the cable networks in 79 towns to provide about 31,000 connections; and provision of PABX's (including a 1,000- line PABX in Lusaka for the Government) and subscriber apparatus; (iii) expansion of the long distance network including new microwave links between Lusaka, Kasama and Nakonde, on the Tanzanian border, between Lusaka, Chipata, and Malawi, and between Livingstone and Mongu; construction of about 2,500 km of VHF/UHF radio links; and addition of multiplex equipment on existing and new routes to provide about 2,200 additional long distance circuits; (iv) extension of gentex service3'o about 25 additional localities which are at present served by means of point-to-point tele- graph circuits; and (v) installation of an international switching center in Lusaka. 34. The cost of the program, which includes the preliminary expenditure for the preparation of the subsequent program of expansion to commence in 1981, is estimated to be about US$109 (K 70) million equivalent, including a foreign exchange component of US$69 million equivalent. The estimated total cost of the project is about US$78 (K 50) million equivalent, including a foreign exchange component of US$52 million, or 67 percent of total costs. The estimates are based on the PTC's recent experience with respect to the ongoing works and have been updated to reflect conditions at the beginning of 1975. The estimates do not include any customs duties or import taxes on telecommunication equipment as this equipment is at present exempt from such charges. Provisions for expected price increases represent 24 percent of the project's foreign costs and 30 percent of the project's local costs (both before contingencies). Physical contingencies represent 4 percent of the project's total cost (before contingencies) and are included to cover a possible growth of the long distance traffic at a faster rate than projected. 3/ Telegraph exchange switching system used by public telegraph service. - 13 - Project Execution 35. The planning, detailed engineering, and preparation and evaluation of bids will be carried out by the Borrower with the assistance of telecommu- nications consultants (Section 3.02(a), Loan Agreement). The switching equip- ment and the main trunk bearers will be installed by the suppliers while the expansion of the cable networks in the main centers will be executed up to 1976 by contractors with the assistance of local staff. After 1976, these and other works included in the project will be installed by the Borrower. However, the Borrower may need assistance for the supervision of the installation and commissioning of the switching equipment. Assurances have been obtained that, should assistance be necessary, the Borrower would contract the services of suitable consultants (Section 3.02(b), Loan Agreement). Financing Plan 36. The proposed Bank loan of US$32.0 million equivalent represents about 41 percent of the total project costs, and would be used to finance about 61 percent of the foreign exchange costs of the project. The loan would be used for financing all items in the project referred to in para. 33 with the main exceptions of: (i) the microwave link between Lusaka, Kasama, and the Tanzanian border including various spurs of this link (estimated cost US$8.6 million equivalent including a foreign component of US$5.2 million), being financed with a 15-year loan of $5.2 million equivalent at 7 percent interest from the African Development Bank (ADB) which was made available by agreement of November 8, 1974 (Recital D and Section 7.01(a), Loan Agreement)); (ii) the domestic trunk and international switching eauiDment (estimated cost US$3.7 million equivalent) to be financed with a grant of $2.5 million equivalent from the Swedish International Development Authority (SIDA) which was made available by agreement of April 12, 1974 (Recital E and Section 7.01(b), Loan Agreement); (iii) a 5,000 line extension of the Ridgeway exchange in Lusaka (estimated cost US$1.3 million equivalent) to be financed with assistance from the Guarantor (Recital F and Section 