Tanzania - Telecommunications Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. 3133-TA STAFF APPRAISAL REPORT TANZANIA TELECOMMUNICATIONS PROJECT TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TI April 2, 1981 Transportation, Water and Telecommunications Department Eastern Africa Regional Office 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.  CURRENCY EQUIVALENTS US$1.0 = T Sh 8.3 T Shl = US$0.120 :FISCAL YEAR Government: July 1 - June 30 TPTC : January 1 - December 31 LIST OF ABBREVIATIONS AND ACRONYMS USED IN THE REPORT Carrier - A system of providing a number of circuits over one radio link, coaxial cable, or a pair of wires Channel - One circuit of a carrier system carrying speech or tele- graph signals DELs - Direct exchange lines EAPTC - East African Posts and Telecommunications Corporation--an autonomous government-owned public corporation responsible for the operation of all public services in the telecommuni- cations sector in Kenya, Tanzania and Uganda. The corpora- tion has now ceased to operate with the break up of the East African Community. HF/UHF/VHF - High frequency radio up to 30 MHz; ultra high frequency radio beyond 300 MHz; and very high frequency radio between 30 MHz and 300 MHz TPTC - Tanzania Posts;and Telecommunications Corporation--an autonomous government-owned public corporation responsible for the opetation of all public services in the telecommuni- cations sector MHz - Megahertz Microwave - A wavelength term normally applied to systems working at frequencies:above 1,000 MHz. Multiplex - Part of the equipment.in a carrier system--see above Telex - Telegraph exchange service for subscribers' TAC - Tanzania Audit Corporation  FOR OFFICIAL USE ONLY TANZANIA TELECOMMUNICATIONS PROJECT TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TELECOMMUNICATIONS SECTOR ............................... 1 Background and Organization. 1 Access to and Usage of Service. 2 Quality of Service and Existing Facilities. 3 Demand for Service. 4 Sector Goals. 5 Sector Constraints. 7 Bank Group Role. 8 II. THE PROGRAM AND THE PROJECT. 8 The Plan and the Program. 8 Project Concept. 9 The Project. 9 Project Costs .11 Contingencies .12 Project Financing ........................................... 13 Procurement .............. 13 Disbursements ................. , ..... 13 Project Implementation .14 Performance Indicators and Monitoring .15 III. ECONOMIC ANALYSIS ........................................... 15 Telecommunications and Economic Development . 15 The Distribution of Benefits ................................ 16 Tariff Policies .18 Least Cost Solution .19 Return on Investment .20 Risks ...,.... 20 Environmental and Health Aspects .20 This report is based on the findings of a Bank appraisal mission which visited Tanzania in April/May 1980, comprising Messrs. D. Lomax and H. Ruud, TWTTL. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Page No. IV. THE IMPLEMENTING AGENCY ..................................... 21 Organization ................................................ 21 Management and Control ...................................... 21 Staff and Training .......................................... 21 Accounting and Budgeting .................................... 22 Billing and Collection ...................................... 23 Audit ....................................................... 23 V. FINANCIAL ANALYSIS .......................................... 24 Postal Operations ........................................... 24 Past Financial Performances ................................. 25 Present Financial Position .................................. 25 Valuation of Assets ......................................... 26 Financing Plan .............................................. 27 Future Financial Performance ................................ 28 VI. RECONMENDATIONS ............................................. 29  LIST OF ANNEXES AND CHARTS Page No. 1. International Telephone Statistics ........................ 30 2. Existing Facilities as of December 31, 1979 .... ........... 31 3. Description of Works in TPTC's Program, 1980-84 .... ....... 32 4. Program and Project Costs ................................. 35 5. Schedule of Disbursements ................................. 36 6. Implementation Schedule ................................... 37 7. Performance Indicators .................................... 38 8. Schedule of Telecommunications Tariffs and Charges 39 9. Study of Tariff Structure - Draft Terms of Reference 42 10. Return on Investment .45 11. Organization Chart .47 12. Profit and Loss Accounts .................................. 48 13. Estimated Source and Application of Funds .50 14. Balance Sheets .51 15. Documents and Data Available in Project File .53 Map - IBRD 15091  I. THE TELECOMMUNICATIONS SECTOR Background and Organization 1.01 Tanzania has a land area of about 945,000 square kilometers, a large part of which is high, arid plateau. The population of approximately 17.5 million (1978) increases by about 3% per annum. Five percent of the total population live in Dar-es-Salaam and five percent in the twenty other biggest urban centers; the rural population, making up the major part or about 90% of the total, is well spread over the territory, with higher densities near the three main Indian Ocean ports of Dar-es-Salaam, Tanga, and Mtwara, and in the Lake Victoria area, the highlands around Kilimanjaro, and the southern highlands near Lake Nyasa. Per capita GNP for 1979 is estimated at US$230. About 90% of the active population is engaged in agri- culture, which accounts for about 50% of GDP and 80% of export earnings (mainly cotton, coffee, sisal, tobacco, and cashew nuts). The small but growing industrial sector includes textile and sugar mills, tobacco process- ing, two cement factories, an oil refinery, and diverse other small plants. Government has been trying hard to increase the country's agricultural production, both food crops and export crops, and to create additional employment opportunities. The efforts during the last decade have focused on measures to organize the rural population (in villages, districts, and regions), to accelerate its social development, and to decentralize develop- ment action responsibility, to the district level in particular. Further- more, collective and cooperative farming and the establishment of small- scale industries are being encouraged. However, scant access to telecom- munications services, poor road conditions, and limited transport facilities impair government efforts, slow down the impact of any administrative and social reforms, and make very difficult the marketing of agricultural products and the timely delivery of agricultural inputs. The country's economic development has also been constrained by a serious foreign exchange shortage, caused by a need to import foodstuff during years of serious drought (mainly 1973 and 1974), as well as by the more recent war in Uganda. 1.02 With the breakup of the East African Community (EAC), including the East African Posts and Telecommunications Corporation (EAPTC), the Government of Tanzania established in 1977 the Tanzania Posts and Telecom- munications Corporation (TPTC), which is an autonomous government-owned corporation under the Ministry of Communications and Transport. In addition to its handling the postal services of the country, TPTC is responsible for the establishment, expansion, operation, and maintenance of all local, national and international telecommunications services. (Annex 11 shows the organizational setup of TPTC.) In addition to the military organizations, the Ministry of Home Affairs and the Aerodromes Department operate, under licenses issued by TPTC, some telecommunications services for their administrative needs. Private users can operate point-to-point telecom- munications services after obtaining a license from TPTC. These licenses are issued only when TPTC is not in a position to provide such services adequately; they are renewed on an annual basis. Tariffs for telecommuni- cations services are fixed by the Minister of Communications and Transport  - 2 - upon recommendation by TPTC. With a sufficient separation between the postal services and the telecommunications services being provided for (para. 4.02), the telecommunications services are adequately organized. Furthermore, there is no fragmentation in the responsibility for handling of the telecommunications monopoly, as this is clearly assigned to TPTC by the legislation. The country has no industry of significance for the manufacture of telecommunications materials and equipment. Access to and Usage of Service 1.03 In Tanzania, the number of direct telephone exchange lines in service (DELs) per 100 population, about 0.21, is among the lowest in the world. For Africa as a whole, except for the Republic of South Africa, the corresponding average figure is 0.4; for Asia, except for Japan and the People's Republic of China, it is 0.9; for Latin America 3.2 and for North America 32. (Comparisons of telephone densities among countries are presented in Annex 1.) Forty-four percent of the DELs of Tanzania are in Dar-es-Salaam, with five percent of the population, which makes 1.8 DELs per 100 inhabitants there. Another 42% of the DELs are installed in the other regional capitals, making the average telephone density there about 1.4 DELs per 100 inhabitants. This leaves 14% of the DELs for the rural areas with 90% of the population, making an average density of only 0.04 DELs per 100 inhabitants in the vast countryside, including district and other development centers. All the regional capitals (20 on the mainland and 5 on Zanzibar with Pemba) have some telephone service, but about one- fourth of those district centers which are not co-located with regional capitals are not yet satisfactorily connected to the telecommunications network. About 60 other towns have manual telephone service of varying quality and, in addition, about 200 remote places are equipped with radio call service, 1/ but most towns and villages have no access to telecommu- nications facilities. 1.04 No precise figures are available in regard to categories of subscribers or users. However, it is known that 60% of telecommunications revenues comes from government users, including the parastatal entities. This category dominates the number of subscribers in the regions outside the capital city, whereas private business and residential subscribers amount to nearly one-half of the total number in Dar-es-Salaam. It is also known that very few telephones are used solely for residential pur- poses. Due to the prevailing shortage of lines, a telephone is normally used mostly for business transactions, even when it is installed in a residence. The fact that business communications make up a big portion of the total traffic is reflected in pronounced peaks in the traffic load of both local and long distance facilities during working hours. The number of pairs for telephone connections available in local cable networks and 1/ A shortwave radio facility for emergency and specialized purposes but unsuitable for public communications.  - 3 - particularly in the Dar-es-Salaam network is almost exhausted. This is the main reason for the high number of telephones connected to the same line (2.3 as an average for the whole country), which is detrimental to good service in a network of the Tanzanian type, as is also the fact that many of the exchange equipment have no more available lines. The high degree of utilization of the available facilities leaves little flexibility for new connections and has hampered growth during the last two to three years. However, for the lines that can be connected, TPTC has an allocation system which gives priority to essential services and works satisfactorily. By modifications in the tariff structure, price considerations should to some extent make the allocation to priority services automatic in the future (see para. 3.11). 1.05 Eighty-two percent of the total number of telephones in the country are connected to local automatic exchanges, the rest to manual exchanges. Ninety-five percent of the local traffic and ninety-four percent of the inter- urban traffic is automatic. The manual local exchanges have the following opening hours: less than 25 subscribers: 8 hours a day 25 to 60 subscribers : 12 hours a day 60 or more subscribers : 24 hours a day. The international telephone traffic is operator-handled, except for the traffic to Kenya and Uganda, which is operated and charged in the same manner as are inland calls. Most of the international telephone traffic and telex traffic (except for Kenya and Uganda) is routed via a satellite earth station, operating since September 1979 in the INTELSAT system and giving fully satisfactory service. Telephone satellite circuits have thus been established with Italy, United Kingdom, Japan and Seychelles, and telex circuits with Italy and the United Kingdom. HF circuits, having limited working hours and giving less than satisfactory service, are operating between Tanzania and Burundi, Zambia and Mozambique, for tele- phone traffic, and between Tanzania and Mozambique, United Kingdom and Zambia, for telegraph traffic. 1.06 There are 426 telex subscribers in the country, of which 110 are outside Dar-es-Salaam. The latter are connected to either of the two telex exchanges in Arusha and in Dar-es-Salaam. Of the regional capitals, 15 have telex subscribers, and in these places TPTC uses teleprinters connected to the telex network for telegram transmission. Quality of Service and Existing Facilities 1.07 Due to a much heavier demand for services than the network was designed to handle, the local telephone exchanges, the interurban exchanges, and the long distance transmission lines are all heavily congested during daytime. Many of the transmission lines are frequently out of order for lack of spare parts or inadequate maintenance, whereby the number of available channels is constantly reduced below the nominal number and the congestion problem is further aggravated. The high number of telephones per DEL (see  -4- para. 1.04) also contributes to the problem. In reality the congestion makes it difficult for a client to gain access to the telephone network and to complete calls from about 9:30 a.m. to 2:00 p.m. during working days. Thus it is not unusual that, during this period, dialing tone is obtained in Dar-es-Salaam only after ten or more attempts and that a direct dialed long distance communication can only be completed after hours of trial. Sample studies show that only 5.5% of call attempts are successful. More than 70% of long distance call attempts, made during any time of day and night, are not completed due to equipment or circuits being congested, and 24% due to called subscriber station being busy (which in many cases is due to him being engaged in trying to make another call). Waiting time for manually connected long distance calls amounts in most cases to hours or days, which often makes the service of little value and discourages clients. (The number of cancelled calls is likely to be high; no statistics on cancellations are available at this time.) The external plant in Dar-es- Salaam and other cities consists mainly of underground cables, many of which are old and cause faults by poor joints and, during the rainy season, by leakage. In spite of this problem, the quality of service of the local cable networks is not too bad: there was an average telephone failure rate of approximatley 1.2 faults per telephone during the year 1979. Less than one-half of the faults were cleared the day they were reported, with most of the balance cleared within 48 hours. This performance is reasonable. Demand for Service 1.08 In spite of the facts that a potential subscriber has to be registered on a waiting list for an average period of more than two years, and that he is normally not given any fixed delivery time promise at the time of registration, the official waiting lists contained as many as about 18,000 registrations as of December 31, 1979. There is in addition a latent demand, of approximately the same size, which shows itself from area to area, as expansion works are undertaken. Of the 18,000 potential subscribers, about 9,000 could not be connected due to lack of both cable pair and exchange equipment lines and a further 5,000 (approximately) due to lack of cable pair. For the remainder a variety of reasons were given. The increase by 3,700 in the number on the waiting lists from the end of 1978 to the end of 1979 can be compared to the increase during the same period of the number of DELs by about 2,900 to 38,283 (9.3% increase) and the number of telephones by about 6,300 to 88,684 (8.7%). 1.09 Practically all the registrations on the official waiting list relate to Dar-es-Salaam and other relatively important cities. This does not reflect a lack of demand in smaller cities and rural areas but rather the fact that potential clients have been discouraged by long waiting times and by poor service from established facilities. At the time of Bank appraisal, there was no sign that the number of new demands would decrease. However, with the capacity of TPTC to increase the annual addition of new connections by resources provided under its investment program (Chapter II), the amount of the unsatisfied demand is tentatively projected to decrease by  -5- 1984 to perhaps as low as 12,000 or two-thirds of the end 1979 figure. TPTC will also consider tariff measures that would help in channeling the demand for new subscriber connections in a manner which is desirable to achieve government development objectives (para. 3.11). The exact demand for tele- phone communications has not been quantified; from the discussions on the quality of service (para. 1.07), it is evident, however, that the demand does now and will in the next few years greatly exceed TPTC's actual capacity for traffic handling and investment implementation, and thus cause long waiting times. 1.10 The number of telex subscribers increased from December 31, 1978, to December 1979 by 22% to 426, while the waiting list was extended by 76 to 314 during the same period. The reasons for the latter, relatively large figure, is a shortage of exchange lines and shortage of teleprinters. The telex service is, more than the telephone service, dependent on the economic activity in Tanzania and internationally. However, it has been projected, on the basis of enquiries and studies within TPTC, that once the present waiting list has been eliminated by means made available during the invest- ment program, the unsatisfied demand for new telex subscriptions will stabilize at around 150 a year. Sector Goals 1.11 Telecommunications development objectives are in harmony with those of the national development plans which give priority to rural develop- ment and dispersal of the development effort away from major cities, together with overcoming the isolation of areas within the country. Rapid two-way communication is seen as an important means of achieving this goal. In the current five-year plan the objectives established for telecommunications include: (a) measures to improve substantially the functional efficiency of the present installations; (b) measures to improve communications to rural development areas and establish an infrastructure enabling such improvement; and (c) measures to expand and improve Tanzania's international telecommunications. 1.12 After having considered the present shortcomings in its services (paras. 1.07-1.10) and the objectives set in paragraph 1.11, TPTC has formulated in concrete terms the targets of its 1980-84 investment program. These targets, which have been endorsed by Government, are as follows: (a) to install manually operated facilities in unserviced district centers and in other towns with major rural development importance;  (b) to provide satisfactory telecommunication channels to all neighboring countries and to install manually operated telephone facilities in all border towns; (c) to provide subscriber long distance dialing between all regional capitals; (d) to increase the extension, reliability, and capacity of the long distance network so as to ensure the likelihood of call completion attaining acceptable levels; (e) to increase the reliability and capacity of the local switching and cable networks at various cities and towns, reducing the present number of outages and reducing the number of unsatisfied demands registered on the waiting lists (including the additions up to the end of 1984) to two-thirds of the present level; (f) to install at least one public call box at all places with a telephone switchboard installation; (g) to provide teleprinter installations at all district centers and at some other towns with major rural development impor- tance, for rapid and reliable transmission of telegrams and for public access to the telex network; and (h) to develop and train the staff of TPTC. These targets appear to be well established, with a view to achieving develop- ment towards a telecommunications network that is well balanced, technically and economically, and that can support the country's economic and social development to a desirable degree including government administration of the country, the rural development effort, and private sector business. 