Colombia - Second Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2524 PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 740-CO) May 29, 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.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 740-CO) Table of Contents Page No. Preface (i) Project Performance Audit Basic Data Sheet (ii) Highlights (iii) PROJECT PERFORMANCE AUDIT MEMORANDUM I. Project Summary 1 II. Main Issues 3 The Sector The Role of the Bank in the Sector 5 Project Concept and Design 6 Project Implementation Supervision 8 Financial Performance 9 Institutional Development 12 Performance of Consultants 13 Bank Performance 14 III. Conclusions 15 Attachment: PROJECT COMPLETION REPORT 1. Introduction 16 2. Project Preparation and Appraisal 16 3. Project Implementation, Operation and Cost 23 4. Operating Performance 23 5. Financial Performance 23 6. Institutional Performance 27 29 7. Project Justification 8. Bank Performance 30 9. Conclusions and Important Lessons to be Learned 31 10. External Viewpoint 31 ANNEXES 1 - Project Provisions and Variations 32 2 - Income Statement 35 3 - Statement of Financial Position 36 4 - Statement of Sources and Application of Funds 37 5 - Computation of Revalued Asset Value and Depreciation 38 6 - Return on Investment 39 7 - Compliance with Covenants 40 MAP 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.  (i) PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 740-CO) PREFACE This report presents the results of a performance audit of the Second Telecommunications Project in Colombia for which a loan for US$15 million (Loan 740-CO) was made to Empresa Nacional de Telecomuni- caciones (TELECOM) in 1971. The loan was signed in May 1971, became effective in August 1971 and was closed in June 1977. The Project Performance Audit consists of a Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Central Projects Staff (CPS) EWTTP Department. OED has reviewed the PCR against the Appraisal Report and other documents in the Bank files and discussed the project with Bank staff. The Memorandum is generally in agreement with the views and data presented in the PCR, which is a comprehensive and objective document. However, in addition to providing a brief summary of the project experience, the Memorandum addresses the specific issue of supervision effort, where OED reaches slightly different conclusions from the PCR, and offers supplementary comment on a number of points of special interest. Following normal procedures, a draft copy of this Report was sent to the Government and Borrower for comments. However, none were received.  (ii) PROJECT PERFORMANCE AUDIT BASIC DATA SHEET COLOMBIA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 740-CO) KEY "ROJECT DATA Item Appraisal Actual or Expectation Current Estimate Total Project Cost (US$ million) 32.4 27.4- Overrun (%) - Loan Amount (US$ million) 15.0 15.0 Disbursed ) 15.0 15.0 Cancelled - - Repaid to Outstanding to Date for Completion of- Physical Components 12/74 12/76 Proportion Completed by Appraisal Target Date (%) 100% 70% Proportion of Time Overrun (%) - 80% Incremental Financial Rate of Return (%) 29 23 Financial Performance - Adequate Institutional Performance - Adequate Cumulative Estimated and Actual Disbursements (US$ million) FY 1972 1973 1974 1975 1976 1977 1978 (i) Appraisal Estimate 1.0 5.9 11.5 15.0 - - - (ii) Actual .3 3.8 8.4 12.8 14.1 14.9 15.0 (ii) as % of (i) 25 65 73 85 94 99 100 OTHER PROJECT DATA Item Original Revisions Actual or Plan Revisions Current Estimate First Mention in Files or Timetable - - 11/68 Government's Application - - 4/70 Negotiations - - 1/15-17, 1971 Loan Agreement Date - - 5/28/71 Effectiveness Date - - 8/16/71 Closing Date 06/30/75 12/31/76 7/11/77 Borrower 6/30/77 Borrower Empresa Nacional de Telecomunicaciones (TELECOM) Executing Agency Empresa Nacional de Telecomunicaciones (TELECOM) Fiscal Year of Borrower January 1 - December 31 Follow-on Project Name Third and Fourth Telecommunication Projects Loan Numbers Loan 1073 and Loan 1450 Amount (US$ million) US$ 15 and US$60 million respectively Loan Agreement Dates (Signed) 1/16/75 and 7/7/1977 Effectiveness Date 4/14/75 and 10/03/77 MISSION DATA Item 1.1onth, No.of No. of Date of Year Days Persons Manweeks Report Appraisal 06/70 25 3 10.7 Follow up 08/70 15 4 8.6 03/71 Total 19.3 Supervision I 10/71 14 2 4.0 11/71 Supervision II 09/72 15 2 4.3 10/72 Supervision III 04/73 10 1 1.4 06/73 Supervision IV 02/75 12 1 1.7 02/75 Supervision V 08/75 14 2 4.0 09/75 Supervision VI 03/76 14 2 4.0 04/76 Subtotal 19.4 COUNTRY EXCHANGE RATES Name of Currency: Colombian Pesos (Col$) Year Appraisal 1970 US$1.00 = Col$18.50 1971 = Col$20.20 1972 = Col$21.96 1973 = Col$23.73 1974 = Col$26.16 1975 = Col$31.05 1976 = Col$34.83 Completion July 1977 = Col$36.50 1/ The total cost figures are TELECOM's best estimates.  (iii) PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 740-CO) Highlights The Second Telecommunications Project in Colombia consisted of the major part of the 1971-74 expansion program of Empresa Nacional de Telecomunicaciones (TELECOM). Some revision in the project content and facilities became necessary during the implementation period, due to price escalation following the devaluation of the US dollar, an increase in demand over the extended project period and a refusal by certain of the local operating companies to cooperate with TELECOM in the introduction of toll ticketing facilities. The project objectives were, however, substantially met, both in relation to provision and extension of telecommunications services and the development of an effective organization within TELECOM. Some progress was also made towards rationalization of a complex and frag- mented sector, which has presented special problems in view of the local political considerations and interests involved. The project can be regarded as having been successful, both in its physical and institution building achievements. The audit report (Report No. 1232, dated July 19, 1976) for the first telecommunications loan (Loan 499-CO, made in June 1967) concluded that the initial approach by the Bank probably gave too much emphasis to looking at the Borrower and the project from an isolated "Company" point of view. The broader sectoral issues, including the high cost and inefficiency of fragmentation, were addressed during appraisal of the second project and have led to a detailed sector study and initial steps towards integration, a process which is continuing under the ongoing third and fourth projects. The following points are of special interest: - the problems resulting from fragmentation of the sector and the approach to consolidation (PPAM paras. 12 to 15 and 17-18 and 37-38); - the revision of the project (PCR para. 3.02 and PPAM para. 22); - project cost variations (PCR paras. 3.05 and 3.06 and PPAM paras. 24 and 25); - the collection problem (PCR paras. 5.09 and 5.10 and PPAM paras. 32 to 36); ( iv) - institutional development (PCR para. 6.01 to 6.05 and PPAM paras. 37 to 41); - adequacy of supervision (PCR para. 8.02 and PPAM paras. 27-29). PROJECT PERFORMANCE AUDIT MEMORANDUM COLOMBIA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 740-CO) I. PROJECT SUMMARY 1. The Bank has made four loans to Colombia for telecommunications projects, for a total amount of US$106 million. The loans have all been made to the Empresa Nacional de Telecomunicaciones (TELECOM), an autonomous Government-owned company which operates all the public, international and long distance telecommunications services, the internal telegraph and telex services, and has over a period provided and acquired local telephone services in areas where other local companies were not prepared to operate or could not operate efficiently and profitably. The fourth loan contains an element for TELECOM to assist in the development of other companies through a process of equity investment. The loan which forms the subject of this audit (Loan 740-CO) was for US$15.0 million, to cover 88% of the foreign exchange cost or 46% of the total cost (US$32.4 million) for TELECOM's 1971 to 1974 expansion program. The actual project cost is now estimated as US$31.9 million (PCR para. 3.05). 2. Although well conceived at appraisal, it was necessary to revise the project content for the following reasons: (a) the devaluation of the US dollar in 1973 brought about signi- ficant cost increases under contracts placed in certain other foreign currencies; a necessary reduction of foreign expendi- tures, to keep within the funds available, was obtained through the use of locally produced manual instead of automatic exchange equipment,l/ and local costs of the equipment could be met from the 25% local contingency provision; (b) in order to meet growth in demand over the extended period of project execution, additional long distance facilities were provided; (c) the refusal of certain of the local companies to cooperate in the provision of toll ticketing facilities as originally planned. The equipment which had been ordered in the case of one company which initially agreed with the proposal could, fortunately, be used to meet growth elsewhere. 3. Implementation of the project was delayed by about 2-1/2 years, i.e., a time overrun of about 80% on the original forecast (Project Data Table). It is estimated that the project as a whole was about 70% com- plete at the scheduled project completion date, with about 25% of local subscribers network facilities available. The reasons for the delays 1/ The Bank also agreed to financing some items under the third project. - 2 - in implementation were: (a) delays in procurement of trunk switching equipment 1/; (b) over-optimistic estimates at appraisal of the time needed to reach agreement on provision of toll ticketing with certain of the local companies and to provide for removal of one particular installation after completion of a new installation (PCR para. 3.03); (c) changes in project content and scope during the process of execution, partly resulting from the devaluation of the US dollar. 4. Despite the changes in project content and the implementation delays, the project has substantially met the original objectives. The contribution to the productive sectors of the economy is of major signi- ficance, both through the provision of improved and expanded long distance and telex facilities and the major expansion of local facilities into small towns and rural areas, given the country's topographical and transport problems. Local growth in demand was underestimated - a frequent tendency where there is suppressed demand (PPAM para. 19) - but the long distance fore- casts were probably realistic. The internal financial rate of return for the project, originally calculated at appraisal as 29%, was recalculated, on the basis of the actual results for the project, at 23% (PCR para. 5.08). The lower rate of return is considered to be due to increased construction costs over a longer construction period and some delay in obtaining the financial benefits. 5. A major Bank objective in lending for telecommunications development in Colombia has been the progressive integration and consoli- dation of the sector, with consequent improved efficiency, reduction in cost, better standards of service and a possibility to provide needed services in small towns and rural areas. Given the local political con- ditions and interests involved, these objectives are only likely to be achieved over a period of some years and constituted a strong case for the Bank's continued involvement through four lending operations. The project which is the subject of this audit was perhaps of special signi- ficance in this process of focussing more sharply on the broader problems of the sector. 6. Through its participation in the sector and the employment of both technical and financial consultants the Bank has been successful in bringing about major improvements in TELECOM's internal organization and capacity to meet its growing responsibilities. Although significant progress was made during the period of project execution, there is a need for further advice and assistance in the process of decentralization of authorities to regional headquarters, development of budget and cost accounting systems and automatization of accounts. This work is continu- ing under the third and fourth projects (PCR paras. 5.11-5.12 and 6.03- 6.05). 