7.01(d), Loan Agreement); and (iv) the 1975-76 expansion of cable networks in the Copperbelt towns (estimated cost US$4.8 million equivalent) under a turnkey contract, also to be financed with assistance from the Guarantor (Recital F and Section 7.01(d), Loan Agreement). - 14 - 37. The financing plan for the Borrower's telecommunications development program, including the proposed project, to be implemented over the period 1975-1980 is as follows: K US$ Million Million % USES Ongoing Work 10.0 15.6 14 Proposed Project 50.1 78.2 72 Future Project 9.8 15.3 14 Total Uses 69.9 109.1 100 SOURCES Internal From Operations 41.5 64.7 59 Less: Debt Service & Other 20.5 32.0 29 Net from Operations 21.0 32.7 30 Decrease in working capital 1.9 3.0 3 Subtotal 22.9 35.7 33 Grants and Borrowings Proposed IBRD 20.5 32.0 29 ADB 3.3 5.2 5 SIDA 1.6 2.5 2 Government 17.0 26.5 24 Future Borrowing(for works to be completed after 1980) 4.6 7.2 7 Subtotal 47.0 73.4 67 Total Sources 69.9 109.1 100 Financial Position of Telecommunications Operations 38. Through 1980, the earnings of the Borrower's telecommunications operations are forecast to increase by an average of 13 percent per annum while expenses are forecast to increase at 18 percent per annum. The operating ratio would correspondingly decrease from a high of 83 percent in 1975 to 74 percent in 1980. As a result of the increase in assets from the development program, the rate of return on telecommunications operations is projected to decline from 12 percent in 1974 to 9 percent in 1975 and then increase to - 15 - about 11 percent in 1976, remaining steady thereafter through 1980 (refer para. 40). The debt/equity ratio is forecast to rise from 55 percent in 1975 to 72 percent in 1980 while debt service coverage is expected to decline from 2.5/1 to 2.1/1 during the same period. 39. The Borrower's telecommunications operations will be adequately in- sulated financially by assurances obtained from the Borrower on transfers of funds between the telecommunications and postal operations, and on coverage of postal deficits from the Guarantor (Refer para. 31). With the exception of a covenant on dividends, the other financial assurances provided by the Borrower have therefore been limited to telecommunications operations. These assurances are: (i) The rate of return will be maintained at not less than 11 percent from FY76 onward (Section 5.04, Loan Agreement). (ii) Bank approval will be obtained before any new long-term debt is incurred unless the maximum debt service requirements for any succeeding fiscal year are covered at least 1.4 times by actual present internal cash generation (Section 5.05, Loan Agreement). (iii) Payments of dividends will not be made during the project construction period without Bank approval (Section 5.08, Loan Agreement). It is not expected that dividend payments would be feasible during this period; hence, it is intended that Bank approval would require a satisfactory revised financing plan. During the construction period, short-term finance is expected to be required by the Borrower to overcome temporary funds shortages. Assurances that the Guarantor will make these funds available have been obtained (Section 2.03, Guarantee Agreement). 40. The level of the present telecommunications tariffs will have to be gradually increased to generate a reasonable rate of return and to generate funds necessary for expansion. To obtain the proposed return on assets, increases in revenue of about one-third will be necessary over the project period. The tariff structure is basically sound. The annual rental of US$27.00 and the call charge of US$0.045 are both within the range encountered in many countries, and long distance charges are reasonable. Procurement and Disbursement 41. Procurement of all goods provided under the project will be by international competitive bidding in accordance with Bank guidelines. In accordance with the Government's request, local manufacturers will be accorded - 16 - a preference of 15 percent of the CIF cost or the applicable customs duties, whichever is lower, on bids for telephone distribution cables. The cost of these cables is not expected to exceed US$4.5 million equivalent. 