Iraq - Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2755 PROJECT PERFORMANCE AUDIT REPORT IRAQ: TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) December 5, 1979 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. b FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT IRAQ: TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) Table of Contents Page No. Preface 1 Project Performance Audit Basic Data Sheet 11 Highlights i11 Project Performance Audit Memorandum I. Project Summary 1 II. Main Issues 3 Initial Problems 3 Project Execution, Cost Variations and Delays 3 Financial and Institutional Factors 5 III. Conclusions 6 Attachment: Project Completion Report 1. Introduction 7 2. Project Preparation and Appraisal 8 3. Project Implementation, Operation and Cost 10 4. Operating Performance 16 5. Financial Performance 17 6. Institutional Performance 20 7. Project Justification 22 8. Bank Performance 23 9. Conclusions 24 Annexes I - Project Revision (including interrelated facilities) 25 2 - Income Statement 1971-77 28 3 - Compliance with Covenants 31 4 - Organization and Management 32 5 - Incremental Financial Rate of Return 34 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.  PROJECT PERFORMANCE AUDIT REPORT IRAQ: TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) Preface This report presents the results of a performance audit of the Iraq Telecommunications Project, for which a loan of US$27.5 million was made to the Government of Iraq for expansion of the telecommunications facilities of the Posts, Telegraph and Telephones Administration (PT&T) over the period 1971-1975. The loan was signed on October, 27, 1971, became effective on January 28, 1972 and closed on December 31, 1978. The Project Performance Audit Report consists of a Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Central Projects Staff (TWT Depart- ment). The PCR was prepared after a field visit to Iraq in May, 1979. OED has reviewed the PCR against the Appraisal Report and other documents in the Bank files and discussed the project with Bank staff. The PPAM is generally in agreement with the PCR although, in the absence of some relevant data which it has not been possible to obtain from the Beneficiary, the PCR is not always able to be fully conclusive in its findings. In addition to providing a brief summary of the project experience, the PPAM offers supplementary comment on the unusual aspects of this loan, including a more explicit outline of the initial problems resulting from the Bank's limited earlier participation in development of the country. The PPAM also deals with the achievements of both the Borrower and the Bank, it men- tions the case for some technical assistance as a follow-up to Bank lending and it deals more fully with the project cost estimates and the actual costs. Following normal OED procedures, a draft copy of this report was sent to the Government and Borrower for comments. None were received.  PROJECT PERFORMANCE AUDIT BASIC DATA SHEET IRAQ - FIRST TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) KEY PROJECT DATA Appraisal Actual or Item txpectation Current Estimate Total Project Cost (US$ million) 39.7 49.1/1/ Cost Overrun ) - 24 Loan Amount (US$ million) 27.5 27.5 Disbursed 27.5 Date of Physical Completion March 1976 April 1977 Proportion Completed by Appraisal Target Date (%) 100% 32% 2/ Proportion of Time Overrun (%) - 24 3/ Incremental Financial Rate of Return (%) 14 4/ 17 4/ Financial Performance Good 5/ Institutional Performance Acceptable Cumulative Estimated and Actual Disbursements US$ (US$ million) As of June 30: 1972 1973 1974 1975 1976 1977 1978 1979 's) Appraisal Estimate 2.5 12.8 19.9 26.2 27.3 27.5 27.5 27.5 (ii) Actual - - )3:3 4.5 14.1 19.1 19.1 27.5 (ii) as % of (1) - - 15.6 17.2 51.7 69.8 98.6 100 OTHER PROJECT DATA Item Original Plan Actual First Mention in Files - October 1968 Negotiations - July 7-16, 1971 Board Approval - September 9, 1971 Loan Agreement - October 27, 1971 Effectiveness - January 28, 1972 Closing Date December 31, 1976 December 31, 1978 Borrower Republic of Iraq Executing Agency Posts, Telegraphs and Telephone Organization (PT&T) Fiscal Year of Borrower Up to March 31, 1975 - April 1 to March 31 Interim Year 1975 - April 1 to December 31 As from 1976 - January 1 to December 31 MISSION DATA Item Month/Year No. of Weeks No. of Persons Manweeks Date of Report Identification 11/68 1 1 1 01/14/69 Preparation 03/70 1 1 1 05/12/70 Appraisal 11/70 4 3 8 12/01/70 Prenegotiations 04/71 1 5 5 05/05/71 Total 7 15 Supervision I 04/72 1 3 3 05/11/72 Supervision II 09/72 1 1 1 10/25/72 Supervision III 08/73 1 2 2 09/18/73 Supervision IV 10/74 1 2 2 11/22/74 Supervision V 08/75 1 2 2 09/16/75 Supervision VI 11/76 1 1 1 12/15/76 Supervision VII 03/77 1 1 1 05/02/77 Supervision VIII 02/78 1 1 1 03/09/78 Completion 05/79 1 2 2 06/29/79 Total 9 15 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Iraqi Dinar (ID) Year: Appraisal Year Average Exchange Rate: US$1 = ID .36 Intervening Years Average US$1 - ID .30 Completion Year Average .jS$1 -- ID .29 1/ These are estimated costs only and the exchange rate has been taken as ID 1.00 = US$2.8 as at appraisal for an equivalent comparison. Current rate is ID 1.00 = US$3.38. 2/ It is difficult to arrive at a realistic value for percentage proportion completed, with diverse components of project such as telex, microwave trunk switching and satellite terminal. The figure has been estimated by comparing costs of components completed and commissioned in this case. 3/ This is calculated on basis of time elasped between signature of loan to expected com;letion date of March 31, 1976 as against actual completion date of April 1977. 4/ The incremental financial rate of return is a minimum estimate of the economic rate of return. 5/ Based on PT&T's financial statements up to 1975 and provisional information for 1976. As from 197', no finan- cial information is available. There is no reason to believe, however, that PT&T's financial pe 'ormance deteriorated, as the September 1976 tariff increase should have produced increased revenues as from 1977.  - iii - PROJECT PERFORMANCE AUDIT REPORT IRAQ: TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) Highlights The project was well conceived and was designed not only to meet demand for telex, long distance and international telecommunications services, but also to improve the quality of long distance and international services in order to meet international standards 1/. There was some underestimation of the demand for the associated local services (not financed under the loan) and a major upward revision of the program as a whole was made during execution of the project (PPAM para. 14 and PCR paras. 4.01-4.02). The project met its physical objectives and has been successful, both in expanding and improving quality of service. The revenue from long distance, international and telex services has increased over ten times between 1971 and 1977 and thus has been a major factor in PT&T's satisfactory financial performance, with recent rates of return on net fixed assets exceed- ing 20% (PPAM para. 8). Considerable progress was made in providing an increased degree of autonomy to PT&T and, with the assistance of consultants, in developing its internal organization to provide a satisfactory accounting system, improved lines of communication and the tools necessary for effective management. The Bank proposals for institutional improvements and improved financial perfor- mance have to a large extent been implemented. The following points are of special interest: - the special problems involved in processing the project through to Board approval (PCR paras. 2.02-2.04 and PPAM paras. 12 and 13); - possible under-estimate of project costs at appraisal (PCR para. 3.07 and PPAM paras. 14-17); - financial performance (PCR paras. 5.01-5.12); and - insitutional performance (PCR paras. 6.01-6.04 and PPAM paras. 18-21). 1/ As appraised, it also included some local network facilities, financing of which was subsequently undertaken by Government.  PROJECT PERFORMANCE AUDIT MEMORANDUM IRAQ: TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) I. Project Summary 1. The Telecommunications Project financed under Loan 788-IRQ was the first Bank lending operation in Iraq after a gap of five years. For this reason, it assumed rather special significance and posed a number of country, legal, organizational and technical problems. The fact that these were satisfactorily and expeditiously resolved is to the credit of the Borrower, the Beneficiary and the Bank (PCR Section 2 and PPAM paras. 12 and 13). 2. The project was also the Bank's first loan for telecommunications development in Iraq and formed part of PT&T's 1971-75 development program. Total estimated project cost was US$39.7 million, with a foreign cost compo- nent of US$27.5 million to be financed under the loan. The project provided for: the installation of expanded long distance and international services; the provision of an automatic telex service; and part of the cable and sub- scriber facilities for expansion of the local telephone network. The provi- sion of local telephone exchanges and the balance of the local network was being carried out under the overall development program, using Government financing. The project also provided for improvements in PT&T's organization and financial arrangements to enable it to operate more effectively (PCR paras. 2.04 and 2.07-2.09 and PPAM para. 14). 3. Due partly to the lack of familiarity with Bank operating procedures and a feeling on the part of the Iraqi authorities that the requirements, based on normal Bank practices, involved undue interference in Iraq's affairs, the process of prenegotiation and negotiation was involved and difficult but was satisfactorily resolved (PCR Section 2 and PPAM paras. 12 and 13). The minor delays caused by the problems involved in the negotiations had no appreciable effect on project start-up as preparation of bidding documents had gone ahead. 