1.13 The main components of the investment program are: (a) to increase the country's total telephone switching capacity by about 54,000 automatic and 7,000 manual lines and the local cable networks by about 75,000 lines; (b) to install about 30,000 new DELs, about 700 private branch exchanges, and about 60,000 telephones; (c) to construct about 70 VHF, UHF or microwave radio links for reliable long distance circuits, and to increase the capacity of existing links by adding equipment for channeling and switching; (d) to increase the capacity of the telex central office in Dar-es-Salaam by 900 lines and adding about 1,400 teleprinters and telegraph transmission equipment as needed;  - 7 - (e) to improve the reliability of power supply facilities for telecommunications installations; and (f) to complete the construction of TPTC's new training center. 1.14 The following table outlines the result of some of the physical achievements expected from the implementation of the 1980-84 investment pro- gram, which achievements are in addition to a higher degree of reliability and efficiency of the telecommunications services than at present, and to TPTC's generation of a significant amount of local funds (para. 5.11) during the program period. end 1979 end 1984 Telephone line density (DELs per 100 inhabitants) - Total 0.21 0.32 Urbanl/ 1.80 2.00 Rural 0.04 0.09 Telephone availability in rural areas - number of rural towns served 114 156 - percent of total rural population with relatively convenient access to telephone service 3.60 4.70 Unsatisfied demand for telephone subscription in areas with service 18,000 12,000 1/ The term "'urban" covers towns and cities with 20,000 or more inhabitants. Sector Constraints 1.15 The autonomy, responsibility, and organization of TPTC are adequate for the operation and expansion of the Tanzanian telecommunications services. The officials of TPTC management are well qualified for their tasks, and staff with both training and experience is available on all levels in the organization. There is, however, a shortage of such trained and experienced staff, which shortage has made difficult the much needed increase of efficiency in the utilization and maintenance of the existing installations and in expansion work. Realizing this shortcoming, the Government has caused TPTC to include a strong training department in its organization. Training facili- ties, however, are extremely inadequate (para. 4.05). 1.16 The other major constraint which has impeded progress in the telecom- munications sector has been the lack of secured long-term foreign exchange financing. This has caused slow and somewhat erratic expansion, and resulted in inability to implement continuous longer term planning, in high equipment costs, and in a failure to sustain an adequate maintenance program.  -8- Bank Group Role 1.17 Prior to 1977, the telecommunications services in the East African Community (Tanzania, Kenya, and Uganda) were managed by EAPTC. The Bank has been associated with these services since in 1967 it approved a US$13.0 million loan (483-EA) to EAPTC to help finance a project designed to increase local and long distance facilities. The project was satisfactorily completed in early 1974. A second loan (675-EA) for US$10.4 million was approved in 1970 to finance a project to further extend the telecommunications services. This project was satisfactorily completed in June 1975. The combined project performance audit report on these first two projects, while holding an overall positive view of the achievements by the Bank's association with EAPTC, points to delays in project implementation caused by inadequate planning and project management, to problems in procurement, and to failure to meet demand for service. A third loan (914-EA) was approved in May 1973 for US$32.5 million to further extend telecommunications services. Due to problems in the East African Community, leading to its breakup, the works to be undertaken on the third project have been delayed. The Tanzania part of the project is now anticipated to be completed in 1981. 1.18 IDA first became associated specifically with the telecommunications sector in Tanzania through a sector mission in January 1979 followed by a project identification mission in September 1979. IDA's proposed role in the telecommunications sector in Tanzania is focused upon institutional develop- ment and staff training, provision of independent technical and economic advice, promotion of an improved tariff structure, and provision of a sound long-term foreign exchange base on which plans can be prepared and implemented and equipment and facilities costs reduced. While the three EAC projects, mentioned in paragraph 1.17, were managed by EAPTC in a not completely satis- factory manner, the mission expects that TPTC, which will manage the proposed project, would, with planned training initiatives, have the ability to imple- ment it satisfactorily as it has now a significant experience in planning, engineering, and construction of telecommunications installations. This experience was partly gained during execution of Tanzanian part of earlier projects (para. 1.17). Furthermore, TPTC is now conversant with Bank Group's guidelines for procurement and in the process of preparing bidding documents for procurement of goods in the project. II. THE PROGRAM AND THE PROJECT The Plan and the Program 2.01 The telecommunications investment program was designed within the overall framework of the national development plans (para. 1.11). The tele- communications component has been approved by Government and is not expected to be modified. TPTC and the Ministries of Finance and of Planning have always maintained close links concerning the preparation and approval of telecommunications programs and required budgetary allocations. These Ministries are thus aware that this sector cannot ensure completion of its agreed program commitments and designs without an assured long-term funds availability.  - 9 - 2.02 The updated program for telecommunications investment covers the period 1980-84. The program is set out in detail in Annex 3 and includes the following: (a) the proposed project (para. 2.03); and (b) other program works (see Annex 3 for more details): (i) completion of works under the third EAPTC project (para. 1.17); (ii) other ongoing works; and (iii) preliminary works needed for expansion of the telecommunications facilities from 1985 onward. 2.03 The complete program is estimated to cost about T Sh 1,715 million (US$207 million) with a foreign exchange component of about T Sh 1,100 million (US$133 million) (Annex 4). Project Concept 2.04 The proposed project has been designed within the framework of the TPTC's current investment program (paras. 1.13 and 2.02). It comprises works to be undertaken principally during the years 1981, 1982 and the first half of 1983, which are essential for the successful implementation of the program. 2.05 In addition to providing physical facilities and help TPTC generate significant amounts of local funds (para. 5.11), the project has a number of broad objectives. It aims at improving and developing TPTC as an institution, and increasing its capacity for training staff. It aims at focusing the services expansion in rural areas and at spreading the network to presently unserved or insufficiently served areas, both urban and rural. Since in a network of this size and stage of development, it remains necessary to estab- lish reasonably uncongested and reliable urban and long distance networks into which, naturally, most of the traffic from rural users would be flowing, the project aims at supporting a technical and economic balance of the program. Finally, the project will facilitate an increase to acceptable levels of the reliability and functional efficiency of the present installations. The Project 2.06 The proposed project provides for (references are made to the overall investment program targets outlined in para. 1.12): (a) construction of about 550 km of overhead line routes and of about 12 VHF or UHF links, as well as installation of about 850 channels of rural carrier equipment and of power supply equipment for telecommunications facilities at  - 10 - about 90, mostly rural, centers. These facilities will be used to connect district centers and other rural towns, as well as border towns to the telecommunications networks (items (a), (b) and (d) of para. 1.12), and to ensure reliable service; (b) construction of four microwave links and installation of about 600 channels of multiplex equipment in new and existing broadband transmission systems. This equipment is essential in the development of the principal long distance network (items (b), (c) and (d) of para. 1.12); (c) expansion of the local cable network at about 90 urban and rural centers; pressurization of junction cables in Dar-es- Salaam, and provision of dropwire. The local cable and the dropwire correspond to outside network plant and subscriber installations foreseen in items (e) and (f) of paragraph 1.12. (The necessary switching equipment and telephone instruments are partly available or under installation; the supply of the remainder is being secured under bilateral financing); (d) provision of about 700 teleprinters. This equipment is needed during the first two years of the project, for connection of telex subscribers (about two-thirds), for leased circuit terminals, and for installations under item (g) of paragraph 1.12; (e) provision of cement and other building material. The local production of cement and certain other building material does not adequately supply the needs of the country; the balance having to be imported. The quantity included in the project corresponds to what is needed for antenna tower foundations, cable ducts, and operational buildings, so as not to allow the shortage of such material to cause delays in the comple- tion of the project; (f) provision of spare parts: for existing power supply and telecommunications installations, for air-conditioning installations in equipment rooms, and for vehicles that are needed in the installation of project items and in the operation of telecommunications facilities. The general shortage of foreign exchange has caused extreme difficulties for TPTC's ongoing activities. Thus, about one-third of the vehicle fleet is garaged, waiting for spare parts. Parts of the long distance network are out of use, due to lack of spare parts. Some equipment installed in the coastal areas will have its life length reduced by corrosion, due to the fact that the air-conditioning does not work for lack of spare parts. The provision of spare parts under the project aims at rectifying the situation as far as possible;  - 11 - (g) provision of an air-conditioning plant and of training