42. The Bank would disburse against 100 percent of the CIF costs of imported equipment and materials, 100 percent of the foreign costs of ser- vices and 100 percent of the ex-factory cost of any locally awarded contract for goods specified under the loan. Any unused balance of the loan would be made available for purchase of additional goods or services similar to those already procured under the loan. Expenditures on the project that are in- curred after January 1, 1975, would be eligible for disbursements from the loan. These expenditures are estimated to total less than US$200,000. Justification 43. The Government is well aware that Zambia's presently inadequate telecommunications services are having an adverse influence on the achieve- ment of the country's economic and social objectives. The Government's telecommunications development program, which includes the proposed project, is a major step towards meeting the demand for good quality service and the extension of communication links domestically and internationally. In particular, local exchange equipment will be installed in 60 towns throughout Zambia's eight provinces and the long distance network will be extended to 32 additional towns that are not served at present. By the end of the project period, it is expected that the waiting list of applicants for local service will have been reduced from the present 44 percent, including esti- mated latent demand, to about 28 percent of direct exchange lines in-service. Demand for long distance, international, and telex service should be met in full. Meeting these demands is essential for an efficient organization of the production, distribution, and marketing functions in the Zambian economy. 44. The internal rate of return on the project is estimated at above 16 percent when taxes and duties are excluded. A sensitivity analysis has been carried out, showing that even an unfavorable combination of the main para- meters would result in a rate of return of no less than 12 percent. These rates are a minimum estimate of the real economic benefits, since they were calculated using the expected revenues as the only measure of benefits. 45. The fiscal impact of the Borrower's telecommunications operations will be favorable. During the 1975-1980 period, Government is expected to receive interest payments totalling US$15.1 million equivalent and tax payments of US$11.7 million equivalent. Since the Government has already included about US$8.3 million in the 1975 budget for the telecommunications capital develop- ment program and a further contribution of US$17.6 million equivalent is required in 1977-1979, the net fiscal impact is US$0.3 million receipt by Government. After the construction period, the net payments to Government would become larger. - 17 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 46. The draft Loan Agreement between the Bank and the Posts and Tele- communications Corporation, the draft Guarantee Agreement between the Republic of Zambia and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 47. Features of the Loan and Guarantee Agreements of special interest are referred to in paragraphs 30, 31, 35, 36, 39, and 41 of this report. 48. Additional conditions of effectiveness would be: (i) all conditions precedent to the effectiveness of the ADB Loan Agreement and the SIDA Grant Agreement shall have been satisfied, or alternative arrangements satisfactory to the Bank shall have been made for the financing of the microwave link between Lusaka, Kasama, and Nakonde and the trunk and international switching equipment; (ii) the Guarantor and the Borrower shall have entered into an agreement satisfactory to the Bank providing for the Guarantor to make to the Borrower loans equivalent to US$26.5 million, and all such additional amounts as are required by the Borrower for the purposes of the Project; (iii) all necessary governmental and corporate action shall have been taken for the assumption by the Borrower of the assets, liabilities, and reserves of the GPO; and (iv) the Guarantor shall have prepared recommendations for the initial capitalization of the Borrower acceptable to the Bank and shall have agreed with the Bank on a time-table for their implementation. 49. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. - 18 - PART VI - RECOMMENDATION 50. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 8, 1975 ANNEX I Page 1 of 3 pape 00OUTRY DATA - ZAMBIA ARA POPULATION ~NSIT 752,61 k1 L.5 uJUIn (Mid-1972).. Per kelof arable land SOCIAL INDICATORS Beference Cowuntriee Zambia GNP PER CAPITA US$ (ATLAS BASIS) 1 .. 380 L- 880 La 800 La 810 & DEM~GRAPHIC Crde birth rat. (per thousad) 51 /b 50 33 30 d Crude death rot. (per thousand) 19 7U 21 c 25 c 9 Infont mortlity rate (per thoudand live births) 259 7 .. ..~ 79 43 / Life expectancy at birth (years) b4 h L L 39 62 / 68 ros reproduction rot. 2 .. 3.3 /c 2.0 2.2 /_ 1.3 Population growth rate 3.0 2.9 71 0.9 /4 2.3 / 1.0 i Population growth rate - urban .. 1M k 8 / 3n Ago structure (percent) 0-1L 45 56 o 31 39 27 15-64 2 51 o 66 55 6 65 and over 1 31. 5 6 Age dependency ratio / 1. 1.00.8 0.8 0.5 EconoiC dependency ratio 1.8 o 0.9 1.6 0.9 Urban population es percent of total .. 34 /d.k 32 L 76 L. 39 äjNL Family planning: No. of acceptors cumulative (thous.) .. No. of users (% of married womn) .. EXPIDYMNT Totol labor force (thousands) .. 1,210 27 L, r 3,000 t 8,900 Percentage employed in agriculturs .. 58 19 & 5 Percntags unamployed .. 10 .. 5 3.3 INCOM DISTRIBUTION Percent of national tncom roceived by highest 5% 38 / ..t. 30 /u 15 u v Percent of national income rceived by highest 20% 57 .t ... 57 u 52 j 42 Percnt of national incowe received by louest 20% 6 .... 5 /u.v 7 u , Percent of national income roceivd by lo-nt 50% 15 ..13 M- 19 ov DISTRIBUTION OF LAND 0igRSHI? i owned by top 10% of oners ... % owned by smallest 10% of owners .. HEALTH AND NUTRITION Population per physician 12,000 t 13,580 o 5,100 lo 2,010 /4 1,010 Population per nursing person 3,060 sa 2,950 . 600 73 5,320 / 510 Popu,lation per hospital bad 350 f 310 . 100 7o 250 180 Pr capita calorie supply as % of requirements / 87 /z 88 95 101 125 Per oapita protein supply, total (gras per day) /6 63 65 56 71 92 Of which, animal and puls. 25 Death rate 1-5 years / .. .. . . 32 29 / 3 Lv 2.6 v EDUCATION Adjustöd /8 priary school enrollment rmtin 52 85 168 /oab 119 ¿g.ab 9L Adjusted I secondary school enrollment ratio 2 12 16 29 45 Years of sohooling provided, firet and second level 12 12 13 12 12 Voational enrollment as % of soc. school enrollment 28 15 /ac 15 33 72 Adult literacy rate % .. 53 ad.ae 30 /v.ad.ae 90 A ad 85 /ao HOUSING Alerage No. of persons per roo0 (urban) -. 2.1 o .. 1.3 g 1.3 Percent of occupied units without piped water .. 5. - 50 /q.a 66 s Accoss to electricity (ae % of total population) 28 /.L .. i0 i 85 ^h 8 /ah Perosnt of kural population connacted to slectricit . .. 20/a 30 /d 80 CONSUMPTION Radio receivers per 1000 population 9 /a) 23 a 126 1h9 /a 171 a Pasnoger cars per 1000 population 11 15 a l/ 19 58 a Elontric poer consumption (kwh p.c.) 681 /s 1,074 263 .80 a 1,570 a Nesprint consumption p.c. kg per year 0.8 /a 0.6 a .- 5.7 5.2 a4 Nots, Figures refer either to the latest period. or to account of environmentml temperature, body weight, and tho lotest years. latest periods refer in principle to distribution by age and ea of national populationo. thr years 1956-60 or 1966-70; the latest year in prin- Protein standardo (requireoente) for all ountrie aetab- cipi to 1960 and 1970. liMhed by USDA Economie Research Serrice provide for a li~uo / The Per Capita GNP estimate i. at market prices for allowance of 60 gr~m of total protein per day, and 20 grms of yearo other than 1960, calculated by the bame conversion aninal and puloe protein, of which 10 grame ohould be animal technique as the 1972 World Book Atlas. protein. These etandarde are somevat lower than tboec of 75 / Avoraga number of daughters per woan of reproductive grame of total protein and 23 gra, of aninal protein as an age. average for the world, propoeed by FAO in the Third World Food / Population gowth rates are for the decades ending in Survey. 