India - Third and Fourth Telecommunications Projects

Document of The World Bank FOR OFFICIAL USE ONLY F C Report No.1640 PROJECT PERFORMANCE AUDIT REPORT INDIA: THIRD AND FOURTH TELECOMMUNIATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) June 20, 1977 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA: THIRD AND FOURTH TELECOMMUNICATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) Table of Contents Page No. Preface Project Performance Basic Data Sheet Highlights SumImary ii Project Performance Audit Memorandum 1 I. Background 1 II. System Development 2 III. Project Implementation Costs and Schedules 5 IV. Financial Performance 13 V. Institutional Development 16 VI. Economic Aspects 18 VII. Conclusions 24 Appendix 1 Attachment: Project Completion Report (Credit 241-IN) Project Description A 1 Objectives A l Project Physical Achievements and the A l Construction Schedule Project Cost Estimates A 7 Allocation of Credit Proceeds A 8 Organization and Management A 9 Finances All Consultants A13 Auditors A13 Insurance A13 Reporting Requirements A13 Conclusion A14 Annexes 1, 2, and 3 - Continued This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Cont'd) Page No. Project Completion Report (Loan 615-IN/Credit 153-IN) Project Description B I Objective BI Project Achievements and the Construction Schedule B 1 Project Cost Estimates B 5 Allocation of loan/credit proceeds B 6 Organization and Management B 7 Finances B 8 Consultants B 9 Auditors B 9 Insurance RIO Reporting Requirements B10 Lessons Provided RIO Annex A PROJECT PERFORMANCE AUDIT REPORT INDIA: THIRD AND FOURTH TELECOMMUNICATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) Preface This report presents a performance audit on the pro- jects supported by Loan 615-IN and its associated Credit 153-IN, both of 1969, and by Credit 241-IN of 1971, the third and fourth lending operations to India for the development of its telecommunication services. Credit 403-IN for the fifth operation is now substantially disbursed and Loan 1313-IN for the sixth operation has recently been signed. The audit is based on: the attached Project Completion Reports (PCR) pre- pared by the Central Projects Staff; a review of the projects' appraisal reports and other documents and correspondence in Bank files; and discussions with Bank staff and with officials of Posts and Telegraphs Department (P&T) and of the Government during a visit by an OED mission to India in August 1976. The cooperation of P&T and the Government is grate- fully acknowledged.  PROJECT PERFORMANCE AUDIT REPORT INDIA: THIRD AND FOURTH TELECOMMUNICATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) LOAN AND CREDITS: BASIC DATA Loan 615-IN and Credit 153-IN Credit 241-IN First contact Jan. 1966 a/ a! Appraisal mission Jan. 1969 Dec. 1970 Negotiations May 1969 Mar. 1971 Board Approval June 1969 April 1971 Agreement June 1969 May 1971 Agreement effective July 1969 June 1971 Closing date - original 31 Dec. '72 31 Dec. '72 31 Dec. '74 - final 30 June '73 31 Dec. '72 30 Sept. '75 Amount US$ equivalent - original 27.50 27.50 78.00 - less cancell. - - final 27.50 27.50 78.00 Repayment time, years 30 50 50 Grace time included, years 10 10 10 Interest rate or service charge, % 6-1/2 3/4 3/4 Commitment charge 3/4 - Joint financing US$35.00 million equivalent from CIDA Incremental Financial Rate of Return (appraisal) 16% (at audit)- 19% a/ Informal proposal received by Bank/IDA in November 1965 for support of Fourth Plan, and formalized in January 1966. Loan 615/Credit 153 covered a first tranche, and Credit 214 the second.  PROJECT PERFORMANCE AUDIT REPORT INDIA: THIRD AND FOURTH TELECOMMUNICATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) Highlights The projects were part of the telecommunication program under the country's Fourth Plan (1969-74). The program was success- ful in all aspects despite delays in its implementation. It did not achieve the high construction targets aimed at, and therefore resulted in traffic congestion on the system and longer than expected waiting time for new connections. Overall cost of the actual program i.e., of the components which were completed between 1969-74, was about the same as the corresponding appraisal estimates. Financial performance was generally better than forecast. Institutional and organizational achievements were substantial, and included implementation of commer- cial accounting and management information system. The program also contributed to the development of rural telecommunications and of national telecommunication industries. The incremental rate of re- turn at audit (19%) is better than that projected at appraisal (16%). The following points may be of particular interest: Reasons for cost overruns and underruns on project components (paras. 12-14, and PCR para. A3.07). Project construction delays: their reasons; measures taken to overcome them; and their impact on tele- communication services (paras. 15-21, and PCR paras. A3.01-3.04). Better than expected financial performance (paras. 22 and 23, and PCR paras. A7.01 and 7.02). Institutional and organizational improvements achieved (paras. 24 and 25, and PCR para. A6.02). Implementation of commerical accounting and of manage- ment information system (paras. 29-31 and PCR para. A6.03). Development of rural telecommunications (paras. 41 and 42). Role of the program in the development of national tele- communication industries (paras. 43-48).  PROJECT PERFORMANCE AUDIT REPORT INDIA: THIRD AND FOURTH TELECOMMUNICATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) Summary Loan 615-IN/Credit 153-IN of 1969 for US$27.5/27.5 million equiva- lent, and Credit 241-IN of 1971 for US$78.0 million equivalent, were provided to finance the foreign exchange costs of imported finished goods and also raw materials and components for indigenous manufacture of equipment and cables required for India's telecommunication development program under its Fourth 5-Year Plan (1969-74). Joint financing by Canadian International Development Agency (CIDA) equivalent to US$35.0 million provided for the purchase of cables and microwave systems. The "project", for which the loan and the two credits were made, consisted of a substantial part of the Government's program for expanding local telephone service, long distance transmission and switch- ing facilities, and telegraph and telex facilities. As a result of the project, India's telecommunication services were expanded considerably during the period 1969-76. Nonetheless, telephone services continue to be inadequate, as indicated by the long waiting times for new connections and the heavy congestion of local and long distance traffic. The pressure on the system has resulted in unusual traffic charac- teristics which, compounded by design defects of the equipment (first imported and then manufactured under license) and by India's adverse climatic condi- tions, had led to operating, engineering and industrial difficulties which have been subsequently resolved. Construction under the Fourth Plan fell substantially behind targets (especially in long distance transmission and switching installations) due mainly to the slow procurement and delayed deliveries under the Canadian credit, combined with low outputs and slower than expected production by the Indian suppliers of transmission and switching equipment, and especially of cables. Problems with steel procurement for indigenous manufacture of towers was another contributing factor. The expenditure on the project in the period 1969-74 was 29% lower than the appraisal estimate of US$652 million equivalent. However, this was mainly a reflection of a slower pace of investment than originally estimated. The originally planned major works are taking longer to construct but will prob- ably cost about the same as originally estimated. Financial results during the Fourth Plan period were satisfactory and generally better than forecast, mainly due to the lower than expected plant investment and unanticipated tariff increases. The rate of return on average non-revalued net plant in service ranged from 13.8% to 21.2%, well - ii - above the minimum 11% stipulated in the credit agreement. Plant revaluation, which was agreed would take place at least within five years of the first operation, did not materialize. Approximately 65% of the funds used for ex- pansion were internally generated. P&T's telecommunication operations made a net contribution of Rs. 1.3 billion to the Government (including subsidy to the postal services) during 1969-74, instead of receiving the forecast Rs. 1.0 billion contribution from the Government. Progress towards organizational changes in this period was slower than had been planned. However, P&T's organization was substantially improved and good progress was made towards becoming a modern, well managed enterprise following sound commercial principles. The institutional developments mainly related to the transfer of accounting responsibilities to P&T from other Government entities, the introduction of commercial accounts, the improvement of billing and collecting procedures, the introduction of an effective manage- ment information system, the gradual improvement of stores management, and a general decentralization and strengthening of planning, construction, mainte- nance and operation functions. The appraisal for the third operation had estimated an overall average economic rate of return of about 40% for the project. The appraisal for the subsequent operation had used the incremental financial rate of re- turn for the whole Fourth Plan project, conservatively estimated at 16%, as a measure of the economic return for the project. The ex-post incremental financial rate of return is now estimated at 19%. The two most outstanding economic aspects of the project were its industrial dimension and the systematic effort given to developing rural services. India's success in developing simultaneously its telecommunication system, a manufacturing capacity to supply the materials and equipment needed yielding great savings in foreign exchange, and the research and development (both in P&T and the main industries) essential to obtain modern products of competitive quality and price, is most commendable and unusual amongst developing nations. Rural services have been provided by P&T at a loss (financed by internal cross-subsidy) in recognition of their importance as part of the economic development infrastructure and as a lead to subsequent profitable expansions. The Bank played a major role in these developments, not only as the sole available source of multilaterial financing for the import of finished goods, but mainly by: a) pressing for and giving strong support to P&T's financial reorganization; b) continuing to support the industries' development through financing P&T purchases of imported raw materials and components; c) supporting vigorous action from the largest Indian manufac- turer on its production organization problems, and; d) financing R&D equip- ment for P&T. The Bank also showed flexibility in adapting to P&T's moves to partially overcome supply delays and other shortfalls. During the preparation period for the third loan/credit, the Bank pressed for the use of foreign consultants to assist in implementing the - iii - organizational and financial reforms agreed upon. Later it accepted the Indian view, that in this case, foreign consultants would be both unnecessary and potentially counterproductive. The outcome would indicate that this was a correct decision. During this same period the Bank also pressed for a modification of the Parliamentary grant system under which P&T operations were perceived as incompatible with commercial principles and practices. After further consideration of the problem the Bank modified its position. The system was not changed and has not proved to be a constraint on P&T's development along commercial lines. The balance between successful institutional development and short- falls in physical execution must be seen as overall favorable. The telecom- munications sector and its main entities have continued to gain in institu- tional, managerial, financial and technical strength.  PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA: THIRD AND FOURTH TELECOMMUNICATION PROJECTS (Loan 615-IN/Credit 153-IN and Credit 241-IN) I. Background 1. India's telecommunication services are the responsibility of two organizations, both under the jurisdiction of the Ministry of Communica- tions: the Posts and Telegraphs Department (P&T), which operates all inland services 1/ and was the beneficiary of both lending operations covered in this audit; and the Overseas Communication Services (OCS), which handles all international telecommunications. Three major public-sector enterprises manufacture most of the equipment and cables required for the telecommunica- tion system's development: Indian Telephone Industries Ltd. (ITI), Hindustan Teleprinters Ltd. (HTL), and Hindustan Cables Ltd. (HCL). They are supple- mented by three P&T factories and by an increasing number of small, privately- owned ancillary industries. 2. Ever since its first operation in 1962, the Bank has strongly sup- ported P&T's physical and institutional telecommunications development and, through it, that of its main Indian supplying industries. Approximately one- fourth of all Bank funds lent for telecommunications have gone to India, and the Bank has financed a substantial part of P&T's foreign exchange needs for the large expansion and modernization of its telecommunication services under the Government of India's Third, Fourth, and Fifth 5-Year Development Plans. 3. Loan 615-IN/Credit 153-IN and Credit 241-IN were addressed to the first three and last two years, respectively, of the Fourth Plan (1969-74) for telecommunications. Both operations can thus be reviewed together. 4. An informal proposal for Bank/IDA financing of the Fourth Plan, received in November 1965, was formalized in January 1966. The Bank desired an indication of progress on the accounting and organizational changes, re- commended by consultants financed under the previous credit agreement as a precondition for appraising the new project. This took some time 2/. Un- certainty concerning the replenishment of IDA funds was also a factor affecting the timing of the appraisal. The appraisal was finally made in January 1969. Preparations proceeded rapidly and the agreements for Loan 615-IN/Credit 153-IN (US$27.5/27.5 million equivalent) were signed in June and became effective in July 1969. Considering that the Fourth Plan was 1/ With the exception of a few special-purpose telecommunication networks, notably those of the railways and defense. 2/ Further conditions for appraisal were added at this time by the Bank and then, after review, dropped (paras. 27 & 28). - 2 - finalized by P&f as late as March 1969, and that some purchases tendered from April 1969 were accepted for retroactive financing, it is unlikely that the late appraisal, by itself, caused any direct significant delay in the Plan's implementation. Preparation for the subsequent credit (241-IN, for US$78.0 million equivalent) developed normally during supervision in 1969 and 1970; the agreement was signed in May 1971 and became effective in June 1971. Joint financing for the Fourth Plan was provided by a Canadian International Development Agency (CIDA) credit for US$35.0 million equivalent. The Government of India was the borrower and P&T the beneficiary of both oper- ations (further details on Basic Data Sheet). 5. The project under the loan and the two credits consisted mainly of: expanding the local telephone exchange capacity by some 565,000 lines and providing associated external and subscriber plant to connect approxi- mately 540,000 new main lines into service; expanding the trunk network by approximately 26,000 inter-urban speech channels, with automatic trunk switch- ing facilities for 8,900 lines and with point to point subscriber trunk dial- ing over 50 routes; expansion of the telex system to add some 9,300 new sub- scribers, including the necessary switching and trunk facilities; expansion and modernization of the telegraph service; and further development of man- agement, training, and research facilities. Continuing the Bank's initiative and support in the gradual transformation of P&T into a modern and effectively managed commercial public utility, the loan/credit agreements included special provisions on financial reorganization, stock control, and rate of return on assets. II. System Development 6. During 1969-76, India's telecommunication services expanded substan- tially, largely as a result of the project. The number of main telephone lines in service grew at 8.7% p.a. Local telephone traffic increased by 14.6% p.a. Long distance circuits almost trebled to a total of 28,000 and route re- liability increased; traffic rose by 18.6% p.a., with the number of subscriber dialed calls growing at 29.1% p.a. and accounting for two-thirds of the total in 1976. The number of telex subscribers increased by 19.7% p.a., and their traffic by 36.5% p.a. International services were greatly improved by the in- troduction of OCS' first earth station for satellite communication in March 1971 (the main system development not included in the project - financed by a Canadian credit), telephone traffic increasing thereafter by 65.4% p.a. Appendix 1 gives basic statistics on system development during the period 1965-76. 