equipment. These items are critical in the completion of the new training center and in starting up the activities there (para. 4.05). They cannot be procured locally; (h) provision of 40 vehicles. These vehicles are specialized or four-wheel-drive vehicles for handling of cable drums and other heavy or bulky items and for other installation and maintenance work. In computing the number of vehicles needed, it has been assumed that practically all of the vehicles now garaged (item (f) above) will be brought back into service; (i) installation of a digital telephone exchange in Zanzibar city as a pilot project preceding the introduction of similar equip- ment on a large scale in various parts of Tanzania; (j) provision for training fellowships and overseas study tour. These are intended for specialization in such essential fields as outside plant engineering, construction, and operation, in stores and supplies management, etc., and will complement the locally available training; and (k) provision of consultancy services for, inter alia, a study of the impact of improved telecommunications on the economic and social development of the country. Project Costs 2.07 The estimated cost of the project is about T Sh 390 million (US$47.0 million), with a foreign exchange component of about T Sh 224 million (US$27.0 million). The cost details are given in Annex 4 and summarized below:  - 12 - T Sh million US$ million Local Foreign Total Local Foreign Total Local Network Cables, accessories, dropwire 68 75 143 8.36 8.78 17.14 Interurban Network Overhead lines and rural/line carrier - 15 15 0.09 1.78 1.87 VHF, UHF and microwave links 21 28 49 2.62 3.30 5.92 Multiplex equipment 1 8 9 0.08 1.04 1.12 Power supply equipment 1 4 5 0.05 0.54 0.59 Telex and Gentex Network Teleprinters 1 17 18 0.20 2.03 2.23 Support for Installation and Operation Cement and other building material 1 7 8 0.14 0.82 0.96 Spare parts 1 7 8 0.10 0.82 0.92 Vehicles 1 4 5 0.10 0.50 0.60 Pilot Project 4 11 15 0.36 1.60 1.96 Training and Consultancy Services Training equipment and air conditioning 11 6 17 1.32 0.73 2.05 Fellowships, study tours and consultancy services - 3 3 0.01 0.30 0.31 Subtotal 110 185 295 13.43 22.24 35.67 Physical contingencies 6 8 14 0.65 1.00 1.65 Price contingencies 50 31 81 5.99 3.76 9.75 Total Financing Required 166 224 390 20.07 27.00 47.07 2.08 The cost estimates (figures represent the expected cost level at the latter part of 1980) are based on prices quoted in Tanzania and similar countries for similar types of equipment. No taxes or duties are charged on imported telecommunications equipment. The local costs are based on preva- lent costs of civil works, or costs of small equipment and services available in Tanzania. Contingencies 2.09 A physical contingency of 5% has been provided on foreign and local costs. Price contingencies have been applied for all equipment and materials on an annual price escalation of 8% in foreign costs and 17% for local costs. They are considered adequate and reflect the declining cost in real terms of telecommunications equipment. The resulting estimated overall price escalation amounts to about 26% of the estimated base cost plus physical contingencies.  - 13 - Project Financing 2.10 Project costs will be financed as follows: US$ million % IDA 27.0 57 TPTC 20.0 43 Total 47.0 100 2.11 The proposed IDA credit of SDR 22.1 million (equal to US$27.0 million using the rate SDR 1.00 = 1.22) would be to the Government of Tanzania on standard IDA terms and would finance about 57% of total project costs. In line with conditions applied in government onlending to other parastatals, Government would onlend the proceeds of the proposed IDA credit, at an interest rate of 10% per annum, for a period of 20 years including a grace period on capital repayments of five years with TPTC carrying the foreign exchange risk. Assurances were obtained in this regard during negotiations. The execution of a subsidiary loan agreement between Government and TPTC acceptable to the Association and reflecting the above is to be a condition of credit effectiveness. Procurement 2.12 All equipment to be financed by the proposed IDA credit will be procured through international competitive bidding (ICB), except for a few items costing a total of about US$1,500,000. The items excluded from ICB and proposed for negotiated purchase on the grounds of compatibility are spare parts for existing vehicles and for existing telecommunications and auxiliary equipment (US$750,000). The prices paid for the negotiated purchases would be subject to IDA approval and would have to be reasonable in terms of ICB prices offered on similar items. Furthermore, contracts for civil works materials and sundry maintenance equipment and spares costing less than US$150,000, and not exceeding a total of US$750,000, would be awarded following TPTC procurement procedures which are satisfactory. Disbursements 2.13 Funds would be disbursed on the following basis and, for each category, disbursement would cover 100% of foreign expenditures and 85% of local expenditures.  - 14 - Category US$ (000's) (a) Cables and accessories 9,000 (b) Rural line and carrier equipment 1,750 (c) Microwave and UHF equipment 3,500 (d) Power equipment 500 (e) Multiplex, VHF and radio call equipment 1,000 (f) Teleprinters 2,000 (g) Civil works raw materials (cement and reinforcing rods) 1,000 (h) Vehicles 500 (i) Spares for telecommunications equipment, air conditioning equipment, power equipment, and vehicles 1,000 (j) Training and research equipment (including air conditioning) 550 (k) Fellowship and consultancy services 400 (1) Pilot project 1,800 (m) An unallocated amount transferable to above categories as appropriate 4,000 Total 27,000 An estimated schedule of disbursements is given in Annex 5. Project Implementation 2.14 The Tanzania Posts and Telecommunications Corporation (TPTC) will be responsible for project implementation. TPTC staff will prepare engineer- ing designs for all equipment, prepare bidding documents, evaluate bids and prepare contract documents. TPTC will lay and commission all local and junction cables and install subscriber facilities both in provincial towns and the metropolitan area. TPTC will also install the microwave, multiplex and radio equipment. TPTC's management and staff are sufficiently experi- enced and are capable of managing the above work satisfactorily. TPTC staff are currently preparing bid documents and technical specifications for nearly all IDA-financed goods. Implementation and operations within TPTC have been hampered by lack of spare parts for vehicles (currently about 35% of vehicles are off the road awaiting spare parts). The project provides for spare parts and tools, and the status of vehicle maintenance will be monitored during supervision. During the execution of the project, IDA supervision of procurement will also ensure that equipment will be properly deployed and procured or delivered only when the building or structure for this equipment is certain to be completed by delivery time and only when any necessary ancillary equipment (switching, etc.) is certain to be ready for system linkup. An estimated project implementation schedule is given in Annex 6.  - 15 - Performance Indicators and Monitoring 2.15 Performance indicators to help monitor TPTC's project implementa- tion and operational and financial performance are given in Annex 7. These were discussed and agreed upon during negotiations and will be included in TPTC project progress reports to be sent to IDA. Project execution reports will be prepared and submitted on a quarterly basis, financial reports in accordance with paragraph 4.10 below. The performance indicators and the figures showing their expected annual variations have been chosen so as to demonstrate TPTC's degree of success in installation of facilities provided under the project, in making agreed staffing improvement, in accelerating its training activities, in utilizing spare parts provided under the project, in keeping down the level of outstanding subscriber accounts receivable, and in improving its financial performance as projected. III. ECONOMIC ANALYSIS 3.01 The economic analysis discussed in this chapter related to the 1980-84 telecommunications investment program, of which the project forms an integral part. The program is designed to facilitate achievement of the objectives of the telecommunications sector which are derived from the National Development Plans (para. 1.11). Telecommunications and Economic Development 3.02 Inside Dar-es-Salaam and a few other big cities, the existing tele- communications facilities are congested, particularly during office hours. Moreover, the main long distance network is almost always congested during daytime hours, and often faulty. The characteristic feature of the rural network is a very sparse availability, circuits often out of order and heavily congested (paras. 1.03-1.09). 3.03 Government development efforts, which are focused on rural devel- opment (para. 1.01), have an indispensable need for a countrywide network of reasonably well functioning telecommunications services. In the actual situation described above, these efforts are being seriously hampered, particularly so by the inadequacy or unavailability of communications channels between Dar-es-Salaam and the other regional capitals, and between them and the district centers and other principal towns. For example, an important long distance telecommunications link in the country goes between Kigoma, situated on Lake Tanganyika, and Dar-es-Salaam. Kigoma is important not only as capital of region but also as point of transfer of goods between the railway to Dar-es-Salaam and the shipping lines, particularly the one to Burundi. Usually, between two and four hours are required to establish a call on this link during office hours, and this poor service contributes to difficulties for the transporters to avoid transit delays, to difficulties to comply with plans for Kigoma's development, and to Government's diffi- culties to monitor the situation.  - 16 - 3.04 The lack of access to rapid communications over most of the vast expanse of Tanzania has created significant problems or aggravated existing problems in the coordination and management of all sectors. Major problems have, for example, been encountered in creating and maintaining a national transport system, and in coordinating trips to minimize fuel consumption; many of these are related to a lack of information and reliable communica- tion channels. Trucks often return to base empty even though there are cargoes waiting to be picked up; breakdowns are not quickly reported and there are delays in analyzing mechanical problems and sending a repair team with suitable parts and tools. Agricultural development efforts also suffer because of slow and unreliable communication. There are many instances in which supplies are not ordered or provided on a timely basis, and informa- tion on prices, transport, and administrative problems is either untimely, unavailable, or sometimes grossly misleading. Among other things, this directly or indirectly reduces the quantities of agricultural products exported and reduces the quantities and the timeliness of locally produced foddstuff available in the domestic consumer markets. This in turn has undesirable consequences for the country's economy at large and for the producers' development endeavors. 3.05 Government officials, responsible for project implementation, who require daily information from parastatals and other ministry depart- ments, spend up to three hours a day travelling, due to the fact that inadequate telecommunications links necessitate frequent trips by car. In the absence of adequate long distance telephone connections, other government officials must make monthly or even weekly, costly and time- and fuel-consuming trips. Instead of a situation where adequate telecom- munications services contain the pressure on the strained transport system, the present inadequacy of these services exaggerates the burden on the system. Furthermore, due to shortage of both means of telecommunications and of transport, day-to-day problems and bottlenecks remain frequently not reported or inadequately attended to. 3.06 The investment program (para. 1.13) has been designed to improve the reliability and efficiency of the present telephone installations to more acceptable levels. It will also increase the capacity of the local and long distance networks, so as to enable automatic and manual calls to be established without excessive delay. It will expand the network to about 42 presently unserved towns, enabling access both from public tele- phone booths and from subscriber installations. Although the program will not eliminate unsatisfied demand for subscriber connections or for immediate access, it will significantly improve the present situation, thus alleviating some of the difficulties indicated in paragraphs 3.02 to 3.05. The Distribution of Benefits 3.07 Most segments of Tanzanian society will feel, directly or indirectly, the benefits of TPTC's 1980-84 investment program, since the completion of the program will contribute to greater efficiency in business, transportation, and Government administration and rural development, health, and educational programs.  - 17 - 3.08 By end 1984, the access to the network and the quality of communi- cations should have improved greatly. In general, the targets described in paragraph 1.12 should have been fulfilled as follows: (a) the remaining 17 district centers and other presently unserved towns which are important in the economic and social develop- ment would have been connected to the telecommunications net- work and been provided with a manual switchboard, one or more public telephone booth(s), and the possibility for connection of subscribers; (b) all border towns would have been provided with rapid and reliable telephone connections; none has it at present; (c) high quality links with the eight neighboring countries would have been established or would be in the process of being established; more or less satisfactory links to three of these countries now exist, with very poor links to the other five; (d) the principal long distance network would consist entirely of circuits complying with international standards and would enable approximately the following: (i) direct dialing between all regional centers, with not more than one failure in five attempts; (ii) manual traffic to and from all district centers and border towns, with less than half an hour waiting time; (iii) manual traffic with other towns connected to the network with less than an hour waiting time; and (iv) international traffic of acceptable quality; (e) the reliability of the local networks at about 90 urban and rural cities and towns will have been improved (the number of faults per telephone and year reduced from 1.2 to 0.7) and their capacities extended. About 60,000 new telephones and about 300 additional public call boxes will have been installed. The updated waiting list for new subscribers, in areas with service, will have been reduced to about 12,000; and (f) teleprinters will have been installed and connected to the telex networks, at all district centers and at about 50 other places with important economic activity.  - 18 - 3.09 By end 1984, the telephone density will have increased from 1.80 to 2.00 in urban areas and from 0.04 to 0.09 in rural areas (para. 1.14), and the long distance network will have been improved and additional public call boxes been installed (para. 3.08) Although the level of the telephone density will still be much higher in urban areas, the relative increase is much bigger in rural areas (125%) than in urban areas (11%). As a result, the benefits of the program will be felt significantly in the activities of economic and social development in rural areas, including those of the small farmers and small businessmen and their families. 3.10 Inside Dar-es-Salaam and other urban communities, the greatest benefits would flow to Government administration, including parastatals, and to commercial activities. Benefits would also be reaped by a rela- tively limited number of senior civil servants and others who can afford a private telephone installation, and by the large number of people who can utilize public call boxes. The expected flow of benefits is acceptable. However, tariff measures should be considered that can in the future guide the flow of benefits further (para. 3.14). The proposed project will have a favorable financial impact on government development programs in other sectors and will generate significant public savings. Over the project period, it is estimated that TPTC will generate a net amount of US$84 million equivalent in local currency revenue, which Government may use for other purposes (para. 5.12). 3.11 During negotiations, assurances were obtained that by December 31, 1982, TPTC will have carried out the study of the impact of improved tele- communications services on the economic development of Tanzania under terms of reference satisfactory to IDA. Such study shall include a survey on the usage of telecommunications services by current and potential customers. Tariff Policies 3.12 The last tariff increase was in February 1975. TPTC has a tariff review committee consisting of the director general, the two assistant director generals, and the directors of finance and of research and corporate planning. This committee sends its recommendations to the TPTC Board, which forwards for approval final recommendations to the Ministry of Communications and Transport. The telephone access allocational aspects of tariff policy have not in the past been a prime factor in determining tariff level or structure. 3.13 A table of existing tariffs is at Annex 8. The installation cost (US$36) and the annual rental (US$58) for telephone are the same in rural and urban areas, as is the charge (US$0.08) for an untimed local call. The charges for long distance domestic calls vary with the distance between caller and called station (US$0.16 to.US$1.10 per minute; during "cheap rate hours" the charge is one-half). The installation fee is relatively low by developing country standards, and the long distance call, charges  - 19 - relatively high; the annual rental charge and untimed call charge compare approximately to the average of charges in other countries. On the average, about 80% of the calls made from urban residential or office telephones are local calls and about 20% are long distance domestic or international calls. For rural telephones, the ratio is approximately the opposite. Hence, the distributional result of the tariff structure for telephone calls is that it favors urban clients by relatively low total charges. The structure, however, corresponds to costs for installation, maintenance, and operation which are lower in cities. Nevertheless, the relatively high costs for subscribers in rural areas are not conducive to a higher usage which may be commensurate with Government rural development efforts, and which over a period of time, could render TPTC's installations in rural areas profitable. 3.14 TPTC will, therefore, undertake a tariff study under terms of reference as discussed during the negotiations (draft terms of reference are at Annex 9). The study should be completed by December 31, 1982 and the results and implementation implications should be reviewed with IDA not later than June 30, 1983. The study should compute the costs of the various elements of the telecommunications services provided, and estimate the needs for the services of the various groups of existing and potential users. It should attempt to rationalize tariff structure and level toward ascertaining what changes, if any, might improve channeling of the utili- zation of the telecommunications network to high productivity users, and to attempt to distribute the benefits of investments throughout the entire country in such a manner as to promote equity and balance and to efficiently support Government and private efforts for economic and social development. Least Cost Solution 3.15 The design of the telecommunications network has been based on what is considered to be appropriate technology and standard engineering methods for minimizing capital and recurrent costs. Experienced engineers within TPTC have carried out the planning and design for each component of the network expansion. Appropriate intervals for extension of the various types of plants have been adopted. 3.16 For the programmed expansion of the present central offices and for installation of new switching facilities, register controlled crossbar equipment of recent design will be used, since the Tanzanian installation and maintenance personnel is familiar with this kind of equipment, and since appropriate arrangements have been made in the stores organization and in staff training. During the next program, the major portion of switching equipment added is likely to be electronic digital; the pilot installation at Zanzibar, provided for under the present project, will give valuable planning information in this regard. Subscriber dialing, instead of the operator-handled setting up of calls for traffic between the regional capitals, is thought to be desirable despite this solution being somewhat less labor intensive and slightly more demanding on initial capital. This is primarily because automatic operation has distinct time, reliability, and  - 20 - efficiency advantages, for both TPTC and the clients, on the high traffic routes in question, with a significant amount of the traffic originating beyond the regional capitals, in manual exchange areas. Return on Investment 3.17 The internal financial rate of return on the program, defined as the discount rate which equalizes the present value of cost and revenue streams (at 1980 prices) attributable to the 1980-84 program, is 17%. 