4. Although a number of installations were completed by March 1976, the target date for project completion, the project as a whole was only completed in April 1977, a time overrun of about 24% (PCR para. 3.05 and PPAM para. 15). Procurement was generally satisfactory with one exception where the Bank was unable to agree financing (PCR para. 3.06 and PPAM para. 16). 5. During the period of execution of the project, some significant but not major changes were made in project content; however, with the pro- vision of additional financing by Government, following the oil price increase of 1973, the development of the associated local telephone network was more than doubled and certain other additional long distance and international - 2 - facilities, which would both extend and increase the flexibility of the system, were provided (PCR paras. 3.02-3-04 and PPAM para. 14). 6. The costs of the project increased by about 24% in Iraqi dinars and by about 45% in U.S. dollars. Foreign exchange cost in US dollars increased by 44%. Reasons for the increased costs were: rather low cost estimates at the time of appraisal; provision of additional facilities; increased cost of civil works; and, in the case of US dollar figures, changes in currency parities (PCR para. 3.07 and PPAM para. 17 ). While being pre- pared initially to consider supplementary financing, the Bank finally agreed with Government that it would not finance cost overruns (PPAM para. 21). 7. Although recent data are not available on market factors, such as demand for service and traffic levels, the improvements in service quality under the project have been significant and the tenfold increase from 1971 to 1977 in combined revenues for long distance, international and telex facili- ties is a clear indication that the facilities were needed and are being effectively utilized (PCR paras. 4.01 and 4.02 and Annex 2). 8. PT&T's financial performance has shown significant improvement, with a rate of return now exceeding 20% and an average for the 1971-77 period of 15%. The average operating ratio over the same period was 80, improving to less than 70 during the last 2 years. Data are not available on PT&T's internal cash generation. The incremental financial rate of return for the development program was 17% as against an estimate of 14% at the time of appraisal (PCR Section 5 and paras. 7.04-7.05). 9. Both the internal organization of PT&T and the quality of management improved significantly over the project period. While Bank staff have gen- erally been in agreement with the changes made, they considered that it might have been prudent to proceed more slowly with decentralization of accounts (PCR paras. 5.10, 6.02 and 6.07). Loan covenants have generally been satis- factorily met with the exception of submission of audited financial statements which, despite repeated reminders, were only made available up to FY1975 (PCR paras. 5.09-5.12 and Annex 3). Other data requested by the Bank for the PCR have not been made available. In the absence of further lending for the sector, it is questionable whether anything could or should be done to correct the position. Nevertheless, it would seem that, given the contribution the Bank has made to physical and institutional development, continuing technical assistance would have been beneficial to the sector (PCR para. 9.01) 1/. 1/ The Bank has gained considerable knowledge of factors involved in the development of telecommunications facilities in developing countries and a considerable amount of useful data has been incorporated in CPS papers. In the absence of a technical assistance program, it would perhaps be helpful to Iraq for the Bank to supply the Ministry of Communications with some of the technical and economic papers relating to the tele- communications sector, and which are in the public domain, which have been published in the PUN and GAS series. 10. Given the difficult conditions which have applied, the Bank's handling of this project has been commendable. It has shown tact, restraint and understanding during the initial discussions, and has subsequently pro- vided useful advice and assistance during project execution. The quality of supervision and the reports prepared has been high. 11. A discussion of issues which are supplemental to or have not been fully dealt with in the PCR is in Section II. General conclusions drawn by this audit are in Section III. II. Main Issues Initial Problems 12. Prior to the approval of this loan, the Bank had made only two loans to Iraq, the first for flood control in 1950 and the second for roads in 1966. A number of country considerations (including the availability of foreign exchange resulting from the oil revenues, changes in Government and some reluctance by Iraq to approach western sources) were factors in the Bank's limited participation in development of the country. However, following a dialogue commenced in 1968, a five-year lending program was approved for FY1971-76. The program included thirteen projects with the first one, the telecommunications project, scheduled for approval in FY1971. In the event, only four of the projects included in the lending program were finally pro- cessed, as Bank lending ceased again after 1973 following the increase in oil revenues. 13. The process of developing the project, defining its content, agree- ing the necessary institutional and financial improvements and negotiating satisfactory legal documents presented major difficulty. The main sources of the difficulty resulted from: the tenuous relationship which had existed prior to 1968; the absence of lending over a period of five years (1966-1971); the fact that the Bank had no prior knowledge of the sector; and a perception amongst Government officials that the Bank wished to interfere in matters which were the prerogative of Government and was raising unnecessary issues to hinder financing of the project 1/. In order to resolve these problems, both the Borrower and the Bank had to show considerable flexibility and understand- ing of one another's position and it is to the credit of all concerned that it was possible to reach agreement and approve the loan in September 1971. The PCR (Section 2) adequately outlines the process of project development, appraisal and negotiation. Project Execution, Cost Variations and Delays 14. Total estimated project cost at appraisal was US$39.7 million, with a foreign cost component of US$27.5 million to be financed under the Bank loan. The project, as appraised, formed part of the Government's first five-year (1971-75) development program, which aimed,at:, meeting part of the local service demand by doubling the number of telephone connections; pro- viding modern and reliable long distance and international telecommunications 1/ Government indicated these views in a letter of April 6, 1971. facilities; providing telex service; and improving the organization of the sector to allow it to operate effectively and expand to meet its increased commitments (PCR para. 1.03). The development program, of which the project formed part, was expanded during execution to increase further the local network capacity by 100% and provide additional international and long dis- tance facilities (PCR paras. 3.01-3.04). 15. Project completion was delayed by 13 months, an increase of 24% on the expected execution period. However, about 80% of the additional exchange capacity associated with the project had been installed by the target comple- tion date. This, taken with the completion of the telex exchange and satel- lite earth station and a large part of the microwave system, would indicate that about 60% of the revenue earning capability had been realized by the original completion date (PCR Annex 1). 16. On procurement, the Bank showed reasonable flexibility, within the terms of its Guidelines, in dealing with a new Borrower (PCR para. 3.06). In one case, however, which is not dealt with in the PCR, the Beneficiary, for reasons of standardization, placed an order for teleprinters with a supplier who was not the lowest evaluated bidder. No provision for any preference was included in the bidding documents and the quantities to be purchased greatly exceeded those actually in service. The Bank, therefore, correctly refused to finance this purchase. 17. The project cost estimates in the PCR (para. 3.07) are expressed in Iraqi dinars, which have been revalued upwards against the US dollar by about 21% over the project period. Changes in currency parities are not a signifi- cant cause of increased project costs if costs are expressed in local currency but they are significant if costs are expressed in US dollars. In US dollars, total project costs increased by about 45% and foreign costs increased by 44%. In addition to the explanation of cost increases given in the PCR, it appears that some of the cost estimates included in the appraisal report were on the low side. In the case of the microwave system, the original foreign cost esti- mate of the consultants who designed the system was US$19.5 million. Based on ICB prices quoted at the time for similar systems financed by the Bank, this cost estimate appeared to be very high. The consultants accepted that inter- national competition might result in prices lower than they had originally estimated and they suggested, shortly before departure of the appraisal mis- sion, a reduced estimate in the range US$ 11.5 million-US$15.5 million. The appraisal estimate was established at the lower end of the range 1/. Actual cost, including some additional facilities, was US$16.4 million 2/. The 1/ The file material does not explain how the appraisal estimate came to be established at the lower end, but a partial explanation at least is that the appraisal mission made a lower provision for physical contingencies. The Appraisal Report states that "the estimates for long distance facilities are largely based on consultant's estimates for microwave systems which on the basis of experience appear to be on the high side; even so, they were not reduced but a contingency of only 5% was included to accommodate minor design changes". 