7. TELECOM's operating results for fiscal years 1971-76 were generally satisfactory although financial performance fell short to some extent from estimates made at appraisal. The average rate of return on 1/ Other procurement proceeded without delay. - 3 - net fixed assets was 12.6% as against a covenanted 11.0% and an appraisal forecast of 18.2%. The average operating ratio was 84% and the debt service coverage was 2.2 times. About 60% of the fund requirements for the project period have been internally generated. Although the present debt/equity ratio of 58/42 and debt service coverage of 3.9 are satis- factory the future debt level and servicing ability of TELECOM will con- tinue to warrant scrutiny in the light of its heavy development program (PCR Section 5). 8. The main financial problem presently existing in the sector is the poor collection performance (PCR para.5.09). This has persisted since the Bank's first involvement in the sector and has on occasion seriously affected TELECOM's liquidity position. Although the Bank has taken action, on numerous occasions, to require both TELECOM and Govern- ment to correct the position, the problem does not lend itself to easy resolution, for the reasons outlined in PPAM Section II paras. 32 to 36. There has been some improvement and, over the longer term, the problem should reduce progressively with the wider introduction of toll ticketing and TELECOM's further acquisitions or associations with the local companies. 9. The covenants set out in the legal documents have been met other than for delay since 1973 in the submission of audited reports (PCR para. 5.13 and Annex 7), and the failure by Government to ensure timely payment by its agencies. Government was also required to use its best efforts to ensure prompt payment by the other telephone operating entities (PCR Annex 7). The fact that these efforts have not been success- ful does not, however, establish a failure to meet the covenant. 10. A discussion of the selected main issues is in Section II. General conclusions drawn by the audit are in Section III. II. MAIN ISSUES The Sector 11. Colombia, with its population of about 24 million, faces a number of transportation and communication problems due to the topography and the division of the country into a number of regions separated by the high mountain chains. About half the population is urban, with more than a quarter living in the four main cities of Bogota, Medellin, Cali and Barranquilla, all of which are important administrative and manufacturing centers. The provision of reliable telecommunications services, with adequate coverage of the country is an obvious requirement for effective administration and expansion of the economy, and is important not only to the urban sectors but to the sparsely populated districts and rural communities. 12. Colombia's telecommunication services are operated by a large number of companies. Empresa Nacional de Telecomunicaciones (TELECOM) is an autonomous Government-owned company, set up in 1947 and progressively made responsible for operation of all national telex, telephone and tele- graph long distance and international services. TELECOM also operates the local telegraph offices and telex services. Local telephone services in Colombia have developed separately from long distance services and muni- cipalities and state governments have been authorized to acquire, install and operate these local services. TELECOM has over a period provided or purchased local telephone services in rural areas and communities where other entities were not willing or able to provide these services or could not operate profitably due to the small size and remoteness of the communities. 13. Although compulsory acquisition is not possible under existing legislation, TELECOM was from 1971 required by Government to set aside a part of the long distance revenues for the acquisition of local entities prepared to sell their undertakings. The progress of acquisition was, however, slow, due partly to TELECOM's limited physical resources, and due partly to the liquidity problems commented on below (paras. 31-37). At the time of appraisal, there were some 59 entities in addition to TELECOM providing local telephone services. Local telephone installations provided by TELECOM, where other entities were not prepared to operate, consisted of 373 exchanges in small communities and rural areas with a total of 21,000 local telephones or about 3% of the total for the country. 14. Apart from the fragmentation which existed in the operation of local telephone facilities, the control of the sector was also divided. The Ministry of Communications exercised regulatory control over the sector on behalf of Government and provided some policy and technical advice to local operating entities. The National Planning Department was responsible for intersectoral priorities in development, with a telecommunications section scrutinizing the investment plans for entities to ensure effective use of resources. The Ministry of Finance was responsible for examining investment plans (in relation to terms and conditions of suppliers credits, local and foreign borrowing) and for the approval of all contracts. Domestic tariffs were at the time subject to approval by the Minister of Communications. 15. The fragmentation of the sector which had developed, with considerable decentralization to the municipalities and regions and an inadequate degree of central coordination, was costly and inefficient. While TELECOM and the two largest entities at Bogota and Medellin had adequate planning capacity, they prepared their development plans indepen- dently of each other. Most of the smaller entities did not possess the managerial or technical competence to plan effective expansion programs. They were also, in many cases, facing financial problems due to excessive short-term financing and failure to take advantage of economies of scale. - 5 - Plans for expansion were subject to delay in obtaining Government approval. Procurement practices were generally unsatisfactory and, with bilateral financing for what were often small quantities, had led to a multiplicity of systems purchased at high cost. There was no standardization in tariffs, personnel were insufficiently trained, and standards of service were generally unsatisfactory. The Role of the Bank in the Sector 16. The Bank's first lending for telecommunications in Colombia (Loan 499-CO) approved in June 1967, was to TELECOM in the amount of US$16 million. The project dealt with in this audit was for further expansion of TELECOM's telecommunications network under Loan 740-CO, in the amount of US$15 million. The Bank has since approved further financing for TELECOM in the amounts of US$15 million and US$60 million, financed under Loans 1073-CO and 1450-CO. 17. In early 1969, the proposed loan for the second telecommunica- tions project in Colombia was taken out of the lending program on the grounds that financing might be possible through supplier credits and that the internal institution-building task would be completed with the termination of the first Bank project. However, the project was subsequently restored to the lending program when the Bank recognized that there were more general problems existing in the sector which needed resolution and there remained a potentially important role for the Bank to play. It is interesting to note that the audit report for the first telecom- munications project (Loan 499-CO) issued in July 1976 states that initially (in 1967) too much emphasis was given to looking at the Borrower from the isolated "Company's" point of view and that certain broader topics such as the relation with other telecommunication companies and integration of the sector should have been examined earlier. A similar conclusion was reached in the Bank about.three years later in July 1969, when the need for a sector study was outlined. Due to staff constraints, it was not possible to under- take this study at the time, although a reconnaissance mission reported on the subject at the end of 1969. A more detailed report recommending integration of the sector, was produced in October 1970, based substantially on data collected during appraisal of the second project. In 1974, at the request of Government, a comprehensive review of the sector was undertaken (the National Planning Department assisted in collecting data) and the Bank's report (Report No. 663-CO) was published in May 1975. Based on this report, Government has agreed to the need for consolidation in the sector and a number of the steps to be taken to achieve this. The wider institution- building objectives of telecommunications lending to Colombia have thus been progressively addressed: the second and third loans have recommended con- solidation of the sector and the fourth loan supplements present practices by channeling investment for the smaller local entities through TELECOM in exchange for TELECOM's equity participation in the entity. The advantage of giving priority to the consolidation of the smaller entities is that it will not only cover the areas where service standards are poorest and - 6 - economic and social needs have not been met (the entities in the principal cities are more highly developed and efficient) but will gradually enable TELECOM to build up the organization necessary to become the leading national telecommunications entity. By the end of the fourth project, it is estimated that the 60 separate operating entities at the time of appraisal of the second project will have been reduced to about 15. 18. Although admittedly a highly complex area, as related to the political, legal, financial, developmental and service considerations, it appears that an earlier, comprehensive, review of the sector, before the first project, might have resulted in more timely improvements. Sector reviews in general would seem desirable, as a prelude to investment, if the Bank is to direct its available financing for telecommunications development to the countries in greatest need of financial, technical and institution- building assistance. These comments do not, however, question the justifi- cation of the Bank's telecommunications projects in Colombia and the considerable achievements which have resulted therefrom. Project Concept and Design 19. Taking into account the sectoral problems, the need to improve and expand communications in the small towns and rural areas, the expected growth in long distance traffic and the advantages resulting from toll ticketing and detailed billing, the overall concept of the project as appraised was sound. There is, however, evidence of under- estimation of demand for subscribers' connections, as is indicated by the provision of 26,000 lines capacity on 16 of the larger automatic exchanges (with further expansion provided for under subsequent projects) as against 22,750 on 32 exchanges provided for at appraisal. While this increase in demand resulted in part from the delays in project execution, growth in demand for connections over the project period has been about 14.5% per annum as against an appraisal forecast of 12.3%. A tendency to underestimate demand seems common to many telecommunications projects, particularly where there is suppressed demand due to the absence of facilities or poor quality service. Although details of actual long distance traffic growth are not readily available, it would appear that this was fairly close to the appraisal forecast of 25% per annum and the extension of the project to provide capacity of 2,600 circuits instead of the 1,600 planned was largely due to the additional growth in demand during the extended period of the project. 