1960 and 1970. 7 Some otudieo hare ouggested that erude death rateo of hildren åk Ratio of population under 15 and 65 and over to popula- age 1 through 4 may bo used a. a firat approximation index of tion of ages 15-6 for age dependency ratio and tD lbor malnutrition. fore of ages 15-6 for emonmie dependancy rtio. L8 Perantage enrolled of oorreonding population of ~chool ag. FAO reference standarde repreent phyiological re- a defined for each ountry. quirements for norml activity and health, taking /a 1972; /b Estimte for African population based on analysis of 1963 censs; e4 1965-70, UN estimte; Ld 1973; le 1950; /4 1963; 4 1969-70; Ih 1970-71; Li 1960-72; /4 1965-69; ain toso and as many ---11 towoohips as could be separetely identified; Q Settlements having a populatio over 2,000 inhabitanto; L. Populated centers which have definite urban charateristic. contributed by certaln public and ämnicipa.l servicee; F For definition of urban e UN Dm gphic Ysarbook 1972, page 157; 1969; 1971; å Etimate; r 15-49 yare; Persona seCking work; 4 1 959 Hounahods; 0 968; 1962; x Personel in government service only; Including mldwivee and nuroLng auxiliarie; a 1961; _a 1-66; /ab Including overage studente; Zac 1965; 15 years and over; lao Definition not avail=a; Il£ Piped water in.de; /ag ata reer to houselm; & P.retage of dwellings; /24 Urban only; 12 Data for Southem Rhodesia and Malaw are included. - Yugo.laiia is selected as an objective country bca,use it has a higher degree of development with extenmive tate participation In industry and comrce; alo the agricultural sector, the dominant sector of employment, io developing from a relativoly low level of prductivity. R3 April 24, 1975 ANNEX I Page 2 of 3 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWT (%, constant prices) US$ M1n. % 1965 -69 1970 -73 GNP at Market Prices 2,356 100.0 5.6 2.1 Gross Domestic Investment 666 28.3 19.5 6.2 Gross National Saving 837 35.5 10.2 3.0 Current Account Balance 171 7.3 Exports of Goods, NFS 1,216 51.6 0.4 1.6 Imports of Goods, NFS 783 33.2 9.6 -1.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 1/ Value Added Labor Force- V. A. Per Worker US$ M1n. %M1n. % us $ T Agriculture 219 15.2 0.656 54.3 334 28.0 Industry 718 49.8 0.176 1L.5 4,087 342.0 Services 506 35.0 0.298 2L.6 1,698 142.0 Unallocated . . 0.079 6.6 . . Total/Average O 100.0 1.-7 100.0 1,193 100.0 GOVERNMENT FINANCE 2/ General Government Central Government M1n._I of GDP (KwazaMln.) % of GDP 1972 197L 19701-72 1973 1973 1971- 73 Current Receipts ) 396 24 26 Current Expenditure ) 360 22 2 Current Surplus )3 2 1 Capital Expenditures ) 153 9 12 External Assistance (net) ) 41 3 2 MONEY, CREDIT and PRICES 1965 1969 1970 1971 197 1973 T7Mllion K. outstanding end periodr Money and Quasi Money 113.7 281.5 355.6 318.5 3hl.l 4l0.8 Bank credit to Public Sector -84.9 -120.5 -169.7 18.3 148.o 199.3 Bank Credit to Private Sector 3/ 42.5 116.2 142.9 183.1 165.h 176.8 (Percentages or Index Numbers) Money and Quasi Money as % of GDP .. 20.7 28.3 27.0 26.0 25.2 General Price Index (1963 = 100) 107.9 135.7 141.9 151.11 161.1 170.8 Annual percentage changes ini General Price Index +4.9 +6.2 4.6 6.7 6.b 6.0 Bank credit to Public Sector . . . . 708.7 34.7 Bank credit to Private Sector 3/ .. +2L.9 +25.1 +28.1 -9.7 6.9 NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. 