Document of The World Bank FOR OFFICIAL USE ONLY fc) tILAJ itt * iReport No. 3237-UR STAFF APPRAISAL REPORT URUGUAY FIRST TELECOMMUNICATIONS PROJECT ADMINISTRACION NACIONAL DE TELECOMUJNICACIONES (ANT June 17, 1981 Latin America and the Caribbean Regional Office Transportation, Water and Telecommunications Department This document has a restricted distribution and may be used by recipients only in the performance of d their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1.00 = NUR$9.51 (September 1980) NUR$1.00 = US$0.105 NUR$1,000,000 = US$105,152 FISCAL YEAR January 1 - December 31 LIST OF ACRONYMS IN THE REPORT ANTEL - Administraci6n Nacional de Telecomunicaciones--an auto- nomous entity responsible for the operation of all local, national and international telecommunications services. SEPLACODI - Secretaria de Planeamiento, Coordinaci6n y Difusi6n-- a Government entity of ministerial rank responsible for public sector analysis and technical assistance on economic and financial matters and in planning of public sector activities. UTE - Usinas y Trasmisiones del Estado--a Government power supply company that before ANTEL's creation was also responsible for public telecommunications service. FOR OFFICIAL USE ONLY URUGUAY ADMINISTRACION NACIONAL DE TELECOMUNICACIONES (ANTEL) FIRST TELECOMMUNICATIONS PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TELECOMMUNICATIONS SECTOR ............................... 1 Background and Organization .............................. 1 Access to Service ........................................ I Quality of Service and Existing Facilities .... ........... 3 Usage of Service ......................................... 4 Demand for Service ................................. . 4 Sector Goals ............................................. 5 Sector Constraints ....................................... 6 The Bank's Role .......................................... 7 II. THE PROGRAM AND THE PROJECT ................................. 8 The Program ............................................... 8 The Project .............................................. 9 Project Cost ............................................. 10 Contingencies ................................ 11 Items and Sources of Financing ........................... 11 Procurement .............................................. 12 Project Implementation ................................... 12 Disbursements ................... 12 Performance Indicators ................................... 12 III. ECONOMIC ANALYSIS ........................................... 13 Program Size and Composition ............................. 13 Distribution of Benefits ................................. 14 Tariffs ................... 16 Least Cost Solution ................... 17 Return on Investment ..................................... 18 Risk .. 18 Environmental and Health Prospects ....................... 19 This report is based on information obtained from ANTEL, and from the findings of a Bank appraisal mission composed of Messrs. M. DeLima, M. Sergo and B. Wellenius, which visited Uruguay in September/October 1980. 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. - ii - Table of Contents, Continued Page No. IV. THE IMPLEMENTING AGENCY ..................................... 19 Organization ............................................. 19 Staffing ................................................. 20 Training ................................................. 21 Maintenance .......... 22 Accounting ............................................... 22 Audit ............ ........................................ 22 Billing and Collection ................................... 23 Insurance ................................................ 24 V. FINANCES .................................................... 25 Introduction ............................................. 25 Financial Performance .................................... 25 Financial Position ....................................... 26 Valuation of Fixed Assets ................................ 27 Project Financial Performance ............................ 27 Financing Plan ........................................... 28 VI. AGREEMENTS REACHED AND RECOMMENDATIONS ....................... 30 List of Annexes, Charts and Map 1. International Telephone Statistics ........................... 32 2. Basic Telecommunications Statistics (1971-79) ................ 33 3. Summary of Physical Targets .................................. 34 4. Exchange Capacity, and Main Lines as of December 31, 1979 and 1980 and Forecast (1981-85) .... ...... 35 5. Investment Program (1981-85) ................................. 36 6. Physical Construction Schedule (1981-85) ..................... 37 7. Schedule of Construction--Chart No. WB-21912 ................. 40 8. Schedule of Disbursements .................................... 41 9. Performance Indicators ....................................... 42 10. Summary of Principal Tariffs ................................. 43 11. Tariff Study - Draft Terms of Reference ...................... 45 12. Rate of Return on Investments ................................ 48 13. Organization--Chart No. WB-22179 ............................. 51 14. Consultants--Terms of Reference .............................. 52 15. Staff Details ................................................ 56 16. List of Key Posts ............................................ 57 17. Training Details ............................................. 58 18. Notes and Assumptions to Financial Statements ................ 61 19. Financial Statements (1977-80) ............................... 64 20. Projected Financial Statements (1981-85) ..................... 67 21. Related Documents and Data Available in Project File ... ...... 71 MAP Telecommunications Network--Uruguay IBRD No. 15228 I. THE TELECOMMUNICATIONS SECTOR Background and Organization 1.01 Uruguay is a small, fertile, highly urbanized country with a slow growing population of about 3.0 million of which 1.2 million live in Mont:evideo, the capital. The people are highly literate, and culturally homogeneous; GNP per capita in 1978 was about US$1,610. 1.02 Major economic reforms were launched in the mid 1970s addressed towards attaining economic efficiency with market prices playing the major role in resource allocation, strengthening production by the private sector, and opening up the country to international business. 1.03 The Ministry of National Defense is responsible for the overall supervision and control of the telecommunications sector, which mainly com- prises Administracion Nacional de Telecomunicaciones (ANTEL), a decentral- ized state-owned public utility. ANTEL has the monopoly for the provision of all public national and international telecommunications services in Uruguay. It is also responsible for the allocation and control of the radio spectrum, and is authorized to license and control the operation of private telecommunications services (where ANTEL cannot provide such services). Radio and television broadcasting stations are licensed by executive decree at the recommendation of ANTEL. The Ministry of National Defense operates facilities required for its own organization, and additionally provides point-to-point maritime services. Ship-to-shore services are provided by ANTEL, and are linked to Uruguay's telecommunications network. The police organization operates its own facilities which are generally not extended to ANTEL's network. Until December 31, 1980, two subsidiaries of US companies (International Telephone and Telegraph Corporation and Western Union Inter- national) operated some international telegraph and telex services. ANTEL has taken over the operation of these services on January 1, 1981 on the termination of the franchises granted to these companies. Since ANTEL had provided similar services before, it does not expect any difficulty in oper- ating the additional traffic that was handled by these entities. ANTEL's five-year investment programs, annual operation budget, tariffs, and organi- zation structure and authorized posts are approved by executive decree at the recommendation of Secretaria de Planeamiento, Coordinacion y Difusion (SEPLACODI). 1.04 Domestic manufacture of telecommunications equipment and materials in Uruguay is limited to minor items, and annual sales of such items to ANTEL amount to less than 1 percent of ANTEL's capital expenditure. Access to service 1.05 The telephone density in Uruguay (as of January 1979) averaged 9.6 telephones per 100 population, the highest in any Latin American country. Annex 1 sets out international telephone statistics. Although about - 2 - 74 percent of main lines 1/ were installed in Montevideo, the country had about 340 exchanges operating in other cities, towns and villages; only 1.3 percent of villages with 201-500 inhabitants, and 12 percent of villages with 200 inhabitants or less did not have telephone service. There are about 1,400 local and long distance public call offices throughout the country. On the basis of the total population of places with telephone exchanges as a proportion of the country's total, more than 80 percent of the country's inhabitants have access to this service. Ninety-two percent of the main lines are connected to automatic exchanges. Currently about 30 percent of the long distance outgoing calls from Montevideo are subscriber dialed, as are about 40 percent of those originating in the rest of the country. Subscriber dialing is being gradually extended to cover more towns and cities. 1.06 In Montevideo, about 22 percent of main lines are connected to business and government offices, and the balance to residences, as shown in the table below.2/ According to a stud C arried out by ANTEL, 7 percent of Proportion of Main Lines (Percent) Residences 77.6 Services 10.6 Professional 3.1 Education, health & transportation 1.5 Banks 0.9 Tourism 0.4 Other services 4.7 Commerce 6.2 Government 2.5 Industry 2.2 Other and not classified 0.9 TOTAL 100.0 these residential main lines are in areas of high average socioeconomic level, 15 percent upper-middle, 56 percent lower-middle, and 22 percent low level.3/ In the rest of the country, the nonresidential proportion is somewhat higher averaging about 33 percent. New main lines are connected in 1/ "Main line" as mentioned in this report refers to the telephone line connecting a public telephone exchange to the subscriber's telephone instrument. 