20. Initial designs were based on providing the least cost solutions with excellent service quality; the decision subsequently made to install manual instead of automatic exchanges in the smaller centers might be questioned as lowering service standards but was probably a matter of expediency, conditioned by price escalation, and - in the absence of other foreign exchange financing - was justified in providing at least a basic service through import substitution. - 7 - 21. One omission in project design which in retrospect merits comment was the failure to reach agreement with six small entities, who subsequently refused to cooperate in the provision of toll ticketing facilities, before including the provision of these facilities in the project. Project Implementation (a) Revision of Project 22. In addition to the installation of a smaller number of higher capacity automatic exchanges (PCR para. 3.02) manual exchange facilities were substituted for automatic facilities in the case of the exchanges of up to 200 line capacity (para. 24). Neither change necessitated a change in project description. Trunk switching with toll ticketing equipment intended for Cali was diverted elsewhere to meet the additional traffic load, following the refusal of EMCALI to meet the cost of the associated ANI equipment required in its local exchanges, despite an earlier agreement that it would do so. Provision of toll ticketing was also not possible in the case of the six other smaller companies. One section of the microwave system to the Venezuelan border was financed by Venezuela; the number of channels on other sections of the microwave system was-increased to meet traffic growth over the extended period. (b) Physical Achievements 23. Based on the exchange equipment capacity at the time of appraisal of the project and the data given for December 1973 in the appraisal report for the third project, about 25% of the local network capacity was available at the original project completion date. However, the conclusion in the PCR, that the project was 70% complete as at the original completion date, is probably substantially correct, when allowance is made for the fact that the microwave systems and maritime mobile faci- lities were 100% complete. (c) Project Cost Variations 24. The appraisal report indicates an intention to install a total of 42,000 lines of local exchange equipment, 22,750 of which would be in 32 new automatic exchanges of more than 200 lines and 19,250 in 240 small automatic exchanges of up to 200 lines.l/. The appraisal report anticipated that the Bank loan would cover the foreign exchange financing required for this equipment. The PCR (Annex 1) states that, in the event, 26,000 lines of local automatic equipment 1/ A description of the project is in Annex 11 of the Appraisal Report. - 8 - were installed in 16 new automatic exchanges and an undefined number of lines were installed in 240 small manual exchanges. Although the project files do not show when the decision was taken to change from automatic to manual exchanges, it was established that it would be necessary to defer ordering 16,000 lines of local automatic exchange equipment, due to a shortfall in foreign exchange financing of US$2.6 million. The shortfall followed price escalation resulting from the devaluation of the US dollar (11% in February 1973) and other cost increases. The substitution of small manual exchanges, manufactured locally, for imported automatic exchanges, as originally proposed, is a significant reason for the major increase in local costs for this item. 25. The purchase of additional long distance channeling equipment was, to some extent, compensated by financing the spur to Venezuela from other sources and it would appear that, despite the escalation of the contract price in US dollars after devaluation, unit costs for the local network and long distance circuits were similar or slightly lower than appraisal estimates. Long distance switching costs were, however, higher both due to an increase in capacity and the devaluation of the US dollar but it is difficult to establish the actual unit cost increase in view of the changes in the number and size of installations which took place after appraisal. 26. As indicated in the PCR, procurement went relatively smoothly. Difficulty were experienced only in one case, namely the procurement of long distance switching and automatic message accounting (AMA) equipment. Separate bids were submitted by suppliers and it appeared there would be cost advantages in ordering the equipment items separately. TELECOM maintained, however, that: (i) there would, in all probability, be delays in designing interworking arrangements between the long distance exchanges and the AMA equipment; and (ii) the placing of separate orders might also lead to interworking difficulties and contested responsibility. TELECOM preferred, therefore, to place the order with one manufacturer and con- sidered that it was entitled to group the exchange and AMA equipment together for award purposes. Having satisfied itself on the legal posi- tion and the application of the Guidelines for Procurement, the Bank was able finally to concur with TELECOM's proposals for the award. Supervision 27. Given the problems existing in the sector and the lack of continuity in staff assignments, it is questionable whether during the early stages of project implementation the Bank's supervision effort was as adequate as the PCR asserts (PCR para. 8.02). It is perhaps not without significance that, at the time of negotiations for the project, the Borrower had requested frequent supervision and that, on at least one occasion, a supervision mission was sent specifically in response to the Borrower's request for advice. While a supervision mission took place in October - 9 - 1971 (the loan became effective in August 1971), an earlier visit would have been extremely valuable to advise on the required institutional improvements and the steps necessary to get the second project underway following effectiveness. In the light of the problems existing in the sector, the October 1971 supervision mission recommended further super- vision in May 1972. The Country Programs Department had, in 1971, also suggested that intervals of six to eight months would be appropriate for supervision missions. However, due to staff constraints, the next super- vision mission was actually undertaken in September 1972. The gap in supervision between April 1973 and February 1975 (22 months) was probably not of major importance in that two other visits were made within this period (for the sector study and for appraisal of the third project) and the project financed by Loan 740-CO was, by then, well under way. The average period between visits from September 1972 through March 1976 was 7 months. 28. Leaving aside work load problems, lack of continuity may have been a contributing factor in limiting the frequency and, possibly, the effectiveness of supervision of this project. No less than 5 engineers and 5 financial analysts were responsible for the project at various times. It is recognized that reasonable continuity would have been dif- ficult to achieve, in view of the transfer of responsibilities within the Bank and the rotation of staff. In the light of the failure to resolve the important and long-standing collection problem, the supervision summaries tended to show an over-optimistic performance rating for the project, although supervision as a whole contributed to the success of the project. The value the borrower placed on supervision is underlined by his requests for additional visits. 29. As a final comment on the Bank's supervision efforts, credit should be given for the contribution made by the Bank's Resident Repre- sentatives Office. This Office provided some of the continuity lacking in the Bank's direct supervision efforts and also dealt effectively, between supervision missions, with managerial, financial and other non- technical issues. The Resident Mission also took a major part in and contributed to the sector study and to Government's acceptance of the principles necessary for rationalization of the sector. Financial Performance 30. The overall financial results have been satisfactory although falling short of the targets set during appraisal and failing to meet the covenanted rate of return of 11% on revalued assets in FY1971 and 1973. These failures largely resulted from the delay in obtaining adjustment of tariffs based on a rate of return concept under inflationary conditions with rapidly increasing operating expenses. The tariff adjust- ments made, however, were eventually adequate, with a 14.2% rate of return in 1972 (following the 10.6% in 1971) and 13.2% in 1974 (following the 7.5% - 10 - in 1973). Further tariff increases took place in 1975 and 1977 so that the covenanted rate of return has continued to be exceeded. The average rate of return over the 1971-76 period has been 12.6% as against the appraisal forecast of 18.6%. The average operating ratio has been 84 compared with the forecast 78. 31. Although TELECOM has substantially met the 1.5 times debt limi- tation covenant, the PCR comments (PCR para. 5.05) on a need to continue closely to scrutinize the position within the context of the ongoing and future major expansion programs. TELECOM has generated 60% of its funding requirements for the six year period (1971-1976) as against an appraisal forecast of 57%. Nonetheless, TELECOM has faced liquidity problems and its ability to undertake the project while at the same time setting aside funds for purchase of other entities has to some extent been prejudiced by the problem of obtaining timely payment for its services. 32. The PCR outlines the unsatisfactory position in relation to accounts receivable (PCR paras. 5.09 and 5.10) but it does not highlight the problems involved. Overdue accounts receivable have been a permanent source of concern since the Bank first started lending for development of the sector, a major problem being Government's failure to settle its accounts. In its function as the long distance carrier, TELECOM is subs- tantially dependent on the independent telephone entities who operate the local services for collection of long distance call charges and payment of the agreed percentage to TELECOM after deduction of their own share (22.5%-35.0%). The agreement in force required the local companies to pay TELECOM interest on overdue payments at the rate of 1% per month. The penalty was later revised to 1 % per month for the first month's delay, 1 1/2% per month for the next month and 2% per month for subsequent months. In April 1976, the penalty interest rate was further raised to 2 1/2% per month of delay. Nevertheless, the companies have frequently retained TELECOM's share of long distance call charges for periods of time to help themselves out of a tight cash situation. They have also, in some cases, made counter claims against TELECOM, which became more difficult to resolve the longer the delay in settlement. In an endeavour to resolve the problem, at least partly, TELECOM started, in 1968, to bill subscribers directly for operator-connected calls from Empresa de Telefonos de Bogota (ETB) (its main customer), retaining ETB's percentage (22.5%) against ETB's outstanding debt. 33. For its local services, TELECOM follows normal disconnection procedures for private subscribers, but, as a Government-owned company, it is unlikely to be allowed to disconnect Government Departments. TELECOM would also face difficulty in discontinuing long distance services for the local companies in view of the fact that any such suspension of service would affect all subscribers, including all essential services. 34. The Bank has endeavoured, through its association with the sector to assist in resolving this issue. The matter has been the subject of a considerable number of discussions up to Ministerial level, it has - 11 - been raised explicitly in letters to the President of TELECOM and it has, on a number of separate occasions, been the subject of correspondence with the Ministers of Finance and Communications. Agreements for payment of past arrears of Government accounts were negotiated in connection with the second Loan (740-CO) and, under the third loan (1073-CO), it was agreed that Government would use its best efforts-to resolve the position in relation to its own agencies and the local telephone enterprises. These agreements have generally resulted in Government action to improve the position and reduce receivables including the transfer of the ownership of buildings from the Post Office to TELECOM, but they have not brought about a satisfactory long-term solution. In connection with the fourth telecommunications project (1450-CO), it was agreed that TELECOM would prepare, no later than October 31, 1977, a detailed plan, to be agreed with Government and the Bank, to ensure timely collection of past arrears and all future accounts for services rendered. An initial draft was sub- mitted to the Bank for review in January 1978 and has since been the subject of discussions and correspondence with TELECOM but has yet to be cleared by Government. The matter is still being pursued, both in cor- respondence and during supervision missions. 35. The position in October 1978 showed some improvement with overdue Government accounts reduced from the Col.$lll million shown in the PCR (para. 5.09) to Col.$75 million.l/ ETB Bogota is also paying current accounts promptly, an improvement which can be related to the intro- duction of toll ticketing, and the increase in revenues which has ensued. The beneficial effect of toll ticketing upon revenues results from the fact that it makes detailed accounts available to subscribers, so that they can identify their calls and there are fewer disputed accounts. In consequence, subscribers are more confident in the system and request full access to the long-distance network. The successful introduction of toll ticketing in Bogota is likely to prove embarrassing to the local companies in Cali and other centers, who at present are unable to make detailed accounts available to their subscribers. This together with the increased revenue which it produces is likely to result in the administrations in Cali, Medellin, Baracabermeja, Buenaventura, Manizales and Pereira deciding to accept toll ticketing. If so, there should be some improvement in the settlement of current accounts. Also, the problem will disappear for those smaller entities taken over by TELECOM. 