2/ Figures do not differ significantly .. not available from "Cen-ral Government". . not applicable 3/ Includes parastatal organizations. ANNEX I rage j or 3 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1970-73) 1973 197L US $ Mln % (Millions US$) Exports of Goods, NFS 1,216.4 1,425.8 Copper 921.0 94.0 Imports of Goods, NFS 783.3 1,101.L Lead, Zinc, Cobalt 39.3 4.0 Resource Gap (deficit = -) 533T " All other commodities 19.9 2.0 Total 950.2 100.0 Factor Payments (net) -134.7 -112.3 Net Transfers -142.3 -140.4 Balance on Current Account T 7 777 Direct Foreign Investment ** ** EXTERNAL DEBT, DECEMBER 31, 1973 Net MLT Borrowing (Public) Disbursements 187.9 81.1 US M1n Amortization -56.0 -40.5 Subtotal 131.9 _707 Public Debt, incl. guaranteed 966.9 Capital Grants 15.3 1.6 Non-Guaranteed Private Debt Other Capital (net) -281.6 -28.1 Total outstanding & Disbursed Other items n.e.i -39.9 -39.0 Increase in Reserves (+) -S*2 DEBT SERVICE RATIO ) 1/ Gross Reserves (end year) 190.4 171.1 197h Net Reserves (end year) 106.1 152.9 Public Debt, incl. guaranteed 4.3 Non-Guaranteed Private Debt Total outstanding & Disbursed IBRD/IDA LENDING, (March 31, 1975) (Million US$): RATE OF EXCHANGE IBRD IDA Outstanding & Disbursed 132.7 Before February 1973 Since Februarg 1973 Undisbursed 184.2 S1. 00 = Kwaha 0 7114 US 5 1.00 a utstanding incl. Undisbursed 316.9 K 1-00 = US K 1.00 =us$.5 1/ Ratio of estimated Debt Service to Exports of Goods and Non-Factor Services in 197L. not available not applicable ANNEX II Page 1 of 5 STATUS OF BANK GROUP OPERATIONS IN ZAMBIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at March 31, 97)Amount (less cancellations) US$ million Loan No. Year Borrower Purpose Bank Undisbursed 8 loans fully disbursed 104.4 562 1968 Zambia Furest Planting 5.3 0.I 592 1969 Zambia Education 17.4 8.1 645 1969 Zambia Education 5.3 1.2 685 1970 Zambia Crops Farming 5.5 1.9 701 1970 Kariba North Power Station 40.0 1.8 701-1 Bank Company 42.1 34.5 882 1973 Zambia Integrated Family 11.5 10.4 Farming 900 1973 Zambia Education 33.0 32.1 919 1973 Zambia Electric- Hydroelectric 1.0 93.8 ity Supply Corp. Power 1057 1974 Zambia Urban Develop- 20.01/ 2000 ment Total 399.5 204.2 of which has been repaid 50.9 Total now outstanding 348.6 Amount sold 38.6 of which has been repaid 26.3 12.3 Total now held by Bank 336.3 of which is undisbursed 2 204.2 (Undisbursed of partici- pations) 10.1 1/ ecame effective April 1, 1975. ANNEX II Page 2 of 5 B. STATEMENT OF IFC INVESTMENT (as at March 31, 1975) (US$ million) Year Obligor Type of Business Loan Equity Total 1972 Zambia Bata Shoe Shoe manufacturing 0.85 0.23 1.08 Co. Ltd. 1973 Zambia Bata shoe Shoe manufacturing 1.20 - 1.20 Co. Ltd. Total gross commit- ments 2.05 0.23 2.28 less cancellations, terminations, repay- ments & sales 1.27 - 1.27 Total now held by IFC .78 0.23 1.01 Total undisbursed 0 - 0 ANNEX II Page 3 of 5 C. Projects in Execution 1/ Loan No. 562-ZA - Industrial Forestry Project: US$5.3 million loan of October 5, 1968; Closing Date: June 30, 1977 Execution of the project is making more rapid progress than ex- pected at the time of appraisal and is likely to be completed a year ahead of schedule. However, there are several staff vacancies which gives cause for some concern. The Government is making strong efforts to recruit the requisite staff and it is expected that the vacancies will be filled shortly. Loan No. 592-ZA - First Education Project: US$17.1 million loan of April 11, 1969; Closing Date: March 30, 1977 As a result of, inter alia, prolonged negotiations with the archi- tectural consultants, a reduction in 1972 of budget allocations due to a de- cline in copper prices, and poor management in the early stages of implementa- tion, the project is about 2-1/2 years behind schedule. Progress is now satis- factory. To allow for the completion of the project, the original September 30, 1974 Closing Date has been extended to March 30, 1977. Loan No. 645-ZA - Second Education Project; US$5.3 million loan of Novem- ber 30, 1969; Closing Date: December 31, 1975 Construction work was completed in April 1975 and procurement of furniture and equipment is expected to be completed in May 1975. Delivery of some equipment is likely to extend beyond the September 30, 1975 revised Closing Date. However, payments to suppliers and submission of all with- drawal applications are expected to be finalized prior to the Closing Date. Educational objectives are being met but slower than originally envisaged. Precise cost information is not available but it is likely that a saving of US$0.75 million in the Loan proceeds can be expected, due to, inter alia, savings resulting from