2/ Based on a stratified random sample of 3,000 main lines. 3/ Socioeconomic level measured by a composite indicator based on family income, home and car ownership, and other factors. - 3 - the order of receipt of applications subject to availability of exchange and outside plant capacity. Overriding priority is, however, given to government, hospitals, physicians and pharmacists; businesses and professionals are given five years and three years antedate in priority, respectively. Nonpriority applicants wait up to several years to obtain a main line, depending on the exchange area. At the end of 1980 there were approximately 63,000 outstanding applications for main lines (about 29 percent of total number of subscribers). Quality of Service and Existing Facilities 1.07 In Montevideo, local telephone service is generally unreliable and of poor quality, making it often easier to conduct business by traveling to meetings rather than by telephone. Local service is severely congested; on an average, probably only about one-half of local call attempts are successful, and during peak business hours, congestion is worse.4/ Call attempt failures are due to (a) called party being engaged (reflecting the high per telephone usage due to insufficient main lines installed); (b) insufficient traffic handling equipment at the exchange (resulting in internal blockage); and (c) high failure rate of local exchange switching equipment and of cable plant due to past neglect in maintenance. Due to poor condition of the cable network, heavy rain brings about widespread breakdowns. Repairs are often slow, and extended outages are common. 1.08 Long distance service is also congested. Although about 80 percent of long distance calls succeed, this is largely due to the fact that about 70 percent of this traffic is manually handled, calls being only canceled after a number of attempts have failed. Average delay on ordinary manual long distance national traffic is about one and one-half hours, and on priority traffic (charged at twice the ordinary rate), about one hour. The completion rate of international calls is about 72 percent and the average delay of completed calls is about one and one-half hours; delays of several hours are not uncommon. 1.09 In Montevideo the quality of calls once established varies considerably but is often unsatisfactory. Noise, interruptions and crosstalk are fairly common. In the interior, overall quality and reliability of telephone service are acceptable. 4/ Based on about 24,000 call attempts made among test lines in Montevideo exchanges, an average 33 percent failed due to insufficient traffic handling equipment at the exchanges, faulty exchange equipment, or faulty interexchange (junction) cables. This result, however, excludes call attempts that fail due to called party being engaged and due to cable network faults (other than in junctions). Reliable data for these are not available. The 50 percent estimated average local call attempt failure rate given above probably underestimates the severity of congestion in local service. During peak hours generally the congestion is much more severe. - 4 - 1.10 Basic data on plant in service and usage of telephone, telex and telegraph facilities in the period 1971-79 are set out at Annex 2. Usage of Service 1.11 In Montevideo, nonresidential subscribers, comprising 22 percent of the total main lines, originate about 40 percent of all calls and generate about 48 percent of ANTEL's telephone revenue. These figures, however, underestimate the use of telephones in relation to directly productive activities. About 43 percent of calls from residential telephones are made to offices and professionals, partly for business related purposes. Furthermore, an unquantified proportion of calls among residences are likely to be for business purposes to mitigate to some extent the crippling effects of traffic congestion prevailing during office hours. Overall, ANTEL estimates that about 60 percent of all calls made in Montevideo relate directly to the productive and distribution activities of the economy, and these account for about 70 percent of ANTEL's telephone revenue. Demand for Service 1.12 Expressed demand for main lines as of December 31, 1980 totaled 283,534 for the whole country, including 220,548 lines in service and 62,986 outstanding applications for new lines. Based on past long-term growth trends of expressed demand, ANTEL forecasts that demand will total about 367,900 by end 1985--a 5.4 percent annual growth rate. The table below gives actual and ANTEL's forecast levels of aggregate expressed demand for and supply of main lines year by year for the period 1975-85. 1 2 3 4 End Main Outstanding Total Main Lines in Service of Lines in Appli Expressed as Proportion of Year Service cations Demand (1+2) Expressed Demand (1/3) Actuals 1975 187,389 34,850 222,239 0.84 1976 192,752 31,196 223,948 0.86 1977 201,393 38,738 240,131 0.84 1978 204,164 42,435 246,599 0.83 1979 212,484 48,127 260,611 0.82 1980 220,548 62,986 283,534 0.78 Forecasts 1981 254,298 40,775 295,073 0.86 1982 278,360 23,455 301,815 0.92 1983 303,198 16,135 319,333 0.95 1984 332,759 8,815 341,574 0.97 1985 366,400 1,495 367,895 0.99 - 5 - However, a systematic procedure for periodically preparing and updating area-by-area forecasts, and for reconciling them with the aggregate projections, is not in use. It is thought that ANTEL's forecasts probably underestimate demand since (a) it is too early for the historical trend data to reflect the increased communications requirements of the changing economy (see paragraph 1.02), and (b) the projections do not take into account the impact on expressed demand of planned major increases in service availability and quality.5/ 1.13 By end 1980, the telex service had 900 subscribers and 400 applicants on the waiting list. The demand for telex in towns where service was not available is not quantified. However, ANTEL expects total demand in the country in 1985 to reach about 2,400--a 21 percent annual growth rate over the current measure of expressed demand. Sector Goals 1.1L4 The legislation whereby ANTEL was established 6/ in 1974 explicitly recognized telecommunications services to be essential. In a cross-sectoral review of the country's progress and programs, 7/ the Government in 1978 assigned a high priority to expanding telecommunications services as required to meet the needs of all other sectors, and improving quality through the substitution of aging plant. In this context, ANTEL's efforts until 1985 focus on (a) major rehabilitation and expansion of local telephone service in Montevideo, thereby attempting to greatly increase the reliability and quality of service to present subscribers, while meeting most of the current and forecast expressed demand; (b) continued modernization of the long distance network, and automatization and expansion of telephone operations in the interior, to decongest and expedite national services; (c) bring international services rapidly up to modern standards; and (d) improve ANTEL's organization and management towards becoming a viable and efficient utility capable of undertaking increasingly large development efforts. Attention is also given to expanding telex facilities to meet all demand in areas currently served, and extend telex service to new areas of the interior. These are adequate priorities given the state of Uruguay's telecommunications services and the Government's directives. 1.15 ANTEL's 1981-85 investment program will bring the total number of telephones in operation in Uruguay by end 1985 to about 476,300, or some 5/ Experience in several cities of the interior has confirmed the existence of a considerable hidden demand which only materializes as service availability and quality are perceived to be rapidly improving. This is in line with the findings in other countries. Also total demand at end 1980 was 5.6 percent higher than forecast only a year earlier reflecting a growth of 11 percent rather than the forecast 5.4 percent. 6/ Ley 14,235 of July 25, 1974. 7/ Conclave Gubernamental, Solis, March 1978. 16 telephones per 100 population 8/ (compared with 13.0 in 1980). Over the period 1981-85, the number of main lines will increase at 10.7 percent per annum, well above the 2.7 percent per annum averaged over 1971-79. By end 1985 almost all of the demand for main lines which is currently forecast (paragraph 1.12) is expected to be met, against 78 percent by end 1980. All services will improve considerably, especially in Montevideo (where also most of the expansion will take place), and international service in particular will do so significantly. However, as service improves and expands at a high rate relative to Uruguay's past achievements, actual main lines demand and traffic are likely to outpace forecasts; ANTEL intends to monitor the situation, and prepare the next five-year investment program in the light of actual experience. Sector Constraints 1.16 As a branch of the former Usinas y Telefonos del Estado (UTE), telephone services in Uruguay reached a fairly advanced stage of development in the mid 1930s. However, inadequate sector organization, shortage of capital, import restrictions and other problems (many reflecting the country's general economic difficulties) resulted in stagnation and deterioration of these services especially from the mid 1950s. Following the setting up of ANTEL in 1974, and a succession of major changes in the country's economic policies, telecommunications operations have been gradually developing administrative autonomy, as well as good relations with regulatory entities in Government, as needed to run along sound utility principles. Likewise, whereas until recently ANTEL was unable to generate internally a reasonable proportion of the funds needed for expansion and service improvement, the financial outlook is now improving (see Chapter V). Hence, although further progress regarding both sector relationships and finances needs to be pursued, ANTEL's development efforts at least up to the mid or late 1980s will be mainly constrained by major inadequacies in its own organization, management and staffing. 