1/ This excludes some non-telecommunications service payments due from the Ministry of Communications. Of the presently overdue receivables for services rendered Col.$60 million or 80% are due from three departments. - 12 - 36. TELECOM had hoped to sign new contracts with the other local enterprises, which would permit TELECOM to apply increased interest rates to overdue accounts. However, it appears that signing of such contracts 1/ has been held up, pending a review of the revenue sharing agreements by the Ministry of Communications and approval by Government of the detailed plan. Institutional Development 37. It is perhaps appropriate to consider achievements in the area of institutional development both in relation to the sector as a whole and within TELECOM's own operation. TELECOM had been established initially with the function of providing and operating long distance and international services. In 1963, it took over operations of the unprofitable, labor intensive national telegraph system, consisting largely of obsolescent facilities. It has also assumed responsibility for local telephone services by providing facilities in small towns without service and by purchasing the facilities of municipal telephone companies which could not operate effectively and profitably (para. 12 and 13). These changes and increases in operational responsibilities have involved a number of implications in relation to TELECOM's managerial, technical, administrative and finan- cial organization and position at a time when it was endeavouring to undertake major expansion of the profitable long distance and international facilities. 38. The initial concern of the Bank, at the time of appraisal of the first project (Loan 499-CO), was related to TELECOM's own institutional development. As the project progressed, the broader issues, including the inefficiency and high cost of fragmentation of the local telephone faci- lities, were addressed and the appraisal mission for the second project (Loan 740-CO) recommended integration of the sector into a single national telecommunications body. The appraisal report accepted that, due to the local and regional political and financial interests, any form of merger through legislation would probably be strongly resisted and that, over the shorter period, any sectoral reorganization would mainly be brought about through a process of acquisition of the smaller companies by TELECOM. Such an arrangement also had the advantage of bringing about a gradual evolution of TELECOM's capacity to broaden and increase its responsibi- lities. The sector study, in its report issued in May 1975, recommended the gradual integration of all telephone services under TELECOM. The number of local companies, excluding TELECOM, had been reduced to 46 (from 59) by October 1976 when the fourth project was appraised and TELECOM then had 476 exchanges in operation, providing service to about 53,000 subs- cribers. With the use of development funds under the fourth loan, the 1/ An agreement has, it is believed, now been signed with ETB. - 13 - process of consolidation should be speeded up and, on completion of the fourth project in 1982, it is estimated that TELECOM may have absorbed all but 15 of the local telephone companies and will largely be responsible for all telecommunications services in the intermediate and smaller towns and rural areas. 39. Within the context of overall control of the sector, responsi- bility for approval of local and long distance tariffs has been transferred to the National Tariff Board (which also deals with other sectors). This is expected gradually to influence and improve the economic rationale of pricing policies. Other approval procedures will be progressively simpli- fied as TELECOM extends its operations and the workload in the respective Ministries should be progressively reduced. The principal issue affecting the operation of the sector which remains to be resolved is the accounts receivable position. 40. Within its own organization, TELECOM with the help of consultants and its auditors, continued the process of institution-building in line with its wider responsibilities and the growth of the network. An important aspect now receiving attention by TELECOM is the need, with the increased size and extent of TELECOM's operations, for increased decentralization of authority commented on in the PCR (para. 6.05). On the technical side, satisfactory short and long term development plans were prepared by the consultants. The process of improving procedures and controls started under the first loan (499-CO) has been continued, with the assistance of the financial .consultants. Introduction of improved cost accounting and budgeting and the data processing system (PCR para. 5.11) has to some extent been delayed due to the failure to appoint consultants at an earlier date. As indicated in the PCR (para. 6.08), satisfactory improvements in productivity took place during the period of execution of the project and training facilities were adequate. 41. Although the PCR mentions the actuarial study to establish TELECOM's pension liability, and the accounts have been suitably adjusted to reflect pension liabilities in the balance sheet, TELECOM has continued, through 1977, to make severence payments directly to its employees rather than to replace this practice, under the terms of a 1968 law, by a payment to the FONDO NACIONAL DE AHORRO (FNA) which would then take responsibility for making severence payments. By arrangement with Government and the FNA, payment by TELECOM to FNA was first deferred until 1975 and latterly through 1982. Although this arrangement has improved TELECOM's liquidity, it would seem that regularization of the position should not be deferred beyond 1982. Performance of Consultants 42. The performance of the technical consultants employed by TELECOM has been satisfactory both in relation to their specific task of preparing the long and short term development plans and in helping TELECOM develop - 14 - in-house capability. Thus, the need for further technical consultancy assistance should be obviated, except possibly in new areas of advanced technology, such as the introduction of electronic switching systems. TELECOM originally proposed employing international consultants for the improvement of cost accounting and budgeting. It is encouraging to note that this work was subsequently undertaken by local consultants and the arrangement is proving very satisfactory. Bank Performance 43. The Bank's overall performance should be viewed in relation to the achievements under a series of loans, with the third project now nearing completion and the fourth project beginning to get under way. The complexity and problems of the sector were such that Bank lending over a number of years has been necessary in order to achieve a significant impact, consolidate the improvements made and initiate further action on those proposed. Within this context, the progressive development of a more integrated and efficient sectoral organization, which is still in hand (para. 38) will result in major economic and social benefits through the provision of better quality service at least cost, extension of service into the smaller towns and rural areas and increased ability to meet demand in all areas. In this process, the Bank has acted firmly and effectively and has provided advice which has been valued and generally accepted. As noted, the Bank's efforts have not led to a satisfactory resolution of the accounts receivable problem. However, the problem inherently does not lend itself to an easy solution and it is difficult to suggest any other action which the Bank could have taken (paras. 34 and 35). 44. The Bank's assistance and advice, provided during the execution of the first project, contributed to a second project which was well conceived and which achieved a good balance between, on the one hand, the expansion of the essential (and profitable) long distance and telex facilities while, on the other hand, extending service into a considerable number of additional small towns and rural areas. Demand forecasts were reasonable based on the information available. Technical decisions were on the whole sound and based on least cost solutions. The introduction of toll ticketing will in particular facilitate greater use of the service, improve customer relations and provide valuable traffic and statistical data. The decision to install manual instead of automatic exchanges was acceptable on the basis of expediency in providing service when funds were not available to follow the original plan (paras. 20 and 24). 45. The Bank input (supplemented by that of the consultants) on the engineering organization of TELECOM and on the execution of the project was significant, particularly in the later stages, when supervision was frequent and greater continuity was established. The requirement for international competitive bidding has resulted in both improved specifica- tions ensuring satisfactory equipment performance and lower prices. Advice - 15 - given to TELECOM during the procurement process has, it is believed, been of particular value and even in the one case where a difference of opinion arose, it was resolved satisfactorily. 46. The Bank's financial institution building input, continuing from that provided under the first project, has, with the assistance of the consultant and the internal auditor, made a major contribution to developing an effective accounting system with the tools necessary for satisfactory management. This process is still continuing. The Bank has not had to concern itself with training but has encouraged an improvement in staff productivity through setting and monitoring targets. III. CONCLUSIONS 47. The project made a worthwhile contribution to the economy by providing a greatly extended and improved long distance network with addi- tional facilities (toll ticketing) at one main and two smaller centers. It has also significantly expanded service into the less developed and rural areas. Delays in execution have been significant, largely resulting from the fragmentation of the sector. However, the project has been impor- tant in continuing to move the sector towards a more integrated and efficient structure. 48. The process of institution building within TELECOM's organization has continued and on the whole has been successful. However, considerable work remains to be done; the position in relation to collections for services rendered in particular remains a matter of major concern. - 16 - COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) LOAN 740-CO COMPLETION REPORT 1. INTRODUCTION 1.01 Telecommunications service in Colombia is provided by 48 entities of which 47 are responsible for local telephone operations in different places; and one, Empresa Nacional de Telecomunicaciones (TELECOM) is res- ponsible for the operation of national long distance telephone, telegraph and telex services; international telecommunications services; and some local telephone services. The 47 local telephone entities are operated by municipal and state governments, while TELECOM (the Borrower) is an autonomous entity operated under the overall supervision of the Colombian Government. 1.02 The Bank has been continuously associated with TELECOM's opera- tions within the telecommunications sector in Colombia since 1967. In June 1967, the Bank approved a US$16 million loan (499-CO) to help finance a project to establish a modern long distance network and to expand and improve the national and international network. The project has been satisfactorily completed. In May 1971, a second Bank loan (740-CO) for US$15 million was approved to help finance a project for the installation of new local networks; for the extension of long distance facilities; and for retention of accounting consultants for improvement of budgeting, costing and plant accounting. The second project continued the institution building efforts initiated under the first loan. The project was estimated to cost US$32.4 million including a foreign exchange expenditure of about US$18.2 million equivalent. 