7. In spite of these and other very important achievements, India's telephone service continued to be inadequate as indicated by the long waiting times for new connections, even when potential subscribers agreed to contri- bute a large share of the capital outlay required for the connection. Exist- ing subscribers had great difficulty in actually getting calls through (but - 3 - when they succeeded, the quality of calls was generally good). These prob- lems were mainly due to a shortage of capacity. Equipment design defects (exogenous to P&T) and system underprovisioning were also important causes of the difficulty. 8. In 1976, India's telephone density 1/ was a bare 0.3%, one of the world's lowest and the lowest for systems with over 500,000 telephones. Although connections' overt demand 2/ did not grow anywhere near the very high forecasts prepared at the time of the Fourth Plan 3/,it remained far ahead of supply. The number of waiters in 1975 stood at 637,000 or a full 48% of main lines in service. At the beginning of the Fourth Plan (1969) the waiting list was equivalent to 6.7 years of past net additions of main lines into service; although this dropped gradually to a low of 4.5 years in 1972, it subsequently rose again and in 1975 was equivalent to 7.8 years. With these levels of unsatisfied overt demand, it is probable (and P&T recog- nizes) that there is also a large hidden component of unsatisified demand, which will only emerge as the system develops 4/. From 1975, overt demand was further suppressed by the introduction of a requirement for prospective subscribers to pay their full capital contribution at the time of applica- tion rather than at installation (which was the earlier practice paras. 37 & 39). Even so, in 1976 there were 281,000 waiters or the equivalent to 2.7 years' of past net growth. The following Table II-1 shows these relative movements of supply and overt demand. 9. The extreme shortage of telephones that afflicted India continu- ously for the last several decades was mainly because of under-investment in the telecommunications sector (in both, P&T and the State-owned manu- facturing enterprises) rather than the result of limitations in P&T's capacity to handle larger projects; this was compounded, under the Fourth Plan, by shortfalls in construction for reasons mainly exogenous to P&T. Even if the industrial base were to be substantially expanded, P&T estimates that any expectation of meeting reasonable projections of today's overt unsatisfied demand in less than some 15 years would be unrealistic. This estimate does not include the unquantified hidden demand which will gradually become visi- able. Thus, the outlook may well be one of at least two further decades of substantial unmet demand 5/. 1/ Number of telephone stations per 100 inhabitants. 2/ Number of main lines in service plus number of outstanding applications (waiters) for new connections. 3/ The two appraisal reports had forecast a lower growth rate of demand (about 13% p.a.) through 1974, in contrast to the Fourth Plan's fore- cast growth rate of about 16.5% p.a. 4/ The existence and importance of hidden demand has been documented in Chile and by the Bank in Pakistan, and indications were reported also by Bank documents on China, Malaysia and East Africa. 5/ Shortfalls under the Fourth Plan will be discussed later, in Project Implementation Costs and Schedules. Table I-1: Telephone Connections Supply and Demand iorecast Waiting Overt b/ a/ Overt Supply/ list equi- Year demand- Supply Waiters demand Overt valentd/ (April 1) (thous.) (thous.) (thous.) (thous.) demand,% years - 1965 556.6 294.6 851.2 65.4 1966 651.3 349.2 1,000.5 65.1 1967 681.7 389.6 1,071.3 63.6 1968 744.8 430.2 1,175.0 63.4 7.1 1969 1,300.0 813.8 427.6 1,241.4 65.6 6.7 1970 1,500.0 888.7 414.4 1,303.1 68.2 6.2 1971 1,680.0 981.4 310.0 1,291.4 76.0 4.4 1972 1,940.3 1,057.5 341.0 1,398.5 75.6 4.5 1973 2,160.0 1,155.7 405.0 1,560.7 74.1 4.9 1974 2,410.0 1,243.3 532.0 1,775.8 70.0 6.5 1975 n.a. 1,330.0 63?.0 1,967.0 67.6 7.8 1976 n.a. 1,467.0 281.0-d/ 1,748.0 d/ 83.9 d/ 2.7 a/ Main l1eponz lines iz r2rvi-e. b/ Number of main lines in service plus number of outstanding applica- tions for new connections, i.e. waiters. The figures in this column are taken from the Appraisal Reports and represent a growth rate of about 13% p.a. The Fourth Plan had envisaged a growth rate of about 16.5% p.a. through 1976. c/ Number of waiters expressed as years of past net additions of main lines into service. d/ "Advance Deposit Scheme" introduced. Source: P&T Directorate, August 1976. - 5 - 10. The acute shortage of telephones resulted in abnormally high call- ing rates. In addition, in respect of crossbar exchanges (both imported and manufactured in India under license), serious design shortcomings were found, namely, a number of electrical and mechanical design weaknesses led to com- ponent failures and call handling capacity was less than the design expecta- tions. Extensive modifications are still under way to remedy these defects. These design shortcomings compounded by the high use per telephone resulted in a very large proportion of incompleted call attempts due to the other telephone being engaged; this led to a worsening of the already acute con- gestion existing in both the local and long distance services in many areas. 11. These conditions, and some of the impacts of the Fourth Plan's construction shortfalls, are reflected in Tables 11-2 and 11-3 which illus- trate service performance from the viewpoint of the probability of call attempts being completed. Table 11-2 shows that in Bombay District, one of the most affected by telephone shortages and high traffic, only about 32% of local call attempts and 10% of STD call attempts are successful; in both types of calls, roughly 44% of call attempts fail because the other telephone is engaged. Insufficient switching equipment, to handle the traffic offered, accounts for the failure of about 6% of local calls and about 25% of STD calls. Equipment malfunctioning, which is responsible for only a small frac- tion of failures in the step exchanges, occurs for the time being far more frequently in the common control exchanges. User errors and no reply account for a large proportion of failures; this, however, is mainly due to the high incidence of early abandonment of the call attempt, itself probably related to the often unduly long time to obtain dialing tone (another indication of insufficient equipment provisions to handle traffic offered). Table 11-3 shows the proportion of artificial call attempts that failed in tests in 25 important areas comprising 42% of the country's total main lines: about 10% of local calls, 24% of junction calls, and 64% of STD calls attempted, failed due to equipment insufficiency and/or malfunctioning 1/. III. Project Implementation Costs and Schedules Costs 12. The Fourth Plan was estimated to cost a total of US$651.7 million equivalent, of which US$168.3 million would have been the foreign exchange component. The final cost incurred in P&T's expansion over the period in which this project was to have been executed (1969-74) came to only about US$465.3 million equivalent, of which some US$105.6 million was in foreign 1/ These test calls are set up among dedicated telephones tested to be in good working order and fully attended. Thus the tests reflect only system performance and do not include user errors, no reply, and other telephone engaged. - 6 - Table 11-2: Results of Observations on Live Traffic, Bombay District, May 1976a/. Type of call Completed Uncompleted call attempts due to and switch call attempts User errors Other telephone Insufficient Equipment + no reply_b/ engaged equipment c/ malfunction c LOCAL Strowger 31.0 15.5 46.1 5.9 1.5 Crossbar 33.1 14.3 38.3 6.8 7.5 STD Strowger 12.0 12.3 45.1 29.9 0.7 Crossbar 7.6 22.8 43.9 19.7 6.0 a/ Centralized service observation of 12,110 calls from 17 of Bombay's 31 exchanges; sample said to be representative of whole Bombay. b/ Premature abandonment and wrong dialing by calling party, and no reply of called party. e/ No tone, level congestion. d/ Dropping, wrong number switched, double connection, and miscellaneous faults. SOURCE: Bombay Telephone District, August 1976. - 7 - Table 11-3: Results of System Performance Tests in 25 Exchange Areas - India, 1976 S y s t e m Main lines % test calls uncompleted a! in service Local Junction STD 1. Bombay b/ 175,128 17.8 25.3 82.0 2. Calcutta 125.164 12.7 40.7 75.4 3. Delhi b/ 114,218 4.2 20.0 54.1 4. Madras 66,210 4.6 8.8 31.3 5. Ahmedabad 35,228 2.7 3.1 41.8 6. Amritsar 10,204 4.6 12.6 86.0 7. Jaipur 12,273 1.1 6.3 67.8 8. Lucknow 11,791 6.7 14.2 62.7 9. Agra 9,470 3.8 1.5 26.8 10. Chandigarh 11,265 3.0 - 61.0 11. Meerut 6,193 10.8 - - 12. Dehradun 5,361 2.2 12.0 - 13. Saharanpur 2,234 3.5 - 49.0 14. Ludhiana 8.032 16.3 - 72.0 15. Ambala 3,523 12.0 19.4 55.0 16. Hubli/Dharwar 4,164 2.2 1.0 40.0 17. Trichur 3,998 5.0 - - 18. Vellore 2,684 2.0 - 22.0 19. Belgaum 3,456 8.7 - - 20. Gorakhpur 1,949 3.2 - - 21. Gandhi Nagar 710 4.5 - 32.7 22. Hoshiarpur 566 10.5 - - 23. Mussoorie 520 5.5 - - 24. Alwar 1,352 4.0 - 36.0 25. Bhopal 6,815 7.1 5.7 69.0 TOTAL 621,516 WEIGHTED AVERAGE 10.1 23.9 64.3 a/ All test calls, placed on attended dedicated telephones in good working order so uncompleted calls reflect system congestion and malfunctioning. b/ 1975. SOURCE: P&T Directorate, August 1976. - 8 - exchange 1/. These reductions are the result of project execution delays, whereby important parts of the project which were not built during the given period were carried over to the next quinquenium. Although substan- tial unit cost overruns and savings were probably incurred in parts of the project, the total final cost including the works carried beyond 1974 is likely to be close to the appraised estimate. 13. A summary of appraisal and final cost estimates for the total project and the parts completed in 1969-74 is given in PCR/A&B para. 4.01. It suggests that the actual unit costs were about 6% higher than the original estimates for the local telephone installations and 41% higher for the long distance network. On the other hand, the telegraph and telex unit costs were probably about 19% lower than the estimates 2/. The unit cost overrun in the long distance system is mostly accounted for by higher prices of indigenously produced transmission equipment. The causes for the higher prices were the large increases in wages and salaries and in costs of some materials, and in the expenditures on transportation of and custom duty on substantially larger than planned imports of equipment and cables (which became necessary to partially overcome the local production shortfalls). The small overrun in local telephone unit costs is reasonable, given the project size. Substantial price increases in locally made step equipment (due to higher wages and metals prices) were offset by lower than antici- pated local production costs of crossbar equipment. No satisfactory expla- nation was forthcoming on lower than estimated telex and telegraph unit costs. 14. Assuming the above unit cost overruns and underruns, and assuming that the unit costs of buildings, land and miscellaneous are the same as 1/ Project costs are given in the appraisal and completion reports in rupees. The exchange rate applicable at appraisal (US$1 = 7.5 Rs) is used here to convert the expected project costs, and the average of the rates at appraisal and audit (US$1 = 8.2 Rs) is used to convert final costs. 2/ Roughly all the originally planned works were completed, except for telex where only 6,480 new lines were connected instead of the planned 9,260 as demand developed below forecasts. Assuming that both telex and non-telex unit costs were reduced by the same pro- portion, and that 100% of non-telex works were completed, then final unit costs were 81.4% of the original estimate. -9- the appraisal estimates, then the total cost of the project including all the works originally planned would reach to approximately US$664 million or 2% above the appraisal forecasts 1/. Schedules 15. Construction under the Fourth Plan in 1969-74 fell substantially below targets, especially in long distance transmission and switching installations; the following Table III-1 gives comparative figures at aggregate level; Annex 1 provides further detail on most items. 16. These construction shortfalls were mainly because of: slow pro- curement and delayed deliveries under the Canadian credit, low outputs and production delays by the Indian suppliers of transmission and switching equipment and especially of cables; shortage of steel for the indigenous manufacture of towers; and limited success of P&T in handling the construc- tion overload at the end of the period resulting from the accumulation of delayed deliveries 2/. Other factors included: delays in initiating the test of new microwave equipment for want of antennas that were not procured on time; production shortfalls of switchboard cables and plugs in P&T fac- tories; slippage in the construction of some buildings; late deliveries of no-break power plant by a foreign contractor due to force majeure; and re- tendering for imported coaxial cables following a late decision of P&T to 1/ The cost incurred in 1969-74, calculated at the average exchange rate (US$1 = 8.2 Rs) is US$465.3 million. The balance of local main lines (110,066) at the average cost/line of 1969-74 (US$578) would add US$63.62 million. The balance of long distance circuits (12,238) at the average 1969-74 cost per circuit (US$8,045) would add US$98.46 million. The balance of telex lines (2,780) at the average 1969-74 cost per line (US$2,370, calculated under the assumptions of the preceding footnote) would add US$6.59 million. And finally if unit costs of land, buildings and miscellaneous are those of the initial estimate, there remains US$30.10 million worth to be added. The total cost of the part of the initially planned 1969-74 works carried over to the following period would thus come to US$198.77 million, taking the total cost of the originally planned works to US$664.10 million which is 1.9% above the appraised estimate. 2/ According to P&T, the lower than planned addition of telex lines resulted from lower than forecast demand, not construction short- falls. However, in March 1974 there were 1,800 outstanding appli- cations for new telex lines, or 2/3 of the difference between planned and actual lines added. Besides, at that time there were 4,564 lines spare capacity in the telex exchanges, attributed by P&T to the large number of small exchanges (in which spare capacity is normally high due to the limited divisibility of plant and other factors). Within the scope of this audit it has not been possible to work into the geographical distribution of these spare capa- cities and unmet demands to produce an opinion on the subject. - 10 - Table III-1: Construction Targets and Actual Achievements, 1969-74 (all figures Refer to Additions to Existing Systems) Class of Works Construction Over 1969-74 Appraised Actual Actual/ Target Appr., % LOCAL TELEPHONE SYSTEMS Exchange Capacity 565,000 443,834 78.6 Subscribers Connected 540,000 429,934 79.6 Telephones 700,000 561,503 80.2 Cable pair-Km (thousands) 4,400 2,520 57.3 LONG DISTANCE TRANSMISSION Microwave Channels 6,216 1,776 28.6 Coax. & other cable Chann. 11,628 8,062 69.3 VHF/UHF Channels 1,994 118 5.9 Open wire channels 6,078 3,752 61.7 HF Channels 54 LONG DISTANCE SWITCHING Trunk auto. exch. lines 8,900 3,600 40.4 STD routes 50 29 58.0 OPEN WIRE, TELEGRAPH AND TELEX Telegraph offices 2,418 2,062 85.3 VFT Channels 2,610 2,643 101.3 Long distance PCOs 2,000 1,998 99.9 Telex lines 9,260 6,480 70.0 Teleprinters 18,627 16,120 86.5 Source: P&T Directorate, Completion Report of 24 Oct. 1975. - 11 - prefer a better cable than specified. These various problems were compounded by Government procedures for import licensing approval, and by the jurisdic- tion of the Director General for Technological Development, the Ministry of Steel, and the Electronics Commission over the procurement of many items. Action was initiated with some success to streamline procedures but Govern- ment intervention was frequently an impediment to P&T's timely action. 