1.17 Separation from UTE and absorption of telegraph services and other functions formerly the responsibility of other government services, was not followed by a sufficient effort in reorganization. At present, ANTEL reflects piecemeal attempts to put together a basic working entity out of a scatter of units taken over by stages. There are also a number of management weaknesses in terms of what is needed to run a modern utility. Finally, mainly due to low salaries and inadequately structured salary scales, there is a strong tendency for qualified staff to search for better employment terms elsewhere, and ANTEL is unable to attract experienced replacements where available, or to retain young university or technical school graduates beyond the initial training period (see Chapter IV). 8/ Assuming a population growth rate of 0.5 percent per annum (equal to that over the period 1970-76). 7- The Bank's Role 1.18 Except for a telephone component in a 1950 loan to UTE, the World Bank has had no operations in the telecommunications sector of Uruguay. In 1975, the Inter-American Development Bank (IDB) approved a loan (No.282/OCUR) to ANTEL. During execution of the project, IDB experienced problems with ANTEL in respect of (a) delay in project execution, (b) organizational shortcomings, and (c) failure to collect Government bills. The project's completion has slipped considerably as procurement was delayed. ANTEL was required to retain consultants for procurement assistance. The process for selection and retention of consultants is very involved in Uruguay, and took considerable time. IDB staff consider the work of the selected consultants as satisfactory, and the progress of the IDB project as now good. The same consultants have now been retained by ANTEL for procurement, and contract supervision for switching equipment and the earth satellite station. Part of the former would be World Bank financed under the proposed loan, and bid documents are ready. It is, therefore, expected that the World Bank project would not encounter major procurement problems. Organization shortcomings are expected to be overcome by ANTEL's retention of consultants to attend to specific issues (see paragraphs 4.02, 4.06 and 4.07). With respect to improving collection of Government bills, the Bank has laid down targets for ANTEL and the Government to settle old bills, and will set out details of procedures to assure timely payment of bills for services rendered after October 31, 1981 (see paragraph 4.18). The World Bank considered involvement in the telecommunications sector in Uruguay in early 1980 after IDB indicated that they had no plans for any further involvement in this sector, and that they were considering projects in other sectors which suitably covered the objectives they set out to pursue in Uruguay. The World Bank's current lending strategy in Uruguay is centered on supporting directly productive se!ctors of the economy and the infrastructure required for their efficient operation, especially in the Montevideo metropolitan area and linkages to the main interior cities and with other countries. The project proposed for Bank financing, which focuses on the improvement and expansion of telephone service in Montevideo and on the improvement of long distance and in,ternational facilities (see Chapter II), is directly supportive of this strategy. 1.19 The Bank's involvement in financing this project is justified in terms of: (a) helping improve ANTEL's organization and management as needed to run it along sound utility lines, and encourage the adoption of salary levels and structure which may enable the entity to recruit and retain qualified staff; (b) assisting ANTEL in attaining an adequate technical solution (especially in the Montevideo multiexchange area) at a time when choices on network structure and switching technology must be made; -8- (c) reducing the cost of equipment and materials, by extending use of international competitive bidding to all imports, and by following Bank procurement guidelines; (d) ensuring adequate tariffs for telecommunications services, including a tariff level that permits the full recovery of costs and generation of funds for investment needed for expansion and improvement of services, and a tariff structure which promotes economic efficiency in the use of existing plant and in the allocation of new resources; (e) assisting ANTEL in planning subsequent stages of its development, and ensuring an investment mix that is responsive to the country's priorities expecially in productive sectors; and (f) providing long-term financing to help meet ANTEL's high foreign fund requirements arising from the need for a massive rehabilitation and expansion effort. II. THE PROGRAM AND THE PROJECT The Program 2.01 ANTEL has prepared a telecommunications development program for the five-year (1981-85) period. This program mainly aims to increase the number of main lines from about 221,000 in service at the end of 1980 to about 366,000 at year-end 1985, an annual growth rate of about 10.7 percent. Besides this expansion of subscriber services in urban and rural areas, the program provides for the installation of about 1,400 additional public call office telephones, most of these in the Montevideo telephone area. The program is planned for execution during 1981 through 1985, and comprises the following main items: (a) ongoing works for the installation of exchange equipment, associated outside plant and construction of buildings; (b) extension of the long distance network, and maritime service; (c) installation of telegraph and telex equipment; (d) construction of ANTEL's new administrative building; (e) renovating some existing switching equipment; (f) preinvestment for the following (1986-90) program; and (g) the project for Bank financing (paragraph 2.03). - 9 - Contracts for all works defined at (a) through (e) have been awarded. The works at (a) and (d) are scheduled to be commissioned by December 1983; and those at (b), (c) and (e) by end 1982. Annex 3 sets out a summary of physical targets at end 1980, and end 1985. Annex 4 sets out the exchange capacity, main lines, total telephones and outstanding applications at end of 1979 through end 1985 yearwise. The map sets out the telecommunications network. 2.02 The program is estimated to cost about US$302.9 million equivalent inicluding a foreign exchange expenditure of about IJS$187.9 million equivalent. Annual program costs from 1981 through 1985 are set out in Annex 5. The Project 2.03 The project proposed for Bank financing is a high priority selfcontained part of ANTEL's 1981-85 development program. It provides for a balanced and integrated development of all telecommunications services, acddressing the sector's main goals (see paragraghs 1.14 and 1.15). It will be carried out between 1981 and 1985, and consists of the following installations: (a) a total of about 208,800 lines of local automatic telephone exchange equipment in Montevideo including the replacement of about 99,000 lines of antiquated and fault prone equipment; replacement of existing deteriorated cables; and additional cables and telephones to connect about 60,000 additional main lines; (b) a total of about 19,700 local automatic telephone exchange equipment lines in the rest of the country, to replace some manual exchange equipment, and to expand existing automatic exchanges; and associated cables and telephones to connect about 13,000 additional main lines; (c) about 900 additional long distance circuits; (d) a standard A earth satellite station; (e) a combined national and international automatic exchange with a total of about 4,200 terminations including terminations for about 1,300 long distance and for about 900 international circuits; (f) buildings to house equipment; and (g) services of consultants to assist ANTEL in project management and execution; and in the improvement of organization, salaries, staff plan, maintenance, financial management, and tariff studies. - 10 - Project Cost 2.04 The total cost of the project is estimated at about US$204.8 million, including a foreign exchange expenditure of about US$134.7 million equivalent. Project costs which are shown in detail in Annex 5, are summarized below: NUr$ Million US$ Million Item Local Foreign Total Local Foreign Total Local Facilities Exchange equipment 63.5 1,430.5 1,494.0 3.1 69.5 72.6 Cables 285.5 461.0 746.5 16.4 24.8 41.2 Telephones 18.0 70.0 88.0 0.7 3.3 4.0 Call office sets 1.3 12.4 13.7 0.1 0.9 1.0 Subtotal 368.3 .1,973.9 2,342.2 20.3 98.5 118.8 Long Distance Facilities National transmisstion - 92.0 92.0 - 4.3 4.3 Earth satellite station 4.5 109.4 113.9 0.2 5.9 6.1 Switching equipment 1.0 41.9 42.9 - 2.3 2.3 Subtotal . 5.5 243.3 248.8 0.2 12.5 12.7 Buildings 70.9 - 70.9 4.2 - 4.2 Consultants 1/ 3.9 20.0 23.9 0.3 1.3 1.6 BASE COST 448.6 2,237.2 2,685.8 25.0 112.3 137.3 Contingencies Physical 17.8 - 17.8 1.0 - 1.0 Price 934.2 554.2 1,488.4 44.1 22.4 66.5 Total Expected Cost of Project 1,400.6 2,791.4 4,192.0 70.1 134.7 204.8 1/ In addition to ANTEL's retention of consultants for project execution (see paragraph 2.05), ANTEL has received proposals for consultancy services in organization and personnel management (see paragraphs 4.02 and 4.06). ANTEL proposes to use the same consultants selected for the above work to assist ANTEL in the areas of finance management and tariff analysis (see paragraphs 3.11 and 4.10). According to past accounting procedures ANTEL has included the cost of about US$2 million for the retention of these consultants under general administration costs. 2.05 The project's foreign costs are based on estimated December 1979 prices which have been based on the experience of similar equipment procured by other telecommunications organizations through international competitive bidding, and then adjusted for inflation experienced and expected during 1980. Local costs are based on June 1980 prices. ANTEL has already - II - retained a firm of consultants to carry out procurement, construction and supervision of local exchanges and of the earth satellite station. ANTEL will use 242 manmonths of consultants for preparation of switching equipment specifications, award evaluation, contracting, and work supervision; and 37 manmonths of consultants for similar work in connection with the earth satellite station, at an average manmonth consultancy cost of US$4,500 plus NUr$14,000. The project costs are reasonable. ANTEL is exempt from payment of customs duties on imported goods, and of any other taxes on procured goods. Contingencies 2.06 Price contingencies included in project costs amount to 48 percent Of the total of base and physical contingency costs. They result from the estimated local cost increases of 40 percent per year; and the estimated foreign cost increases of 9 percent in 1981, 8.5 percent in 1982, and 7.5 percent annually from 1983 through 1985. These contingency estimates are in cccordance with the Bank's expectations for projects in Uruguay. For the conversion of projected local costs into US dollars, the Uruguayan peso is expected to be devalued against the US dollar by about 27 percent annually (see note to Annex 5). 