2/ Additional route sections were separately financed by Iraq. - 5 - appraisal cost estimate of US$3.3 million for the satellite earth station, together with the international switching centre, although based on the con- sultants estimates, is also considered to have been on the low side; actual cost was 38% higher at US$4.6 million. Financial and Institutional Factors 18. Operating, financial and institutional performance are dealt with in Sections 4, 5 and 6 of the PCR. It is desirable to consider these in relation to the conditions which existed at appraisal, when the local network served about 82,000 subscribers (nearly 70% in Baghdad), mainly using obsolescent, poorly maintained and overloaded equipment. Long distance facilities were almost wholly routed over poor quality, overloaded and unreliable land lines and international facilities were provided by means of HF radio stations, subject to the uncertainties of ionospheric propagation. 19. A start had been made in institution building in 1963, when the P&T Department was converted to the Post, Telegraphs and Telephone Agency (PT&T), designed to function as a commercial enterprise with its own board of directors. However, PT&T did not have an adequate accounting system, with separate postal and telecommunications accounts, and lacked other tools neces- sary for effective management. Government was aware of the weaknesses in the institution and had in 1970 engaged the Arab Research & Administrative Centre (ARAC) as management consultants to make a study of the organization, and advise on the changes desirable. ARAC subsequently assisted in implementation and training. 20. Based on investigations made during the appraisal, the mission also reached conclusions on what was desirable to strengthen the administra- tion and establish a satisfactory financial basis for future operations; although sensible in concept and following normal Bank practices, these conclusions did not perhaps initially give sufficient consideration to local conditions and the laws under which PT&T was operating. When the mission's proposals were communicated to Iraq, they were found to be only in part acceptable and resulted in the reaction commented on in para. 13. Further discussions between the Iraqi authorities and Bank staff took place in Baghdad during April 1971; although it was not possible to resolve the differences, the Iraqi authorities accepted that the Bank was proposing provisions which had had general application in the case of other loans and sufficient progress was made to decide to continue the dialogue during negotiations in Washington. The agreement reached during these negotiations resulted in a number of special provisions and omissions to meet the Iraqi objections (PCR paras. 2.08, 2.09 and 5.11). The covenants and agreements have in the main been honored (PCR Annex 3), the institution has been streng- thened considerably and the institutional objectives were substantially met. 21. The relationship, between the Beneficiary -and the Bank was good during the initial stages of project execution and the Bank supervision of the project was very satisfactory (PCR paras. 8.03 and 8.04). However, following the oil price increase and major increases in the development program (which placed an increased strain on PT&T's resources), the degree of - 6 - cooperation and standard of reports has deteriorated. The relationship between PT&T and the Bank may also to some extent have been prejudiced by the fact that, in April 1973, the Bank indicated to the Ministry of Communica- tions that it was prepared to consider supplementary financing of the cost overrun of the foreign exchange component of the project. Subsequently, the Bank agreed with Government that supplementary Bank financing would not be provided to meet cost overruns on Bank projects, a position which was finally confirmed by the Bank in a communication to the Ministry of Finance on February 9, 1976. However, as late as July 1975, the Ministry of Communica- tions was still indicating that it expected the Bank to finance the cost overrun. III. Conclusions 22. The project was successful, with major achievements in modernizing facilities, improving service quality and expanding service to meet the growth of the economy. The initial development targets (particularly for local facilities outside the project) have in retrospect been found to be too conservative, an outcome which is not unusual in telecommunications projects. Achievements in institution building have been significant. - 7-- Attachment IRAQ: TELECOMMUNICATIONS PROJECT (LOAN 788-IRQ) Project Completion Report 1. INTRODUCTION 1.01 At the time of appraisal in 1971, telecommunication services in Iraq were the responsibility of PT&T operating under Law Number 81 of 1963. PT&T was a government entity under the jurisdiction of the Ministry of Communications, and was operated as a government department although treated independent of the government's budget for its revenues and current expenses. PT&T underwent a change in 1976 with the introduction of Law Number 7 of 1976. By this law, PT&T was converted to a Public Organization headed by a President and assisted by a Board of Directors with three Directorates for (a) Posts, (b) Telegraphs and Telephones (long distance), and (c) Telegraphs and Telephones (local services). The PT&T Organization and the three Direc- torates have all been given corporate status and greater financial and administrative autonomy. Besides PT&T, the Defense Services and Civil Aviation have their own telecommunication services. PT&T is responsible for the provision of all local, long distance and international public tele- graph, telephone and telex services; leases facilities to the Ministry of Information for the relay of television and radio programs and also leases circuits to other departments and agencies. 1.02 The Bank has been involved in the telecommunications sector in Iraq since October 1968 when Government showed interest in Bank assistance. Government, urged by the Bank, employed a consultant to carry out a technical feasibility study of the national long distance system, which was the highest priority need. This study was completed in September 1970. Appraisal of the project was carried out in November 1970. 1.03 The PT&T program that was appraised formed a part of Government's first five year (1971-75 1/) development plan. The objectives of the PT&T program were to: (1) double the number of telephone connections to meet a part of the demand; (2) provide modern and reliable domestic and international long distance telecommunication services; and 1/ The plan period was extended for nine months beyond March 31, 1975 and the commencement of the fiscal year was changed to a calendar year as from April 1, 1975. -8- (3) improve the organization of PT&T to enable it to deal more effec- tively with telecommunication services and to develop adequately. 1.04 The project which formed part of the program was the first Bank financed operation in the sector. It achieved the sector goals under item 2, and partially under items 1 and 3 above. The Bank loan for US$27.5 million was approved in September 1971. A second project to assist further expansion was also contemplated, but due to improved revenues after 1973, the Iraqi Government did not seek this assistance. 2. PROJECT PREPARATION AND APPRAISAL Orgin 2.01 The Government of Iraq enquired about the possibility of Bank financing in this sector in October 1968 primarily for a national long distance system. The Bank arranged two preappraisal missions to Iraq for project identification and preparation. As a result, Government was advised to prepare a project feasibility study for the long distance system. Govern- ment employed Microwave Services International (MSI), USA as consultant and presented the feasibility report to the Bank in September 1970. Preparation, Appraisal, Negotiations and Approval 2.02 Appraisal of the project was carried out in October/November 1970. After appraisal of the project, a special mission was sent in April 1971, for prenegotiations in Iraq primarily to discuss the issues raised by the appraisal mission relating to tariffs and financing arrangements for PT&T, and to seek Government's agreement. Agreement was obtained in principle on some major points but others remained unsettled. Government was invited for negotiations in Washington in June 1971, Negotiations were held in Washington in July 1971 by an Iraqi team headed by the Minister of Planning. The project which was appraised on the basis of the initial five year plan, was expanded at the time of negotiations to include a satellite earth station and international telephone switching center. The loan amount originally envisaged at US$24 million, was also increased to US$27.5 million. 2.03 During negotiations, the Iraqis requested that the Loan Agreement should only contain a description of the project facilities financed by the Bank loan. It was pointed out by Bank representatives that many items in the program, which Iraq was to finance, were closely interlinked with those in the project and that without timely provision of the former, the efficient operation and use of the project items could be significantly affected. The Iraqis then agreed to indicate in a separate Schedule 3 of the Loan Agreement only such items as being "facilities and equipment necessary for the project to be provided by the borrower." 