17. Procurement under the Canadian (CIDA) credit, for transmission materials and systems, suffered successive delays mainly from a late change in policy by the Government of India, difficulties at the stage of bid eval- uation, and technical problems by a supplier. Systems planned to be com- missioned by 1972 were still not fully completed in 1976. Although at the time of appraisal the Government of India approved in principle the intended purchases from Canada, it later preferred to reserve parts of the microwave systems (1,200-channel equipment, and antennas and waveguides for all routes) for indigenous manufacture. The Canadians found any mix of equipment unac- ceptable, especially because at the same time, P&T demanded a total system performance guarantee and did not agree to the suppliers redoing path analyses prepared by P&T. After long delays, mutually acceptable terms and specifica- tions were issued. However, at the time of bids evaluation, a further six months were needed to clear complaints from the unfavored tenderers. Orders were finally placed in late 1971, some 18 months behind schedule. The micro- wave supplier later ran into design difficulties resulting in further delivery delays; at audit some of the performance problems encountered even at the installation stage had not been fully cleared. 18. Mainly due to extended labor unrest in the area, and to late delivery of machines needed for a planned factory expansion, HCL, P&T's main indigenous cable supplier, fell much short of agreed production targets especially during the first 3-year segment of the Fourth Plan. Although gradually the problems subsided and the levels of production rose very substantially, virtually none of the aggregate yearly targets were met and the large backlog remained. Table 111-2 illustrates this. 19. The deliveries from ITI, P&T's main indigenous supplier of transmission and switching equipment, fell behind schedule. Among the factors that contributed to the slower than expected production were: problems in scheduling and balancing output to achieve optimum produc- tion of completed units; and the unexpected need to modify the design of a new line of switching equipment manufactured initially under license. The new design required time for field testing and for changing the manu- facturing procedure. 20. The rather formidable switching design problems were overcome by the concerted action of R&D groups from ITI and P&T. Production planning, organization and control was gradually improved with the assistance of con- sultants and under sustained Bank insistence. These very positive achieve- ments, however, did not reflect in ITI's production until after 1974, and - 12 - Table 111-2: HCL Delivery Shortfalls to P&T Year % of year's target % of accumulated Fourth delivered a Plan targets delivered Al Dry-core Coaxial Dry-core Coaxial cable cable cable cable 1969-70 75.2 52.5 75.2 52.5 1970-71 47.0 76.8 58.2 37.3 1971-72 32.0 21.2 48.1 30.3 1972-73 34.8 63.0 56.2 65.2 - 1973-74 43.9 106.9 52.5 b/ 76.0-E a! By quantity of cable. b/ Targets for the first three years revised to 69% of original total. c/ Targets for the first three years revised to 45.7% of original figures. Total deliveries for 1969-74 less than initially planned for 1969-72. Sources: P&T Directorate, Completion Reports of 17 Sept. 1974 and 24 Oct. 1975. - 13 - ITI's deliveries to P&T during the period 1969-74 remained below expec- tations. Switching equipment was especially affected, as shown in the follow- ing Table 111-3. These delays were aggravated by further delays from suppliers of small complementing parts required to complete installations; late deliv- eries of microwave equipment and inability to supply antennas for most systems (both items included a number of the parts of local manufacture but originally intended to be purchased under CIDA agreement, and inability to supply coaxial cable equipment on schedule. 21. The failure to meet the construction targets for the Fourth Plan has meant that little progress has been made in bringing supply in line with the continually growing demand. The undesirable effects of this have been discussed in Section II. On the other hand, the long delays in completing the long-distance expansion plan has led to unduly high congestion over many routes and postponement of the extension of subscriber trunk dialing (with increased costs of manual operation and larger delays in obtaining long distance calls) 1/. Closing date of Loan 615 was extended for six months to accommodate late deliveries of some equipment; Credit 241 closing date was extended for six months, and then again for three months, for similar reasons. (PCR/A paras. 3.01 - 3.12 & PCR/B paras. 3.01 - 3.20) IV. Financial Performance 22. Table IV-1 shows the actual and forecast main financial perfor- mance indicators for the period 1969-74. Financial results over the Fourth Plan were satisfactory and generally better than forecast, mainly because of lower than expected additions to plant, better plant utilization and unfore- seen tariff increases. Because of the satisfactory financial performance, P&T was able to make a net contribution of Rs. 1,299 million to the Govern- ment (including transfers to the postal services) instead of the initially envisaged net contribution of Rs. 982 million from the Government to P&T. The actual change in the financing scheme did not adversely affect the execu- tion of the project. (Comparison of actual and estimated financial results is given in Annex A of PCR/B). 23. The annual rate of return was well above the minimum 11% agreed to under both Loan 615/Credit 153 and Credit 241. The value of plant, however, has not been revised for a considerable time, although under 1/ At the Bank's request in 1972, P&T studied the likely effects of the imminent long distance construction slippage and concluded that al- though overloading would take place in 1973 on some routes, this would be rapidly overcome mostly during 1974. Despite the Bank's view that shortages could be acute and that special measures were needed to handle it, P&T decided that special measures were unnecessary; this decision was based on the findings of its study that degradation in trunk service was not likely to be felt. The proportion of uncompleted STD call attempts due to system shortage and malfunctioning, illustrated in Table 11-3, suggests however that P&T's expectation was overoptimistic. - 14 - Table 111-3: ITI Switching Equipment Delivery Shortfalls to P&T % of year's target % of accumulated Fourth Plan Year delivered I targets delivered Strowger Crossbar Strowger Crossbar 1969-70 59.5 52.1 59.5 52.1 1970-71 60.6 50.6 60.1 51.3 1971-72 80.0 31.3 66.8 56.6 1972-73 96.4 91.0 90.6 -/ 90.4 £- 1973-74 73.6 61.3 86.9 - 80.9 a! In number of lines equivalent. b/ Target for the first three years revised to 75.5% of original plan. c/ Target for the first three years revised to 62.8% of original plan. Source: P&T Directorate, Completion Reports of 17 Sept. 1974 and 24 Oct. 1975. - 15 - TABLE IV-l: Main Financi&l Performance Indicators 31 March 1969- 31 March 1974 1969/70 1970/71 1971/72 1972/73 1973/74 Rate of Return a! Appraised 1969 13.3 12.1 11.7 12.3 12.8 Appraised 1971 12.6 11.9 11.2 Actual 13.8 14.7 19.6 21.2 18.0 Operating Ratio b/ % Appraised 1969 70 71 71 70 70 Appraised 1971 73 74 75 Actual 69 70 64 63 68 Self-Financing Ratio SL % Appraised 1969 40.4 28.9 37.6 48.7 57.1 Appraised 1971 33.2 30.5 36.6 Actual 60.7 72.4 70.2 62.2 59.7 Debt/Equity Ratio A/ Appraised 1969 20/80 24/76 25/75 25/75 25/75 Appraised 1971 24/76 26/74 26/74 Actual 18/82 18/82 20/80 21/79 22/78 Debt Service Coverage e Appraised 1969 1.9 2.3 2.9 3.1 3.4 Appraised 1971 Actual 2.1 3.0 2.5 2.7 2.0 a/ Net operating income (before interest) as % of average non-revalued net plant in service. b/ Total operating expenses as % of total operating income. c/ Net internal cash generation (net operating income before interest plus depre- ciation, less debt service) as % of total funds. d/ Total long-term debt as proportion of total equity, at period end. e/ Sum of debt service, Postal Branch transfers, and transfers to Government funds, divided by internal cash generation. - 16 - Loan 615/Credit 153 it was agreed that plant revaluation would take place from time to time and at least once every five years 1/. It is probable that the actual plant value is significantly higher than book value, and therefore the rate of return is not as high as it now appears. V. Institutional Development 24. During the period 1969-76, P&T's organization improved very sub- stantially and made considerable progress towards becoming a modern, well managed enterprise following commercial principles, a goal which the Bank pursued intensely from its first telecommunication credit to India. Progress was slower than expected in some areas namely: the introduction of commer- cial accounting; the improvement of billing and collection procedures; the introduction of an effective management information system; the improvement of the stores organization; the separation of postal management at circle and district level and; a general decentralization and strengthening of plan- ning construction, operation and maintenance functions. The organizational changes most clearly related to the agreements under the third and fourth projects are discussed below (and also in PCR/A&B paras. 6.01 - 6.04). 25. P&T is a Government department operating under the Parliamentary grant system. Following its policy that telecommunication services in the borrowing countries should be oriented to modern commercial outlook, the Bank required under the first telecommunication credit in 1962 (and made it a precondition for appraisal of the second credit in 1964), that P&T engage consultants to review its accounting system. At that time account- ing was mainly limited to recording of receipts and payments, and was carried out by a different Government organization (the Comptroller and Auditor General of India (C&AG). It provided neither timely nor adequate information for effective management. 26. The consultants recommended (in May 1965) the adoption of a commercial accounting system and the establishment of an accounting staff within and under the control of P&T. This was accepted in general by the Government although some points proved to be controversial and were only resolved by a Working Party that generally supported the consultants' views. 27. As one of the conditions for appraising this project, the Bank insisted on reviewing the Working Party's findings and receiving 1/ P&T has already constituted a committee for re-fixing the life of the assets so that the value of the plant can be re-assessed. According to the Government of India, on completion of the above committee's report, re-evaluation of assets will be carried out as suggested by the Bank. - 17 - assurances that the Government would act to carry out the major changes recommended by the consultant. At this stage further requirements were added: (a) P&T would agree to engage foreign consultants to assist with implementing the proposed organizational changes in spite of P&T's view that consultants, if necessary, could be supplied from India, and (b) the Parliamentary grant system would be modified in P&T's case or P&T would be transformed into a Corporation. 28. In November 1968, following a review by a mission supervising the earlier credit, the Bank found that the implementation of the organizational changes by P&T and Government were proceeding satisfactorily. At that point, the Bank concluded that the parliamentary grant system - as it was - gave P&T ample freedom for the principles and practices of commercial operation to be effectively introduced, and that consultants for implementation were not only unnecessary but might be undesirable. It concluded that the appraisal should no longer be delayed, and the credit was in fact appraised two months later. 29. P&T succeeded in staffing the higher accounting posts with qualified Indians 1/. The transfer of P&T's accounting functions from C&AG were com- pleted in 1970, close to the schedule. The first commercial accounts were produced for FY1970/71, some two years later than envisaged, and soon after P&T had taken over its accounting function from C&AG. The Bank received unaudited accounts within 4 months after the close of each fiscal year and audited accounts about 10 months later 2/. Double entry accounting, on an accrual basis, was introduced at the district level and above in 1972. Internal auditing was established in each accounting unit in 1974. The commercial accounts are extended to each circle and district so that, finan- cial statements reflecting operating performance, may become available for comparing the relative performance of each of these areas. 30. Commercial accounts have had a large impact on P&T's management and have also become a normal element in relationship with the Government. They are submitted to the Parliament for information purposes alongside the cash budget accounts required under the grant system. 31. A management information system (MIS) was developed at P&T's ini- tiative (not required under any Bank agreement) with the assistance of Indian consultants and implemented in 1975. MIS provides, for the first time, an integrated set of financial, organizational, and technical data on a monthly basis. The information, originated at division and subdivision levels, is gradually organized and built up as it progresses towards the higher man- agement levels. It is subsequently fed back again to the lower levels, 1/ Thus, the Bank's earlier view that such qualified people were not available in the country (the basis of its pressure on P&T to hire foreign consultants for the implementation stage) proved incorrect. 2/ Auditing of commercial and cash budget accounts is done by C&AG. - 18 - presenting them with a national synthesis of targets and performances which has proved useful in orienting priorities and supporting motivation throughout P&T. Commercial accounting data and the underlying principles play an impor- tant part in the MIS, and through it have come to influence P&T's month-to- month management. 32. Parallel to the introduction of commercial principles and proce- dures, the value of plant in service acquired increasing importance. Although a revised assets register has been compiled, its up-to-date valuation has not yet been undertaken as stipulated in the credit covenant. 33. At the appraisal of the third credit, it was found that the value of stores was excessive, mainly due to a lack of proper stock control methods as well as uncoordinated ordering by the various P&T units. Under a credit covenant, P&T engaged Indian consultants to assist in the design of an im- proved stores organization. The consultants proposed that implementation would proceed as far as possible concurrently with the study. This was accepted by P&T's Board. However, although most of the consultants' recom- mendations were accepted by P&T, there was considerable delay in their imple- mentation. The delays were further increased by organizational and manpower problems at district and circle level 1/, by lack of financial resources for warehouse construction 2/ because of the special economic measures of 1975 and, possibly, by insufficiently decisive action at some levels. Overall implementation progress of the new organization stores has been slow. How- ever, at audit, further recommendations by the same consultants (retained again in connection with the fifth credit) were generally being followed, the stores' organization was headed by suitably qualified people, and allo- cation of responsibility at the lower levels had advanced considerably. It is thus likely that the deficiencies observed at appraisal are on their way to being overcome in the near future, provided adequate financing con- tinues to be made available. VI. Economic Aspects 34. In general terms, two outstanding economic aspects of the project were its industrial dimension and the systematic effort given to rural devel- opment. India's success in developing simultaneously a telecommunication system, a manufacturing capacity to supply the equipment and materials for 1/ With hindsight, it would have been useful to include in the consultants' terms of reference some explicit attention to implementation problems below P&T headquarters' level. 2/ Extensive renovation of the warehousing facilities is required in order that the stores' organization recommended may be effectively implemented. - 19 - the system's expansion and improvement, and a research and development capacity essential to the development of modern products of competitive quality and price, is most unusual among developing countries. Rural services have been provided by P&T at a loss (financed by internal cross-subsidy) in explicit recognition of their importance in contributing to the economic development of the countryside and as a lead to subsequently profitable operations. Economic and Incremental Financial Rate of Return 35. In the appraisal of the third credit the Bank made an attempt to quantify the economic returns likely to result from the project. This was based on rough estimates of the expected demand curves for various classes of service and the benefit to consumers in terms of what they would be willing to pay for service. On this basis, local telephone expansions during the first three years of the Fourth Plan were expected to yield roughly a 25% average economic rate of return, long distance expansions and automation 75%, and telex 50% resulting in an overall average return of about 40%. Calculating economic returns at the margin it was concluded that the allocation of 'local telephone expansion investment among different exchange areas was generally well balanced, with the exception that an increase in Bombay's share would produce a higher overall return 1/. 