3.18 This rate of return understates the real benefits to be derived from the investment program, partly because the benefits stream used in the calculation does not take into consideration a major portion of the indirect and external benefits which are received by nonusers of the ser- vice. It also does not include much of the consumer surplus which telephone users receive. In recent years, inflation has resulted in telephone tariffs falling in real terms, and, in the absence of tariff changes (para. 3.12), they will continue to do so. As an example of the significance of this, a portion of the consumer surplus is estimated by (a) tabulating over the program period the prices in 1980 real terms, which the existing subscribers and existing registered applicants have demonstrated a willingness to pay; and (b) assuming that the new applicants will also be willing to pay the same real amount as existing subscribers and waiting applicants have demonstrated a willingness to pay. Given these assumptions, all of which are considered reasonable, and after shadow pricing the foreign exchange elements of the program at US$1.0 = T Sh 12.0, the quantifiable estimate of the economic rate of return would be 24%. Risks 3.19 The project offers limited risk. The principal risk is the pos- sibility of delayed physical implementation due to unforeseen circumstances. In telecommunications projects, which comprise a relatively large number of independent activities, delay in the completion of a few works does not generally prevent the use of other newly created assets. Furthermore, costs and benefits are often delayed in roughly the same degree, so the impact on the rate of return may not be significant. A sensitivity analysis on the economic rate of return (Annex 10) shows that a combination of 10% higher capital costs and 10% lower revenues would result in a return of 19%. Environmental and Health Aspects 3.20 Telecommunications projects have very little direct impact on the environment. The plant is mostly unseen and it consumes little energy. Through its use as an alternative to communications involving physical movements, however, telecommunications has the potential to conserve energy, reduce environmental pollution, and facilitate such items as health services delivery and emergency care.  - 21 - IV. THE IMPLEMENTING AGENCY Organization 4.01 Established by the Tanzania Posts and Telecommunications Corpora- tion Act, 1977, dated December 2, 1977, TPTC, the project implementing agency, is an autonomous government-owned public corporation responsible for all domestic and international postal and telecommunications services in Tanzania. It started operations on February 3, 1978. 4.02 TPTC has a board of directors on which are representatives of, among others, Ministries of Finance and of Communications and Transport, of Parliament, and of the employees' union. The day-to-day operations of TPTC, which have a commercial orientation, are controlled by a director general, who has reporting to him a director of research and corporate planning, and two assistant directors general in charge of operations, and finance and administration. Postal and telecommunications share the common services of research and corporate planning, of finance and administration, and of buildings. From an accounting point of view, the operations of postal and telecommunications services are separately identified. TPTC's present organization chart is shown at Annex 11. Management and Control 4.03 The management, budgeting, and control systems in TPTC operate reasonably well, although there are some areas which require strengthening (para. 4.07). The flow of management information is not always presented in a way that could lead to effective action. TPTC is working on a management information system which is expected to be completed during the next 12 months. Staff and Training 4.04 Estimated telecommunications staff distribution by category is given in the following table: Staff Classification Numbers Senior engineers 155 Technicians and specialist workers 911 Operators 962 Laborers 724 Administrative 402 Total Communications Staff 3,154  - 22 - This number of staff is on the high side when compared with the number of telephones now in service (77 per 1,000 DELs). With the introduction of more sophisticated systems, TPTC, during the project period, does not anticipate expanding its staff at the same rate as in the past (about 7% p.a.) and expects that by end 1984, staff density will have reduced to about 58 per 1,000 DELs, which is acceptable pending further reduction in subsequent years. 4.05 TPTC has a great need for training of its staff, both in order to improve operation and maintenance of existing installations and to cater to foreseen expansion. Currently, TPTC has two training campuses, both in Dar-es-Salaam. In addition, TPTC has the possibility to send some students for managerial and administrative training to a multi-national training institution in Arusha. The available facilities are, however, very inade- quate, and a new training center is being built in the outskirts of Dar-es- Salaam. Completion is expected in early 1983, at which time the activities at all the campuses will be consolidated. The major part of the training will be done at the new center, although some will still be undertaken at the TPTC's present centers and some students be sent to the Arusha institution. -4.06 Instruction and training programs within TPTC cover most signifi- cant aspects of its business (engineering, maintenance, postal matters, finance, civil works, etc.). There is both in-house and on-site training, with instructors having formerly worked on site. Maintenance personnel are, on the average, retrained for two weeks per year. Middle- and senior-level technicians are sent overseas for short- and medium-term courses. Swedish aid has provided a number of instructors for the schools and this aid is to continue. Several small items of equipment as well as air conditioning for the machinery rooms are required. The project provides for these, thus ensuring that external financing requirements for the training component are covered. The present plans for TPTC's training activities foresee a successive increase of up to 14,000 student-weeks in 1984, up from 6,000 in 1979. This corresponds to the need of the organization. The increase in number of student-weeks will only be attained, however, if the planned activities are implemented in a timely fashion. Accounting and Budgeting 4.07 TPTC enjoys a considerable degree of financial autonomy and prepares its accounts on a commercial basis. TPTC is required by the TPTC Act to present its audited accounts within six months of the end of the financial year. Up to now, this has not been possible due to various delays (para. 4.10). TPTC prepares annual budget forecasts and these are presented to the board for its review, comment, and approval, in September of each year (three months in advance of fiscal year). Capital development budgets are forwarded for final approval to the central government authorities via the Ministry of Communica- tions and Transport, and it is in this area that full financial autonomy for TPTC is not achieved. Government is in control of foreign exchange resource allocation to TPTC and in this role can determine the size and scope of expansion. Tanzania's extreme shortage of foreign exchange funds has been a  - 23 - major constraint on sector development (para. 1.16). TPTC operating results are presented separately for telecommunications and postal operations (para. 5.02). The annual balance sheet is prepared for TPTC as a whole, with tele- commdnications and postal assets separately identified. TPTC's accounting operations are slow but otherwise reasonably well controlled and managed. Billing and Collection 4.08 Rentals are billed monthly in advance and call charges are billed monthly after they have been incurred. The billing system at the issuing office in Dar-es-Salaam is computerized. At present, bills are on average issued about three-and-a-half months after the period to which they relate. Two months of this delay occur prior to receipt of billing information by the centralized computer center in Dar-es-Salaam. Subscribers can pay at any post office and are expected to do so within two weeks of their receiving the bill. The policy is that, if a subscriber has not paid the bill within one month after receipt of the bill, the telephone is disconnected. This policy, however, does not seem to be uniformly applied in all cases. Accounts receivable as of December 31, 1979, are estimated to be T Sh 170 million representing private and parastatal sector users. This is an overdue factor of about six months, which equates to two-and-a-half months payment delay or doubtful debts and three-and-a-half months bill issuance delay. In order to clarify and improve the accounts receivable situation, TPTC will use their receivables ageing analysis by type of user to institute procedures to ensure a reduction of the level of outstanding receivables so that they do not exceed the equivalent of four months of gross telecommunications revenues by December 31, 1982, and three months by December 31, 1984. Assurances were obtained during negotiations that TPTC accounts, billings and computer sections would investigate and suggest methods of improving the three-and-a- half months delay in the present bill issuance and forward the report of investigation with implementation implications and actions to IDA by December 31, 1981. One critical factor in the current bill issuance delay is the lack of vehicles for the billing services. This should be partly taken care of under the project [para. 2.06(f) and (h)]. A recent mission to Tanzania has confirmed that elements of this study have already started and that progress has been made to the extent that total delay has recently been reduced to about two and a half months. Audit 4.09 TPTC has an internal audit section which, since December 1979, has been expanded to 19 personnel. This section operates with an audit program and covers both routine accounting and management control procedures. Every two months, an internal audit report is issued to management. 