2.04 The other points of discussion during negotiations related to: (a) the dates for commencement of submission of audited financial statements; (b) rate of return; and (c) date for completion of a telecommunication tariff - 9 - study. The Iraqis preferred to submit audited financial statements wilh separate accounts for telecommunications as from April 1, 1977, (i.e., afte- projected completion of the project). After discussions, it was agreed tha! the fiscal year commencing April 1, 1975, was a reasonable target. The Iraqis did not agree to the rate of return covenant as proposed by the Bank. The matter was discussed and it was agreed that a covenant expressed in quali- tative terms would be incorporated in the Loan Agreement. In an agreed minutes of negotiations, the Bank's representative stated that a rate of return covenant expressed in qualitative terms differed from the Bank's normal practice, and that the Bank would expect an annual rate of return of at least 10%; the Iraqi Government would aim at the objective, but no binding commitment with regard to the particular rate of return in each and every year could be given. A proposal for a covenant requiring the Borrower to complete an ongoing tariff study by March 1974, was dropped on Iraqi request. In a supplementary letter to the Loan Agreement, however, a statement was made that the Government expected this study to be completed prior to the completion of the project. 2.05 The Bank's Board of Executive Directors approved the loan on September 9, 1971, and the Loan Agreement was signed on October 27, 1971. Project's Role in Long-Term Plan 2.06 The project was a part of Iraq's 1971-75 development plan and aimed at improving and expanding the telecommunication facilities, and modernizing the long distance national and international telegraph, telephone and telex facilities. Project Description 2.07 The project was part of the telecommunications program and consisted of the following: (a) a national microwave system connecting the main towns from Baghdad to Hilla, Basrah and Amarah in the south and to Mosul, Kirkuk and Erbill in the north; the provision of multiplexing equipment for about 1,500 telephone channels and television program interconnections and spurs for about six TV stations; installation of ultra high frequency links to important centers in the northeast; (b) long distance exchange facilities with total capacity of about 5,000 lines permitting direct subscriber trunk dialing between the major cities; (c) part of the cable network and subscriber facilities including local and junction cables and drop wires, branc', exchanges, and telephone instruments; (d) national and international telex and gentex services by p-o- viding exchange facilities for approximately 701 lines; - 10 - (e) a satellite ground station including an international switching center and associated facilities; and (f) engineering consultant services required for detailed engineer- ing of (e) and for supervision of construction of (a), (b) and (e) above. Covenants 2.08 In addition to the Bank's standard covenants on management, report- ing, etc., the Loan Agreement provided that PT&T shall: (a) furnish to the Bank in English as soon as available, but not later than six months after the end of each fiscal year, audited annual financial statements for PT&T, reflecting telecommuni- cations operations separately as from the fiscal year commenc- ing April 1, 1975; and (b) as from April 1, 1977, ensure a reasonable annual return on national investments in telecommunication facilities (e.g., suf- ficient to cover operating expenses, debt service--if exceeding depreciation, and create a reasonable surplus to finance future investments). In the agreed minutes of negotiations (para. 2.04) the Bank stated that it expects a rate of return on net fixed telecommunications assets in operation of not less than 10% to be achieved by PT&T. 2.09 Supplementary letters were also agreed upon stating that: (a) a special committee had been instituted by Government to review tariffs and is expected to complete its study prior to com- pletion of the project to provide Government with a basis for making revisions; and (b) a consulting firm had been appointed to review and recommend improvements on the administrative and management organiza- tion and the financial procedures of the PT&T. 3. PROJECT IMPLEMENTATION, OPERATION AND COST Loan Effectiveness and Project Start-up 3.01 The loan was signed on October 27, 1971, and made effective on January 28, 1972. There were no delays in project start-up. The bid docu- ments for the national long distance microwave system, which was a major component of the project, were cleared with the Bank soon after negotiations and the notice inviting bids was published on August 29, 1971. - 11 - Revision 3.02 The major changes which occurred in the project are indicated in Annex 1. These were: (a) the microwave system was extended to Sulaimaniya, Um Kasr and Fao; (b) the UlHF network was postponed for execution in the second plan as part of an extensive national secondary network development; (c) the long distance trunk exchanges were expanded; (d) the telex exchange was redesigned; and (e) toll ticketing equipment was added to the international switching center. 3.03 Substantial changes also occurred in the interconnected facilities for the project to be financed by Government (see para. 2.03). The local telephone systems were increased from 100,000 to 204,000 lines along with the outside plant network. Details are also given in Annex 1. 3.04 As a result of the availability of additional resources to Iraq in 1973 and the upward revision of the National Development Plan, the telecom- munications development program was considerably expanded. The revised program was estimated to cost about ID 43.5 million compared to its original cost of ID 21.9 million. In addition to the items in the Bank financed project and interconnected facilities described in paragraphs 3.02 and 3.03 above, the program provided for: (a) long distance coaxial cable system between Baghdel to Mosul and Basra; (b) provision of additional antenna in the satellite station to work with the Atlantic Ocean satellite; and (c) additional long distance switching and toll ticketing equip- ment for the international switching center. The changes in the program were in line with original objectives set out in the plan and resulted from additional available resources, advancing develop- ment and expansion which would have taken place later in any case. These were acceptable to the Bank. As regards the revisions to the project, Iraq agreed to finance the cost overrun on the loan amount (see para. 3.10). - 12 - Implementation Schedule 3.05 The project was originally scheduled for completion by March 31, 1976. It was actually completed in April 1977. Some of the major com- ponents of the project, however, were completed earlier as indicated below. Month/Year Item of Completion 1. Telex exchange December 1975 2. Satellite earth station March 1976 3. Microwave Baghdad-Basra section and trunk exchanges July 1976 4. International switching center October 1976 5. Microwave Baghdad-Mosul section and trunk exchanges April 1977 Procurement 3.06 Procurement of goods and services for the project were on the whole satisfactory. The first major procurement related to the national microwave system and trunk switching equipment. Bids were received in April 1972, but the review of consultant's recommendations and the con- tracting process took considerable time. Contracts for microwave system was awarded in July 1973 and trunk switching equipment in August 1973. In 1972, SOFRECOM was appointed as consultant for the earth satellite station and the international telephone switching center. Bids were received for these systems in September 1973 and contracts placed by May 1974. In case of the telex exchange equipment, although the bid documents had been cleared with the Bank, Iraq placed orders in August 1974 without the approval from the Bank. This was apparently due to misunderstanding and when submitted later, the Bank found the evaluation acceptable and agreed to the contract. Costs 3.07 It has not been possible to get information from Iraq, in spite of efforts prior to and during the completion mission, on the actual costs of the completed project. Whereas some information on foreign costs is available from the contracts financed under the Bank, there is a very little information on local costs. An exact comparison and anlaysis, therefore, is not possible. Our estimate, based on available but inadequate data, indicate the following: - 13 - Costs in Iraqi Dinars (millions) 1/ Original Estimates Final Estimates- Item Local Foreign Total Local Foreign Total 1. Local services 2.86 1.79 4.65 2.86 1.79 4.65 2. Long distance services 0.93 5.57 6.50 1.77 7.81 9.58 3. Telex services 0.10 0.57 0.67 0.13 0.48 0.61 4. Satellite ground station 0.17 1.18 1.35 1.05 1.59 2.64 5. Consultants - 0.14 0.14 - 0.06 0.06 6. Contingencies 0.31 0.57 0.88 - - - Total Project Cost 4.37 9.82 14.19 5.81 11.73 17.54 1/ In the absence of actual cost data from PT&T, these are estimates only. Contract values for foreign costs in case of Bank-financed items 2, 3 and 4 have been used. In the case of item 1, which was not Bank financed ultimately, the appraisal estimates have been retained for local and foreign costs The comparison indicates project cost estimates at completion to be about 24% higher than appraised costs. This increase could be attributed to (a) the changes in the currency parities which occurred during loan dis- bursement, (b) higher than normal values of bids in Iraq due to difficult working conditions, (c) addition of some special facilities not originally intended, and (d) the increased cost for civil works including buildings and access roads. Disbursements 3.08 The estimated and actual total annual disbursements of the Bank loan year by year through 1979 are as follows: - 14 - Accumulated Disbursements Bank As % of Fiscal Year Appraisal Actual Appraisal ----------US$ thousands---------- 1972 2,500 1973 12,800 1974 19,900 3,113 15.6 1975 26,200 4,503 17.2 1976 27,300 14,110 51,7 1977 27,500 19,201 69.8 1978 27,500 27,103 98.6 1979 27,500 27,500 100 3.09 The slippage in disbursement was due in part to the delays in the original construction schedule, and in part to the procedures adopted by Iraq for the withdrawal of loan funds. Iraq was making payments to suppliers directly and claiming reimbursement under Procedure I, but con- siderable time lapsed invariably in sending the applications to the Bank for reimbursement. The final payment on the national long distance micro- wave contracts were also delayed due to the delayed supply of some of the components. 