2. PROJECT PREPARATION AND APPRAISAL Preparation, Appraisal and Negotiations 2.01 In April 1970, an application for a loan together with TELECOM's four-year (1971-74) expansion plan was received by the Bank. An appraisal mission visited Colombia in June 1970. A subsequent visit in July-August 1970 was made to complete the appraisal. Negotiations for the loan between the Bank, TELECOM, and Colombia Government representatives took place in January 1971. The Bank's Board of Directors approved the loan on May 18, 1971; the Loan Agreement was signed on May 28, 1971. - 17 - Project's Objectives in Long-Term Plans 2.02 The project as a part of a long-term plan was a continuation of the earlier Bank financed project. Its aim was to meet demands for service in local areas not served by municipalities and state govern- ments, and to provide adequate long distance services. The project also aimed at improving and strengthening the institution to enable it to cope with heavier responsibilities of an expanded future network. Project Description 2.03 The project for Bank financing which formed part of the Borrower's four-year expansion plan consisted of the following: (a) the expansion of the Borrower's local telephone services including the supply and installationof 42,000 (22,750 automatic and 19,250 manual) new I ines with the necessary switching equipment, cable net- works, subscriber's plant and ancilliary equipment; (b) the upgrading and expansion of the Borrower's long distance network including: (i) the construction of new microwave systems linking Medellin with Barranquilla and Cartagena, and Buca- ramanga with Cucuta and San Cristobal; the expansion of the Bogotg - La Cruz route by the addition of a microwave radio frequency channel; the establish- ment of 14 new VHF or UHF routes presently served by open-wire lines; and the provision of 620 supplemen- tary voice frequency channels on the existing principal microwave and VHF or UHF routes; (ii) the replacement of the maritime radio installations at Buenaventura and Barranquilla with modern equipment; and the installation of carrier equipment on open-wire lines to create 1,000 additional channels and of HF equipment on some routes to improve services and trans- mission quality; (iii) the installation of new trunk switching exchanges at Bogota, Cali and Medellin and of toll ticketing faci- lities at ten cities; (c) the expansion of the Borrower's telex facilities by the installa- tion of 1,000 additional lines and 1,000 new teleprinters in the Bogotg telex exchange; and (d) the preparation and introduction of effective budgeting costing and plant accounting procedures, approved by the Contraloria General of the Guarantor. - 18 - Covenants 2.04 The Loan Agreement provided that the Borrower shall: (a) employ accounting consultants acceptable to the Bank to assist the Borrower in preparing and introducing effective budgeting costing and plant accounting procedures; (b) until 1975, limit any increases in staff to five percent of the total number of staff as of the beginning of the calendar year in which such increase shall take place; (c) provide to the Bank not later than four months after the end of each fiscal year, certified copies of its financial statements and audit reports; (d) not incur any debt unless its net revenues for the fiscal year next preceding such incurrence or for a later 12- month period ended prior to such incurrence, shall not be less than 1.5 times the maximum debt service require- ment for any succeeding fiscal year on all debt including the debt to be incurred; (e) establish tariffs which would provide an annual rate of return of at least 11% on the average current value of the net fixed assets; and (f) until the expansion program was completed, obtain the Bank's concurrence before committing itself to any capital expen- diture not required for the project in excess of US$500,000, or five percent of the preceding fiscal year's capital expen- diture, whichever amount was greater. 2.05 The Guarantee Agreement stipulated that the Guarantor should use its best efforts to ensure that the telephone operating entities which are independent from the Guarantor shall make due and punctual payment of all their present and future dues to the Borrower. 3. PROJECT IMPLEMENTATION, OPERATION AND COST Loan Effectiveness and Project Start-Up 3.01 The loan was made effective on August 16, 1971. There were initial delays in procurement, but progress later improved and by September 1972, contracts for about a total US$13.4 million (out of US$15 million) had been awarded. The last contract was signed in December 1973. -19 - Revision of the Project 3.02 Except for the provisioning of toll ticketing, which was in- fluenced by outside factors, the project was carried out substantially as originally planned. The original project provisions, the project as carried out, and reasons for the minor variations between the two are set out at Annex 1. Briefly, the variations comprised (1) the installation of a smaller number of exchanges with a slightly higher total of equipment lines; (2) provision of about 900 more long distance channels than proposed; and (3) due to the objections of the local tele- phone companies to the introduction of toll ticketing systems in their network reduction of the proposed toll ticketing installations from ten to three, The changes did not materially affect the original objectives of TELECOM's project, but have probably reacted to the disadvantage of subscribers of the local companies which would not accept toll ticketing. Implementation Schedule 3.03 The project was originally planned to be completed by December 31, 1974. By the planned completion date, all microwave radio systems, mari- time radio equipment and about 1,700 additional long distance channels were in service. By the end of 1975, all local exchanges were in service. The long distance exchanges at Bogotg and Ibague, and the toll ticketing equipment at Ibague were installed by March 1976 but could not be com- missioned because the local telephone entities had not (a) installed the necessary interconnecting equipment in time; and (b) agreed on a revenue sharing plan with TELECOM. The long distance equipment to be installed at Medellin was that proposed to be recovered from Bogota after the new equipment at Bogota, was brought into service. The delay in commissioning of Bogota equipment resulted in delay in trandferring the recovered equip- ment, and in its reinstallation at Medellin. The Cali exchange equipment could not be installed there because the local telephone company (EMCALI) after agreeing to purchase automatic number identification (ANI) equipment to interconnect with TELECOM's toll ticketing equipment, decided after TELECOM obtained the equipment, not to purchase ANI equipment. Since TELECOM could not instal the purchased equipment at Cali, TELECOM transferred that equipment to Bogota, Ibague and Cucuta where the higher than anticipated traffic necessitated installation of additional equipment. Procurement 3.04 Except for the initial procedural delays, TELECOM encountered no difficulties in procurement of equipment in accordance with the Bank's guidelines. Costs and Disbursements 3.05 The estimated costs at the time of appraisal and revised estimated costs are suamarized below: - 20 - Revised Original Estimate Ystimated Costs Local Foreign Local Foreign Items Col$ US$ Col$ US$ (000) (000) (000) (000) 1. Local exchanges 7,800 5,300 17,541 3,767 2. Cables 67,550 - 73,337 6341, 3. Subscribers' plant 3,900 460 - 4. Long distance transmission 22,660 5,810 15,757 5,662 5. Maritime ratio 1,650 290 2,253 714 6. Long distance switching 16,040 3,090 62,090 5,030 7. Consultants - 300 - 520 8. Telex 1,370 2,420 4,273 2,304 9. Buildings 74,000 - 62,531 68 10. Unallocated 67,410 530 - - Total 262,380 18,200 237,782 19,092 1/ Included in costs of local exchanges. TELECOM did not maintain separate expenditure accounts for both the plan and for works included in the appraised project. Actual costs for project works are, therefore, unavailable. Foreign costs can be established fairly accurately because these were taken from contracts signed with the suppliers; however, the actual total project costs and item wise costs were extrapolated from the plan costs and may not be strictly comparable with the appraised project costs; also an analysis of cost variations cannot be accurately made. Overall the increase in actual over appraised estimated foreign total costs was about five percent. Extrapolated total local costs were about nine percent lower than appraised estimated costs. 3.06 Reasons--as outlined by TELECOM--for cost variations are as follows: Foreign: Decrease (35%) in local exchange costs was due to fewer exchanges, each with higher line capacity, but with 8% more total number of lines being procured. Per line costs of larger exchanges are generally lower than similar costs for small ex- changes due to scale economies. Increase (240%) in maritime radio costs, a relatively minor item, was partly due to underestimation and partly to the small size of the order. Increase (63%) in long distance exchange equipment was due to some underestimation accompanied by delay in installation, which led to payment of higher prices based on contract escalation clauses. Increase (70%) in consultants services was due to the need to obtain technical consultants with a large service scope for this proj- ect and also to assist TELECOM in the formulation of the following development plan. - 21 - Local: Higher (50% or Col$5.8 million) local exchange installa- tion costs were due to costs of freight and insurance (about Col$5.6 million) not earlier provided in the project estimates. The lower costs (30% or about Col$7 million) under long distance transmission were probably due to errors in appropriation and division of expenditures resulting in long distance switching local costs being debited, with some of the costs pertaining to long distance transmission. The higher costs (36% or Col$6 million) for maritime radio were due to inflation. The higher (387% or Col$46 million) costs for long distance switching equip- ment were due to (1) costs of freight and insurance (about Col$7.5 million) not earlier provided in the project estimates; (2) wrong debit (see above) of Col$ 7 million; and (3) infla- tion. TELECOM is unable to give any further cogent reasons for the balance of the excess, but thinks that other works costs may have been debited to this item. The higher costs (312% or Col$2.9 million) for telex were due to inclusion of freight and insurance (about Col$3 million). The lower building costs (15%) are attributed to smaller number of buildings being constructed since fewer, than proposed, exchanges were installed. General: The overall local costs are lower than estimated, and the overall foreign costs are insignificantly higher than esti- mated. The overall total costs are, however, lower than estimated by about 15%. Disbursements 3.07 The estimated and actual total annual disbursements of the Bank loan are as follows: Accummulated Disbursement Actual Bank (US$ '000) As of % Fiscal Year Appraisal Actual Appraisal 1972 1,050 263 25 1973 5,900 3,822 65 1974 11,500 8,387 73 1975 15,000 12,814 85 1976 - 14,100 94 1977 14,900 99 1978- 15,000 100 - 22 - 3.08 The slippage in the disbursement was due to initial slow pace of procurement. About 85% of the loan was actually disbursed by the original loan closing date. Loan Allocation 3.09 The original and final allocation of the loan proceeds is as follows: Loan Allocation Category (US$) Original Final I Local exchange equipment 5,760,000 3,692,835 II Long distance transmission equipment 5,410,000 5,992,736 III Long distance switching equipment 3,090,000 4,797,853 IV Consultants 300,000 516,576 V Unallocated 440,000 - Total 15,000,000 15,000,000 In view of major increases in long distance traffic and the need to main- tain satisfactory standards of service and avoid excessive delays and repeat calls, TELECOM reviewed the project increasing the long distance provisions under Categories II and III, and deferred some local exchange installations included in the project where demand fell short of expectations with a saving in Category I. Operations 3.10 TELECOM is fully satisfied with the quality and efficiency of the plant obtained through contractors. The equipment was supplied in accordance with the specifications, which were reviewed in the Bank, and its performance has met the specified requirements. Performance of Consultants, Contractors, Suppliers and Borrower 3.11 TELECOM retained TELECONSULT of US as consultants for the prepara- tion of a short-term plan (this was the basis for the fourth project financed under Bank Loan 1450-CO) and a long-term plan. Additionally, TELECONSULT prepared numbering, signalling and transmission plans. Generally, the performance of TELECONSULT was satisfactory. The suppliers and contrac- tors have performed in accordance with their contractual obligations. TELECOM has good technical personnel, fully capable of designing and operating all types of equipment. Cable installations are fully carried out by TELECOM. TELECOM, however, has entrusted some local exchange equip- ment installations to the equipment suppliers. TELECOM has now decided - 23 - to build up local exchange installation expertise by contracting for the installation work with local contractors, and expects that all such installation (except in the case of special equipment) would be carried out progressively in future by local firms. TELECOM kept the Bank informed about the project's progress through the quarterly progress reports which were received regularly although sometimes late. TELECOM's project per- formance has been generally satisfactory. 