equipment contributions by bilateral agencies. Loan No. 685-ZA - Commercial Crops Farming Project: US$5.5 million loan of June 5, 1970; Closing Date: December 31, 1975 The project is making satisfactory progress but the 1973/74 crop season suffered from adverse weather conditions and development of new project land was delayed due to late arrival of farm machinery. The Tobacco Board took over the management of the Mukonchi Training Unit from the Com- monwealth Development Corporation at the end of 1974. The take-over arrange- ments are satisfactory but staffing will depend on the success of the Board's current recruitment program. At headquarters level, the Board still requires strengthening, particularly in its accounting department. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any prob- lems which are being encountered and the action being taken to remedy themo They should be read in this sense, and with the understanding that they do not purport. to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 4 of 5 Loan No. 701-ZA - Kariba North Project: US$82.1 million loan of July 29 1970, as amended on December 6, 1974; Closing Date: July 1, 1976 Steady progress continues on this project, which is now in the last stages of construction, but delays in completion of some of the civil works and in erection of generators may cause a postponement in commission- ing of the station by three months. There is no change in the cost esti- mates, as such a delay was foreseen. The Central African Power Corporation - the Agent - and the engineers are now making concerted efforts to obtain better performance from the contractors and to limit the delay in commis- sioning to less than a month after the target date of October 1, 1975. Loan No. 882-ZA - Integrated knily Farming Project: US$11.5 million loan of February 28, 1973. Closing Date: June 30, 1979 The project, which is also being implemented by the Tobacco Board, achieved 87% of its farmer recruitment target of 1,650 farmers during 1973/ 74, and management is confident this shortfall will be made up next season. Die to adverse weather conditions in 1974, the tobacco yields were about 50% lower than expected while the maize crop was reduced 25% after being affected by diplodia followed by a fungus attack. Loan 900-ZA - Third Education Project: US$33.0 million loan of June 6, 1973; Closing Thte: September 30, 1979 Problems, now resolved, in recruitment of staff for two of the three Project Units created some initial delays in project implementation. However, work being implemented by the Project Unit previously established under the First Education Project (Loan 592-ZA) is proceeding on schedule with the bulk of the civil works contracts awarded as a result of the utilization of previously approved standardized drawing and tender docu- ments. Due to the early stage of project implementation, it is likely that time lost in recruitment of Project Unit staff will be overcome during the overall project implementation period. Loan 919-ZA - Kafue Hydroelectric Project (Stage II): US$115.0 million loan of July 16, 1973; Closing Date: December 31, 1979 Construction of the project is proceeding satisfactorily. About 30% of the work on the main dam, which accounts for 75% of the project cost, has been completed without significant geological problems, and dis- bursements are on schedule. On the basis of firm price contracts placed for all the electrical and mechanical equipment, and physical progress of civil works, about US$10.0 million of the loan may remain undisbursed. The Borrower's financial performance, however, has been unsatisfactory, chiefly ANNEX II Page 5 of 5 because the revised retail tariffs have not yielded the anticipated rev- enues while administrative expenses have soared. A considerable increase in revenues is needed and the Government and 7ESCO are examining alter- native courses of action for meeting this objective. In addition, the Borrower's management, particularly on the financial side, needs strengthen- ing. Management consultants are now being hired and a