2.07 Except for variations in quantities which could occur in building construction and civil works, and for which a physical contingency amounting to 5 percent of local costs has been provided, no other physical contingencies are necessary. Provisions of local exchange lines, long distance circuits and of telephones are based on detailed engineering and forecasts of equipment quantities. In the case of cable networks, the dispersion of these networks throughout the system permits flexibility and adjustments, which makes provision of physical contingencies unnecessary. Items and Sources of Financing 2.08 Of the project's foreign cost of about US$134.7 million, the proposed Bank loan would provide US$40 million; government would provide US$40 million in foreign exchange (paragraph 3.08); the balance of about US$54.7 million and the local cost of about US$70 million equivalent would be provided through ANTEL's internal cash generation. 2.09 The items for Bank financing in US$ million are as follows: Local exchange equipment 32.1 Telephones 2.5 Long distance switching 2.3 Unallocated 3.1 Total 40.0 The Bank loan is assumed to be for 15 years, including three years of grace, wii:h a 9.6 percent interest rate. - 12 - Procurement 2.10 All Bank-financed goods would be procured through international competitive bidding in accordance with the Bank's procurement guidelines. None of the goods proposed for Bank financing are currently manufactured in Uruguay. Local price preference in procurement is not, therefore, required by the Government. Uruguay is a member of the Latin America Free Trade Association (LAFTA), but since ANTEL pays no import duties, preference for regional pact manufacture is not admissible. ANTEL proposes to obtain other imported project goods through international competitive bidding, using its own and Government funds. Other goods which are manufactured locally, like outdoor line and telephone fitting materials, would be obtained through local competitive bidding and financed by ANTEL's own funds. The arrangement for local bidding permits competition and is satisfactory. Project Implementation 2.11 The proposed schedule for project execution as set out in Annexes 6 and 7 (Chart WB-21912) is realistic. ANTEL's staff, with the assistance of local consultants, has prepared engineering designs for all switching and earth satellite station equipment. ANTEL has also prepared bid documents and technical specifications for all other Bank-financed goods. Bids for all these goods are expected to be invited by July 15, 1981. ANTEL would contract with local companies to lay and joint all local distribution and interexchange cables and would supervise the construction of all cable works entrusted to these contractors. ANTEL would install all subscribers' equip- ment. ANTEL's technical staff would assist contractors' staff in the in- stallation of transmission equipment, of the earth satellite station, and of new and sophisticated types of switching equipment. Building extensions to house project equipment will be designed and supervised by ANTEL's staff and will be constructed by local contractors. ANTEL's management, together with assistance from consultants, is capable of carrying out this project satis- factorily. The project is scheduled for completion by December 31, 1985. Disbursements 2.12 The estimated disbursement schedule is set out in Annex 8. Disbursements would be made for 100 percent of the CIF cost of the imported equipment and, where applicable, the foreign costs of its installation. All disbursements would be completed by June 30, 1986. Performance Indicators 2.13 Indicators which would assist in monitoring ANTEL's project imple- mentation and operational and financial performance are set out in Annex 9. These indicators have been discussed and agreed upon during loan negotia- tions. ANTEL would include these indicators in the quarterly project pro- gress reports sent to the Bank for the period ending December 31 of each year. - 13 - III. ECONOMIC ANALYSIS 3.01 The following economic analysis refers to the whole of ANTEL's 1981-85 telecommunications investment program, of which the proposed Bank-financed project comprises the major part. Program Size and Composition 3.02 The size of ANTEL's 1981-85 investment program falls short of what can be justified a priori from the economic viewpoint, namely replacement of antiquated and fault prone plant and meeting promptly outstanding applica- tions for service and new demand expected to arise during the program period (see paragraph 1.12) and prepare for the following investment project. The high economic rate of return very conservatively estimated for the program (see paragraphs 3.13-3.15) supports this impression of underinvestment in the sector. However, given ANTEL's institutional limitations (see Chapter IV), and the complexity of massive plant rehabilitation, the size of the program proposed to be carried out by ANTEL, together with consultants' assistance, is considered to be about the level that ANTEL can prudently undertake. 3.03 Within this limitation, the program addresses both replacements and other improvements to current subscribers, and expansion of facilities. Approximately 99,000 lines of automatic telephone exchange equipment will be substituted in Montevideo, leaving only about 20 percent of exchange capacity with more than about 20 years in service. Similarly, after replacing much of the fault prone parts of the city's cable network, only 15 percent of it would have been in use over 20 years. Some 7,200 lines of manual telephone exchange capacity in the interior will be substituted by automatic equipment. Congestion on long distance service will be greatly reduced, and speed and reliability of this service improved considerably, by introduction of sub- scriber long distance dialing in another 25 exchanges in the interior of the country, increasing the number of long distance circuits, and introducing a new combined national and international automatic telephone exchange.. The latter, and provision of a standard full size earth satellite station, will considerably improve the availability and quality of international services. All this will result in an improvement of service quality and reliability to current subscribers, in lower maintenance costs, and in higher effective traffic leading to larger benefits and telephone revenues. Also, approxi- mately 120,000 additional main lines will be connected in Montevideo, and 26,000 in the interior, which would meet most of the currently outstanding and conservatively projected demand until end 1985 (see paragraph 1.12). Some 1,400 telex lines will be added probably meeting demand up to 1985, including that in cities not currently served (see paragraph 1.13). 3.04 In general, this balance between service improvement and expansion, between Montevideo and the interior, and among types of service, is at this - 14 - time reasonable and consistent with good engineering practice.9/ In the course of project execution, however, several matters should be taken up with ANTEL and built into the preparation of the post 1985 investment program. In particular, a detailed economic analysis must be carried out of (a) the tradeoffs between replacement and expansion in Montevideo; (b) the priorities for automatization, provision of subscribers long distance dialing and expansion among places in the interior; and (c) the size of the overall share of investment allocated to the interior as compared with Montevideo. Given the fact that ANTEL will move towards more generally satisfying forecast demand, the need for such an analysis will assume increasing significance. Distribution of Benefits 3.05 The approximately 90,000 main lines of current Montevideo subscribers that will benefit from exchange equipment rehabilitation are likely to be distributed by economic sectors as shown in the table below. Number of Main Lines in Montevideo Per- Rehabilitated Added Total cent Residences 72,100 93,100 165,200 79 Services 8,700 12,800 21,500 10 Commerce 4,800 7,400 12,200 6 Government 2,000 3,000 5,000 2 Industry 1,700 2,700 4,400 2 Other and not classified 700 1,000 1,700 1 Total 90,000 120,000 210,000 100 The distribution of the approximately 63,000 outstanding applications for connections, most of which will be made by 1983, is very similar to that of the ensemble of current subscribers. Assuming that the approximately 120,000 main lines to be connected in Montevideo under the 1981-85 program 9/ An exception is the rebuilding (to be completed in 1981) of some old telephone exchange equipment. This was an urgent temporary relief measure for Montevideo undertaken before the more comprehensive 1981-85 program was developed. Similarly, a small (type B) earth station was set up in 1980 (US$2.2 million equivalent, not in the 1981-85 program) which will be replaced in 1983 by the full size station included under the project. - 15 - will be likewise distributed as are current main lines,10/ the benefits of expansion of Montevideo's telephone and total telephone investment in this city will reach the various economic sectors as shown in the table above. 3.06 Congestion of local, long distance and international telephone service, especially during office hours, will be greatly reduced. Although by 1985 the proportion of nonresidential main lines is expected to be similar to what it is at present, the proportions of calls generated by them (currently 40 percent in Montevideo), and of revenues (48 percent), are likely to increase significantly once office-hour congestion is reduced. The already high total proportion of telephone calls and revenues which relate directly to economic production and distribution functions is there- fore expected to increase even further. Thus, whereas the rehabilitation and expansion would at first sight seem to apply to mostly residential users, the value of which will at least partly reflect social uses, in fact, the investment will be primarily supportive of economic activities. 