4.10 The Tanzania Audit Corporation (TAC) is TPTC's external auditor. The audit of the 1978 accounts has recently been completed; delays have occurred both in the presentation of draft accounts and in the auditing work. The situation has improved somewhat, although the one major delay is the  - 24 - billing delay (para. 4.08). During negotiations, assurances have been ob- tained that TPTC will continue to employ independent auditors acceptable to the Association and will conform to the following timetable with respect to forwarding reports to IDA. Fiscal Year Audited Accounts (months after end of fiscal year) 1981 8 1982 7 1983 6 1984 6 1985 6 V. FINANCIAL ANALYSIS 5.01 The final division of the East Africa Posts and Telecommunications Corporation (EAPTC) assets and liabilities 1/ among the former partner states, after the breakup of the EAC in 1977, is still pending. The independent mediator, appointed in January 1978 to advise on the division, has presented his report in March 1980, but the acceptance of his recommendations and the final settlement may take some time. Government has authorized TPTC to operate EAPTC assets in Tanzania. However, these assets cannot be declared the property of TPTC until final agreement is reached. This situation implies that historic and projected financial statements presented for TPTC are provisional and may be adjusted according to a future final settlement of EAPTC's assets and liabilities. The financial covenants would be drafted to become operative on a specific date subsequent to final agreement of the mediation. During negotiations, agreement was reached on how to apply the principles underlying these covenants on provisional financial data, until such time as the mediation exercise has been concluded and final financial statements are available. Postal Operations 5.02 In addition to telecommunications, TPTC operates the postal services. For the years 1976 to 1979, postal revenues covered operating expenditures, leaving a profit margin of about T Sh 1.0 million. Postal 11 Including also the assets and liabilities of East African External Telecommunications Corporation, a company which was owned by EAPTC and which had been established for the purpose of operating the installations for international telecommunications services.  - 25 - services are supposed to operate on a break-even operating basis. Some telecommunications funds will, however, over the project period, be used to finance postal capital works. The accounting system of TPTC separates postal and telecommunications operations (para. 4.07). Postal net fixed assets accounts for about 10% of the total assets now managed by TPTC. The analysis in this chapter relates to the whole of TPTC's operations. Past Financial Performances 5.03 The past financial performance of TPTC has been good. A summary for the years 1977 to 1979 is given below. 1977 1978 1979 (T Sh millions) Operating revenues 249.7 298.4 329.3 Operating costs 104.3 132.9 156.9 Operating surplus before tax 145.4 165.5 172.4 Taxation - 70.5 60.0 Net operating surplus 145.4 95.0 112.4 Operating ratio (%) 42 45 48 Rate of return on revalued assets before tax (%) 27 24 21 after tax (%) 27 14 14 As can be seen, operating ratios and rates of return both before and after tax are acceptable. Present Financial Position 5.04 A summary of TPTC's estimated balance sheet as at December 31, 1979, is shown below.  - 26 - T Sh US$ (millions) Assets (Book Value) Fixed Assets Telecommunication net plant in operation 385.9 46.5 Postal net plant in operation 118.5 14.3 Work in progress and materials and supplies 230.0 27.7 Total net fixed assets 734.4 88.5 Financial assets 109.0 13.1 Current assets 369.5 44.5 Total assets 1,212.9 146.1 Liabilities Equity capital 641.1 77.2 Reserve funds 132.4 16.0 Long-term debt 257.0 30.9 Current liabilities 182.4 22.0 Total liabilities 1,212.9 146.1 Financial assets consist of investment of INTELSAT 1/ and pension liability funds. The book value of EAPTC Tanzania based assets are included above. However, these EAPTC assets, which have yet to be legally vested to TPTC, represent less than 10% of the value of TPTC's net fixed assets. Valuation of Assets 5.05 TPTC's records on fixed assets are incomplete and historic cost for each item cannot be firmly established. Plant accounts are maintained, however, and present asset figures and future projections are considered to be reasonably accurate. 1/ Covering the right to participate in the INTELSAT system for telecommunication via satellites.  - 27 - 5.06 TPTC has never established the effect of inflation on the value of its fixed assets. A consultant study of EAPTC assets valuation, dated January 1976, concluded that the gross book value of the estimated Tanzanian share needed to be increased by 21% to reflect replacement cost at December 1974. To reduce possible distortion in assets value by price inflation on the one hand and declining unit costs of telecommunications assets from improved technologies on the other, TPTC's total net fixed assets in operation have been adjusted on a trial basis to reflect the current value of the assets, by being revalued from the 1974 base by 6% per annum. 5.07 During negotiations, assurances were obtained that, not later than September 30, 1981, TPTC would propose and agree with IDA on a method for the annual revaluation of its total fixed assets. Assurances would also be obtained that TPTC would review the value of its fixed assets annually there- after, in accordance with the methods agreed on with IDA for the purposes of calculating the rate of return on the telecommunications assets. Financing Plan 5.08 The forecast of sources and application of funds is based upon TPTC's capital expenditure program and is shown in Annex 13. Following is a summary of the financing plan for the period 1980-84. T Sh US$ (millions) Requirements Proposed project 390 47 Other program works 878 105 Future programs preinvestment 446 54 Total program cost 1,714 206 Increase in reserve and net current assets 592 71 Total requirements 2,306 277 Sources Internal cash generation 1,249 150 Less debt service 316 38 Net cash generation 933 112 Medium- and long-term financing 1,373 165 Total sources 2,306 277  - 28 - Medium- and long-term financing consists of: multilateral agencies (IDA) - T Sh 224 million; bilateral agencies (Japan and Sweden) - T Sh 800 million; suppliers' credits and Government - T Sh 349 million. Of this financing, approximately T Sh 680 million is already confirmed, and the items for financing ensure effective implementation of the project vis-a-vis ancillary link-up equipment. 5.09 TPTC has a good net internal cash generation which finances the equivalent of 54% of program costs. Long-term debt and increase in net current assets are both high as debt is required for foreign exchange expenditures; hence, there is a large build-up in the accounts of local currency. The Ministry of Finance has in the past swapped local currency for foreign exchange. As there can be no certainty of this for the future, it has not been assumed in any financial projections. Future Financial Performance 5.10 Financial statements for the fiscal years 1980-85 are given in Annex 12 through Annex 14. A summary of TPTC's expected future financial performance, assuming inflation on operating costs (17% on local and 8% on foreign costs) consistent with those used for estimating project costs, is given below: Fiscal Years Ending December 31: 1980 1981 1982 1983 1984 1985 Operating revenues (T Sh million) 377 461 565 692 850 979 Operating expenses (T Sh million) 187 235 297 361 435 507 Operating surplus (T Sh million) 190 226 268 331 415 472 Operating ratio (%) 50 51 52 52 51 52 Rate of return on revalued assets (%) before tax 24 24 24 22 22 23 after tax 13 12 13 12 12 12 Current ratio (times) 2.9 3.1 3.4 3.6 4.0 4.7 5.11 TPTC's projected financial performance over the project period is good. The operating ratio at 52% and rates of return are considered satis- factory. From 1983 to 1985 the current ratio is high due to the local currency build-up mentioned in paragraph 5.09. 5.12 In respect of tariffs, it has been assumed for the financial pro- jections that there will be no increases during the project period since TPTC's rate of return on revalued assets remains acceptable, despite inflation, due to an almost doubling of DELs during the program period and to an increased utilization of the services. The present forecasts show the annual rate of return on the estimated revalued assets to be not less than 12% after tax, and not less than 22% before tax. Each of these rates is adequate to meet TPTC's future financial requirements. The payment of tax and interest would result  - 29 - in a transfer to Government from the telecommunications sector during the project period of about T Sh 700 million (US$84.0 million) (para. 3.10). During negotiations, assurances were obtained that TPTC would maintain tariffs at a sufficient level to achieve a rate of return on revalued average net telecommunications fixed assets of at least 12%, after tax, each year. VI. RECOMMENDATIONS 6.01 During negotiations, assurances were obtained that the following be a condition of effectiveness of the proposed credit: that TPTC and Government had signed a subsidiary loan agreement acceptable to the Association, whereby the pro- ceeds of the IDA credit be onlent to TPTC at an interest rate of 10% per annum for a period of 20 years, including a five-year grace period, and with foreign exchange risks to be borne by TPTC (para. 2.11). 6.02 During negotiations, the following major assurances were obtained that: (a) by December 31, 1982, TPTC will have carried out the study of the impact of improved telecommunications services on the economic development of Tanzania under terms of reference satisfactory to IDA. Such study shall include a survey on the usage of telecommunications services by current and potential customers; (b) TPTC will study the level and structure of its tariffs; the study to be completed by December 31, 1982, and that TPTC would review with IDA the implications of the implementation of the conclusions of this study not later than June 30, 1983 (para. 3.14); (c) not later than September 30, 1981, TPTC would propose and agree with IDA on a method for revaluation of its fixed assets and would review the value of its fixed assets annually thereafter for the purposes of calculating the rate of return (para. 5.07); and (d) TPTC would maintain tariffs at a sufficient level to achieve a rate of return on revalued average telecommunications net fixed assets of at least 12% after taxes each year (para. 5.12). 