4. OPERATING PERFORMANCE Market Forces 4.01 TELECOM proposed installation of a total of 42,000 lines in existing exchanges, including 18,000 lines in areas which at the time had no service. The recorded unfilled demand at the time of appraisal was about 3,500. On completion of the project, about 25,000 connections had been made. During 1977, TELECOM made about 10,000 additional connec- tions, but estimates unfilled demand to be at least 15,000. The actual growth rate achieved from 1972 through 1976 of about 14% was higher than the forecast annual growth rate at appraisal of about 12%. Similarly, while about 2,000 additional long distance circuits were installed, the more than anticipated traffic provided for at appraisal congested some long distance routes. TELECOM has with the experience gained of traffic flows during the first two projects gained useful experience and more adequately designed the network and provided circuits (in the third and fourth projects) to cater for the traffic likely to be generated on expansion of local service. 4.02 Because of the lag in meeting the demand for connections and consequent higher per telephone usage, the quality of service deteriorated in some areas. Even so, TELECOM introduced toll ticketing in Bogota-- the largest telephone area--in Cucuta and in Ibague giving considerable subscriber satisfaction and diverting traffic from semi-automatic long distance operation to the more efficient subscriber trunk dialing service. 5. FINANCIAL PERFORMANCE Financial Results 5.01 TELECOM's operating results during the fiscal years 1971 through 1976 were generally satisfactory and adequate to finance 60% of the fund requirement for the period and maintain its operations. However, actual financial performance as reflected by financial ratios has been uniformly not as good as was forecast during appraisal of the project financed under 740-CO. Detailed yearly financial statement showing comparisons between - 24 - the actuals and the forecast including the appropriate financial ratio comparisons appears at Annexes 2 to 4. Significant figures and financial ratios are as follows: 1971 1972 1973 1974 1975 1976 Operating revenu (Col$ million) 810 1,000 1,141 1,537 2,101 2,822 Operating income- (Col$ million) 111 168 108 250 388 525 Rate of return'/ (%) 10.6 14.2 7.5 13.2 14.6 15.8 Operating ratio1/ (%) 86 83 90 84 81 81 Debt-equity ratio 53/47 49/51 60/40 60/40 57/43 58/42 Current ratio (times) 1.7 1.6 1.4 1.2 1.8 1.6 Debt service coverage (times) 2.1 1.5 1.2 2.0 2.7 3.9 1/ Computed on the basis of the method established in Schedule 5 to Loan Agreement 740-CO. 5.02 Section 5.05 of Loan Agreement 740-CO requires that TELECOM earn an annual rate of return of at least 11% on the average current value of its fixed assets in operation. Current value is to be determined by the asset revaluation method detailed in Schedule 5 of the Loan Agreement. This revaluation method establishes current value by relating the peso value of the asset to the current relationship between the Colombian peso and the US dollar. Application of the method for the development of the current value of average net plant in operation and associated depreciation appears as Annex 5. 5.03 Under this method of rate of return computation, TELECOM did not achieve the minimum annual requirement of 11% in the years 1971 and 1973 when it earned 10.6% and 7.5%, respectively. TELECOM, however, adjusted its tariffs in 1971 and 1974 to rectify this earnings shortfall and earned, as a result, rates of return of 14.2% in 1972 and 13.2% in 1974. 5.04 TELECOM has continually increased its tariffs to offset rapidly increasing operating expenses with major tariff revisions in 1971, 1974, 1975, 1977 and 1978. Also in an attempt to control expense levels, TELECOM has effectively controlled staff levels keeping increases below the five percent convented in Section 4.01(b) of the Loan Agreement in all years except 1971 when the staff increase was slightly above at 5.3%. This effort, however, has not resulted in the anticipated expense level control as increasing wages and other costs have more than offset the savings made available through restricting staff increases. Even with these efforts, TELECOM's operating ratio continued to be high varying from 81 to 90 during the 1971-76 period. 5.05 A potential weakness in TELECOM's financial position is its fairly high debt-equity ratio. This ratio increased from 49/51 in 1972 to 60/40 in 1973 and 1974. There is no indication of any future lessening - 25 - of TELECOM's comparative debt level and heavy debt servicing charges can be anticipated in the future. TELECOM so far has been able to keep its internal fund generation in pace with increasing debt servicing require- ments dropping below the 1.5 times only in the particularly poor earnings year of 1973. The debt level and the debt servicing ability of TELECOM warrants continuous scrutiny particularly in view of TELECOM's large development programs. Sources and Application of Funds 5.06 Fund requirements and sources during the 1971-76 project period are summarized below. Detailed annual statements appear at Annex 4. Col$ US$ % (millions) Requirements Construction 2,754 101 74 Local network acquisitions 212 6 6 Investment in INTELSAT, etc. 80 5 2 Increase in working capital 619 19 17 Other 27 3 1 Total Requirements 3,692 134 100 Sources Internal generation 3,316 118 Less: Debt service 1,101 42 Net internal generation 2,215 76 60 Borrowings Commercial bank loans and suppliers' credits 462 18 12 IBRD Loan 499-CO 67 4 2 IBRD Loan 740-CO 687 27 19 IBRD Loan 1073-CO 128 4 3 Total borrowings 1,343 53 36 Subscriber deposits 77 3 2 Pension funds 57 2 2 Total Sources 3,692 134 100 5.07 During the five-year period, TELECOM was able to internally generate 60% of its fund requirement, a very acceptable performance which was more favorable than the 57% forecast. The remaining requirement was obtained, 36% from debt, 2% from subscriber deposits and 2% from pension funds. The appraisal forecast had been for 38% debt and 5% subscriber deposits. - 26 - Return on Investment 5.08 The internal financial rate of return was recalculated on the basis of the actual results of operations during the project period. The result was a rate of return of 23% which was lower than the 29% estimated during appraisal, primarily because construction costs were higher and the construction period was longer. The rate of return of 23% is, however, a very acceptable level of return. Details relating to this calculation appear as Annex 6. Collection Performance 5.09 A serious problem which TELECOM has not been able to resolve is its inability to obtain timely payment for services billed to Government agencies and other Colombian telephone operating entities. In the most currently available report of March 1978, balances in some Government accounts were as high as 29 to 39 times current monthly billings and Col$102 million of the total Col$lll million was past due. In long dis- tance services accounts with other telephone entities, the balance represented only four months billings but amounted to Col$828 million even after reflecting a Col$123 million refinancing of arrears owed by the Empresa Municipal de Tel6fonos de Cali. Of this total receivable of Col$828 million, Col$489 million was past due. 5.10 The collection problem has been addressed in this and subsequent Loan Agreements and has been the subject of considerable correspondence between the Bank and TELECOM. However, no significant improvement has been achieved. Net accounts receivable (after reflecting a reserve for bad debts) increased 7.7 times from December 31, 1970, to December 31, 1976, while annual revenues increased only 4.6 times. Loan Agreement 1450-CO in Section 5.08 requires a definitive, official plan for the timely collection of past arrears and future billings. This plan is presently under development but has not yet been submitted for Bank's review. A defi- nite, detailed plan, supported by Government involvement, must be initiated to assure that future tariffs will not have to be structured, as in the past, to carry this unreasonable burden. Financial Consultants and New Accounting System 5.11 In 1968 TELECOM engaged financial consultants, Bustamante y Asociadal, Mexico, to improve general accounting, financial control, inven- tories, purchasing, credit and collection and data processing. The first phase of this effort was partially financed by Loan 499-CO and was completed in 1972. A second phase to further improve cost accounting and budgeting was considered desirable and was initiated in 1975. An amount of US$300,000 was included in the project financed by Loan 740-CO to cover these costs. However, these loan funds were eventually utilized for technical consul- tants and the financial consultants were paid from TELECOM's own funds. Subsequently, the financial consultants' efforts were further expanded to encompass a completely integrated data processing system utilizing six - 27 - regional terminals for recording and transmitting data to the central unit in Bogota. Implementation was started in January 1978 utilizing a newly installed computer, the IBM 370-138. Three terminals are now in operation and the other three will be operative by July 1, 1978. The new system will at this point be handling fixed asset recording and control, budgeting and customer billings. 5.12 The systems work done by Bustamante y Asociadal appears to be thorough and well founded. The resulting product is a completely inte- grated, remotely accessed, modern system. Providing the system receives the constant attention required for its effective implementation, it should provide TELECOM with an effective tool to monitor and control its operations. Annual Audit 5.13 Loan Agreement 740-CO requires that the annual audit report from an independent auditor be furnished to the Bank by the end of April follow- ing the close of the related year. The covenant was complied with during the early years of the project, but the reports for the years 1973 through 1976 were not completed until July or August of the following year. The 1977 audit report has not been completed since 1977 operating results are only now being finalized. TELECOM states that as a result of its rapid growth and dispersion of operations, the accounting system has not been able to keep up with the growing requirements in an efficient manner. Thus, data accumulation has been delayed. With the installation of the new accounting system (para. 5.11) final annual results should be available during the month of February and the audit report submission requirement should be no problem in the future. Actuarial Study 5.14 In compliance with Section 5.07 of the Loan Agreement, an actuarial valuation was performed on TELECOM's pension liability as of December 31, 1970. The liability, determined by the valuation was placed in the accounts of TELECOM and was subsequently increased in accordance with the findings of the actuarial review. TELECOM is contemplating an updating of this valua- tion to more realistically reflect current conditions of the pension program. Such an updating would be advisable after a period of seven years. 6. INSTITUTIONAL PERFORMANCE 6.01 The quality of management and organization effectiveness on the technical side was generally satisfactory, judged by the performance in the physical expansion achieved. 6.02 TELECOM has continued to develop an effective planning organiza- tion and has integrated this project with two following Bank financed projects to develop a long-term plan of network expansion designed to meet - 28 - the demand for service. TELECOM has demonstrated an ability to efficiently procure goods through international competitive bidding. 