3.07 In addition to its use in supporting participation in the economy, improvement and expansion of residential telephone service should generally enhance the quality of life. Based on the distribution of current unmet residential main line applications in Montevideo by average socioeconomic levels of the population in the respective areas of the city, it can be expected that about 79 percent of new residential main lines will be made in areas of low and lower-middle socioeconomic level, 15 percent in uppermiddle and 6 percent in high-income residential areas. This is close to the distribution of existing subscribers (paragraph 1.06). 3.08 Over the period 1981-85 approximately US$126.8 million will be collected and transferred to Government in the form of an 18 percent value added tax levied on telecommunications services. Furthermore, financial projections indicate that ANTEL will be able to pay a contribution to Government of US$15.0 million in 1985 (see paragraph 3.10).1l/ 10/ The differences among these distributions are minor. For example, residential main lines account for 77.6 percent of all current Montevideo lines, 77.5 percent of all currently outstanding applications (based on a sample of 13,700 applications), and 78.8 percent of the applications received in the last one and one-half years, which are likely to better reflect the composition of forthcoming applications (sample size 5,200). Residences account for 80.0 percent of current main lines to benefit from exchange equipment replacement. Differences may be relatively larger for smaller categories. 11/ If current demand forecasts prove conservative, however, these funds may be needed for preinvestments for the program starting 1986. - 16 - Tariffs 3.09 A summary of ANTEL's present tariffs is given at Annex 10. The domestic tariff level decreased in real terms from 1976 to 1978, but increased at about the rate of inflation thereafter: Cost of Domestic International Date Living Tariffs Tariffs 1/ 12/31/76 1.00 1.00 1.00 12/31/77 1.57 1.26 1.41 12/31/78 2.30 1.68 1.86 12/31/79 4.21 2.89 2.23 06/30/80 5.05 3.63 2.40 i/ The increase of international tariffs has been lagging behind inflation since 1979 due to the government policy of lower devaluations of the NUr$ than the difference between rates in local and international inflation. Adequate legislation and procedures exist which have generally in the past resulted in prompt correction of domestic tariffs for local inflation and international tariffs for devaluation of the NUr$. Such adjustments currently take place several times per year. In 1980 the average revenue per subscriber will equal about US$300, or about US$360 if the 18 percent value added tax is included. 3.10 The Government's stated policy is to keep ANTEL's tariffs at a level that produces enough revenues to cover ANTEL's operating cost and provides an adequate contribution to expansion of the telecommunications sector. In 1977-80, however, the rate of return has only averaged about 5 percent (see paragraph 5.02), which has been insufficient to provide an adequate contribution to expansion. In case funds are generated in excess of ANTEL's needs, Government can require ANTEL to pay a contribution to Government for its general expenditures.12/ 3.11 ANTEL's tariff structure is in line with current practice in other developing countries. Initial charges and rentals differentiate among types of subscribers (i.e., residential, professional and others--mainly business and government), long distance call charges are reduced at nighttime and on weekends, and subscriber dialed calls are priced lower than similar operator-assisted calls, all of which is satisfactory. However, the relationship between the costs of providing the various services and the '111 1e 4,55C3 ofi 1A\91 6 . - 17 - corresponding tariffs has been distorted over time due to inflation and inadequate adjustments, and the cost structure will undergo change as ANTEL introduces new technology. These and other considerations 13/ point to the need for ANTEL to revise its tariffs. The emphasis of such a review should be on improving the value of market signals to further direct existing plant usage and new investment towards economically efficient use of resources. This would be in line with general government policy regarding pricing of public utilities. Accordingly, during negotiations ANTEL agreed to carry out a review of, and propose any necessary changes to, its tariffs, mainly i-a terms of marginal production costs and demand characteristics, subject to meeting the entity's financial performance requiremnents and taking into account equity considerations and other general objectives set out in the Government's development policies. An outline of such a study is set out at Aninex 11. As a condition of effectiveness of the proposed loan, ANTEL agreed to assign staff and/or retain consultants with qualifications and terms of reference acceptable to the Bank to carry out the tariff study. ANTEL also agreed to submit to the Bank by October 31, 1982 for comments (a) the results of such study, including any recommendations for changes in tariff structure and level, and (b) an action plan to implement these chianges. Within six months of receiving the Bank's comments, ANTEL will carry out all actions required on its part to put into effect the action p]an as proposed or as amended in agreement with the Bank. During negotiations, the Government agreed to do whatever is necessary on its part to ensure the implementation of the action plan within the given time framework. Least Cost Solution 3.12 The configuration of ANTEL's existing network and its targets of expanding and improving service within the 1981-85 five-year telecommunica- tions plan (see paragraphs 1.14 and 1.15) limit the number of viable alternative solutions to comply with those targets. The dimensioning and timing of works under the 1981-85 program of which the Bank project is an integral part, are based on engineering studies designed to determine-the least cost solution for each work. ANTEL's proposed replacement of fault prone and antiquated equipment in Montevideo is a step in the right 13/ The "professionals" tariff category, which applies to the residences of doctors, nurses, etc., is an unnecessary refinement since it applies to only about 3 percent of main lines. The unit call charge (i.e., per local call in excess of the number included in the monthly rental) at NUr$0.20 (2 US cents) appears to be low, especially given that service is heavily congested (i.e., resulting in high production and opportunity costs per completed call). There is no time differentiation for local calls, as would be useful to encourage a shift of some types of traffic (mainly residential) to off-peak hours. The connection fee plus reimbursable deposit required for new lines, while sufficiently large (US$240 to US$290) to have some rationing effect on demand (which is desirable while ANTEL catches up in meeting demand), is in this sense probably of little effect since it can be paid on easy credit terms. - 18 - direction. Efficiency of service in a multi-exchange network as in Montevideo, depends on the efficiency of its weakest links. By eliminating the sources of weakness, telephone service will be significantly improved. Given existing telecommunications technology, the program as a whole, which will include the introduction of electronic digital switching, represents a least cost solution to comply with ANTEL's five-year plan targets. Return on Investment 3.13 The internal financial rate of return (defined as the discount rate which produces a zero net present value of incremental cash flows) of ANTEL's 1981-85 investment program is 24 percent (see Annex 12). 3.14 As from June 1, 1980, a value added tax of 18 percent was included in ANTEL's bills. ANTEL acts as the Government's tax collection agent and the tax is not included in ANTEL's revenues. No decrease in observed demand was noted when the tax was introduced. With the 18 percent tax included in the benefits stream as a minimum estimate of the amount users are willing to pay for telecommunications services over and above ANTEL tariffs, a minimum estimate of the economic rate of return of the 1981-85 program is 30 percent. 3.15 These rates of return understate the benefits to be derived by users from the investment program. Partly this arises from the fact that users are willing to pay for the telephone service considerably more than ANTEL's tariffs plus value added tax. For example, under severe telephone traffic congestion, users incur a considerable cost in time spent attempting to call, and possibly also in business inefficiency resulting from the long delays in completing calls. In at least some parts of the country, poten- tial subscribers have been found willing to pay immediately the full invest- ment cost of new telephone main lines in order to get them promptly. The demand for houses and offices with a telephone in Montevideo is considerably higher than for those without a telephone. Also, spare capacity to be installed under the 1981-85 program will be utilized at later times to expand service or increase traffic capacity at low additional investment cost. None of these related additional benefits have been incorporated in the calculation of the rate of return. Risk 3.16 The project offers limited risk. The principal risk is the pos- sibility of delayed physical implementation due to unforeseen circum- stances. Since this project comprises a relatively large number of partly independent activities, delay in the completion of a few works would not generally prevent the use of other newly created assets. Further, costs and benefits of telecommunications projects tend to be delayed in roughly the same degree so the impact on the rate of return may not be significant. A sensitivity analysis on the financial rate of return (in Annex 12) indi- cates that a combination of 10 percent higher capital cost, 10 percent higher operating costs and 10 percent lower revenues, would result in an i'aternal financial rate of return of not less than 17.5 percent. - 19 - Environmental and Health Prospects 3.17 No significant adverse environmental or health effects are expected from the project. As the project would provide better telecommuni- cations services, the growth of vehicular traffic congestion during business hours in larger urban and suburban areas could be reduced somewhat for a given level of overall communication activity, particularly in Montevideo, accompanied by a reduction in the growth of atmospheric pollution. Further- more, better telecommunications could result in the better utilization of transport for movement of food, medicines and patients in emergency s:ituations. IV. THE IMPLEMENTING AGENCY Organization 4. 