3.10 The need for reallocation of proceeds of the loan was apparent to Iraq and the Bank in October 1972 when the bids received for the national microwave system resulted in much higher costs than allocated in this item in the loan. Iraq proposed to fund the procurement of cables and accessories under Category II from its own resources and a reallocation was proposed by the Bank initially in July 1973. The Bank, after considering various alternatives for meeting the cost overrun,proposed ultimately, that Iraq should meet the increases over the total amount of US$27.5 million loan from its own resources. Although Iraq agreed to the proposal, the formal agreement to a reallocation, in a slightly modified form to the original proposal, was finally reached only on August 25, 1977, by an exchange of letters between the Bank and Iraq. 3.11 The original and final allocation of the loan proceeds is as follows: - 15 - Loan Allocation Category Original Final ------- in US$--------- I. Long distance scheme consisting of: (a) Microwave system: Basrah-Baghdad-Mosul with associated spurs to TV stations, equipment for UHF radio links, telephone and telegraph multiplex equipment 11,400,000 16,460,209.39 II. (b) Long distance exchange equipment and accessories 4,200,000 4,931,115.08 II. Local and junction cables, drop wires, branch exchanges 1/ and telephone instruments 5,000,000- - III. National and international telegraph/telex exchange equipment and accessories 1,600,000 1,442,737.00 IV. Satellite ground station including international switching center and associated facilities 3,300,000 4,559,664.00 V. Constultant services 400,000 106,274.53 VI. Unallocated 1,600,000 - TOTAL 27,500,000 27,500,000.00 1/ Due to cost overrun on other items, Iraq financed this item from its own resources, and in the final allocation this category was eliminated; original categories III, IV and V appear as II, III and IV instead. Operations 3.12 - -The smooth acceptance and commissioning of the major systems indicates that PT&T, Iraq, was satisfied with the equipment procured under ICB with bid documents reviewed by the Bank. Although we have not been able to verify whether guaranteed performance after one year of commissioning provided in the contract has been met, we have no reason to believe otherwise. - 16 - Performance of Consultants, Contractors, Suppliers and Borrower 3.13 Some comments on the study by Arab Research and Administrative Center (ARAC) the management consultants retained by PT&T have been given in paragraphs 6.05 and 6.06 dealing with management consultants. 3.14 Microwave Services International (MSI) had been retained by Government in advance of the project for feasibility study, preparation of specifications and assistance in evaluation of bids for the national long distance system. Government did not retain any consultant for super- vision. This did not in fact affect project execution, as PT&T had built up a cadre of competent engineers in the meanwhile. SOFRECOM was retained as consultant for the earth staellite station and the international switch- ing. The suppliers and contractors have in general performed satisfactorily and in accordance with their contracts. 3.15 The PT&T was mostly concerned with the overall coordination of works and to provide required facilities to the consultants and contractors. They had an important but limited role and met their obligations satis- factorily. PT&T's major effort was directed toward the execution of build- ing works involving local contractors where there were some delays but no major hold ups. 4. OPERATING PERFORMANCE Market and Project's Role 4.01 Statistical data from Iraq on operations is lacking, particularly in the final years 1975-77 of the project period, when the new facilities were brought into operation. From the available information and trends observed, it is estimated, however, that the facilities were generally utilized as fast as they were provided. The local service impact perhaps was greatest in improvement of service to existing subscribers,rather than in the addition of new connections,to partly meet demand. The almost com- plete renovation of external plant and replacement of the very old sted-by-step telephone exchange systems,definitely brought about improvements in local telephone services. 4.02 However, the greatest impact is estimated to have taken place in the long distance domestic and international service, and the telex service. Traffic statistics are not available to verify this, but provisional data on billing as of December 1976 (see Annex 2 page 1) indicate a much higher traffic increase than projected with the introduction of the new facilities. Previously subscribers were not able to get calls through on the manual service and the quality of the speech was very poor. The availability of high quality microwave system and full STD facilities must have improved the quality of service, particularly to the users of these facilities. As regards the international service, the improvement should be significant with automatic, satellite, high quality telephone service in place of the old manual high frequency radio service. Iraq has become one of the few Middle East countries with direct access to the international direct dialing network. - 17 - Project Spin-off 4.03 During the project period the only major telecot nunications items manufacturered in the country were concrete cable ducts. It is understood that a proposal for manufacture of telephone cables was considered, but the exact status is not known. 5. FINANCIAL PERFORMANCE General 5.01 The Bank received PT&T's financial statements for FYs ending up to March 31, 1975, with an English translation, and FY ending December 31, 1975 (see para. 5.03). Despite repeated requests by the Bank, no statements for later years were received. - 5.02 PT&T's financial statements do not provide for a separation between postal and telecommunications operations. The appraisal projections for telecommunications operations were, therefore, prepared on a pro forma basis by notional separation based on PT&T's audited financial statements for the whole of its operations. The actual values for the March 31, 1975 balance sheet have been prepared in the same way. As regards the income statements, revenues and most of the operating expenses for PT&T's telecommunications operations are easily separated from its postal operations. Only adminis- trative costs, depreciation and plant in service had to be estimated (see Annex 2 page 3). PT&T's Fiscal Year 5.03 PT&T's fiscal year was changed from April 1 - March 31 to January 1 - December 31 as from April 1, 1975, and the fiscal period ending December 1975, therefore, contains only nine months. The appraisal reporc assumed a fiscal year ending March 31 for the whole project period. Actual _nd appraisal values for fiscal years starting after April 1, 1975 are, therefore, not directly comparable. Financial Results. 5.04 In absence of complete income statements for FYs ending December 31, 1975 and 1976, values denoted as actual for these years, as given in Annex 2, are estimates which have been constructed on available information in the Bank. A summary of PT&T's income statement with appraisal projections for 1971-77 is given below: - 18 - 1/ 2 FYs ending March 31/Dec. 31- 1971 1972 1973 1974 1975 1976-1 1977 Operating revenues (ID million) Appraisal 3.6 3.5 3.9 4.9 6.2 7.3 8.0 Actual 3.9 4.1 4.1 5.0 6.5 7.1 11.1 Operating income (in Million) Appraisal .5 .3 .2 .5 1.3 1.8 2.1 Actual .6 ..5 .3 1.0 1.1 2.2 4.0 Rate of return (%) Appraisal 13 5 3 4 7 8 8 Actual 13 8 6 15 13 24 25 Operating ratio (%) Appraisal 85 73 94 90 80 75 73 Actual 84 88 92 80 82 69 64 1/ All appraisal values refer to FYs ending March 31. The same goes for actual values up to 1975. Actual values indicated under 1976 and 1977, however, refer to FYs ending December 31, 1975 and December 31, 1976, respectively. 2/ Actual values indicated under FY76 refer to nine months only (April 1 - December 31, 1975. The rate of return, however, has been calculated on an estimated full year basis. 5.05 Revenues increased more than projected during the forecast, pre- sumably in part due to higher traffic volume per subscriber. In FY75, excise duties (considered as part of PT&T's revenues in the appraisal report) were abolished and regular tariffs were increased proportionally--about 12%. Furthermore, in September 1976 new tariffs were introduced--the main changes being: (a) the full rate period was changed from 7 a.m. - 4 p.m. to 8 a.m. - 2 p.m. and a comprehensive tariff based on STD bulk metering was introduced; (b) new tariffs were introduced for leased circuits; (c) free local calls were limited to 1,000 per semester and pro- gressive metering of local calls beyond three minutes was introduced; and (d) the call charge was increased from Iraqi fils 4 (about US 1.0 cent) to Iraqi fils 7 (about US 1.9 cents) per pulse. The average increase in tariffs for metered traffic due to these changes was about 85%, which explains the sharp increase in revenues as from FYs76-77. - 19 - 5.06 Total operating expenses increased roughly as projected. Revenues increased substantially more than projections, especially after FY76, and the actual operating income and operating ratio were consequently better than forecast. This was achieved in spite of the delays in the project, which led to the delayed connection of new subscribers, but also to less assets in operation than originally projected. The combination of higher operating income and less assets explains the favorable rate of return as compared with projections. 