36. The appraisal for the fourth operation had made no direct estimates of economic returns. It did, however, use the incremental financial rate of return for the whole Fourth Plan project, conservatively estimated to be 16%, as a measure of the economic returns. The incremental financial rate of return on the actual project is now estimated at 19%. Allocation of Local Exchange Capacity 37. In 1949, P&T introduced a system known as "Own your telephone" (0YT), under which applicants for new telephone connections received both higher priority in obtaining a connection and a rebate on their rental in exchange for a substantial capital contribution 2/. The appraisal mission for the third credit noted that even under the 0YT scheme, a waiting list of about 100,000 had accumulated, with some applicants waiting more than 5 years. The mission recommended that P&T give OYT demands greater priority than in the past in planning exchange expansion, and suggested that an appropriate target would be to meet OYT applications within 6 months starting in 1974. I/ Forecast economic returns at the margin clustered in the 20-25% range, whereas that for Bombay reached 30%. 2/ OYT capital contribution in 1976 was Rs. 5,000 (US$568); from others (see para. 39) it was Rs. 1,000 (US$114). - 20 - 38. 0YT applications obtain preference in the allocation of new connec- tions that become available within any exchange. There is a clearly defined criterion and procedure to this end, applied uniformly throughout the country. However, the priority offered to OYT applications in general does not always materialize, since allocation among exchanges tends to be based on total waiters and also that there are policy constraints to confine expansion to selected areas. The expansion of rural service is also an example where general development considerations have been given more weight than consumers willingness to pay. 39. In 1975 the "Advance Deposit Scheme" (ADS) was introduced, requiring all new and existing applicants for telephone service to pay their capital contributions at the time of application rather than at the time service is provided, as was the earlier practice. ADS was introduced primarily to raise funds required for expansion when such funds could not be obtained from the Central Government budget. The scheme also served to filter out applicants not fully committed or able to pay the charges once the telephones were actually offered to them 1/. The drop out rate before ADS was already low and the large impact it had on reducing the waiting list (from 637,000 in 1975 to 281,000 in 1976) can be regarded mainly as a way to further supress demand and bring forward the collection of some revenues 2/. Least Cost Solutions 40. Switching and transmission practices have evolved in response to the gradual availability of new technology, both imported and indigenous. Outside plant, however, continued to be built using directly buried cables, which resulted in a high fault frequency (only partially alleviated by the gradual introduction of cable pressurization) and considerable mutual nuisance between telephone and other public works; although the technical advantages of ducting are recognized, it is not programmed to be introduced in the near future. It is claimed that in a situation of high unmet demand and severe budgetary constraints present system expansion should be given priority over measures to reduce the cost of maintaining existing lines and facilitate future expansion. I/ In addition to testing for real commitment to pay, ADS indirectly implies an increase in the connection charge insofar as the interest paid on the capital deposit during the time before the telephone is supplied is at the current bank rate, probably well below the oppor- tunity cost of capital. 2/ Data provided by P&T on three Bombay District exchanges, said to be representative, show an average drop-out rate of 5.8% (0YT 6.3%, non-0YT 2.8%) over periods in 1974 and 1975, before ADS. The Bombay district waiting list dropped with ADS from 178,000 in 1975 to 67,000 in 1976. - 21 - Rural Services 41. In rural areas 1/ P&T provides public telephone call offices (PCO), switched telephone service (up to 100-line exchanges), some telex (up to 20- line exchanges), and telegraph offices. Normally P&T does not undertake any installation unless it is forecast to yield revenues at least sufficient to cover recurrent expenses, a condition often not met by rural services. However, P&T installs rural services at loss in locations designated as "category stations" according to their administrative importance, population, access difficulty, distance from other served areas 2/, importance in spe- cific development projects, economic backwardness (as identified by India's Planning Commission) and tourist and pilgrimage importance. In doing so, P&T has explicitly recognized the importance of telecommunication as part of the economic development infrastructure, and the expectation that demand will gradually build up and PCOs will be replaced with profitable small exchange services. P&T thus agrees to install rural facilities within the limitations of each five-year plan provided forecasts revenues cover at least 25% of forecast recurrent costs; for "category stations" this threshold is reduced to 10-15% depending on the location type. As the rural areas nearest the established exchange areas are being covered, average distances of new rural installations increase and unit costs rise; P&T foresees a lowering of the threshold in order to continue to expand these facilities. 42. Under the Fourth Plan, a number of small exchanges and approximately 2,000 PCOs and 2,100 telegraph offices were added 3/. Although only about 5% of the project's total cost was labelled as rural, this did not include the small exchanges which are mostly in rural areas. For the Fifth Plan, approxi- mately 11% of the expenditure will go to rural facilities, and P&T estimates this is also roughly the total expenditure on these services under the Fourth Plan. Rural services have been normally designed to service quality standards near those of urban and inter-urban installations 4/,but P&T has some doubts about whether this is economically optimum 5/ and the subject would deserve systematic analysis. Equipment especially addressed to some of India's rural needs was developed and manufactured indigenously 6/. I/ Defined by P&T following the census criterion of population less than 10,000. 2/ Over 40 km. 3/ Telegraph offices are often combined with post offices. 4/ E.g. small rural telephone exchange trunks are designed for 2% loss, compared with 1% and 0.5% respectively in secondary and main inter- urban trunks. 5/ Two key questions have not been systematically addressed: does a lowering of quality decrease costs? Does it open up the possibility of using other technology (e.g. one suited for fully indigenous manu- facture)? 6/ VHF radios and small switches. - 22 - The Industrial Dimension 1/ 43. A key aspect of the overall successful development of India's telecommunication sector has been the emergence and consolidation of indigenous manufacturing capacity and associated research and development. At the end of the Fourth Plan period, India was able to design and manufacture virtually every type of equipment and cable required for its system development (though not in sufficient quantities). The benefits arising from this situation included: large savings in foreign exchange while obtaining final product prices and qualities that were generally comparable with those of imported goods; close programming relationships between suppliers and P&T, which may result ultimately in shorter delivery periods, lower stocks, and assured supply of spares and expansion components; close collaboration in research and development, ensuring the evolution of industrial products addressed to the country's specific needs and conditions; and expansion of the utilization of India's considerable human capabilities for sophisticated scientific and industrial work. 44. The origins of this remarkable achievement are found in the country's decision soon after independence, to promote vigorously the development of indigenous telecommunication industries (first, and at one later stage, under license from foreign suppliers, but mostly with no external ties). Key supporting roles were played by the timely establishment of R&D organizations within both P&T 2/ and the main industries; the Bank's decision to finance (from the second credit) imported raw materials and components required by the industries to manufacture the equipment supplied to P&T; and the ability of the Government and P&T to set up an effective relationship among the functions of manufacturing, R&D, and system expansion. 45. Under the Fourth Plan, 64% of the proceeds of the third and fourth loan/credits were utilized for the purchase of imported raw materials and components for manufacturing which, with the exception of small amounts of proprietary components, were procured by the industries through international competition. The Bank reimbursed the foreign costs as a fixed proportion of the price of the final goods delivered to P&T, the proportion having been determined at appraisals from the records of actual foreign and local pro- duction costs of each broad type of product. There can be little doubt that this financial support played an important role in supporting the continued development of the main industries. I/ The subject will be discussed more extensively in a forthcoming OED paper: "Case studies on the industrial dimension of the World Bank Group's Telecommunications lending". 2/ Partly financed under the third and fourth loan/credits. - 23 - 46. However, with P&T's increasing capacity to generate 'the funds neces- sary for its telecommunications expansion (including financing the deficits of the postal operations), and a large outstanding demand, the industries' pro- duction capacity became, towards the end of the Fourth Plan, the main limitation to P&T's growth. Some factories did not achieve their full outputs under the Fourth Plan due to both exogenous factors (e.g., labor unrest in West Bengal and late delivery of machines needed for expansion of cable factory) and internal problems (notably production organization deficiencies leading to low and unbalanced output of ITI); these were gradually overcome. At ITI efforts included the use of both Indian and foreign consultants to assist in improving production organization. By the end of the project period the situation was very encouraging. 47. The Bank played an important role in requiring improvements on the manufacturing side (especially in connection with ITI's production of switching equipment) and kept progress under close supervision. However, production capacity will continue to be a bottleneck until the current ,plans for very substantial expansions materialize over the next 2 to 5 years. P&T officers feel that only then will the manufacturing capacity be commensurate with P&T's financial and organizational capabilities for growth. 48. Only a minor proportion of production has been exported (as can be expected, since output in many lines is below the need of P&T alone), but this limited experience suggests that some of the main products are competi- tive in prices, quality, and delivery times. In common with other industries, telecommunications exports receive some Government support but this is probably insufficient for a fuller participation in the international markets. Exports offer the telecommunicatiorssector its best possibility to reduce and ultimately end dependence on multilateral financing (so far substantially available for telecommunications only from the Bank). The export potential has not yet been studied sufficiently and a strategy to develop it is not yet in hand, although the factories already have spare production capacity on some lines (e.g., cables). Economic Studies 49. As early as 1965, the Bank recognized the need and possibility of P&T undertaking economic studies, especially in relation to the problems of investment allocation and pricing. Although this was further explored in several occasions during the project, P&T's intention to establish an economic studies cell did not materialize. At audit, however, the prospects for prompt action were good and staff at various levels were well aware of the potential benefits to be obtained, both regarding specific improvements in the use of resources and through influencing the overall way of thinking at different management levels. - 24 - VII. Conclusions 50. Under the third and fourth telecommunications loan/credits, the sector continues to expand and consolidate. P&T advanced major steps in its transformation into a modern, commercially oriented utility while remaining a Government department as required by national policy. The main supplier industries, two of which failed by far to meet agreed production targets thus contributing largely to project construction shortfalls, were expanded and their production organizations improved. Research and development groups from P&T and from industries succeeded in effectively overcoming major exogenous equipment problems while at the same time they advanced considerably in new indigenous designs (e.g., an electronic telephone exchange prototype now under test with live traffic), and in completing others after extensive field testing (e.g., new lines of microwave and coaxial cable equipment using advanced microelectronics). 51. The Bank played a very important role in these developments, not only as the sole available source of multilateral financing for the purchase of imported finished goods but mainly by pressing for and giving strong emphasis to P&T's financial reorganization, continuing to support the indus- tries' development by financing through P&T purchases of imported raw materials and components, by obtaining vigorous action from ITI on its production organization problems, and by financing R&D equipment for P&T. The Bank also showed flexibility in adapting to P&T's moves to partially overcome supplier delays and other shortfalls. 52. During the preparation period for the third loan/credit, the Bank pressed for the use of foreign consultants to assist in implementing the organizational and financial reforms agreed upon. Later it accepted the Indian view that in this case foreign consultants would be both unnecessary and potentially counterproductive. The outcome would indicate that this was a correct decision. During this same period the Bank also pressed for a modifi- cation of the Parliamentary grant system under which P&T operated as incom- patible with commercial principles and practices. After further consideration of the problem the Bank modified its position. The system was not changed and has not proved to be a constraint on development along commercial lines. 53. Project construction fell substantially short of targets, mainly due to defective, late, or incomplete deliveries by foreign and indigenous suppliers, compounded by Government import procedures and a nationwide shortage of some raw materials. Industrial production capacity became the key limiting factor in P&T's growth, and will continue to be so for several years despite the industries' substantial expansion and improve- ments under way. 54. The balance between successful institutional development and short- falls in physical execution must be seen overall as favorable. The telecom- municationssector and its main entities have continued to gain in institu- tional, managerial, financial and technical strengths. TELECOMMUNICATION SYSTEM DEVELOPMENT - BASIC STATISTICS INDIA (1965-76) (All figures refer to April 1 or year ending on same day) TELEPHONE SYSTEM 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Local exchange capacity (103) 689.2 771.9 842.1 939.5 1,032.4 1,120.5 1,193.8 1,275.6 1 ,379.0 1,476.3 1,567 1,724 % automatic 68.25 71.16 72.21 75.25 76.92 77.30 77.95 78.42 79.87 80.51 81.88 82.96 Subscriber lines in use (103) 556.6 651.3 681.7 744.8 813.8 888.7 981.4 1,057.5 1,155.7 1,243.8 1,330 1,467 Telephones (103) 787.0 881.4 961.0 1,018.0 1,077.9 1,169.9 1,293.3 1,397.3 1,520.5 1,639.4 1,744 1,914 Waiters (103) 294.6 349.2 389.6 430.2 427.6 414.4 310.0 341 405 532 637 281.a/ Local calls (106) 1,043 1,244 1,354 1,412 1,471 1,771 2,207 2,523 2,920 2,918 3,327 LD calls-manual (106) 53.6 58.1 57.2 62.9 71.1 78.3 85.9 95.1 110.4 111.2 114.4 123.1 -STD (100) 17.3 34.2 41.8 37.6 45.1 51.9 72.4 87.1 135.0 166.4 209.0 Int'l outgoing-minutes (106) 0.6 1.8 2.3 3.8 4.5 TELEX SYSTEM Exchange capacity 1,100 1,600 2,840 3,510 5.960 6,760 7,330 9,180 11,180 12,440 13,830 16,370 Subscribers 614 1,029 1,466 2,269 3,351 4,661 5,434 6,490 7,531 8,459 10,192 11,806 Waiters b/ 800 1,300 1,900 1,950 1,850 1,800 2,225 2,400 Inland call units c/ (106) 7.3 6.3 13.2 13.4 27.0 45.5 80.7 107.7 115.0 170.8 196.3 237.8 Int'l out-minutes (106) 1.5 2.1 2.7 4.1 5.3 TELEGRAPH SYSTEM Telegraph offices (103) 8.4 8.8 9.4 9.9 10.4 10.9 11.2 11.5 12.2 12.5 12.8 13.8 Inland telegrams (106) 37.3 40.4 40.5 42.6 45.2 45.9 52.2 54.8 57.7 61.4 61.9 Int'l out. telegrams (106) 4.1 3.8 3.4 3.4 3.2 3.4 3.4 3.6 3.5 3.5 3.5 a/ "Advance deposit scheme" introduced. T/ Figure not available at all areas for early years so data given are partly retrospective (estimates). c/ Calculated from telex revenues collected for rentals and changes in all unit prices SOURCE: India P&T Directorate, August 1976.  