new Financial Con- troller will be recruited in the near future. Loan No. 1057-ZA - Lusaka Squatter Upgrading and Site and Services Project: US$20.0 million loan of December 6, 19743 Closing Date: December 31, 1979 The loan became effective on April 1, 1975. The staffing of the Project Unit has been completed, tender invitations for most infrastructure work have been issued, and the training of aev community development workers has commenced. Community leaders in the squatter areas to be upgraded have been fully briefed on the project and the Project Unit's community develop- ment section is now working with the communities concerned, making prepara- tion for relocation to make way for infrastructure. ANNEX III Page 1 of 3 pages ZAMBIA - TELECOMMUNICATIONS PROJECT Loan and Project Summary Borrower: Posts and Telecommunications Corporation. Guarantor: Republic of Zambia. Amount: US$32.0 million equivalent Terms: Repayment in 20 years including 4 years of grace at 8.5 percent interest per annum. Project Description: The project aims at improving and expanding Zambia's telecommunications facilities by (i) installing 31,000 lines of local exchange equipment (a net increase of 23,100 lines), cables and subscriber apparatus to provide about 31,000 connections, (ii) expanding long distance equipment through three 960 channel microwave links, 2,500 km of UHF/VHF radio links, multiplex and trunk switching equipment, and (iii) expanding telegraph, gentex, and international facilities. ANNEX III Page 2 of 3 pages Estimated Cost: US$ millions Local Foreign Total 1. Local Service: Switching Equipment 0.7 9.4 10.1 Distribution Networks 4.0 10.0 14.0 Subscribers' Equipment and PABX 0.6 1.0 1.6 2. Long Distance Service: Microwave & UHF/VHF 2.2 13.9 16.1 systems L.D. & International Switching Equipment - 4.6 4.6 3. Vehicles - 1.5 1.5 4. Consultants - 0.4 0.4 5. Sites and Buildings 12.4 - 12.4 Sub-total 19.9 40.8 60.7 6. Contingencies: Physical 0.2 1.3 1.5 Expected Price Increases 6.0 10.0 16.0 Total 26.1 52.1 78.2 Financing Plan: The proposed Bank loan of US$32.0 million equivalent would be used to finance about 61 percent of the foreign exchange costs of the project and would meet about 29 per- cent of the Borrower's total requirement of funds for telecommunications over the 1975-1980 period (US$109 million equivalent). The other sources of funds include PTC's internal resources (33 percent), Guarantor (24 percent), African Development Bank (5 percent), Swedish International Development Authority (2 percent), and expected future borrowing (7 percent). ANNEX III Page 3 of 3 pages Estimated Disbursements: US$ millions; IBRD Fiscal Year 1976 1977 1978 1979 1980 1981 Total Annual 1.0 4.7 7.0 8.5 7.3 3.5 32.0 Cumulative 1.0 5.7 12.7 21.2 28.5 32.0 32.0 The proposed Bank loan would be disbursed against 100 percent of the CIF cost of imported equipment and materials, the foreign costs of services and the ex-factory cost of any locally awarded contract for goods specified under the loan. Procurement Arrangements: Procurement of all goods financed by the Bank would be subject to international competitive bidding in accordance with the Bank's guide- lines. A preference margin of 15 percent of the CIF cost or the applicable customs duties, whichever is lower, would be afforded to local manufacturers of telephone cables. Consultants: Consultants will be employed to provide assistance to the Borrower in planning, detailed engineering, and bid preDaration and evaluation (about 60 man-months). Consultants will also be employed for surveying microwave links and VHF/UHF radio systems (approx- imately 18 man-months). Consultants may also be required to assist the Borrower in the super- vision of installation and commissioning of switching equipment (about 60 man-months). Financial/accounting consultants have already been retained for improvement of the Borrower's accounting F-.tems (about 20 man-months). Rate of Return: Above 16 percent. Appraisal Report: Report No. 729a-ZA, dated April 14. 1975.  Z 'S 01'~ 1 29.1 <2* 1 : 4 LuLJ 1 1 ccä 23l ~z . ikl är,I \