01 ANTEL is managed by a three-member Board of Directors appointed by the Government, one of which is the entity's chief executive (President) and legal representative. In 1980, at the Bank's suggestion, day-to-day manage- ment functions were separated from policy and top management responsibili- ties, and vested on a general manager appointed by Government at the recom- mendation of ANTEL's Board. ANTEL's regulations 14/ have been accordingly modified in 1980 in a way which allows for all the delegation of authority to the general manager necessary for efficient management. In practice, the reassignment of responsibilities has proceeded at a good pace.15/ 4.02 The new general manager supervises the work of four divisions--one each for operations, planning, finance, and administration. Each division is headed by a manager with other supporting staff. ANTEL's current main organization chart is set out at Annex 13 (Chart WB-22179) and is similar to that in other developing countries. The complete organization structure, however, has not been formally approved by Government, which earlier turned down two proposals from ANTEL on the grounds that they were not supported by adequate analysis of the entity's specific needs. Currently, each of the division's responsibilities are not clearly defined, job descriptions for individual staff within the divisions are not laid down, and there are no prescribed service standards nor norms for sanction of staff. ANTEL lacks in-house expertise and manpower to overcome these problems, to permit it to embark on a sustained large-scale improvement and expansion of services. ANTEL has, therefore, agreed to employ consultants for a period of one year 14/ Reglamento General de la Administracion Nacional de Telecomunicaciones (ANTEL). Decreto No. 233/977, May 3, 1977. 15/ The general manager, the secretary general, the chief legal adviser, and the manager for the Radio Spectrum Administration Division, all report directly to the Board, and the general manager attends board meetings on a regular basis. - 20 - to (a) review ANTEL's organization structure, and recommend any changes needed, (b) prepare job descriptions and qualification requirements for all posts, including a clear definition of main lines of divisional and individ- ual staff responsibilities, and outline in detail those responsibilities that should be delegated to the general and division managers, and (c) obtain a decision from ANTEL's Board on the performance standards to be met, and thereafter draw up a system to record events and to monitor them and work out the staff requirements in each category involved in the work. Broad terms of reference for the consultants are set out at Annex 14. Assurances have been obtained that (a) ANTEL will retain such consultants before loan effectiveness; (b) by June 30, 1982, send the Bank for comments the consultants' findings and recommendations on all these matters; (c) by October 31, 1982 propose a plan of action including a timetable to put into effect the recommendations after obtaining the Bank's comments; (d) begin on March 1, 1983 to carry out the plan of action; and (e) by February 28, 1984 complete the action. Staffing 4.03 As of January 1, 1981 ANTEL's telecommunications staff totaled about 7,400, of whom about 6,500 were utilized in the operation of the telephone services. With ANTEL operating about 286,700 telephones, the staff ratio was about 23 per 1,000 telephones. This is reasonable consider- ing the large number of long distance open wires in operation which need comparatively large number of maintenance staff, and the manual operation of long distance services, which utilizes about 1,500 telephone operators. When the long distance service is automatized during the project period, and obsolete and fault prone plant is replaced, the staff ratio will fall to about 15 per 1,000 telephones beyond 1985 and thus labor productivity will increase significantly. The staff to telephones ratio will be monitored in the performance indicators (paragraph 2.13). 4.04 Although ANTEL suffers from organizational and management inade- quacies (see paragraph 1.17), its higher level engineering, planning and operations staff are individually qualified, generally competent, and are experienced in project management. Given proper and clear-cut job descrip- tions (see paragraph 4.02) and a staffing plan (see paragraph 4.06), ANTEL would be able to efficiently manage the considerably expanded operations resulting from the project. ANTEL's finance and management staff are also generally qualified and capable. 4.05 Annex 15 sets out the number of ANTEL's employees by type of function, and the pay groups as of June 30, 1980 and as planned for December 1985. About 86 percent of the staff draw salaries of less than US$235 a month. The bulk of the middle-level technicians and engineers draw less than US$700 a month. The salary levels are generally low compared to those prevalent for similar occupations in the private sector and in some other public enterprises. Furthermore, the salary structure is unsatisfactory. It is based on "points" for each type of post (each point's current value is NUr$4.Y5) and te-re- are about 70 ailierent "points" Yevels. StaiE are not awarded any salary increments unless they move to a different job with a - 21 - h-igher "points" level--which for most staff is not a normally available option. Hence in practice staff salaries remain fixed almost indefinitely (except for inflation adjustments). 4.06 Partly because of the inadequate salary level, ANTEL has been unable to attract and retain sufficient experienced personnel. When recruitment has been effected, the "points" system has effectively pegged salaries, and is likely to have been a major disincentive for staff to con- tinue working for ANTEL after gaining initial training and experience in ANTEL. Qualified staff leave for better positions in Uruguay or in neigh- boring countries (mainly Argentina and Brazil), while others regularly hold additional jobs. The latter lowers morale and productivity, as such staff do not pay full-time attention to ANTEL's service requirements. There is, therefore, urgent need to establish a staffing plan with specific recruit- ment targets for all levels and types of staff, together with a program for salary increases, which would make it possible to implement the staffing plan. ANTEL has agreed that the consultants to be retained to assist in i,mproving the organization (see paragraph 4.02) would also recommend salary levels and structures and establish a plan for the recruitment, training, and career development of staff at all levels. Draft terms of reference are at Annex 14. 4.07 In the context of this organization, salaries and staff plan improvements to be undertaken with the assistance of consultants over a period of more than one year, a list of posts expected to play key roles in the implementation of the 1981-85 program and operation of services has been drawn up (Annex 16). ANTEL concurs with the list but has also decided to supplement it with other posts. ANTEL has agreed that the consultants should prepare job descriptions and qualification requirements, and recom- mend salary levels and scales, for these key staff within the first three months of their contract. ANTEL has also agreed to decide on these recommendations after consultation with the Bank and have all key posts staffed and appropriate remunerations in effect not later than three months after receipt of the Bank's comments on these recommendations. Training 4.08 ANTEL operates a center which trains telephone technicians, transmission equipment maintenance staff, and outdoor plant skilled labor. During 1979, ANTEL trained a total of about 550 staff in a total of 75 courses. Annex 17 sets out details. Switching and transmission equipment staff are additionally given on-the-job training during installation of equipment. Since the number of main lines will increase considerably during the project period, ANTEL will have to recruit a large number of outdoor plant maintenance staff. ANTEL has drawn up plans to strengthen the train- ing effort to ensure timely availability and adequacy of trained outdoor maintenance staff. Engineering staff needed to maintain exchange plant would be trained at the suppliers' factories, and during equipment installa- tion, under the contracts for purchase of Bank-financed exchange equipment. T'rained maintenance staff would thus be available when project goods are - 22 - commissioned. These arrangements are adequate. There are, however, no courses in the areas of administration, accounting and management. Assur- ances have been obtained from ANTEL that courses satisfactory to the Bank in the above areas would be added in the training center by December 31, 1982. Maintenance 4.09 Maintenance is at present unsatisfactory. The number of faults is very high (the records do not give a precise picture), averaging about 10,000 at any one time in Montevideo, and the duration of these faults is also excessive--about 700 main lines continued to be faulty for over one month. ANTEL has agreed that the consultants to be retained in connection with organization, salaries and staff plan (paragraphs 4.02 and 4.06), would also draw up procedures for the maintenance of existing equipment and cables and for monitoring their applications (Annex 14). Performance targets on fault incidence and duration have been agreed upon (Annex 9). Accounting 4.10 ANTEL's accounting system functions relatively well, but certain routines should be improved. On the Bank's recommendations, steps were taken to change procedures, e.g., accounting for stores and fixed assets (see paragraphs 5.08 to 5.10). Consultants (Arthur Young & Co.) prepared in 1975 detailed recommendations for improvements in the areas of accounting and financial management of Usinas y Trasmisiones del Estado (UTE, formerly Usinas y Telefonos del Estado) before ANTEL was completely separated from the power operations. A local consultant is now reviewing the applicability of these recommendations in ANTEL. During negotiations ANTEL agreed as a condition of loan effectiveness to send to the Bank a copy of the report of the consultant's diagnosis, and based on this report, prepare an action plan by October 31, 1982 with specific implementation dates. The action plan will be carried out so that results are reflected in ANTEL's financial statements for FY83. 