Al Attachment INDIA: FOURTH TELECOMMUNICATIONS PROJECT (Credit 241-IN) COMPLETION REPORT 1. Project Description 1.01 Credit 241-IN completed financing of the implementation of the fourth five year plan for development of telecommunications facilities, supplementing the funds from Loan 615-IN/Credit 153-IN which had supported the first three years of implementation. The project for 241-IN was defined as the implementation program for the full five year plan period, FY69 through FY74. The project comprised the following main items. I. Expansion of local telephone exchanges to increase the capacity by approximately 565,000 direct exchange lines; together with the neces- sary cables and subscriber equipment to add approximately 540,000 instal- lations. II. EKpansion of the trunk network by approximately 26,000 interurban speech channels together with the necessary switching and terminating equipment. III. Expansion of the capacity of the telex network to provide for approximately 9,300 additional subscribers, together with the associated switching and long distance channels; and expansion and modernization of the public telegraph service. IV. Expansion and modernization of management, training and research facilities, appropriate to the increasing scope and complexity of P&T's operations. The project was expected to have been completed by March 31, 1974. 2. Objectives 2,01 The project was undertaken to continue support of India's economic development objectives by improving and expanding essential telecommunica- tions services for industry, commerce, agriculture and administration for which there were waiting applicants for service numbering about 500,000. The size of India, the wide dispersion of industry and agriculture, and the distances separating the heavy population centers, make good communications essential for efficient marshalling of inputs, for efficient marketing of outputs and for administration of the multitude of the economic and social activities. 3. Project Physical Achievements and the Construction Schedule 3.01 Although a substantial increase in the size of the Indian national telecommunications network occurred over the project period (April 1, 1969 to March 31, 1974), physical achievement fell short of the high targets which had been set at the time of appraisal. Achievements and targets are compared below for the main items and in more detail in Annex 1. A2 (i) Local exchange capacity was increased by 443,834 line units against a target of 565,000 line units. The target was achieved by September 30, 1975 -- 18 months after the original completion date. (ii) The number of direct exchange lines connected to the network increased by 429,934 (9% per annum growth) against a target of 540,000 (11% per annum growth) -- the target was achieved by July 31, 1975, some 16 months after the original completion date. (iii) The number of trunk channels was increased by 13,762 (18,9 per annum growth) against a target of 26,000 (27% per annum growth) -- the target will be about the end of FY76 as major systems are placed in serv- ice for final proving. Formal commissioning would follow some 3 to 9 months later. (iv) The telex network was increased by 6,480 lines (16% per annum growth) and demand was met. The Impact of the Delay in Meeting Project Targets 3.02 In telecommunications projects in developing countries, achieve- ment often falls short of targets. Pressure of demand from prospective customers and from Governments makes the entities pitch their programs at targets near the limit of available resources with favorable future condi- tions assumed. Appraisal missions rightly accept challenging but feasible targets in the knowledge that the additional facilities are urgently required to support economic progress and that in telecommunications, where project works are completed and become usable progressively over the project period, lesser achievements have the same impact as a program based on reduced targets. 3.03 The shortfall in direct exchange line provision increased the waiting list for telephone service, particularly for the lower priority services and increased the loading on existing facilities as users tried to satisfy their communications needs. 3.04 Delays in provision of long distance microwave and coaxial cable systems and automatic long distance switching centers meant that the intro- duction of subscriber dialing of long distance calls for some cities had to be postponed and that at some places delay in connection via a manual oper- ator increased. 3,05 P&T has kept the Bank informed of its progress through its regular quarterly reports, and collaboration with supervision and appraisal missions. Reasons for Lower Achievements 3.06 Design problems with the Pentaconta crossbar system were largely responsible for P&T not meeting the target for augmenting switching capacity (para. 3.08). Low production levels at the Hindustan Cables Limited factory A3 in West Bengal in the early years of the plan due to labor unrest that pre- vailed throughout that region at that time, coupled with longer than expected lead times for cable imported under the CIDA Credit and the Bank's third Loan/Credit, prevented achievement of the planned DEL growth (see para. 3.11). Procurement delays and then design problems with the Canadian microwave equipment being provided under the CIDA Credit meant that the vital New Delhi - Bombay - Calcutta triangle in the national long distance network could not be augmented to the extent required to meet traffic demands in the plan period (see para. 3.15). Coupled with these major fac- tors were problems with local production of switching equipment (see para. 3.08), coaxial cable (see para. 3.15), and microwave radio equipment (see para. 3.15) which contributed to the magnitude of the shortfall. 3.07 Equipment and installation costs have been close to those pre- dicted with the result that program expenditures for the lower achievements were proportionately less than planned levels (see section 4). 1 Local Service Development During the Fourth Five Year Plan (4/1/69-3/31/74) 3.08 Exchange Switching Capacity - Installed switching equipment capac- ity was increased during the plan period by 443,834 line units compared to the target of 565,000 line units. The causes for the shortfall were cross- bar design problems; difficulties with supply of switching equipment from ITI; and curtailment of a proposal to import equipment due to the high prices quoted. (i) The crossbar design problems which arose under the very heavy traf- fic conditions in the major Indian cities caused service to deteriorate to an unacceptable level. The problems had to be identified; modifications found, tested and documented; and then incorporated in existing exchanges and into ITI production with great urgency. A very large number of modifica- tions were required and the installation program was affected due to the heavy load this placed on P&T's technical staff and through the disruption caused to the ITI production lines, and hence supply to P&T, by this near- continuous stream of changes. The switching system concerned is the IT&T Corporation's Pentaconta crossbar system which ITI had put into production in 1967 with the collaboration of Bell Telephone Manufacturing Company (BTM) of Antwerp. This system had been installed in many countries with satisfactory results. However, it had never been subjected to the intensity of traffic which prevails in Bombay, Calcutta, and New Delhi, nor were the levels and characteristics of this traffic fully expected by BTM and P&T at the outset of crossbar exchange production. In these Indian cities, low penetration of telephone services results in extremely high usage of those services that do exist giving calling rates and traffic levels as high as any in the world. All services are in use on the average for 20 to 25% of the busiest periods of the day. An unavoidable consequence is that at least 20 to 25:; of all calls originated must encounter the customer busy condi- tion. Additional call failures occur due to faults, plant shortages or customer error. Repeated attempts are therefore at a high level and add to the high calling rate to impose a heavy load on the crossbar exchange units concerned with call setup. khen these units become overloaded, as they did in India, call failures rise rapidly in an avalanche which can, in the limit, paralyze an exchange. A4 Under this severe stress, electrical and mechanical design weak- ness in the Pentaconta system not before critical, resulted in equipment failures which in turn added to the repeated attempts, placing further stress on the system. Service in the heavily loaded exchanges quickly became unacceptable. In smaller cities or in suburban locations where more normal traffic levels prevailed, satisfactory performance was obtained. The Pentaconta system has been virtually redesigned by P&T and ITI over the plan period to handle these extreme conditions. Existing exchanges have been progressively upgraded while in traffic by BTM, P&T, and ITI and this difficult process continues. A test exchange incorporating all proven modifications is currently being evaluated in New Delhi so that the total effect of the modifications can be fully evaluated. If satisfac- tory, it will be the basis for production and ITI will be able to proceed without the day-to-day interruptions which occurred over the fourth plan period. (ii) Switching equipment production was not only adversely affected by the stream of urgent crossbar modifications, delays were also caused by a high rejection rate for locally-supplied components and material during the early stages of import substitution. There were some labor problems at the ITI factory and weaknesses existed early in the plant production management and coordination with P&T. Output was lower than planned and was not well- balanced, i.e., deliveries to P&T did not provide all the components of the exchanges in a timely manner nor in the sequence needed for efficient con- struction and commissioning. Improvements were effected in all these areas over the plan period and production balance and productivity were much improved from FY74 onward. Both P&T and ITI managements are confident that future switching equipment supply will more adequately match the needs of P&T's program. (iii) Importation of switching equipment was reduced from 35,000 to 10,000 line units due to the unacceptably high prices received in interna- tional bids. Moreover, delayed placing of the order plus the lead time involved meant that the 10,000 line was not available for installation within the fourth plan. 3.09 The fourth plan target for switching capacity was achieved about 18 months behind schedule (i.e., September 1975). 3.10 Direct Exchange Line Growth - The reduced availability of switch- ing equipment, coupled with shortages of cable, allowed 429,934 direct exchange lines to be added to the telephone system against a target of 540,000 -- a 9% per annum growth rather than the 10.7% planned. 3.11 Local network cable production at the factory of Hindustan Cables Limited (HCL) in West Bengal was disrupted in the early years of the plan, and particularly in 1972, by severe labor unrest which was part of politi- cally motivated trouble which affected the whole region. Although these troubles were progressively resolved, with production in FY74 being twice the FY72 level, supply fell seriously short and 1.2 million pair kilometers A5 were provided by HCL during the plan, against a target of 2.29 million pair kilometers. At the same time, procurement lead times for cables being imported under the CIDA Credit proved longer than had been estimated due to Government consideration of possible means of speeding up indigenous produc- tion as a substitute and then due to negotiations on the cable specifications and also curtailed DEL provision in the earlier years of the plan. 3.12. Local cable supply position now is greatly improved. Not only have the labor problems been alleviated, but also production capacity is being tripled. Doubling of capacity at the tuapnarainpur plant is in progress and was completed during FY75 and a new factory at Hyderabad has been com- missioned and commenced its first deliveries during September 1974. 3.13 The DEL target was achieved about 16 months behind schedule (July 1975). Long Distance Network Development During the Fourth Plan 3.14 The target for the fourth plan was to expand the long distance net- work by approximately 26,000 interurban speech channels together with the necessary switching and terminating equipment. 3.15 Speech Channels - 13,762 speech channels were installed. Although representing a substantial growth rate of 18% per annum over the plan, it fell considerably short of the development target. Problems with the supply of both imported and locally-produced equipment resulted in microwave route and coaxial cable route expansion being much less than planned. (i) Imported microwave radio equipment, financed by the Canadian (CIDA) Credit, was intended to provide a new broadband facility interconnecting the principal cities New Delhi, Bombay and Calcutta and intermediate places to meet traffic growth on this vital section of the Indian network. It was first planned to be placed in service in the early years of the plan; however, protracted delays at the outset in reaching agreement on procurement caused the target to be changed to progressive commissioning over the last two years of the plan. However, further delays followed as the chosen contractor, Raytheon of Canada, had design problems with their newly-developed 1800 chan- nel system. The main design problems have now been corrected and the first system has been installed on the Calcutta-Asanol route and is undergoing acceptance tests. However, lesser problems still persist, e.g., high failure rate of a part of the power supply panel, which may delay formal commission- ing but not the date at which the routes can carry traffic on a "test" basis. (ii) Equipment designed by the P&T Research Center and produced by ITI was intended, at the outset of the plan, to be used in providing other routes of about the same total length but generally where the urgency of relief was not so great, as some limited capacity remained in existing facilities to maintain tolerable manual service for a few years. However, delays in final- izing the production model caused P&T to seek imported equipment under a A6 Hungarian Credit for a large number of these routes. The first of these lat- ter systems was delivered late in 1974 and the routes will be installed over a two-year period. The first 960 channel microwave system produced by ITI to the P&T Research Center design has been installed between Poona and Hyderabad. A number of design shortcomings revealed during installation tests have now been corrected and the system is being evaluated under public traffic. P&T expects to complete, by the end of FY77, the approximate 3,000 km of routes on which it is planned to use ITI equipment. (iii) Towers. 3ome delays have also been experienced in the provision of towers by local suppliers which could have been more serious had the routes not already been delayed because of the radio equipment problems. The tower delays were due to a combination of a shortage of some particular steel girder sizes from the Indian steel industry and the introduction by P&T of new structural engineering firms inexperienced in this field in order to develop sources for future supply. (iv) Coaxial cable production at HCL fell below requirements due to the labor unrest mentioned earlier. This was a major factor for the number of route kilometers of coaxial cable installed during the plan being 4,538 rather than the planned 7,500. Because of HCL's lower production in the early years, P& moved to import large tube coaxial cable but the lead time meant that this alternate supply commenced only in the last year of the plan. The Madras-Calcutta route, where it has been used, was brought into service in 1975. Coaxial cable production by HCL in FY74 exceeded the target set for the year and was 70% higher than the FY73 level. Output increased by a further 6% in FY75, reaching the planned maximum factory out- put level. HCL plans to progressively increase capacity at the West Bengal factory and to introduce coaxial cable manufacture at the Hyderabad factory at a later stage. P&T's supply position for coaxial cable therefore appears satisfactory for the current and future years. (v) About 1,000 km of secondary routes using small diameter coaxial cable, which were intended to be commissioned in FY74, have been delayed while substantial modifications of the locally designed 600-channel line equipment which was found desirable after field trials, are finalized. The routes are expected to be commissioned commencing about June 1976. 