6.03 While there has been significant institutional improvements during the project period, TELECOM has still some weaknesses to overcome to enable it to function efficiently on commercial lines. 6.04 Management is handicapped by lack of an effective project budget system which would enable it to monitor project costs against estimated costs. Monitoring systems designed to provide management with measures of service standards, unit costs and the like are additional organizational improvements which could assist the management to design strategies to meet previously laid down targets. 6.05 With the growth of the system, decentralization of authority should be accelerated. While regions have been formed, the regional managers have still to refer to headquarters on a number of issues best handled in the regions. Further, necessary decentralization should be accompanied by published procedures, instructions standards, and an ade- quate reporting system to enable monitoring of performance of delegated authority. Growth 6.06 In all aspects of its activity, TELECOM has shown a steady growth. This has occurred in the organization, plant installed, traffic carried and revenues. 6.07 Despite the considerable service expansion, TELECOM has been unable to meet the demand for service. TELECOM has, however, planned two other following projects to meet service needs. Staff Recruitment, Training and Development 6.08 The number of staff increased from 11,601 at the end of 1972 to 13,124 at the end of 1976. About 4,000 of these staff are used in telegraph and telex operations. TELECOM was permitted under the covenant for Loan 1073-CO to employ 13,425 staff at the end of 1972. Though the number of staff per 100 telephones is not a measure of productivity in the case of TELECOM which in the past has managed largely the long distance services and is now extending its jurisdiction to provide local services, the number of employees per 100 telephones has dropped during this period from 26 to 17. TELECOM has had no difficulty to recruit staff or to train the recruits in its training center. - 29 - 7. PROJECT JUSTIFICATION Project Achievements 7.01 The project has achieved generally the physical growth targets and the institutional improvements envisaged at the time of appraisal. Except for toll ticketing at seven centers and some local exchange installa- tions (which were completed early in the third project), all other installations were carried out as planned. The introduction of toll ticketing in Bogota, Ibague and Cucuta which was carried out with Bank's advice has resulted in considerable public satisfaction and has enabled the public to obtain direct dialed long distance service with itemized details of the calls. Because of lack of faith in pulsed metering on long distance calls, subscribers had earlier barred their lines from direct dialing and had used the less efficient manual long distance operator service which itemized calls. So far, about 70,000 subscribers have asked for debarring in Bogota and currently about 15,000 additional subscribers ask for debarring every month. Subscribers are now dialing on long distance service, confident that details of the calls will be furnished to them in their accounts. Further institutional improvements (see para. 6.04) for decentralization of operations--which have been accepted under Bank advice in a later project--were necessary. In fact, the higher than anticipated demand and traffic (see para. 4.01), and the need for further institutional strengthening as a follow-up to this project clearly substantiates the case for continued Bank involvement. Project Spin-off 7.02 The projeces equipment requirements have stimulated to a small measure the setting up of local industry. Local distribution and junction cables are currently manufactured in two private factories in Colombia. All cable requirements are met from the output of these factories. Sub- scriber station wiring and wiring materials are fully produced in Colombia. L. M. Ericsson assembles some crossbar equipment but not in sufficient quantity to meet the requirements of TELECOM and other telephone companies operating in Colombia. Government has drawn up a plan for setting up a telephone instrument manufacturing plant, and is finalizing the proposal. TELECOM has encouraged and utilized the services of a local company for local exchange installation. The project has given a fillip to the utiliza- tion of local construction expertise. Least Cost Solution 7.03 The system design of long distance equipment on the various routes, and use of automatic exchange equipment in the larger local exchanges and in other local exchanges where adequate long distance facilities were available, together with manual exchanges where filtering of traffic was necessary, were the most economical way of providing service and the least cost solution. - 30 - 8. BANK PERFORMANCE 8.01 The project identified for Bank financing aimed at the provision of facilities where they were required and at the least cost and was well conceived and justified. The Bank encouraged sector consolidation through TELECOM acquiring small and inefficient local telephone entities. About ten such entities were acquired and the service extended in this and the following project. The sector consolidation with consequent economies in equipment costs through bulk purchase, standardization of equipment which could lead to local manufacture in future, lower administrative costs and better utilization of trained personnel, has continued in the following years. The Bank was instrumental in getting TELECOM to implement a com- mercial accounting system which will provide the basis for sound managerial and financially viable expansion. The Bank, by getting TELECOM to retain technical consultants, enabled TELECOM to efficiently design future projects to fit in with long-term expansion requirements. Supervision 8.02 The Bank's project supervisory effort was adequate. TELECOM sent progress reports on the project at quarterly intervals. These reports were carefully prepared, and were sent regularly although often late. Although Bank's appraisal supervision and completion report mission com- prised five different engineers and five different financial analysts, Uhis was unavoidable due to staff and organization changes and in practice did not lead to problems due to lack of continuity. Working Relationship 8.03 The working relationship between the Bank, the Borrower and the Government has been uniformly good. The Bank's supervision missions did not encounter any problems in obtaining information from TELECOM or the Government. This was facilitated by TELECOM allocating a senior staff member to attend specifically to the Bank's project related work. Covenants 8.04 A statement setting out the covenants and their compliance is at Annex 7. - 31 - 9. CONCLUSIONS AND IMPORTANT LESSONS TO BE LEARNED 9.01 Forecasting demand in areas where insufficient or no service exists in the early stages of developmental activities is always difficult. Under conditions of past developmental neglect and rapid business expan- sion, demand tends to exceed expectations when provision of service or its extension becomes possible. Hence when a Borrower makes a forecast based on previous trends as has happened in Colombia, consideration should be given to possible suppressed demand and unrecorded demand in new areas with a higher level of demand than is indicated by the historical trends. This does not involve any major risk in that in the unlikely event of equipment not being immediately utilized, full equipment utilization would only be delayed by a year or two, with the added benefit that the service quality would remain satisfactory and would not deteriorate. 9.02 Consideration is frequently concentrated on meeting additional demand rather than maintaining an adequate grade of service. Appraisal missions should in collaboration with the Borrower agree on the grade of service that should be aimed at by the Borrower taking any special local conditions into account. The number of faults per subscriber per year, the average duration of faults, and the time delay in obtaining dial tone could be some of the items included in the performance indicators. Approp- riate organizational provisions should be made to include a traffic study group to monitor service usage and in conjunction with the network design group, initiate necessary improvements. 9.03 Introduction of automatic message accounting systems, has proved to be an unqualified success in Colombia and would in all probability offer significant advantages elsewhere. 9.04 Fragmentation is a major factor militating against efficient operation of the sector to the advantage of the society, economy and individual subscribers. The only significant failure under the project has been the result of the objections of the separately owned administra- tions to accept toll ticketing. This has penalized subscribers and prejudiced service standards. Fragmentation has also been a significant factor in TELECOM's collection problem. 10. EXTERNAL VIEWPOINT 10.01 In discussions with TELECOM's president and staff, the Bank staff were informed that TELECOM appreciated the assistance of the Bank not only through the Bank's financial contribution but also through the Bank's professional advice and guidance given during the appraisal and supervision missions. Latin America and the Caribbean Regional Office July, 1978 - 32 - ANNEX 1 Page 1 of 3 COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) LOAN 740-CO Project Provisions and Variations A. LOCAL SERVICES 1. The project provided for the installation of 42,000 local automatic exchange lines--32 exchanges with a total of 22,750 lines at the following sites: 1. Malaga 17. Purificacion 2. Velez 18. Cienaga de Oro 3. Sahagun 19. Venadillo 4. Lorica 20. Cajamarca 5. Cerete' 21. Ataco 6. Planetarica 22. Fresno 7. Villeta 23. Ayapel 8. Neira 24. Cucuta 9. San Martfn 25. San Antero 10. Tocaima 26. Momil 11. El Guamo 27. Chinu 12. Chaparral 28. Rierralta 13. Sabanalarga 29. Pueblo Nuevo 14. Cunday 30. Monte Lfbano 15. Ortega 31. Oca7a 16. Natagaima 32. Pamplona Additionally 240 local automatic exchanges with capacities of between 50 and 200 lines totaling 19,250 lines were to be installed in localities with 5,000 to 30,000 inhabitants. 2. TELECOM installed the following exchanges: 1. Cerete 700 9. Planeta Rica 500 2. Chaparral 400 10. Sabanalarga 600 3. Cucuta 15,000 11. Sahagin 500 4. Guamo 400 12. San Mart n 400 5. Lorica 600 13. Tocaima 400 6. MAlaga 500 14. Valledupar 2,500 7. Neira 500 15. Velez 400 8. Ocaiia 2,000 16. Villeta 600 Total 26,000 Additionally 240 manual switchboards were installed at small popula- tion. centers. ANNEX 1 Page 2 of 3 3. Variation Reasons: Higher demand in certain areas compelled TELECOM to install fewer exchanges but with a slightly higher total number of lines. In other cases, TELECOM on a review of the project decided to postpone installation of some exchanges to next project and to delete other items for lack of demand. TELECOM planned installations of manual, and not automatic, exchanges at small installation centers, which installations were carried out. B. LONG DISTANCE SERVICE 1. Transmission Microwave installations were carried out as planned except that the Bogota-La Cruz link was postponed, and carried out in the following project. The reason for postponement was to link this installation with others using La Cruz as the junction point for Bogota-Cali, Cali-Medellin and Bogota'-Medellrn. Additional 624 channels were proposed. Due to higher than anticipated traffic, 1,548 channels were installed. Lincomplex equipment as planned was installed. Extension to VHF network was carried out as planned. Instead of installing 1,068 open-wire channels, TELECOM installed 1,075 channels. 