4.11 Many accounting routines, which currently are done manually, could be done more efficiently by computer. ANTEL currently lacks suitable staff for systems analysis, programing and the running of a computer center. As from December 31, 1981, UTE will no longer be able to handle ANTEL's comput- erized routines (mainly billing, see paragraph 4.14), and ANTEL is therefore in the process of employing suitably qualified staff to form a computer center of its own. ANTEL has indicated that they may require outside assistance for the formation of this center and for the acquisition of a suitable computer. Properly computerized routines would improve the efficiency of ANTEL's accounting. Audit 4.12 ANTEL's accounts are by law audited by a government agency, Tribunal de Cuentas de la Nacion. Detailed procedures for this audit were agreed on under a previous project financed by the Inter-American Development Bank (see paragraph 1.18). These audit procedures and resulting - 23 - audit reports appear satisfactory. The Bank's experience of audits in UTE by Tribunal de Cuentas de la Nacion, however, has been less satisfactory. 4.13 ANTEL's 1977-78 audited financial statements were finalized more than a year after the end of its fiscal year, partly due to problems related to the separation of UTE and ANTEL. The situation has improved lately and FY79 audited statements were available in September 1980. During negotia- tions, assurances were obtained that auditors satisfactory to the Bank will be appointed and that in FY81 and FY82 ANTEL will supply the Bank with its financial statements within six months of the end of its fiscal year and corresponding audit reports within two months thereafter. From FY83 onwards ANTEL will supply the Bank with audited financial statements within six months of the end of its fiscal year. The Bank's supervision mission visit- ing Montevideo will check on the quality of audit staff in the government agency, and would decide if this agency meets with Bank's standards. Billing and Collection 4.14 ANTEL's subscribers are billed monthly on UTE's computer (IBM 370).16/ Bills normally reach the subscribers within one month after the End of the billing period, and they are normally paid (except for bills to Government) about one month thereafter. If the bill is not paid within the period stated in the bill, the amount due is included in the bill of the following month and, in case of nonpayments after reminders per telephone and telegram, ANTEL proceeds to disconnect the subscriber (except for Government). ANTEL's accounts receivable in NUr$ millions as of December 31, 1979, were as follows: Official Private Total Value in balance sheet 62.8 108.6 168.4 Adjustments */ 15.7 18.1 33.8 Accounts receivable, net 47.1 87.5 134.6 Billing in 1979 42.4 367.1 409.5 Average period of collection (months) 13.3 2.9 4.5 ^- These adjustments under "Official" refer to bills for tele- communications services of government subscribers not paid for in cash, but in form of other services (NUr$15.7 million, mainly electricity from UTE) according to the government established compensation mechanism. The value of these other services are booked under current liabilities in ANTEL's balance sheet. The net amount owed by foreign administra- tions to ANTEL for international calls is NUr$18.1 million. 16/ In September 1980, UTE informed ANTEL that it would need all computer capacity only for UTE's routines as from December 31, 1981. This means that ANTEL has to develop urgently its own computer capabilities (see paragraph 4.11). - 24 - 4.15 Some of the government accounts receivable date from 1977 and earlier. Since January 1, 1977, domestic tariffs have been increased by a total of about 260 percent to compensate for the effects of inflation and, therefore, the actual collection period for bills to government is much longer than the 13.3 months indicated above. If government accounts receiv- able are calculated at the average tariff level of 1979, the collection period would be over 18 months. In December 1979, Government paid an amount of NUr$10.2 million towards the bills for 1977 and earlier years. During 1980, however, Government has fallen further behind with its payments, and as of December 31, 1980 Government accounts receivables amounted to about NUr$79 million. 4.16 As from June 1, 1980, a value added tax (VAT) of 18 percent was included in all ANTEL's bills. The tax amounts collected were paid by ANTEL to the fiscal authorities within established time limits. ANTEL was, therefore, financing the tax payment for amounts billed to government subscribers, in addition to the loss in real value of accounts receivable due to inflation and delayed payment. On the Bank's suggestion, a system has been created to eliminate the adverse effects of VAT on ANTEL's finances (Finance Ministry decree dated April 3, 1981). 4.17 Contributing to the government arrears problem, in many cases reorganizations and movements of government agencies have not been adequately recorded by ANTEL to ensure that correct subscribers are billed. Some government subscribers delay payment of their bills arguing that in part they are billed for telephones that are not used by them. This issue was discussed with ANTEL's management and it was agreed that ANTEL would begin in 1980 a program to verify the listings of telephones for government subscribers to ensure correct billing as from mid 1981. Dues for past bills will be adjusted accordingly. 4.18 In order to deal with the situation, it was agreed with ANTEL and the Government that by September 30, 1981, and as a condition of effectiveness, 50 percent of all lines relating to overdue accounts of the public sector as of July 31, 1981 would be identified and reconciled, and by December 31, 1981 similar action would be taken for the remainder of these lines as of October 31, 1981. The Government undertook to pay these accounts not later than June 30, 1982, and to pay for bills for services rendered after October 31, 1981, if not paid by the public sector within 75 days of their billing to the sector. Insurance 4.19 ANTEL has insurance coverage for buildings, internal plant and stores against fire and special perils. Insurance protection is also main- tained for vehicles, for cash in transit, and personal liability. These arrangements are satisfactory. - 25 - V. FINANCES Introduction 5.01 Inflation in Uruguay averaged about 50 percent per year in 1977-80 and ANTEL's tariffs and wages increased roughly at the same rate. The values of fixed assets were adjusted during a 1977 inventory, and revalued (see paragraph 5.08) annually thereafter to compensate for inflation. Exchange losses on foreign loans have been capitalized (loans financing work in progress) or charged against income (loans not financing work in prog- ress) to reflect the devaluation of the Uruguay peso (NUr$) against most major currencies. Comparison of financial results between different years is, therefore, difficult with such distortions of ANTEL's financial perform- ance. To facilitate the understanding of ANTEL's financial performance as presented in this chapter, financial statements are given in current US dollars (see Annex 18, paragraph 1) instead of Uruguay pesos. Financial projections for 1981-85 are also in current US dollars, which is in accord- ance with ANTEL's own practices. Financial Performance 5.02 ANTEL's income statements for 1977-80 are given in Annex 19.1 and notes and assumptions in Annex 18. A summary in US dollars (millions) is given below: Fiscal Year Ending December 31: 1977 1978 1979 1980 Operating revenues 36.2 41.2 51.7 80.2 Operating costs 28.2 32.1 40.1 66.6 Operating income 8.0 9.1 11.6 13.6 Rate of return 1/ (a) (%) 5 4 5 5 - (b) (%) 7 6 7 7 Operating ratio 78 78 78 83 1/ Rate of return defined as operating income over average revalued: (a) net fixed assets in operation plus current assets and (b) net fixed assets in operation. 5.03 According to a Ministry of Economy and Finance decree, ANTEL's tariff level is set as to produce a certain return on average revalued net fixed assets in operation plus current assets, a procedure which is also used for other public utilities (e.g., UTE). Under the 1975 IDB project (see paragraph 1.18), an 8 percent rate of return on this basis was agreed Oll. The application of this covenanted return was postponed, however, until the end of 1981, when long distance and other equipment financed under the IDB project are expected to be brought into service. Government now intends - 26 - to reach agreement with IDB not to apply this covenant as this would be against current policies. 5.04 ANTEL's tariffs have been increased roughly at the same rate as its operating costs (see paragraphs 3.09 and 3.10), and this has permitted ANTEL to maintain a rate of return of about 5 percent on average revalued net fixed assets in operation plus current assets (equivalent to a rate of about 7 percent on average revalued net fixed assets in operation), and an operating ratio of about 80 percent. This tariff level has, however, not permitted ANTEL to generate adequate funds for its expansion programs. A tariff increase in real terms of 4 percent was, therefore, authorized in February 1981. Further tariff increases will be needed periodically, however, to ensure adequate cash generation to carry out ANTEL's investment program. 