3.16 It is expected that the target of additional 26,000 speech chan- nels will be exceeded during FY77. 3.17 Long Distance Switching - The targets set at the time of appraisal for Credit 2h1-IN were that automatic trunk exchanges to switch 8,900 lines would be provided in the plan and that in addition point-to-point subscriber dialing would be introduced on 50 long distance routes. The design and pro- duction problems which affected the local switching achievements also lim- ited the provision of additional crossbar long distance switching capacity to 3,600 lines (see para. 3.08). Also, with the shortfall in speech channel provision, 29 point-to-point subscriber dialing routes were commissioned instead of the 50 originally planned. A7 3.18 Both targets were achieved early in FY76 -- about one year behind schedule. Telex Development During the Fourth Plan 3.19 In the preparation of the plan, it had been estimated that there would be a surge in the demand for telex service and accordingly a target was set for increasing telex network capacity by 9,500 lines -- a more than 20% per annum growth rate over the plan period. Demand was, however, close to the growth rate prevailing in the years preceding the-plan (approximately 12%) and network capacity only needed to be increased by 6,500 lines. 4. Project Cost Estimates 4.01 Cost estimates for the five year program FYs69-74 (the project) made at the planning stage and agreed at appraisal proved to be reasonably accurate. Differences in costs over the project period are related to the differences between targets and achievements. A comparison between esti- mated costs and recorded costs is shown below -- estimated costs are shown in brackets. Costs FYs69-74 (Rs Millions) Local Foreign Total Physical Progress Local telephone 1472 568 2040 419,934 DELs service (1714) (76k) (2478) (540,000 DELs) Trunk service 667 241 908 13,762 channels (795) (421) (1216) (26,000 channels) Open wires, telex 482 52 534 and telegraph (595) (66) (661) Land, buildings and 329 5 334 miscellaneous (521) (11) (532) 2950 866 3816 TOTAL (3625) (1262) (k887) A8 5. Allocation of Credit Proceeds Original Reallocation Final Allocation Oct. 23, 1974 Disbursement US$ I Goods and services to be imported by P&T (a) local exchange switching and transmission systems 4,300,000 3,256,000 2,640,oo0 (b) cable, wire and accessories 13,300,000 17,655,000 17,367,000 (c) radio systems and research, training and test equip- ment, technical assistance 4,400,000 6,032,000 5,764,000 (d) materials, components and machines for P&T workshops 4,000,000 2,912,000 2,678,000 II Goods to be purchased by P&T from the Government telecom- munications factories (a) (i) Telephones, switching and transmission equipment other than trunk automatic exchanges manufactured by ITI 22,500,000 20,598,000 ) (ii) trunk automatic ) 26,312,000 exchanges, manufactured ) by ITI 3,700,000 5,500,000 ) (b) teleprinters, manu- factured by Hindustan Teleprinters Limited 800,000 558,000 569,000 (c) cable and wire manu- factured by Hindustan Cables Limited 25,000,000 21,489,000 22,670,000 TOTAL US$78,000,000 A9 6. Organization and Management 6.01 P&T is a Government Department under the jurisdiction of the Ministry of Communications. It is controlled by a seven member board of senior executives, including the Director General as Chairman, who also holds the rank of Secretary in the Ministry. P&T over the years had had adequate autonomy in policy formulation and day-to-day operations, but operated under the constraints of the normal Government budgetary proce- dures with a traditional cash accounting system. Also, although progres- sive improvements were being made, the general administrative methods of the Department at the outset of the fourth plan were not impressive and certain aspects of the organization needed improving. 6.02 During the period FYs69-74 when P&T's fourth five year plan was being carried out, the P&T, with the Bank Group's encouragement, took important steps of an institutional building nature in order to improve the efficiency of the Department through permitting it to operate more along commercial lines. The important changes pertaining to the Telecommunica- tions Branch that were initiated during this project period were as follows. (i) Transfer of the Branch's accounting function from an outside body, the Comptroller and Aiditor General, to the P&T and the establishment of an accounting staff and organization within P&T to operate the accounting system. (ii) Establish a commercial accounting system using commercial accounts on an accrued basis from which balance sheets and statements of earnings and expenses are prepared. (iii) Audit and certification of the commercial accounts by the C&AG and presentation of the commercial accounts to Parliament. (iv) Establishment of an internal audit system. (v) A double entry accounting system established at each account- ing unit. (vi) Development of a materials management system essential to a telecommunications operation. (vii) Development of a meaningful management information system in which various management levels are involved. (viii) Organizational changes include the decentralizing of operations so that management is better able to administer the growing size and complexity of the operation. A10 6.03 While Government generally supported these changes, the start and subsequent pace of implementation was slow owing to the conceptual and administrative problems involved in changing the established traditional methods. Nevertheless, the results today are impressive. The Telecommuni- cations Branch is using the commercial accounting system as the basis for all financial reporting within the Branch as well as to Goverment. The commercial accounts are audited by the C&AG and presented to Parliament. Management is also utilizing the commercial accounts as a major source of information in its day-to-day operation of the entity and in this way is being inculcated with the modern commercial concepts of management. Also, the commercial accounts form the major element in the meaningful management information system which was introduced during 1975 and is being developed. 6.04 From an organizational standpoint, P&T has decentralized its oper- ations so that it is better able to administer the growing size and complex- ity of the operation. It has also established separate postal and telecom- munication management hierarchies from the field to top level. Units are now managed by individuals with the appropriate postal or telecommunications experience; in the past this was not always the case. Research 6.05 P&T continued progressive development of its technical research activities during the project period. The Research organization demon- strated its value by the major contribution made by its staff to the solving of the crossbar switching problems. Through this work the Telecommunica- tions Research Center (TRC) added considerably to its competence in switch- ing technology. A promising Indian version of the Pentaconta crossbar system has been developed and is about to be tested in the field. They have also increased their expertise in electronics with designs for multiplex, microwave radio and coaxial line equipment reaching local production. 6.06 The Research Center has maintained continuing assessment of tech- nological advances and is well-placed to support P&T's application of elec- tronic switching and satellite technology during the fifth plan. Training 6.07 Staff training also progressed well during the project period. P&T now has a comprehensive training program providing for all categories of staff which uses 14 regional and 25 circle/district training centers located throughout the country. Technical training takes place at three levels: (i) linemen, mechanics, operators, (ii) supervisory staff such as engineering supervisors, and (iii) engineers. The training facilities are able to accommodate 4,000 engineers and about 24,000 other staff per year. Training programs in finance for its junior as well as more senior accounts staff have been established based on on-the-job training for periods of three to five months and also outside study sanctioned by an examination. In addition, a UNDP-sponsored advance level management training center at New Delhi to serve the ESCAP countries, including India, is nearing comple- tion. All 7. Finances 7.01 The Telecommunications Branch's financial results during the four year period FYs71-74 were satisfactory, exceeding forecasts made at the time of appraisal (November 1970) due to tariff increases not foreseen by P&T at the time of the forecasts, but also due to a smaller rate base as a result of delays in the construction program, mainly in respect of the long distance projects and cable provision. Financial data for the fiscal years 1971-74 is given in Annex 2 and summarized below: Fiscal year ending March 31: 1971 1972 1973 1974 (Millions of Rbapees) Operating Revenue Actual 1,548 1,829 2,083 2,291 Appraisal 1,515 1,721 1,914 2,168 Operating Expense Actual 1,081 1,171 1,306 1,550 Appraisal 1,080 1,263 1,h22 1,617 Net Operating Income Actual 467 658 777 741 Appraisal 435 458 492 551 Rate of Return Actual 14.7% 19.6% 21.2% 18.5, Appraisal 13.2% 12.6% 11.9% 11.2% Operating Ratio Actual 70% 64% 639 68% Appraisal 71 % 73% 7h% 75% Average Net Plant in Service Actual 3,171 3,360 3,667 4,008 Appraisal 3,296 3,643 4,135 4,,94o 7.02 The increased tariffs and delays in the construction program altered the financing plan covering FYs71-74 from that estimated at the time of appraisal. Internal sources of funds, consisting of net internal cash generation, OYT payments and subscriber deposits, amounted to 18% more (Rs 380 million), borrowings 29% less (Rs 355 million) and the construction Al2 program, including working capital increase, 22% less (Rs 1,021 million). Transfer of funds to the Postal Branch amounted to Rs $74 million against appraisal estimates of Rs 163 million. As a result, the fiscal impact of the Branch's operations on Government was that funds flowing to Government during the four-year period, hot including customs duties and interest pay- ments, amounted to about Rs 1,219 million compared to appraisal estinates where it was shown that Governent would be making contributions to the Branch of about Rs 1,143 million. A statement of sources and applications of funds by year for the four-year period FYs71-74 is given in Annex 2 and sum- marized below for the period as a whole: 1971-1971 (Millions of Rupees) Appraisal Forecast $ Actual % Variance (% Reguirements -______ Construction program and working capital increase 4,578 100 3j557 100 (22) Sources Internal cash generation 2,960 65 4,182 117 41 Less: Debt service 959 (21) 583 (16) (39) Postal transferr 163 (4) 574 (16) 252 Transfers to Gov't fund - - 905 (25) Net internal cash generation 1,838 40 2,120 60 15 0YT payments 152 3 248 7 63 Subscriber deposits 66 1 68 2 ' Central Gov't contributions 1,306 29 260 7 (80) Borrowings 1,216 27 861 24 (29) Total sources 4,$78 100 3,557 100 (2 A.l 4 1 2. Conclusion 12.01 Considered overall, the performance of the fourth telecommunica- tions project has been reasonable. Although this report describes a number of shortfalls in achievements against physical targets, it will be noted that the achievements were nevertheless substantial -- for example, 9% per annum increase in the customers connected to this large telephone system which had already reached the one million telephone mark by the start of the-fourth plan and an 18% per annum increase in the capacity of the long distance network were achieved. They were made, too, with the impediment of severe equipment supply and technical problems. The causes of these problems were generally outside P&T's control and most could not have been foreseen. P&T and ITI staff have been praiseworthy in the way they have tackled the formidable switching problem. 12.02 P&T has developed significantly as an institution over the proj- ect period; making substantial organizational changes and introducing modern management approaches. The rate of this development has been quite impressive when it is remembered that the changes are being made to long- standing traditional governmental methods and practices. 12.03 Notwithstanding the substantial growth and modernization that has been achieved in the Indian telecommunications network, access to service remains very deficient with telephone density being only .29 telephones per 100 population (see Annex 3 for comparison with other countries) and the standard of service is not high due primarily to the heavy traffic overload on the network. The shortfalls from the targets of the fourth plan have only had marginal effect on this condition, being of a different order of magnitude to the system deficiencies. To correct the situation, a much higher level of investment and physical expansion would be required. At a minimum, it is considered that investment would need to be increased to sustain a growth rate of 20% per annum for a decade or more. P&T has the management ability and the technical staff resources to cope with such a rate of expansion and given a lead time of 2 to 3 years, factory expansion could be carried out to support a higher program. Studies have been initiated in India with the Bank's encouragement to identify more explicitly the economic benefits derived from telecommunications as a step-toward determining what level of development is best matched to the needs of the Indian-economy. Central Projects Staff April 1, 1976 A13 8. Consultants 8.01 The Administrative Staff College of India (ASCI) was appointed early in the project period as consultants to the P&T Department to advise P&T on the establishment of an efficient stock control system, as agreed during appraisal and in the Loan/Credit Agreements for 615-IN and 153-IN. P&T's former consultants, Peat, Marwick, Mitchell and Co., participated in the assignment. ASCI submitted reports with recommendations covering all phases of materials management. The reports were duly considered by the P&T Board and the recommendations, with minor modifications, were adopted. A reorganized Materials Management Section headed by a P&T senior official has been established in the Directorate and is in operation. The performance of the consultants in this assignment has been satisfactory. 9. Auditors 9 .01 The Loan/Credit Agreements provide for the commercial accounts of the Telecommunications Branch to be audited by the Comptroller and Auditor General of India and certified copies sent to the Bank promptly after they are available. The provisional commercial accounts are to be sent to the Bank not later than four months after the close of the fiscal year. While the provisional accounts have been sent on time and have varied little from the audited accounts, it has usually taken more than a year before the audited accounts are received, mainly because of the time involved in the apportioning of joint departmental charges and in certify- ing the accounts. The appraisal mission for the sixth lending operation was informed that the GOI had decided that P&T should take over its Postal Branch accounts from the C&AG as it has for the Telecommunications Branch. This should enable the accounting operations to be streamlined and delays reduced. 10. Insurance 10.01 Pursuant to Government's policy for all its departments, P&T does not carry insurance against losses on its fixed assets from major risks such as flood, earthquake and other catastrophes nor against risk of the more normal type, such as fire and theft. P&T's management agrees with this policy because insurance rates for the major-type risk are considered unecon- omically high, while the wide geographical spread of its assets provides reasonable dispersion of the more normal type of risk. This is a reasonable policy for P&T and in line with the approach adopted by most telecommunica- tion entities. 