5.07 No attempt to revalue PT&T's fixed assets has been made and no revaluation is required under the Loan Agreement. Inflation in Iraq, however, has been insignificant during the project period and the Iraqi dinar has been revalued about 20% against the US dollar. Book values of PT&T's fixed assets, therefore, should reflect current values fairly well. Financial Position 5.08 A notional balance sheet for PT&T's telecommunications operations for FY ending March 31, 1975, is given in Annex 2. Due to the notional separation between postal and telecommunications operations and the lack of information as from April 1, 1975, no funds flow statement has been pre- pared. The last available balance sheet and PT&T's good financial results up to 1976 indicate, however, a stronger than projected financial position. Financial Covenants 5.09 PT&T has confortably met the covenanted "reasonable annual return on national investments in telecommunications facilities," and PT&T's rate of return has each year exceed appraisal projections. In 1976, PT&T's rate of return on net telecommunications assets in operation was 25%, which exceeded the Bank's expectation of 10%, as expressed in the minutes of negotiations (see para. 2.04). 5.10 PT&T did not furnish to the Bank, as covenanted, audited financial statements in English, within six months of the end of each fiscal year reflecting telecommunications operations separately, as from the fiscal year starting April 1, 1975. Statements up to April 1, 1975, were delayed, the December 1975 statement was incomplete, and no statements were received thereafter, despite repeated requests by the Bank. This situation might partly be explained by the following: (a) before the reorganization of PT&T in January 1976 (see para. 6.02) no exact separation of postal and telecommunications accounts could be made; (b) after the reorganization, provincial accounts were delayed due to lack of qualified accounting staff in the provinces. This in turn delayed the preparation of PT&T's consolidated financial statements; and - 20 - (c) the translation from Arabic to English of the consolidated financial statements, to be made by the auditors, took con- siderable time. 5.11 The original covenants were adapted to what could, at that time be accepted within the Iraqi socialist system, and were less restrictive than the Bank's normal requirements. The planning and implementation of the fundamental 1976 reorganization of PT&T's financial organization required, however, more time than expected at the time of negotiations. The results of this reorganization cannot be evaluated at this moment. 5.12 A statement indicating the covenants in the Loan Agreement and their status of compliance is set out in Annex 3. 6. INSTITUTIONAL PERFORMANCE Management and Organization Effectiveness 6.01 The quality of management has improved since the time of appraisal. The main contribution has been made by Government's own efforts at reorgani- zation and its policy of promotion, training and delegation to management. The PT&T is now an organization with considerable operational autonomy. 6.02 Government had engaged ARAC Consultants before appraisal for study of its organization and procedures, but the recommendation of ARAC were only partly implemented. They were overtaken by the decision of Government to reorganize the entire structure of Government and its units as part of a general administrative reform. The organizational structure was changed from Law No. 81 of 1963 to Law No. 7 of 1976 as part of this reorganization, taking into account partly the recommendation of the ARAC management con- sultants. The separation of the postal and telecommunication services was a very desirable step. The new organization, however, suffers from some fragmentation, particularly in the T&T services and transfer of some basic responsibilities to the the Ministry (see Annex 4). Long-range planning is now done by the Ministry of Communications and shorter term development planning is the responsibility of the PTT headquarters organization under a so called "qualitative" and "quantitative" planning department. The Bank was not actively involved nor consulted in the reorganization, but took opportunity to comment on it as it emerged. Growth 6.03 PT&T at the time appraisal was estimated to have had about 7,000 employees engaged in telecommunications with a resulting ratio of about 47 per 1,000 telephones. Reliable statistics are not available to estimate trends in staff growth and productivity during the project period. Staff Recruitment, Training and Development 6.04 Training of staff has been given priority,as evidenced by the establishment as early as 1964 and growth of the PT&T training center, sup- ported initially by UNDP and with assistance from ITU experts. The - 21 - training facilities have been continuously expanded and during the period 1971-75, a second phase program was undertaken; eight experts from ITU were provided to train about 70 engineers, 500 senior technicians, and 900 junior technicians during this period. Iraqi PT&T apparently has made good use of these facilities for the training of technical staff. Management Consultants 6.05 The Iraqi PT&T entered into a contract in August 1970 with the Arab Research and Administration Center (ARAC), Cairo for a review of performance and operating efficiency of PT&T's management and adipinis- tration and to make recommendations for restructuring its internal organi- zation and improving financial management. 6.06 The reports of the study by ARAC were in Arabic and efforts to obtain an English translation of the study from PT&T were not successful A translation of the summary of ARAC's recommendations relating to the accounting system was, however, obtained in which the main recommendation was for introduction of a decentralized accounting system for each of the seventeen provinces. The Bank expressed its reservations on this to PT&T (see para. 6.07). It is not clear as to what extent the ARAC study was taken into consideration in the reorganization of PTT in 1976. It appears, however, that Government implemented the reorganization of PTT as a part of a general administrative reform in Government administration (see para. 6.02). Accounting 6.07 In 1976, PT&T followed the management consultants (ARAC) recom- mendations and decentralized the accounting function to 17 provincial units and three directorates at headquarters. The Bank indicated, that adequately trained accounting staff was lacking in the provinces and that, to avoid delays in the preparation of PT&T's consolidated statements, tht decentralization should be postponed until staff had been trained. PT&T went ahead with the decentralization despite the Bank's advice. All provincial units were late in submitting their FY76 accounts and the Bank has still not received any financial statements as from that year. 6.08 In connection with the 1976 reorganization, PT&T startee :.o redistribute their assets between the postal and telecommunications services. This work was delayed, mainly because of the difficulties encountered by the decentralization, and the Bank has not yet been informed about the results. Billing and Collection 6.09 In 1974, receivables amounted to the equivalent of about 10 months of billing. To correct this situation, PT&T obtained from the Ministry of Finance the right to collect overdue amounts for Government agencies directly from their budget allocations. Consequently, in 1975, preliminary values indicate that the accounts receivable were reduced to - 22 - the equivalent of about four months of billings, which is on the high side but acceptable. The amounts of receivables for international traffic, however, was higher, due to slow processing within PT&T. Audit Arrangements 6.10 The external audit up to FY76 was done by an independent chartered accountant, who audited several public corporations besides PT&T. These arrangements functioned well, except for some delays by PT&T in appointing the auditor (which had to be done each year) and problems for the auditor to get adequately trained staff timely for the PT&T audit. As from FY77, no external auditor was appointed and the Bank has not received any audit reports from FY1976. 7. PROJECT JUSTIFICATION Project Achievements 7.01 The project has generally achieved the physical installation targets. The quality of local, domestic, long distance and international telephone and telex services have substantially improved, with the instal- lation of modern systems, overcoming the poor state of the network, which had been run down for lack of investment during several years before 1970. 7.02 Apart from the physical achievements, the project also achieved some progress in institutional arrangements in the administrative and financial areas. The Postal and Telecommunications accounts have been separated and the tariffs revised to provide a good rate of return. Least Cost Solution 7.03 The design of the long distance equipment, the major component of the project, with an initial microwave system was the least cost solution as compared with the alternative (e.g., coaxial cable). The adoption of a satellite earth station for international telephone and telex services also was the least cost solution. No detailed study was required as no other alternative high capacity system was feasible. Internal Rate of Return 7.04 Based on the assumptions given in Annex 5, the internal financial rate of return for the March 1972 - March 1977 investment program is 17%, which compares favorably with the projected rate of 14% for the original investment program. The internal financial rate of return for the project should be higher, however, as the project comprised the most profitable parts (e.g., long-distance, telex and international facilities) of te investment program. - 23 - 7.05 The economic rate of return of the program should be considerably higher than the above estimate of the financial rate of 17%, the main rea- sons being: (a) despite ample spare capacity of several elements installed under the program, no additional revenue estimates have been included as from 1978 (the capital outlays, however, are included earlier with their full amounts); (b) no estimate of initial or increased consumer surplus (due to improved and expanded facilities) has been made; and (c) no estimates for indirect external benefits for other sectors (transport, agriculture, public service, etc.) from expanded and improved telecommunications service have been included. 