2. Switching Toll ticketing equipment was installed at three (Bogota', Ibague' and Cucuta) instead of at 10 exchanges as proposed. The local telephone operating companies at seven exchange .areas did not concur with TELECOM for introduction of toll ticketing in these areas. Long distance exchanges with toll ticketing were planned at Bogota, Cali, Ibague' and Medellin. Exchanges were installed as planned at Bogota and Ibague and an exchange was installed at Medellin but without toll ticketing as the local operating entity at Medellin did not desire toll ticketing. The toll ticketing exchange at Cali was not installed there but the equipment was transferred and installed as an extension of the toll ticketing long distance exchanges at Bogota', Cucuta and Ibague'. The local telephone entity at Cali (EMCALI) went back on its earlier commitment to accept toll ticketing after TELECOM obtained the toll ticketing exchange equipment. A long distance exchange (without toll ticketing) will now be installed at Cali by TELECOM using its own funds. Though this would be a retrograde step by could cost much more, TELECOM can only suggest to EMCALI to again reverse its decision but is unable to compel it to do so. C. MARITIME RADIO This equipment was installed as planned. D. TELEX SERVICE TELECOM installed a telex system at Barranquilla (300 lines) and Bogota' (300 lines) against a total of 1,000 lines as proposed. During the project period, TELECOM reviewed the telex requirements - 34 - ANNEX 1 Page 3 of 3 and concluded that due to higher than anticipated demand at most centers a large exchange was needed at Bogota, and extension at other cities could be carried out utilizing the recovered Bogota' equipment. TELECOM decided not to carry out further piecemeal additions. A new exchange (electronic) was installed at Bogota' under the following project. COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) Income Statement (Col$ million.) 1970 1971 1972 1973 1974 1975 1976 For the Year Ended December 31: Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Operating Revenues Telephone 393 402 (9) 573 549 24 689 672 17 782 843 (61) 1081 1058 23 1517 1268 249 2051 Telegraph 128 117 11 150 122 28 191 127 64 212 131 81 267 137 30 317 143 174 377 Telex 73 73 - 87 91 (4) 120 103 17 147 118 29 189 135 54 267 157 110 365 Other 19 ER 1 - 19 (19) - 20 (20) - 21 (21)0 22 (22) 23 (23) 29 Total operating revenues 613 10 3 815 _1 -29 T_00 922 78 114 1113 28 1537 1352 185 2101 1591 510 2822 Operating Expenses Staff expenses 381 371 10 510 434 76 601 541 60 801 672 129 939 845 94 1177 1011 166 1624 Depreciation 56 43 13 60 55 5 66 68 (2) 84 80 4 106 94 12 114 110 4 142 Other 96 91 5 123 100 23 154 104 50 137 112 25 225 119 106 364 126 236 457 Total operating expenses 5M 505 -79 693 3 104 821 717 108 1022 W TS- 1270 058 21) IM 1249 06 22 Net Operating Income 80 105 (25) 117 192 (75) 179 209 (30) 119 249 (130) 267 294 (27) 446 342 104 599 Interest Expense Grose 28 38 (10) 34 48 (14) 54 38 16 84 38 46 65 54 11 134 51 83 103 Lese: Charged to construction 11 (11) 13 (13) - - Net interest expense 28 27 1 34 35 T) 54 38 16 84 38 46 65 54 11 134 51 83 103 Net Income After Interest 52 78 (26) 83 T57 ) 1 7 T ) 3 ( ) ) 312 291 21 496 Other Non-operating Income (Expense) _ 2 _ 21 - 21 10 - 10 25 - 25 (57) - (57) 4 - 4 (115) Net Income 52 80 (26) 104 157 (53) 135 171 (36) 60 211 151 145 240 (9) 316 291 25 381 Net Operating Income (above) 80 105 (25) 117 192 (75) 179 209 (30) 119 249 (130) 267 294 (27) 446 342 104 599 Valuation Depreciation Adjustment (3) 10 (13) 6 6 - 11 4 7 11 3 8 17 - 17 58 - 58 74 Net Operating Income Adjusted 83 95 T12) 111 186 7) 168 205 ) 108 246 T38 250 294 T44) Operating Ratio 86 83 86 75 83 77 90 78 84 78 81 78 81 Average Net Plant in Service 852 816 1049 992 1182 1162 1438 1306 1888 1478 2654 1685 3323 Rate of Reture 9.7 11.7 10.6 18.8 14.2 17.6 7.5 18.8 13.2 19.9 14.6 20.5 15.8 1/ The average net plant in service and rate of return have been calculated on the basis of the Loan 740-CO formula. COLOMBIA EMPRESA NACIONAL DE TELECOMUNlCACIONES (TELECOM) Statement of Financial Position (Col$ millions) 1970 1971 1972 1973 1974 1975 1976 For the Year Ended December 31: Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Asseta Fixed Assets Plant in service 901 911 (10) 1052 1170 (118) 1186 1389 (203) 1542 1622 (80) 1983 1917 66 2604 2242 362 3008 Less: Accnulated depreciation 258 244 14 316 324 (8) 382 391 (91 hi) 472 (7) 570 565 5 682 67i 6 824 Net plant in sernvice -643 667 (24) 736 7- 710 04 998 (194) 1077 150 -(73) 1413 1352 61 1922 156i 36 2184 Plant under construction 233 266 (33) 307 323 (21) 430 284 146 536 308 228 566 370 196 365 399 (34) 736 Net fixed assets 876 933 (57) 1038 1169 (131) 134 1282 (48) 1613 1458 155 1979 1722 257 2287 1965 32 2920 Other Assets 117 59 58 145 80 65 154 85 69 677 90 587 674 110 564 637 81 556 853 Content Asse.ts Cash 34 38 (4) 57 62 (5) 57 118 (61) 79 204 (125) 130 296 (166) 229 302 (73) 357 Accounts receivable (net) 142 123 19 223 137 86 275 142 133 296 147 149 494 154 340 824 159 665 1092 Other 3.5 43 (8) 42 46 (4) 51 66 5 75 52 2_3 134 52 82 158 54 104 265 Total current assets 211 204 7 322 245 77 383 304 77 450 403 47 7 502 256 121 515 696 1714 Less: Cur ent liabilities 208 182 26 194 216 (22) 238 211 27 320 230 92 623 224 399 68 222 466 1846 Net correct assets 3 22 (19) 128 29 99 145 95 50 71 173 T45) 135 278 (T43) 523 293 668___ Total Assets 996 1014 (18) 13L1 1278 33 1533 1462 71 2418 1721 697 2788 2110 678 3447 2339 1108 4441 Liabilities Eqaity At beginning of year 362 374 (12) 387 454 (67) 491 611 (120) 599 782 (183) 560 992 (432) 645 1232 (587) 867 Adjustments (27) - (27) (99) (99) (60) (60) (95) - (95) (217) Net inome for pear 52 80 (28) 184 157 (53) 135 171 (36) 60 218 1150) 145 -240 195) 317 T291 26 381 Total ~ ~ ~ - TZip44 5 1) 791 AU (1202) 9 8 13 560 992 (32) 64 22 (8) 867 1523 T03) 131 Long-term Debt 368 499 (131) 548 598 (50) 587 602 (15) 852 614 238 961 732 229 1148 647 501 1412 Other Liabilities Reserve for pension and seerance pay 164 44 120 232 51 181 306 56 250 959 61 898 1102 66 1036 1316 71 1245 1691 Subscriber deposita 17 15 2 23 18 5 28 22 6 31 54 (18) 54 80 (26) 70 98 (28) 93 Other _3 31 17 - 7 1 3 13 11 - 1 26 - 26 46 -4 1 Total other liabilities Ll4 61 L53 272 69 203 347 78 269 1006 US 891 1182 146 1036 132 169 123 1 Total Liabilities 996 1014 (18) 1311 1278 33 1533 1462 71 2418 1721 697 2788 2110 678 3447 2339 1108 4441 Debt-Equity Ratio 47/53 52/48 53/47 49/51 49/51 43/57 60/40 38/63 60/40 37/63 57/43 30/77 58/42 Current Ratio 1.0 1.1 1.7 1.1 1.6 1.4 1.4 1.7 1.2 2.2 1.8 2.3 1.6 COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) Statenent of Sources and Application of Funds (Col$ millione) 1970 1971 1972 1973 1974 1975 1976 For the Year Ended December 31: Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Variance Actual Forecast Vertaece Actual Sources of Funds Internal Generation Net Incoe. before interest and exchange loss 79 105 (26) 138 192 (54) 189 208 (19) 163 248 (85) 293 294 (1) 508 342 166 660 Deprecition 57 43 14 60 55 5 66 68 (2) 84 80 4 106 94 12 114 110 4 143 Other non-cash expenses 40 40 40 - 40 168 - 168 L26 - 126 181 - 181 237 Total internalgeneration 136 149 (127 239 - ~ 9 i ) ~~~17~3 T Donation. end Contrib. tions 1 2 7T -__ 57 Subscriber Deposite 3 2 1 6 3 3 6 4 2 8 32 (24) 18 26 (8) 16 18 (2) 23 Bank leans 60 25 35 67 67 15 - 15 7 Suppliers' credits 64 45 19 85 61 24 52 16 36 148 8 140 106 (106) 69 - 69 19 Local loan - CAR - 60 (60) IBRD Loan 499-CO 72 59 13 67 96 (29) IBRD Lean 740-CO 13 (13) 113 84 29 201 115 86 226 67 159 109 - 109 37 IBRD Loan 1173-CO - 10 (10) 128 Total borrowings 3 12 77 102 -IM T18) T9 IO 73 )24 T3 )2 3 60 19 183 1 Increase (Decrease) in Other and Liabilities 11 38 (27) (17) 42 (59) 9 5 4 (96) 5 (101) 2 5 (3) 52 5 47 43 Total Sources of Funds 347 319 28 379 462 (83) 475 385 90 676 488 188 838 652 186 1064 485 579 1354 Application of Funds investments Construction 195 216 (21) 225 289 (64) 275 177 98 471 233 238 546 335 211 460 300 160 777 Association with other entities - 20 (20) - 20 (20) 50 (50) 212 INTELSAT, etc. 32 2 30 31 2 29 17 3 14 20 3 17 1 3 (2) 16 3 13 (5) Other 3.6 (j3) 39 - 21 (21) - 6 (6) -:- 5 (0) - 20 (20) -__ (29) 29 20 Total~~~~ Ine one23 1 1 5) 292 196 196 491 21 30 47 78 69 476 324 102 1004 Ohtlinvestments 23 25 4 5 5)57 7 _ L Debt Service Amortization 85 51 34 74 77 (3) 126 103 23 118 96 22 132 123 9 125 102 23 103 Interest 27 27 - 22 35 (13) 40 38 2 8 4 38 46 66 5 4 12 109 51 07 103 Total debt service 12 78 34 96 T1 6 166 141 25 202 134 68 123 80 206 Variation in Woring Capital Cash (1) 2 (3) 23 24 (1) - 56 (56) 22 86 (64) 51 92 (41) 99 6 93 128 Other than cash (27) 24 51 4 14 (10) 17 2 15 (39) 7 (46) 42 0 37 206 2 204 16 (28) 26 (54) 27 38 (1) 17 58 ) (7 3 (1) ~ ~ ~ 5 4 Total Application of Funds 347 319 28 379 6 3) 45 385 9 676 488 188 838 652 186 104 485 79 134 Debt Service Coverage 1.2 1.7 2.1 2.0 1.5 1.9 1.2 2.4 2.0 2.2 2.7 2.9 3.9 COLOMBIA LOAN 740-co Computation of Revalued Asset Value and Depreciation Plant in Operation Depreciation Additions Balance and Net Net Average to Plant in and Accumulated Plant in Plant in Net Plant Operation Average Additions Depreciation Depreciation Operations Operations in Operation (C$ Millions) Exchange Rate (US$ Millions) (US$ Millions) (C$ Millions) (VS$ Millions) (US$ Millions) (G$ Millions) Balance December 31, 1969 per Schedule 5 of Loan Agreement 740-CO 56200 16300 39900 Addition 1970 281.3 18.50 15205 Depreciation 1970 - Prior years' additions 2529 - Current years' additions 342 - Total 2871 53.1 Balance December 31, 1970 71405 19171 52234 46067 852.2 Addition 1971 72.1 20.02 3601 Depreciation 1971 - Prior years' additions 3213 - Current years' additions 81 - Total 3294 65.9 Balance December 31, 1971 75006 22465 52541 52388 1048.8 Addition 1972 133.8 21.96 6093 Depreciation 1972 - Prior years' additions 3375 - Current years' additions 137 - Total 3512 77.1 Balance December 31, 1972 81099 25977 55122 53832 1182.2 Addition 1973 354.6 23.73 14943 Depreciation 1973 - Prior years' additions 3649 - Current years' additions 336 - Total 3985 94.6 Balance December 31, 1973 96042 29962 66080 60601 1438.1 Addition 1974 441.2 26.16 16865 Depreciation 1974 - Prior years' additions 4322 - Current years' additions 379 - Total 4701 123.0 Balance December 31, 1974 112907 34663 78244 72162 1887.8 Addition 1975 621.2 31.05 20006 Depreciation 1975 - Prior years' additions 5081 - Current years' additions 450 - Total 5531 171.7 Balance December 31, 1975 132913 40194 92719 85482 2654.2 Addition 1976 403.9 34.83 11596 Depreciation 1976 - Prior years' additions 5981 - Current years' additions '661 - Total 6242 217.4 Balance December 31, 1976 144509 46436 98073 95396 3322.6 Addition 1977 340.3 36.92 9217 Depreciation 1977 - Prior years' additions 6503 - Current years' additions 207 - Total 6710 247.7 Balance December 31, 1977 153726 53146 100580 99327 3667.2 - 39 - ANNEX 6 COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) Return on Investment 1. Benefit Period The benefit period was estimated to be from 1972, when the first project expenditures were made, until 1997 when the average plant addition would have completed its productive life--a period of 25 years. 2. Net Benefit Construction costs were obtained from TELECOM records. Revenues and operating expenses allocated to the project were based on actual 1972- 1977 financial results. All are expressed in 1972 monetary values. A sum- mary of the cost and benefit streams are as follows: Construction Expenses Revenues Net Benefits Costs (C$ millions) 1972 35 2 2 (35) 1973 207 17 54 (170) 1974 187 81 151 (117) 1975 163 179 342 0 1976 36 447 549 66 1977 10 641 768 117 1978-79 641 768 127 3. Return on Investment Based on the above streams, the return on investment on the project as the discount rate which equalizes the stream of net benefits is 23%. COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) LOAN 740-CO Compliance With Covenants Section of The Agreement Brief Description of Covenant Loan Guarantee Compliance Comments Employ accounting consultants 3.02 Yes See Paragraphs 5.11 and 5.12 Limit staff increases to 5% per year 4.01(b) Yes-overall See Paragraph 5.04 Provide Bank with a certified audit report within four months after the end of the reporting year 5.02 No See Paragraph 5.13 1 Not incur debt unless revenues for fiscal year next preceding or for a later 12-month period shall be not less than 1.5 times maximum debt service 5.04 Yes See Paragraph 5.05 Maintain tariffs which will provide an 11% rate of return 5.05(a) Yes-partially See Paragraph 5.03 Obtain Bank concurrence before committing itself to additional capital expenditures exceeding US$500,000 or 5% 5.06 Yes Complete actuarial valuation of its pension liability 5.07 Yes See Paragraph 5.14 Governemnt entities should make timely payments for services obtained from TELECOM 3.02(a) No See Paragraphs 5.09 and 5.10 Telephone operating entities should make timely payments of present and future debts to TELECOM 3.02(b) No See Paragraphs 5.09 and 5.10 CARIBBEAN SEA A COLOMBIA TELECOMMUNICATIONS PROJECT LONG DISTANCE NETWORK _os_ UD OANEXSTN( *,oNbsfksl HF ATLANTIC3.' - - - - vHF os0 ~0' Ut5 -iL Ax Repeater Siaoss9L 0 5 1/i 0 Town, o e i' s n àtLcy k e * 0 IMoracobo ..F , 0ETF V E N E Z U E L A CORDOBIA s s' A N l L Q L ' 66 ý-Aý b c oCO RISARALDA CANARE d( _ _o_- - -- - -L TOllNA m EE N HU iiA E1' - POPAVAN_H5' CA Uj C A E R I N TE r r r h E r C A Q U E r A so0UTH CALD¥A UM-AYO'AMERACA E C U A D 0 RALNI 0 E R U