11. Reporting Requirements 11.01 There are no special reporting requirements needed for this proj- ect. With the Bank Group's continuous support for India's ongoing telecom- munications projects, reporting requirements for current projects have continued to be requested and have been amended from time to time in light of experience gained by the Bank. ANNEX 1 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH Project Service Targets (as at December 1970) Compared to Achievements (in Brackets) Additional Services & Total Facilities Provided 1969-70 1970-71 1971-72 1972-73 1973-74 1969-1974 1. Direct Telephone Exchange Lines 80 85 100 125 150 540 (thousands) (75) (92) (77) (100) (86) (430) 2. Telephone Sets 102 110 130 162 196 700 (thousands) (92) (123) (104) (123) (119) (562) 3. Echange Capacity 86 89 102 127 161 565 (thousands) (88) (73) (82) (103) (98) (444) 4. Voice Frequency Channels Commissioned a) Microwave - 696 1,380 2,052 2,088 6,216 - (360) (252) (660) (504) (1,776) b) VHF/UHF 19 35 410 765 765 1,994 (13) (21) (43) (36) (5) (118) c) Coaxial (plus 1,428 1,920 2,640 2,316 3,324 11,628 other trunk (2,578) (1,020) (1,488) (1,296) (1,680) (8,062) cables) d) Open Wire 712 982 1,312 1,512 1,560 6,078 (666) (938) (426) (822) (900) (3,752) TOTAL 2,159 3,633 5,742 6,645 7,739 25,916 (No. 4) (3,257) (2,339) (2,209) (2,814) (3,089) (13,708)* 5. Telex Lines 800 450 4,,200 810 3,000 9,260 (800) (570) (1,850) (2,000) (1,260) (6,48o) 6. VFT (Telegraph 828 485 500 400 400 2,610 Channels) (623) (499) (472) (546) (503) (2,643) 7. Combined Telegraph 418 500 500 500 500 2,418 Offices (h9) (358) (291) (650) (314) (2,062) *5h HF radio channels were also added during the period, bringing the total increase to 13,762 channels. April 6, 1976 INDIA POSTS AND TELEGRAHS DEPARTMET (P&T) TELECOMUNICATIS MUANCH CREDIT 241-In Financial Data =-1974 (Millions of Rupees) Year Ending March 31: 1972 1973 1974 ApaslAppraisal Appraisal Appraisal Forecast Actual Forecast Actual Forecast Actual Forecas&, Actual CC14PARISON OF FO0RECAST AND ACTUAL STATEMENTS OF INCOME Operating revenue 1,515 1,548 1,721 1,829. 1,914 2,083 2,168 2,291 Operating expense 1,080 1,081 1,263 1,171 1,422 1,306 1,617 1,550 Net operating income 435 467 158 658 492 777 551 741 Rate of return 13.2% 14. 12.6% 19.6% 11. 21.2% 11.2% 18.5% Operating ratio 71% 7 73% 6 4% 63% 75% 68% COM4PARISMN OF FOIRECAST AND ACTUAL BALANC~E =US8 Nat plant in service 3,465 3,222 3,821 3,498 4,448 3,835 5,432 4,181 Net current assets 469 197 523 173 592 537 690 676 Total assets 4V965 4,757 5,971 5,563 7,156 6,751 8,100 7,8 Total equity 3,728 3,422 4,273 3,916 4,987 4,765 5,618 5,468 Lomg-term debt 912 756 1,316 972 1,733 1,242 1,996 Total liabilities 4,965 4,757 5,971 5,563 7,156 6,751 8,100 7,885 Debt/Equity ratio 20/80 18/82 24/76 20/80 26/74 21/79 26/74 22/78 CC3PARICU OF POFZCABT AND ACTEUAL SCURCU2 AID APPLICA.TIONS OF FUJWS Internal cash generation 647 772 693 963 758 1,199 862 1,248 OJT payments 39 75 41 50 38 68 34 55 Bberiber deposits 18 15 16 13 16 21 16 19 opntral Government contributions 64 (36) 343 (33) 495 169 404 160 lbreip borrowings 132 77 404 216 417 270 263 28 Total sources of funds 900 903 .1,497 1,209 1,724 1,727 1,579 1,780 Coatruction program 579 464 1,187 747 1,382 913 1,157 919 Iucrease (deorease) in working capital 52 35 54 (24) 69 364 98 139 Debt service 246 18 196 114 233 124 284 227 Ud2fers to Postal Br@nch 23 146 60 96 40 142 40 190 Tranar to Goverrnnt fund - 140 - 276 - 184 - 305 Total appliwLtion of Rnds 90 903 1,497 1,209 1,724 1,727 1,579 1,780 11bru2. 24, 19% ANNEX 3 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMUHICATICNS BRANCH Comparison of Countries With More Than 500,000 Telephones (as of January 1, 1975) TOTAL TELEPHONES IN SERVICE NUMBER Per Cent Per 100 - Increase from Popu- COUNTRY 1975 1974 1965 1974 1965 Intion Argentina 2,373,665 2.065.273 1.472,130 14.9 61.2 9.41 Australia 3 4,999,982 4,659,182 2,670,212 7.3 87.3 37.49 Austria 1,986,733 1,841,234 936,207 7.9 112.2 26.37 Belgium 2,666.701 2,503,036 1,468,144 6.4 81.6 27.32 Brazil 2,651,728 2,415,000 1,277,503 9.8 107.6 2.50 Bulgaria 718.325 640.842 243,900 12.1 188.6 8.18 Canada 12,454.331 11,668,292 7,019,374 6.7 77.4 54.96 China, (Taipei) 900,605 742,304 147,825 21.3 509.2 5.68 Colombia, Rep. of 1,186,205 1,079,645 409,589 9.9 189.6 4.74 Czechoslovakia 2,480,801 2,354.313 1,398,509 5.4 77.4 16.83 Denmark (Incl. Faroe Islands and Greenland) 2,183,847 2,047,497 1,160,635 6.7 88.2 42.48 Egypt, Arab Rep. of 503.200 471,791 301,405 6.7 67.0 1.374- Next Finland 1.678.873 1,535,406 778,101 9.3 115.8 35.78 Lowest France 12,405,000 11.337,000 5,703,878 9.4 117.5 23.52 Density German DemocraticRepublic 2,451,011 2,326,143 1,586,838 5,4 54.5 15.04 Germany, Federal Republic of 18.767,033 17,802,646 8,168,188 5.4 129.8 30.25 Greece 1,862,050 1,670,132 431,292 11.5 331.7 20.71 Hong Kong 988.545 913,411 219,693 8.2 350.0 22.75 Hungary 1.013,731 968.459 538,608 4.7 88.2 9.65 India 1.689.528 1,590,000 760,000 6.3 122.3 0.294- LoWest Iran 805.560 552,500 181,130 45.8 344.7 2.40 Density Israel 735,156 685,382 215,020 7.3 241.9 21.57 Italy 13.695,006 12.611,653 5.528,751 8.6 147.7 24.62 Japan 41.904,960 38,019,366 12,250,841 10.2 242.1 37.88 Korea. Rep. of n.a. 1,014,016 232,901 - - - Mexico 2.546.186 2,222.654 725,072 14.6 251.2 4.37 Netherlands, The 4.678,945 4,317,006 2,180,273 8.4 114.6 34.41 New Zealand 1 1,494,587 1,410,582 962,596 6.0 55.3 48.12 Norway 1,355,142 1,308,420 868.592 3.6 56.0 33.90 Poland 2.399,249 2.237,603 1,193.362 7.2 101.0 7.09 Portugal 1.011.177 948.003 521,921 6.7 93.7 11.67 Romania 1.076,566 886.166 426,502 21.5 152.4 5.10 South Africa, Republic of4 1,935,831 1.816,291 1,133.331 66 70.8 7.77 Spain 7,042.968 6,331,474 2.526.843 11.2 178.7 19.96 Sweden 5,178,082 4.984,370 2,386,925 3.9 116.9 63.32 Switzerland 3,790.351 3.604,034 2.131,521 5.2 77.8 59.46 Turkey 899,923 807,294 308,100 11.5 192.1 2.30 United Kingdom 20.342,457 19.095,317 9.960,000 65 104.2 36.26 U.S.S.R. 15,782,000 14,260.700 7,100.000 10.7 122.3 6.23 United States 143.972,000 138,286,000 88,793.000 4 1 62.1 67.65 Venezuela, Rep. of 554,197 504,000 260.228 10.0 113.0 4.65 Yugoslavia 1,142,883 1.003,550 369.844 13.9 209.0 5.38 rronm "The 1'orld's T&tephones -- ATJ'T Long Lines."1 March 18, 1976  BI INDIA: THIRD TELECOMMUNICATIONS PROJECT (Loan 615-IN/Credit 153-IN) COMPLETION REPORT 1. Project Description The project was the three-year time segment (April 1, 1969 - March 31, 1972) of P&T's fourth five-year plan (April 1, 1969 - March 31, 1974), and comprised the following main items: (i) comissioning 345,000 lines of local exchange equipment, together with the necersary cables and subscriber equipment to add 300,000 new connections; (ii) expanFion of the long-distance network by 12,000 interurban speech channels together with the necessary switching and terminating equipment; (iii) expansion of the telex network by 5,000 subscriber installations together with the associated switching and long-distance channels; and expansion and.modernization of the public telegraph service; (iv) expansion and modernization of training and research facilities appropriate to the increasing scope and complexity of P&T's operations. 2. Objective This project was intended to support India's development objectives by improving and expanding essential telecommunications services for industry, commerce and agriculture for which there wers waiting applicanto for service numbering about 500,000. The size of the Indian subcontinent, the wide dispersion of industry and agriculture, and the distances separating the heavy population centers, make good communications-essential for efficient marshalling of inputs, for efficient marketing of output and for adminisLration of the different services of the country. 3. Project Achievements and the Construction Schedule 3.01 Although a subatantial increase in the size of the Indian national telecommunications system occurred over the project period (April 1, 1969 to March 31, 1972), physical achievements fell short of the targets which had been set at the time of appraisal. 3.02 Local exchange capacity was increased by 243,000 line units against a target of 345,000 line units. The target was achieved by June 30, 1973 -- 15 months beyond the end of the project period. 3.03 The number of direct exchange lines connected to the network increased by 2h,000 (9% per annum growth) compared to the target of 300,000 (11% per annum growth). The target was achieved by December 31, 1972 -- 9 months behind schedule. 3.04 The number of long distance channels was increased by 7,800 (20% per annum) against an ambitious target of 12,000 (28% per annum) -- the target was achieved by September 30, 1973 or Id months behind schedule. B2 3.05 Long distance switching remained more manually-controlled than had been planned. Automatic long distance switching capacity was increased by 3,000 lines, compared to the target of 1,000 additional lines. The target is expected to be achieved by the end of FY 76. 3.06 The telex network was increased by 3,220 lines (16% per annum growth) and demand was met. The Impact of the Delay in Meeting Project Targets 3.07 In telecommunications projects in developing countries, achieve- ment often falls short of targets. Pressure of demand from prospective customers and from Governments makes the entities pitch their programs at targets near the limit of available resources with favorable future conditions assumed. Appraisal missions rightly accept challenging but feasible targets in the knowledge that in telecommunications where project works are completed and become useable progressively over the project period shortfalls are not generally serious. Lesser achievements have the same impact as a program based on reduced targets. 3.08 The shortfall in direct exchange line provision increases the waiting list for telephone service, particularly for the lower priority services. 3.09 Delays in provision of long distance microwave and coaxial cable systems and automatic long distance switching centers meant that the introduction of subscriber dialing of long distance calls for some cities had to be postponed and that at some places delay in connection via a manual operator increased. 3.10 P&T has kept the Bank informed of its progress through its regular quarterly reports, and collaboration with supervision and appraisal missions. Reasons for Lower Achievements 3 .11 Material supply problems were the main reasons why targets were not met. Some problems, such as those associated with the design of switching equipment and labor unrest at the West Bengal cable factory could not have been foreseen. Others arose, particularly in the case of the long distance projects, because of optimism on the delivery time for imported and locally-developed equipment. Local Telephone Service Development 3 .12 Local Exchange Switching quipment - With the exceptionally intense traffic in the major Indian cities, design weaknesses became apparent during this period in the Pentaconta crossbar switching equipment B3 which had been adopted as a standard system for India in 1967. Design changes were extensive and continued throughout the period. Heavy demands were placed on P&T's technical resources and reduced the work force available for construction; the continuous stream of modifications disrupted the ITI factory production line (see also Para. 3.15 below). 3.13 Factory production of both crossbar and Strowger equipment was also affected by the high rejection rate for local components and material from local suppliers during this period when a concerted effort was being made to increase the local content of production. This difficulty was noted at the time of appraisal of Credit 24l-IN and remedial measures were put into effect. 3.14 Largely as a result of these factors but contributed to by some weaknesses in production management and in coordination between P&T and ITI, the output of switching equipment from the ITI factory at Bangalore was below planned levels and the output was unbalanced, i.e., all the components for exchanges were not provided in a timely manner nor in the sequence required for efficient construction and comissioning of exchanges. 1.15 In collaboration the Bell Telephone Manufacturing Co. of the ITT Group and P&T have redesigned the crossbar system for the demanding Indian traffic conditions. The changes made progressively in working exchanges and in ITI production have improved network performance. A prototype exchange incorporating all proven modifications is being installed in New Delhi to verify the overall performance before being standardized for ITI production. This hopefully will clear up the design deficiencies. 3 .16 As agreed with the Bank, arrangements were made for the izportation of contingency supplies of strategic materials and components for crossbar production. Production management and coordination with P&T have also improved. In agreement with the Bank a BTM production adviser was brought in to assist ITI in production management and the Member Development of the P&T Board was placed on the Board of ITI to assure closer coordination between ITI and P&T. 3 .17 ITI production was substantially increased in FY 1974 and both P&T and ITI are confident that future production will meet India's needs. 3 .18 Local Network Cable - During the project period and particularly in FY 1972, cable production at the Hindustan Cables Limited factory in West Bengal was affected by labor unrest which was a part of the general unrest in the state at that time. Production of pair cable was 0.68 million pair km against a target of 1.42 million. 3 .19 The lead time for cable imported under Loan 153-IN/Credit 615-IN and the CIDA Credit proved longer than estimated with major deliveries B4 commencing only in FY 1972. These sources of supply therefore did not contribute appreciably to achievements in the project period. 3.20 The cable supply position now is greatly improved. Not only have the labor problems at the West Bengal factory been alleviated but also production capacity is being tripled. Doubling of the capacity at the West Bengal factory is in progress and will be completed during FY 1975 and a new factory at Hyderabad has been commissioned and has commenced deliveries. Long Distance Service Development 3.21 Provision of Speech Channels - Full achievement of the target for speech channels depended mainly on commissioning of major microwave and coaxial cable routes which were at the planning stage at the outset of the period. 3.22 Microwave Radio Routes - The most important were the microwave radio routes which were to form the triangle connecting New Delhi, Bombay and Calcutta to supplement the coaxial cable serving these cities. The routes were to be financed by a Canadian (CIDA) Credit with commissioning to be in FY 1972. Lengthy delays occurred in Canada at the procurement stage and quickly made the very optimistic target of commissioning within the project period impossible. Subsequently, the chosen supplier, Raytheon of Canada, had design problems with their newly-developed 1800 channel microwave equipment and installation could not commence until FY 1974. Raytheon expects to complete all routes in New Delhi - Bombay - Calcutta triangle by May 1975. 3.23 On other microwave routes planned for the project it was intended that equipment designed by the P&T Research Centers produced by ITI would be used. These were of about the same route length but in general of lower priority; the urgency for relief was not so great, as some limited capacity remained in existing facilities to maintain tolerable manual service for a few years. However, this underestimated the time required for transition from a proven laboratory model to the production model -- a common error which persists the world over in new equipment development. When delays became evident, steps were taken in 1972 to import equipment for some of the routes under a Hungarian Credit but of course lead times'precluded commissioning of such routes until late FY 1976 and beyond. The first 960 channel system produced by ITI to the P&T Research Center design has been installed between Poona and Hyderabad (600 Kn) and is being evaluated under public traffic. P&T expects to complete within two years approximately 3,000 Km of routes in the next phase of expansion on which it is planned to use ITI equipment. B5 3.24 Coaxial Cable Routes - The labor unrest in West Bengal discussed in Para.3.1 reduced HCL output of coaxial cable and commission- ing of the major 4 tube coaxial cable route of over 2000 Km in length and with capacity for 2700 speech channels on each pair of tubes. Madras- Vijayawada-Secunderabad and Vijayawada-Calcutta routes were delayed. 3.25 The Secunderabad-Vijayawada section (282 Ki) was conpleted in 1Y 73, the Madras-Vijayawada section (482 Km) in FY 74 and the other route is expected to be completed during FY 75. 3.26 The decision was taken in 1970 to defer secondary small diameter coaxial cable route between Nagpur, Secunderabad and Bangalore so that it might be equipped with line equipment with 600 channel capacity which was then under development in the P&T Research Center, rather than with the usual 300 channel equipment. 3,.27 Provision of Long Distance Switching - In the original fourth plan it was intended that India would move quickly into nationwide dialing. The design and production problems, discussed in Paras. 