8. BANK PERFORMANCE Overall and Specific Performance 8.01 After an interval of nearly five years with no lending to Iraq, this telecommunications project was the first project which led to a loan agreement with the Government. Considering the problems of cost overrun, procurement under difficult conditions in Iraq, and dealing with an entity which was exposed to the Bank for the first time, the Bank's performance in this project should be considered satisfactory overall. 8.02 The Bank's effectiveness was, however, increasingly reduced fter the 1973 oil price increase and the availability of consiCerable additional resources to Iraq for financing development, and the consequent increases in the size of the national telecommunications developmen-. program. The Bank, nevertheless, continued to deal with Iraq in a correc. businesslike manner and it is difficult to perceive how or where the Bank with its limited resources could have significantly improved its performance. Supervision and Working Relationship 8.03 The Bank's project supervisory effort was adequate, although the supervision missions of 1978 and the final completion mission of 1979 could not elicit sufficient information from PT&T Iraq, and this left a gap in our monitoring of project achievements, costs and other essential basic data. 8.04 PT&T had been sending progress reports regularly until the end of December 1977, normally at quarterly intervals. The initial reports were quite explanatory, while the later ones became terse and -hort, but adequate. The Bank's appraisal was carried out by an engineer, who unfortunately died before the project could be processed for approval. Since then another engineer has been dealing with the project and maintaining conLinuity. There have been five financial analysts involved with the project, but up to 1976 there were only two. This helped in effective supervision during the most critical period of project execution. - 24 - 9. CONCLUSIONS 9.01 The lack of information and data and the inadequate opportunity for review, particularly during the final stages of the project period (1977-78), has made it difficult to arrive at definite conclusions. Nevertheless, based on available evidence, it is clear that participa- tion by the Bank in the telecommunication project initially helped to improve general Bank/Iraq relationships, after a long fallow period. Bank's involvement and assistance in orderly procurement and urging financial discipline achieved positive results. Europe, Middle East and North Africa Regional Office July, 1979 - 25 - ANNEX 1 Page 1 of 3 pages IRAQ POSTS, TELEGRAPHS AND TELEPHONE ORGANIZATION (PT&T) LOAN 788-IRQ Project Revision (including interrelated facilities) I. Long Distance Service (a) National Long Distance Microwave System The main changes made were: (1) Introduction of drop repeater at Nayaf replacing through repeater at Kassim. Location of repeaters at Tel Jabara and Kalat Loh in the route to Basra was changed slightly and on the northern route, the Kapanak Rash through repeater was cancelled and the route from Kirkuk to Mosul was diverted to Erbill. The site at Sab Abkar near Baghdad was changed to Bayya due to a Government decision. (2) Extensions of the system were made for: (a) Kirkuk-Suleimaniya (b) Basra-Kuwait (c) Mosul-Hassake (in Syria), and (d) Basra to Um Kasr and Fao in the Gulf. The cost of these expansions was estimated at about US$1.7 million, excluding the Basra-Fao link. (b) Long Distance Switching The project provided for 15 long distance switching centers. After receipt of bids, the number of these centers was increased to 16. The total number of trunks terminated was also increased to terminate the additional circuits which became available as a result of the addition of the coaxial .cable from Baghdad .to Mosul and Baghdad to Basrah along the Tigris forming a figure of eight network with the microwave system. (c) UHF Network Provision had been made in the project for a secondary UHF network for the northern areas. One of the major links between Kirkuk-Suleimaniya was replaced by an extension of the national microwave system up to Suleimaniya. Iraq also decided to abandon the rest of the scheme in the first plan and build a major secondary network in the second (1976-80) five-year plan. - 26 - ANNEX 1 Page 2 of 3 pages II. International Services Earth Satellite Station Including International Switching Center The only major revision made in this item related to the addition of automatic toll ticketing equipment, a very desirable addition to the system, which facilitated the identification and recording of billing data and traffic statistics on international calls. III. Telex Service The major revision made was the adoption of an electronic system in preference to electromechanical and the use of concentrators at Basralh and Mosul instead of small telex exchanges at these locations. This was found to be more economical. IV. Engineering Consultants Although the contract with SOFRECOM consultants covered the super- vision of construction, PT&T decided to dispense with this provision. V. Local Services(Interrelated Facilities) (a) Local Telephone Exchange Installation Program Number of Lines Local Exchanges Original Program Revised Program Town or Area of Installation of Installation Total Lines 1st Phase 2nd Phase Baghdad Area 60,000 32,000 86,000 118,000 Basrah Area - - 30,000 30,000 Mosul 4,000 - 10,000 10,000 Amara 4,000 - 4,000 4,000 Suleimaniya 4,000 4,000 - 4,000 Erbill 4,000 4,000 - 4,000 Baquba - - 4,000 4,000 Ramadi - - 3,000 3,000 Kut 4,000 4,000 - 4,000 Hilla 4,000 4,000 - 4,000 Kerbala 4,000 4,000 - 4,000 Nayaf 4,000 4,000 - 4,000 Diwaniya 4,000 4,000 - 4,000 Nasiriya 4,000 - 4,000 4,000 TOTAL 100,000 60,0001/ 141,0001/ 201,000 1/ The first phase installation was for 60,000 lines and the second phase for 141,000 lines. All the 60,000 lines in the first phase and, 14,000 lines in second phase were completed by December 1975 in the first plan period. - 27 - ANNEX 1 Page 3 of 3 pages (b) Local and Junction Cable Networks Along with the 60,000 lines of exchange equipment an order was also placed for the outside plant network of 60,000 lines. Subsequently, orders for extension by 144,000 lines along with an extension of the telephone exchange network of the same size for the subscriber and junction network including ducts and cables, etc., was placed. The value of the second order was about US$37.2 million. IRAQ POSTS , TELEGRAPH AND TELEPHONE ORGANIZATION (PT&T) TELECOMMUNICATIONS OPERATIONS LOAN 788-IRQ Income Statement 1971-77 (in thousands of Dinars) 1971 1972 1973 1974 1975 197611 1977-1 FY ending March 31/December 31: Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Provisional Revenues Rent and local service 1,597 1,707 1,672 1,762 1,844 1,900 2,101 1,833 2,401 2,489 2,744 2,587 3,090 ),477 Long distance service 292 340 292 415 336) 528 511) 999 949) 1,129 1,258) 1,547 1,414) 2,515 International service 47 60 47 69 157) - 203) - 311) - 358) -- 412) - Leased circuits - - 175 40 175 23 225 47 438 48 594 243 650 322 Installations, transfers, etc. 68 135 110 227 110 261 330 257 440 355 440 322 440 473 Telex - - - - 20 16 100 129 230 471 265 956 305 1,648 Telegraph 721 776 721 993 721 990 721 1,227 721 1,949 721 1,424 721 2,305 Other operating revenues 62 62 65 34 68 122 71 67 75 63 79 365 83 363 Excise duties 862 811 464 531 509 253 626 360 730 - 830 - 913- Total Revenues 7.306 11.103 Operating Expenses Personal expenses 2,347 2,550 2,460 2,753 2,636 2,923 2,940 2,894 3,110 4,023 3,218 3,806 3,413 5,158 Other operating expenses 448 356 470 435 575 427 652 597 740 611 807 53731 856 8133/ Depreciation 302 368 365 401 506 411 806 475 1 724 1,439 560- 1 1 li2; Total Operating Expenses 3097 3 274 3 2 3564 5 , 897 7 Operating Income 552 617 251 482 223 332 490 1,003 1,262 1,146 1,842 2,181 2,140 4,012 Other non-operating items 10 (1) - (6) - 205 - 168 - 20 - 24 - Net Income 562 616 251 476 223 537 490 1,171 1,262 1 1 2205 2,0 4012 Average net plant in service 4,187 4,850 5,127 5,707 7,498 5,989 12,856 6,678 19,404 9,151 23,201 12,000-3 25,455 16,000 3 Rate of return (%) 13.2 12.7 4.9 8.4 3.0 5.5 3.8 15.0 6.5 12.7 7.9 24.2-' 8.4 25.1 Operating ratio (%) 85 84 93 88 94 92 90 80 80 82 82 69 75 64 No. of DELs installed (000) 95 98 100 98 115 102 130 111 150 123 170 131 190 146 Average telephone revenues per DEL 31 32 28 31 29 30 33 33 38 33 39 4&41 38 47 1/ PT&T's fiscal year was changed from April 1 - March 31 to January 1 - December 31 as from April 1, 1975. All appraisal values refer to FYs ending March 31. Actual values up to 1975 refer to the same FY, but actual values indicated under 1976 and 1977 refers to the FYs ended Decmber 31, 1975 and December 31, 1976, respectively. Values o indicated under actual in 1976 therefore refer to nine months only. 2/ Based on actual values for January 1 - August 31, 1976 and estimates for September 1 - December 31, 1976. 3/ Estimates based on supervision reports. 