5.05 During negotiations, assurances were obtained from Government that during the period 1982-85 tariffs will be maintained at a level to permit at least 50 percent during any one year (and 60 percent for the whole period) of total capital expenditures to be provided from internal sources. As from 1986, the contribution to expansion from internal sources would not be less than 60 percent. Beginning in December 1981, tariff levels will be reviewed not less frequent than each six months to ensure that the contribution to expansion is maintained at this level and if necessary steps would be taken to raise tariffs. Financial Position 5.06 ANTEL's balance sheets for 1977-80 are given in Annex 19.2 and notes and assumptions in Annex 18. A summary of ANTEL's position in millions of US dollars as of December 31, 1980, is given below: Fiscal Year Ending December 31, 1980: Revised Budget US$ X Assets Net fixed assets 267.5 83 Current assets 78.0 24% Less current liabilities 21.6 7% 56.4 17 Total Assets 323.9 i00 Liabilities Equity 261.2 81 Long-term debt 62.7 19 Total Liabilities 323.9 100 - 27 - 5.07 ANTEL has a strong financial position with only 19 percent of total capitalization in long-term debt. The current ratio of 3.8 may be exaggerated considering that overdue government bills (see paragraph 4.14) are included in current assets, and net fixed assets may be overstated (see paragraphs 5.08 to 5.10). Furthermore, minor adjustments of asset values may be required due to the separation of UTE and ANTEL. The status of the separation of UTE and ANTEL was reviewed during negotiations, and ANTEL will proceed with the separation according to the timetable set out under the fifth power project for UTE. Valuation of Fixed Assets 5.08 At the request of IDB, ANTEL completed an inventory and revalua- tion of its fixed assets as of December 31, 1977. The 1977 inventory is detailed and the revaluation reasonable. On the whole, this work has provided a good basis for subsequent annual revaluations, which are being made according to the average increase in cost of living and the exchange rate for the US dollar. So far, this procedure has produced acceptable results, and ANTEL intends to continue revaluing its fixed assets annually on the same basis. 5.09 During the 1977 inventory, new useful lives for ANTEL's fixed assets according to the time estimated for remaining useful lives of existing assets were established. For example, in the case of exchange equipment, a useful life of 40 years was established. Depreciation rates based on this useful life were applied to assets acquired after 1977, as well as those existing in 1977. It was pointed out by the Bank that these useful lives lead to low annual depreciation charges as compared with practices adopted by most telecommunications entities. To avoid overstatement of operating income and equity, ANTEL's depreciation rates had to be reviewed. This was discussed with ANTEL's management, which took necessary action to adjust depreciation rates and residual values for assets put into service after 1979. 5.10 In 1977-80 ANTEL transferred work in progress (WIP) to assets in operation after a period of up to one year after final acceptance of each work. In many cases, equipment had been in use for two years or more before such transfer occurred. Depreciation on these assets was, therefore, delayed and the capitalization of interest and exchange losses continued for far too long a period. ANTEL's management has taken action to change procedures as from 1981 and to transfer WIP to assets in operation as soon as the equipment is accepted for service. P?roject Financial Performance 5.11 Financial projections for 1981-85 are given in Annex 20:1 and notes and assumptions in Annex 18. A summary in current US$ millions is given below: - 28 - Fiscal Year Ending December 31: 1981 1982 1983 1984 1985 Operating revenues 105.1 124.4 144.6 158.3 172.8 Operating costs 80.3 94.5 108.8 115.9 124.4 Operating income 24.8 29.9 35.8 42.4 48.4 Rate of return 1/ (a) (%) 8 8 8 8 8 (b) (%) 11 10 10 10 10 Operating ratio 76 76 75 73 72 Contribution to expansion 2/(%) 40 55 57 81 93 1/ Rate of return defined as operating income over average: (a) total assets, excluding WIP and (b) net fixed assets in operation. 2/ Defined as: internal cash generation after debt service (excluding capitalized interest), less increase in working capital other than cash, divided by capital expenditures for the year. 5.12 The financial projections are based on a tariff level, which would produce a rate of return of about 8 percent on average revalued net fixed assets in operation plus current assets. For the financial projections, fixed assets revalued by 8 percent peiryear (see Annex 18, paragraph 14), which is expected to fairly reflect the impact of inflation on ANTEL's assets. Over the project period the resulting revenues are expected to allow ANTEL to contribute at least 60 percent of capital expenditures from internally generated funds (see paragraph 5.05). 5.13 At the end of the project period in 1985, ANTEL is expected to have a current ratio of 2.9, a long-term debt equal to 20 percent of total capitalization and a balance in cash and banks of about US$6.8 million. Projected financial results and financial position at the end of the project period are satisfactory. Financing Plan 5.14 Projected funds flow statements for 1981-85 are given in Annex 20:3; a summary in current US$ millions is given below: \ ,9 - 29 - 1981-85 US$ % Capital construction: project 205.8 64 nonproject 97.1 30 Total capital construction 1/ 302.9 94 Increase in working capital 2/ 22.7 7 Decrease in cash (2.8) (1) Total Requirements 322.8 100 Internal cash generation 296.0 92 Less: debt service 3/ 83.5 26 Net internal cash generation 212.5 66 Borrowing: IBRD 39.0 12% BID 13.9 4% EULA 4/ 10.0 3% Others 5/ 47.5 14% 110.3 34 Total Sources 322.8 100 Debt service ratio (times) 2.9 Contribution to expansion 6/ (%) 63 1/ Including capitalized interest. 2/ Excluding current portion of long-term debt and decrease in cash. 3/ Excluding capitalized interest. 4/ European Latin American Investment Bank. 5/ Government, if cofinancing from commercial banks does not materialize (US$40.0 million, see paragraph 3.08) and suppliers' credits (US$7.5 million). 6/ See footnote 2 to paragraph 5.11. 5.15 According to the financial projections, ANTEL's debt service ratio will not fall below 2.7 during any one year of the project period and ANTEL will contribute 63 percent of its requirements for capital expansion from internally generated funds, which is satisfactory. Of total requirements (including increase in working capital), ANTEL will generate internally 66 percent, the World Bank loan will finance 12 percent and other sources will provide 22 percent. The proposed Bank loan would be made to ANTEL for a term of 15 years including 3 years of grace (standard terms for Uruguay) at the current Bank rate, assumed to be 9.6 percent for the purpose of financial projections. - 30 - 5.16 The Government and ANTEL will negotiate a commercial bank loan of about US$40.0 million which is expected to provide for better terms than could have been obtained without Bank involvement. If this additional financing, however, is not obtained, the Government would undertake to make necessary funds available to ANTEL. When the additional loan is obtained, the Loan Agreement would be amended to include (i) a "cross-default" clause, and (ii) a skewed amortization schedule so that uniform semiannual amortiza- tion payments would amortize both loans. An agreement would also be entered into between the World Bank and the commercial bank substantially in the form of earlier Bank agreements with commercial banks. Assumptions on loan terms for financial projections are given in Annex 18, paragraph 19. VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 During negotiations, agreement was reached that ANTEL will: (a) send to the Bank by October 31, 1982 for comments a tariff study and related action plan, and implement this plan within six months of receiving the Bank's comments (paragraph 3.11); (b) send to the Bank by June 30, 1982 for comments , the consultants' recommendations on organization, salaries, staff plan and maintenance; send by October 31, 1982 a proposed plan of action, taking into account the Bank's comments, towards implementation of these recommendations; and commence its execution by March 1, 1983 for completion by February 28, 1984 (paragraphs 4.02, 4.06 and 4.09); (c) discuss with the Bank the consultants' recommendations on key posts and implement these recommendations including the staffing of all key posts not later than three months after receiving the Bank's comments (paragraph 4.07); (d) establish training courses on administration, accounting and management by December 31, 1982 (paragraph 4.08); (e) on the basis of the financial consultant's findings send to the Bank by October 31, 1982 an action plan and implementation schedule and carry these out, so that the results of the improvements are reflected in ANTEL's 1983 financial statements (paragraph 4.10); (f) appoint auditors satisfactory to the Bank; submit to the Bank its financial statements for 1981 and 1982 within six months of the end of the year and corresponding reports witnin two months thereaiter; aa& as irom 1)'S, - 31 - submit financial statements to the Bank within six months of year end (paragraph 4.13); and (g) by September 30, 1981, reconcile overdue accounts for 50 percent of public sector lines as of July 31, 1981 and take the same action for the balance as of October 31, 1981 not later than by December 31, 1981 (paragraph 4.18). 6.02 During negotiations, assurances were obtained that Government would: (a) maintain tariffs at a level as to produce funds from internal sources equivalent to at least 50 percent of the capital expenditures incurred during any one year of the 1982-85 period and at least 60 percent for the whole period; as from 1986, the contribution to expansion from internal sources would be not less than 60 percent (paragraph 5.05); (b) act promptly on changes in tariff structure indicated by the tariff study to be undertaken by ANTEL and/or its consultants (paragraph 3.11); and (c) pay by June 30, 1982 all identified and reconciled debts from public sector lines and subsequently pay any public sector bills that remain outstanding 75 days after billing date (paragraph 4.18). 6.03 As a condition of loan effectiveness, ANTEL will: (a) assign staff and/or retain consultants with qualifications and terms of reference acceptable to the Bank, to carry out the tariff study indicated in paragraph 6.01(a); (b) hire consultants under terms of reference acceptable to the Bank, to provide the services indicated in paragraph 6.01(b); (c) send to the Bank a report on the review referred to in paragraph 6.01(e); and (d) have complied with paragraph 6.01(g) in respect of the first 50 percent of public sector lines. 6.04 The proposed project constitutes a suitable basis for an IBRD loan of US$40.0 million equivalent for a term of 15 years including a 3-year grace period. mr~~~~~~~~~~~~~~~~~~~0 0 0. lo0r. 1 ,<tcrr
Groupe de la Banque mondiale · Staff Appraisal Report
Uruguay - Telecommunications Project
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