3.12-3.15, in connection with local network switching also affected the provision of crossbar long distance exchanges. Also delay in the commissioning of the new network of microwave and coaxial routes meant that capacity was not assured for the traffic stimulation which follows introduction of subscriber dialing of long distance calls and which in India has been in the range of 4 to 50 times the previous traffic levels in many routes. Capacity for switching of only 3,000 lines was provided and manual switching was retained for many routes. 3.28 Telex Development - The increased rate of growth of the telex service which had been predicted for the fourth plan period did not materialize -- 3,220 lines were added to meet demand in the third project period rather than the predicted 5,000. 4. Project Cost Estimates 4.01 Cost estimates made at the planning stage and agreed at appraisal proved to be reasonably accurate. Differences in costs over the project period are closely related to the differences between targets and achievements. A comparison between estimated costs and recorded costs is shown below -- estimated costs are shown in brackets. B 6 Costs (Rs million) Imported Local Instal- Achieve- Category Equipment Equipment lation Total Target ment Local telephone 94.3 645.9 305.2 . 10h5.h 300,000 24,000 service (225.0) (796.2) (357.1) (1378.3) DELs DELs Long distance 22.1 450.6 178.7 651.4 12,000 7,800 service (158.8) (593.9) (294.3) (1047.0) channels channels (incl. telegraph expenditure) Land and building, training and other ancilliary - 1.7 173.0 174.7 organisations (8.0) (20.0) (252.4) (280.4) Totals 116.4 1098.2 656.9 1871.5 (Rs million) (391.8) (1410.1) (903.8) (2705.7) 5. Allocation of loan/credit proceeds The allocation of the loan/credit proceeds was as follows: Original Final CategorZ Allocation Allocation (US dollars equivalent) I. Goods to be imported by P&T (a) Cable and wire 11,300,000 12,593,000 (b) Equipment for long distance systems and training and research equipment 8,300,000 6,573,000 (c) Materials and components for manufacture in the P&T workshops 3,100,000 2,248,000 (d) Consultants - - B7 II. Goods to be purchased from the Government telecommunications factories (a) Telephones, switching and transmission equipment, manufactured by Indian Telephone Industries, Ltd. 11,500,000 16,90,000 (b) Teleprinters, manufactured by Hindustan Teleprinters Ltd. 800,000 1,417,000 (c) Cable and wire, manufactured by Hindustan Cables Ltd. 20,000,000 15,676,000 Total 55,000,000 55,000,000 6. Organization and Management 6.01 P&T is a Government Department under the jurisdiction of the Ministry of Communications. It is controlled by a seven-member Board of senior executives, including the Director General as Chairman who also holds the rank of Secretary in the Ministry. P&T over the years has had adequate autonomy in policy formulation and day-to-day operations, but has operated under the constraints of the normal government budgetary procedures with a traditional cash accounting system. GOI agreed with IDA that a modern accounting system should be introduced in the Telecom- munications Branch of P&T, a revenue-earning public utility which is expected to operate in a commercial manner. With the encouragement of IDA, consultants (Peat, Marwick, Mitchell & Co. of London) were engaged to review the Branch's accounting procedures and make recommendations. 6 .02 The Bank Group has attached great importance to P&T implementing the consultant's recomendations for establishing a modern accounting system for its telecommunications operations as a vital element in improving its management information system. Although GOI had made important decisions supporting the recommended changes, the start and subsequent pace of implementation was slow owing to the conceptual and administrative problems involved in changing the established traditional methods. 6.03 Significant progress in accounting reform began to be made as a result of agreements reached during negotiations for Loan 615-IN/ Credit 153-IN -- agreements that dealt with the specifics and set time- tables for implementing the new accountirg system along the lines B8 recommended by the consultants. The new system now in operation, though continuing to be refined, is a key factor in the Branch beginning to operate more along commercial lines with properly assessed operating results and with more attention being given to spotlighting accountability for completion of projects and meeting budgets-. 6.04 Agreements together with timetables reached during negotiations pertaining to the financial reorganization included: (i) transferring the Branch's accounting function from the Comptroller and Auditor General to P&T -- a major change in the Government structure, (ii) annual accounts taking the form of commercial accounts on an accrual baais in the form of a balance sheet and a statement of earnings and expenses, (iii) the commercial accounts being audited and certified by th ' C&AG (iv) the commercial accounts being presented annually to Parliament, (v) P&T establishing an internal audit system for the Branch, (vi) an assets register being maintained on a current basis, (vii) a double-entry accounting system being established at each accounting unit, (viii) a greater measure of financial responsibility being delegated to the field units, (ix) the tariff covenent taking the form of a rate of return on average net plant in service based on the commercial accounts. 6.o The foregoing undertakings have been/are being complied with. 7. Finances 7.01 P&T's financial results during the three-year project period 1970-72 were satisfactory, exceeding appraisal forecasts due mainly to tariff increases not being reflected in the forecasts, but also due to a smaller rate base as a result of delays in the construction program, particularly in respect of the long distance projects and cable provision. This had the effect of altering the financing plan for the three-year period of the project from that estimated at the time of appraisal. Internal sources of funds amounted to about 22% more (Rs 474 million), borrowings 55% less (Rs h30 million), and the construction program 33% less (Rs 890 million) than the appraisal estimate. As a result the fiscal impact of the Branch's operations on Government was that funds accruing to Government during the three-year period, not including customs duties and interest payments, amounted to about Rs 835 million compared to appraisal estimates where,it was shown that Government would be making contributions to the Branch of about Rs 710 million. Surmmaries of the Income Statements, Balance Sheets and Sources and Applications of Funds Statements for 1970-1974 are in the attached Annex A.Some financial data are given below for fiscal years 1970-1972: B9 Fiscal year ending March 31: 1970 1971 1972 Tff1ions of Rupee ) Operating R3venue Actual 1,311 1,548 1,829 Appraisal 1,323 1,484 1,714 Operating Expense Actual 903 1,081 1,171 Appraisal 926 1,053 1,215 Net Operating Income Actual 408 467 658 Appraisal 398 431 499 Rate of Return Actual 13.8% 14.7% 19.6% Appraisal 13.3% 12.1% 11.7% Operating Ratio Actual 69% 70% 6% Appraisal 70% 71% 71% Average Net Plant Service Actual 2,966 3,171 3,360 Appraisal 2,985 3,566 4,280 8. Consultants 8 .01 The Administrative Staff College of India (ASCI) was appointed as consultants to the P&T Department to advise P&T on the establishment of an efficient stock control system, as agreed during appraisal and in the loan/credit agreements. P&T's former consultants, Peat, Marwick, Mitchell & Co., participated in the assignment. ASCI submitted reports with recommendations covering all phases of materials management. The reports were duly considered by the P&T Board and the recommendations, with minor modifications, were adopted. A reorganized Materials Management Section headed by a P&T senior official has been established in the Directorate and is in operation. The performance of the consultants in this assignment has been satisfactory. . Auditors 9.01 The loan/credit agreements provide for the commercial accounts of the Telecommunication Branch to be audited by the Comptroller and Auditor General of India and certified copies sent to the Bank promptly B10 after they are available. The provisional commercial accounts are to be sent to the Bank not later than four months after the close of the fiscal year. While the provisional accounts have been sent on time and have varied little from the audited accounts, it has usually taken more than a year before the audited accounts are received, mainly because of the time involved in the apportioning the joint departmental charges and in certifying the accounts. The Chairman is well aware of the situation and of the Bank's concern, and has represented to the C&AG the need, and has also offered suggestions, for reducing the delay in furnishing these accounts. l0. Insurance 10.01 Pursuant to Government's policy for all its departments, P&T does not carry insurance against losses on its fixed assets from major risks such as flood, earthquake and other catastrophies nor against risk of the more normal type, such as fire and theft. P&T's management agrees with this policy because insurance rates for the major-type risk are considered uneconomically high, while the wide geographical spread of its assets provides reasonable dispersion of the more normal type of risk. This is a reasonable policy for P&T and in line with the approach adopted by most telecommunication entities. 21. Reporting Requirements 11.01 There are no special reporting requirements needed for this project. With the Bank Group's continuous support for India's ongoing telecommunications projects, reporting requirements for these projects have continued to be requested and have been amended from time to time in light of experience gained by the Bank. 12. Lessons Provided 12.01 The achievements and the problems which occurred during the project provide some lessons, most of which though already familiar to people experienced in telecommunications need to be constantly kept in mind. They may however not be known to people outside the field. They are summarized below: 12.02 Organizational Aspects - Whilst operation of Government-owned utility organizations as statutory authorities remains generally the end objective, verified by the steady evolution of such authorities in developed countries to this status, many countries such as India are reluctant to relax control to that degree at their particular stage of national development due to problems of retaining adequate accountability in its operations. The project shows that much can be achieved through cooperation and understanding between the Bank and the entity B11 over a period of time to organize an efficient and effective telecom- munications authority within the governmental framework while operating along more commercial lines. 12.03 Programming Aspects - In telecommunications projects in developing countries it must be expected that achievement will fall short of targets in the majority of cases. Pressure'of demand from prospective customers and from Governments makes the entities pitch their programs at targets near the limit of available resources with favorable future conditions assumed. Appraisal missions rightly accept challenging but feasible targets in the knowledge that in telecommunications where project works become effective steadily over the project period shortfalls are not generally serious. 12.04 Technical Aspects - New switching systems are never introduced into a telephone system of any significant size without great effort. The system adopted has been designed almost invariably for the characteristics of some other nation's traffic, for different climatic and environmental conditions, and for the facilities required elsewhere. New facilities have to be incorporated and other design changes provided for it to work into existing exchanges. This integration is rarely smooth. In India the conditions were particularly extreme but P&T's experience is similar to that elsewhere where also the process of complete integration of the new and old standard systems has taken many years. This Indian experience lends further support for the Bank's recognition of the benefits of switching system standardization. But at the same time points of network development occur when change must be made. Such a point was reached in India in the mid-1960's when the major networks required a system with more switching "intelligence" than their standard Strowger group selector exchanges for future economic development. The penalties incurred through delays and special effort needed for the change have therefore to be accepted. 12.05 Procurement of major telecommunications equipment from overseas can seldom be done without resulting in lead time at least three and a half years from specifications to commissioning of the facility. P&T expected that procurement under the bilateral CIDA arrangement could cut the lead time but this proved not to be so. In fact other special difficulties arose in procurement and delivery of equipment. 12.06 A very common error, which continues to be made worldwide and in all branches of technology, is to underestimate the time required to develop a production item after a research prototype is developed and tested successfully. In telecommunications, much detailed testing and engineering is required to achieve the state where the equipment will B12 operate 24 hours a day, day after day, for weeks, months and ultimately years, and maintain its specified quality of performance. In the Indian case, there was the additional pressure arising from the urgency of import substitution, on equipment developers to set over-optimistic targets for this transition step. Central Projects Staff November 18, 1974 INDIA POSTS AND TELEGRAPHS DEPARTMENT TELECOMMUNICATIONS BRANCH LOAN 615-IN/CREDIT 153-IN Financial Data 1970-1 7 -(Millions of Rupees) Year ending March 311 1970 1971 1972 l2) 12h Appraisal Appraisal Appraisal Appraispaisa Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual COMPARISON OF FORECAST AND ACTUAL STATEMENTS OF INCOME Operating revenue 1,324 1,311 1,484 1,548 1,714 1,829 2,018 2,083 2,306 2,257 Operating expense 926 903 1,053 1,081 1,215 1,171 1,404 1,306 1,580 1,543 Net operating income 398 -408 431 467 499 658 614 777 726 714 Rate of return 13.3% 13.8% 12.1% 14.7% 11.7% 19.5% 12.3% 21.2% 12.8% 18.0% Operating ratio 70% 69% 71% 70% 71% 64% 70% 63% 69% 68% COMPARISON OF FORECAST AND ACTUAL BALANCE SHEETS Net plant in service 3,229 3,119 3,903 3,222 4,656 3,498 5,337 3,835 5,973 4,093 Net current assets 354 162 415 197 494 173 577 537 656 704 Total assets 4,186 4,329 5,146 4,757 6,063 5,563 6,817 6,751 7,536 7,741 Total equity 3,103 3,158 3,625 3,422 4,237 3,916 4,751 4,765 5,282 5,357 Long-term debt 853 679 1,174 756 1,436 972 1,636 1,242 1,786 1,540 Total liabilities 4,186 4,329 5,146 4,757 6,063 5,563 6,817 6,751 7,536 7,741 Debt/Equity ratio 22/78 18/82 24/76 18/82 25/75 20/80. 25/75 21/79 25/75 22/78 COMPARISON OF FORECAST AND ACTUAL STATEMENTS OF SOURCES AND APPLICATIONS OF FUNDS Internal cash generation 594 624 662 772 772 963 936 1,199 1,093 1,123 OYT payments 33 64 31 75 29 50 26 68 24 66 Subscriber deposits 19 - 15 - 13 - 21 - 19 Central Government contributions 158 79 317 ( 36) 375 ( 33) 202 169 130 89 Foreign borrowings 128 51 384 77 262 216 200 270 150 298 Total sources of funds 913 837 1,394 903 1,438 1,209 1,364 1,727 1,397 1,595 Construction program 565 605 1,044 464 1,097 747 979 913 993 862 Increase (decrease) in working capital 43 ( 71) 61 35 79 ( 24) 83 364 79 167 Debt service 225 116 259 118 232 114 272 124 295 170 Transfers to Postal Branch 80 191 30 146 30 96 30 142 30 160 Transfers to funds held by Government - ( 4) - 140 - 276 - 184 - 236 Total applications of funds 913 837 1,394 903 1,438 1,209 1,364 1,727 1,397 1,595 Times the sum of debt service, Postal Branch transfers and transfers to Government funds covered by internal cash generation 1.9 2.1 2.3 3.0 2.9 2.5 3.1 2.7 3.4 2.0  Srinagar k. Udhampur > INDIAN POSTS AND TELEGRAPS DEPARTMENT Polhank D..-- Dalhousie PROPOSED EXPANSION OF Armritsar rrilr 1 CO-AXIAL CABLE AND MICROWAVE Jr llundur m '1 ~SYSTEMS DURING THE FOURTH Ferozepu Ludh no /Chandigarh . , Am cola DEHRADUN FIVE-YEAR PLAN Muzzafornogar .HATINDA 4 Meu rgr MeWrit 1969 1974 Tp r insukia BIKANER AREaILLY «; 4\ Nolel '- - e i D neeg '\ Agro .4 Siýigur lez.2.ooheo ýý"ý ýT pur Jodpur LucknowCohbehr O---...GORAKHPuh ShiIlong Beaor KAN PATNA Allahabod/ias 4 ~Varanasi Udolpur A Himmotnogar OBohpRANHi AHMEDABAD RABALPR JAMSHEDPUR0o CALCUTTA ---4 --. ndore KHRA b Boroda 5. .RG /5 RAIPUR O RBANDAR Bro\ch i 4~ ---_4 AMALPR Surat k TacK Buisar / Manmritd / Nosik5 Thana BOMBAY Poona NIZAMABAo Status JA\ 1971 VISAKHAPATNAM ESting Iroposed Kolhopur ( able Note 5 Patred Cable BMroavc Radio --.4.- PýANJ1M HuNote C.ble tId awa i ndq p n Dov ngere \ 3 1973 -72 ANGALO MADRAS17-3 > rne- 5 1973-74 \ KOZIIKODE Villupurom N 00 50 0 100 2100 300 400 500 MILES TI RUCHIRA PALLY ¥OTTAYAM Md o TIRUNELEVI TRIVANDRUM A GACOIL FEBRUARY 1971 IBRD 25'47P,