4/ On an estimated annual basis. - 29 - ANNEX 2 Page 2 of 3 pages IRAQ POSTS, TELEGRAPHS AND TELEPHONE ORGANIZATION (PT&T) LOAN 788-IRQ TELECOMMUNICATIONS OPERATIONS Balance Sheet 1975 (In thousands of Dinars) 1/ Year ending March 31, 1975 Actual- Appraisal Fixed Assets Plant in service 15,959 26,838 Less: depreciation 4,325 4,857 Net plant in service 11,634 21,981 Work in progress 9,408 2,550 Total Fixed Assets 21,042 24,531 Current Assets Cash and banks 4,592 1,984 Receivables 2,478 1,367 Inventories 1,561 1,881 Others 3,191 585 Total Current Assets 11,822 5,817 TOTAL ASSETS 32,864 30,348 Liabilities Equity Capital 6,819 5,137 Government's plan law 22,568 22,543 Retained earnings (3,150) (519) Total Equity 26,237 27,161 Subscribers deposits 1,116 1,293 Current Liabilities Excise duties - 366 Profit distribution 8 266 Repayment plan capital 12 106 Others 5,491 1,156 Total Current Liabilities 5,511 11894 TOTAL LTABILITIES 32,864 30,348 Current ratio (times) 2.1 3.1 1/ Telecommunications and postal service have been separated notionally on the basis of available information. - 30 - ANNEX 2 Page 3 of 3 pages IRAQ POSTS, TELEGRAPHS AND TELEPHONE ORGANIZATION (PT&T) LOAN 788-IRQ Notes and Comments on Financial Statements 1. Income statements for PT&T's telecommunications operations in fiscal years ending December 31, 1975 and 1976 have been constructed on the following information: (a) FY ending December 31, 1975, is based on PT&T's income state- ment in Arabic, translated to English within the Bank. As depreciation and assets in operation were not shown in this statement, those items were estimated based on information in the supervision report dated May 2, 1977; and (b) FY ending December 31, 1976, is based on provisional information received by the 1977 supervision mission on: (i) actual figures for the first eight months and (ii) revised budget for remaining four months. Depreciation and assets in operation were estimated in the same way as for FY ending December 31, 1975. 2. The balance sheet for FY ending March 31, 1975 is based on the last complete balance sheet received from PT&T, covering the whole of its operations. The separation between the postal and telecommunications operations is notional and based on information given in that same statement. In the case of assets, the separation is fairly accurate. The separation of liabilities, however, may be substantially inaccurate, as the type of liability seldom indicates to which service it belongs. 3. No funds flow statement has been prepared due to lack of information. Any attempt to construct such a statement (up to March 31, 1975) on the basis of balance sheets with notional separation between postal and telecommuni- cations services, would accumulate the inaccuracies mentioned under paragraph 2 above. The end product could, therefore, be misleading. 4. Income tax for the whole of PT&T's operations was introduced in 1975. No discrimination was made between postal and telecommunications operations. As the extent to which losses on the postal service fiscally com- nensating profits on the telecommunications side is not known, income tax has a' been considered in the financial statements of this Annex. - 31 - ANNEX 3 POSTS, TELEGRAPHS AND TELEPHONE ORGANIZATION (PT&T) LOAN 788-IRQ Compliance with Covenants Whether Complied Loan Agreement Brief Description or not 3.03(a) Submission of plans and speci- Yes fication for procurement 3.03(b) Furnish to the Bank such infor- Yes, excepting in 1977 and 1978 mation as the Bank reasonable basic statistical data on operat- requestsconcerning the project ions was not made available. 3.05 Commencing fiscal year April 1, No, only statements up to March 1975, furnish in English 1975 received. Statements for FY certified audited statements ending December 1975 received incomplete and FY76 and FY77 not received in spite of several reminders and request by completion mission. 3.06 Ensure a reasonable annual Yes rate or return. Supplementary Letters A tariff committee to complete Yes, the Tariff Committee was its study prior to completion of disbanded but tariff revision was project for tariff revision made as a result of review by PT&T itself in 1976, before project completion. Consulting firm to review and Yes recommend improvements on the administrative and management Organization - 32 - ANNEX 4 Page 1 of 2 IRAQ POSTS, TELEGRAPHS AND TELEPHONES ORGANIZATION (PT&T) TELECOMMUNICATIONS BRANCH Organization and Management 1. The Government of Iraq introduced a new organization in the Ministry of Communications and PT&T under Law Nr. 7 issued on January 15, 1976. The main features of this reorganization were: (a) the Ministry of Communications took over the responsibility for the study, planning and design of major projects of PT&T including financing of these projects. This change was applicable to Ports and Aviation also; (b) PT&T became a "Public Organization" headed by a President and assisted by a Board of Directors; (c) PT&T's operational entities comprised the following: ( i) Postal Directorate General; ( ii) Telegraphs and Telephone Long Distance Directorate General; and (iii) Telegraphs and Telephone Local Services Directorate General. (d) the PT&T public organization and the three PT&T Directorate Generals were given Corporate status and financial and administrative autonomy; and (e) the Board of Directors of the PT&T organization was established with the following as members: ( i) the three Directors General for Posts and T&T; and ( ii) two representatives of the labor force. 2. In the new organization, the Ministry of Communications took over from its attached agencies, including PT&T the responsibility for feasibility studies, detailed engineering and procurement on major projects in the second five year development plan 1976-80. This was not a desirable step as it took away from PT&T essential functions in the planning and engineering areas. This, however, was a general decision applicable to all the agencies attached to the Ministry. - 33 - ANNEX 4 Page 2 of 2 3. Except for the above, the organization within PT&T was on the right lines separating postal and telecommunications operations. However, over the short term, the technical and accounting staff who were in short supply got spread thinly between the different units. - 34 - ANNEX 5 Page 1 of 3 IRAQ POSTS, TELEGRAPHS AND TELEPHONE ORGANIZATION (PT&T) LOAN 788-IRQ Incremental Financial Rate of Return 1. Delays in execution, unforeseen additions to the investment program and lack of adequate accounting, make attempts to separate incremental costs and revenues for the project from the rest of the program totally arbitrary. The rate of return calculations are therefore based on the March 1971 to March 1977 time slice of the total investment program. As the project comprised the most profitable parts (e.g., long distance telex and international facilities) of programmed capital expenditures, the rate of return of the project should be considerably higher than that of the program. 2. The calculations are based on the following assumptions: (a) The telecommunications facilities were so congested in 1972 that effective traffic could not increase without additional investment. This assumption is backed up by the flat revenues for FY's 71-73. All increases in revenues over the. FY72 level (except those for in 1972 existing subscribers due to the 1976 tariff increase) are therefore incremental to the FY 71-77 investment program; (b) all increases over the 1972 level in operating expenses (excluding depreciation) are treated as incremental to the program. No transfer payments like interest, taxes etc., are included; (c) the benefit period of about 20 years ends in 1995, when on average, the equipment provided under the program is expected to end its useful life. No residual values are considered, as the discounted 1972 present value would be insignificant; (d) incremental costs and revenues are shown at their nominal values without adjustment for changes in price levels. Inflations in Iraq has been very low during the program period and the ID bas been revalued about 20% against the US$ (compare para. 5.07); - 35 - ANNEX 5 page 2 of 3 (e) all figures as from April 1, 1975, have been adjusted to reflect full twelve months period ending March 31, as most available information refer to PT&T's former fiscal year (see para 5.03); (f) operating costs and revenues for 11,500 in 1973 replaced lines have been included (50% in FY73 and 100% as from FY74); (g) as from FY78, exchange lines installed under the program are assumed to have an exchange fill of about 85% producing a revenue per DEL equal to that of the average telephone subscriber in 1977. 3. The preceding assumptions result in the following incremental cost and revenue streams in ID millions: Years ending Capital Operating Operating Net March 31 Expenditures Cost Revenues Benefits 1972 1.4 - - (1.4) 1973 2.0 .4 .2 (2.2) 1974 2.9 .6 1.3 (2.2) 1975 9.5 1.7 2.8 (8.4) 1976 12.3 2.1 4.9 (9.5) 1977 8.7 2.9 6.8 (4.8) 1978-95 - 3.3 10.3 7.0 The internal financial rate of return corresponding to the net benefit stream is 17%. 4. The internal financial rate of return of the project should be considerably higher, however, due to the following: (a) the project comprised the normally most profitable parts (long distance, telex and international facilities) of the investment program; and (b) in 1976 the pulse charge and other tariffs affecting long distance and international revenues were increased about 85%. The increase in tariffs for local service was lower. 5. The economic rate of return for the program should be considerably higher than the financial rate of 17%, the reasons being as follows: (a) despite ample spare capacity of several elements of the system (whose costs are included under capital expenditures under the program), no further benefits as from 1978 have been included; - 36 - ANNEX 5 Page 3 of 3 (b) no increase in consumer surplus due to expanded and improved facilities has been considered; and (c) no benefits for other sectors (transport, agriculture, public service etc.) from expanded and improved service have been included. 叩