6.03 Provided the above conditions are met, the proposed project constitutes a suitable basis for an IDA credit to Government of Tanzania of SDR 22.1 million (equal to US$27.0 million using the rate SDR 1.00 = US$1.22 equivalent).  - 30 - A2N.;EX 1 TANZANIA TANZANIA POSTS AND TELECOMOUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT International Telephone Statistics TELEPHONES - JANUARY 1978 Principal Rest of Percent of National Cities Country National 1977 Population Percent Principal (OOOs) Per Average Autom- Per Per Cities Prin- 100 Annual atiza- 100 100 Pop- cipal Rest of Total Popu- Growth tion Total Popu- Total Popu- ula- Tele- Country Total Cities Country (000s) lation 1969-78 (Z) (000s) lation (COOs) lation tion phones WORLD 4,138,000 NA NA 423,082 10.22 6.6 99 NA NA NA NA NA NA AFRICA 438,000 NA NA 4,237 12.80 4.3 86 NA NA NA NA NA NA Algeria 18,100 1,991 16,109 298 1.64 7.5 87 176 8.84 122 0.76 10 59 Burundi 4,100 NA NA 5 0.11 5.5 99 3 0.80 NA NA 10 100 Ethiopia 28,609 1,855 26,754 79 0.28 9.1 100 60 3.24 19 0.07 6 76 Kenya 14,384 1,385 12,963 144 1.00 9.3 100 116 8.38 28 0.22 10 81 Madagascar 7,995 1,165 6,830 29 0.36 2.0 94 29 2.09 0 0.00 15 100 Mauritius 894 143 751 29 3.24 6.8 100 12 8.39 17 2.26 16 40 Nigeria 79,059 2,139 76,920 128 0.16 6.0 30 71 3.32 57 0.07 3 55 Rhodesia 6,860 1,044 5,816 197 2.87 6.0 94 159 15.23 38 0.65 15 81 Rwanda 4,800 NA NA 4 0.08 6.5 100 4 0.80 NA NA 10 100 Seychelles 619 160 459 5 7.37 29.2 100 4 23.73 1 0.17 24 83 South Africa 26,130 8,909 17,221 2,320 8.88 5.8 87 1,703 19.08 617 3.58 34 73 Sudan 18,000 1,971 16,029 62 0.34 3.8 91 56 2.84 6 0.04 11 90 Tanzania 16,132 1,216 14.916 74 0.46 10.1 80 59 4.80 15 0.10 7 80 Zambia 4,067 1,855 2,212 54 1.32 2.9 97 44 2.32 10 0.46 46 82 AMERICAS 577,000 NA NA 192,789 33.41 5.0 99 NA NA NA NA NA NA Brazil 119,004 26,729 92,275 4,708 3.96 7.9 98 3,597 13.46 1,111 1.20 23 77 Canada 22,943 10,308 12,635 14,506 63.23 5.7 100 7,445 72.73 7,061 55.88 45 51 Jamaica 2,000 823 1,177 111 5.55 6.9 100 97 11.79 14 1.19 41 87 Mexico 66,944 25,477 41,467 3,712 5.54 13.6 98 3,133 12.30 579 1.40 38 85 Trinidad & Tobago 1,067 100 967 75 7.03 4.9 100 46 46.00 29 3.00 9 61 United States 217,000 43,441 173,559 161,448 74.40 4.5 100 36,365 83.70 125,083 72.07 20 23 ASIA 2,319,000 NA NA 62,877 2.71 9.9 98 NA NA NA NA NA NA Bangladesh 81,800 NA NA 89 0.01 NA 70 49 NA 40 NA NA 55 Burma 31,500 9,000 22,500 33 0.10 4.4 69 27 0.30 6 0.03 29 82 China (Taiwan) 16,866 5,340 11.526 1,685 9.99 22.1 100 986 18.46 699 6.06 32 59 Hong Kong 4,567 4,567 - 1,251 27.39 12.7 100 1,251 27.39 - - 100 100 India 632,099 31,051 601,048 2,247 0.36 8.8 86 1,200 3.86 1,047 0.17 5 53 Indonesia 138,341 15,036 123,305 325 0.23 6.7 68 249 1.66 76 0.06 11 77 Iraq 12,500 11,500 1,000 320 2.56 12.7 96 223 1.94 97 9.70 92 70 Isreal 3,651 1,924 1,727 930 25.47 9.8 100 685 35.60 245 14.19 53 74 Japan 114,620 19,281 95,339 50,626 44.17 10.7 99 11,895 61.69 38,731 40.62 17 23 Korea (South) 35,860 14,643 21,217 1,978 5.20 16.8 97 1,419 12.77 432 0.19 41 71 Malaysia 13,086 1,439 11,647 375 2.86 10.2 99 226 15.70 149 1.28 11 60 Nepal 13,130 303 12,827 9 0.07 6.4 83 8 2.85 1 - 2 92 Philippines 44,980 8,912 36,068 567 1.26 10.0 95 519 5.82 48 0.13 20 92 Singapore 2,325 2,325 - 455 19.57 16.1 100 455 19.57 - - 100 100 Sri Lanka 13,970 955 13,015 74 0.52 2.8 97 47 4.92 27 0.21 7 64 Thailand 44,273 6,475 37,798 367 0.83 13.8 97 308 4.76 59 0.16 15 84 EUROPE 781,000 NA NA 154,829 19.82 8.0 99 NA NA NA NA NA NA France 53,183 9,664 43,519 17,519 32.94 10.7 100 7,129 73.77 10,390 23.87 18 41 Germany, Fed.Rep. 16,767 4,216 12,551 2,860 17.06 9.3 100 1,173 27.82 1,687 13.44 25 41 Italy 56,601 20,677 35,924 16,119 28.49 9.3 100 9,236 44.67 6,883 19.16 47 57 Portugal 9,766 1,736 8,030 1,175 12.03 7.4 95 627 36.12 548 6.82 18 53 Spain 36,230 11,203 25,027 9,528 26.30 12.5 95 4,611 41.16 4,916 19.64 31 48 Sweden 8,267 3,598 4,669 5,930 71.73 4.6 100 2,882 80.10 3,048 65.28 44 49 Switzerland 6,292 2,173 4,119 4,145 65.88 5.6 100 1,919 88.31 2,226 54.04 36 46 Turkey 41,758 8,343 33,415 1,379 3.30 13.9 81 924 11.08 455 1.36 67 20 United Kingdom 55,844 17,522 38,322 23,182 41.51 7.5 100 9,064 51.73 14,118 36.84 33 39 USSR 260,000 25,324 234,676 19,600 7.50 8.9 98 5,194 20.51 14,406 6.14 10 26 OCEANIA 23,000 NA NA 8,350 36.30 5.6 97 NA NA NA NA NA NA Australia 14,074 8,964 5,110 5,835 41.40 6.2 97 4,435 49.50 1,400 27.50 64 76 Fiji 588 87 501 33 5.61 9.5 90 16 18.39 17 3.39 15 48 New Zealand 3,146 2,181 965 1,715 54.51 4.5 96 1,308 59.97 410 42.49 69 76 Papua New Guinea 2,914 250 2,664 38 1.30 9.8 99 33 13.20 5 0.19 9 87 Source: AT&T's "The World's Telephones," a statistical compilation as of January, 1978. Data for Principal Cities for the United States and Japan is in respect of cities with 500,000 or more telephones only.  -31- ANNEX 2 TANZANIA TANZANIA POSTS AND TELECOMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Existing Facilities as of December 31, 1979 I. Local Telephone Capacity of telephone exchanges, lines 48,198 of which automatic " 35,703 manual " 12,495 Number of automatic telephone exchanges 23 Number of manual telephone exchanges 122 1/ Number of telephones 88,684 Number of subscriber connections (DEL) 38,283 Annual growth in DELs (last 4 years) percent 10.0 Average exchange fill, percent 79.4 Unsatisfied demand, number on waiting list 18,275 2/ II. Long Distance Telephone Total number of long distance circuits (microwave, VHF, UHF, HF, tropospheric scatter, line-carrier) 724 Number of Radiocall Service Subscribers 227 Number of Radiocall Control Centers 3 III. Telegraph and Telex Number of telegraph offices 149 Number of telex offices 2 Number of telex subscribers 426 Unsatisfied demand for telex subscription, number on waiting list 314 IV. International Facilities (apart from circuits to Kenya and Uganda) Number of telephone circuits 29 Number of telex circuits 28 Number of telegraph circuits 4 V. Staff Total telecommunications staff 3,154 Number of staff per 1,000 DELs 77 1/ Does not include places with Radio Call installation only; those are about 200. 2/ TPTC estimates that, in addition, there is a latent demand amounting to at least this figure.  - 32 - ANNEX 3 Page 1 of 3 pages TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Description of Works in TPTC's Program, 1980-1984 1. TPTC's 1980-1984 telecommunications development program has the following components: (a) works of this telecommunications project; (b) other program works, which are to be completed prior to December 31, 1984; and (c) works which will be completed after 1984 ("future work"). 2. The following is a brief description of the major works in groups (a) and (b): Works in Group (a): Local Network (i) to expand the local cable network by about 75,000 pairs in about 90 cities and towns throughout the country; to pressurize junction cables and primary cables in Dar-es- Salaam and to provide dropwire for about 23,000 new direct exchange lines; Interurban Network (ii) to construct approximately 550 km of overhead line routes in rural areas and to install about 850 channels of rural carrier systems; (iii) to construct about 16 VHF, UHF or microwave links, for reliable 24-hour connection of regional and district centers and other rural towns to the telecommunications network. Telephone service will be introduced at 70 places, mostly rural towns, which have had no access to two-way telecommunications service--about 30 places will have public call office and about 40 places a manual exchange;  -33- ANNEX 3 Page 2 of 3 pages (iv) to install multiplex equipment for about 600 channels, in order to increase the traffic-handling capacity on congested routes; (v) to install equipment for power supply to telecommunications transmission facilities, with solar cell equipment at about 70 places and with motorgenerators/batteries at about 20 places, most of the places being located in rural areas; Telex and Gentex Network (vi) to provide about 700 teleprinters for telex subscribers and for the TPTC telegram service, in various parts of the country; Support for Installation and Operation (vii) to provide cement and other building material to be imported for a timely completion of the project; (viii) to provide spare parts for telecommunications equipment, for power supply installations, for air conditioning installations in equipment rooms, and for vehicles needed for project installations and for operation and maintenance of telecommunications installations; (ix) to provide about 40 specialized or four-wheel-drive vehicles for handling of cable drums and for other installation and maintenance work; Training and Consultancy Services (x) to provide a minor amount of training equipment and an air conditioning plant for the new training center; (xi) to provide for fellowships and overseas study tours in outside plant engineering, construction, and operation, in stores and supplies management, and in other sectors of the TPTC's activity, as needed; (xii) to provide consultancy services for the study of the impact of improved telecommunications services on the country's economic, social, and cultural development, and for various other purposes; and (xiii) to provide a pilot installation of a 4,000-line digital electronic telephone exchange in Zanzibar city, this installa- tion to provide basic planning information for a large-scale introduction of such equipment in various parts of Tanzania.  - 34 - ANNEX 3 Page 3 of 3 pages Works in Group (b): Local Network (i) to install automatic switching equipment, of a total of about 54,000 lines, for extension of the capacity of existing local exchanges and primary centers and for establishment of new ones; (ii) to increase the capacity of manual local switching (magneto-boards) by about 7,000 lines; (iii) to install about 700 private branch exchanges and about 60,000 telephones; Interurban Network (iv) to increase the interurban switching capacity by about 770 lines and the international by about 350 lines and to install about 130 automanual switchboards; (v) to construct approximately 50 HF, VHF, UHF or microwave links; and to increase the capacity on heavy-traffic portions of the existing transmission network; Telegraph and Telex (vi) to replace the present 360 lines' crossbar telex exchange in Dar-es-Salaam by an electronic exchange for about 900 subscriber lines and to move the crossbar exchange to Arusha where an increase of capacity is needed; (vii) to acquire approximately 700 teleprinters for new telex subscribers; (viii) to quadruple the capacity of the voice frequency telegraph network; and Training (ix) to complete the construction of the new training center for about 300 students (of which 240 boarders), and to move the main training activities to this center.  - 35 - ANNEX 4 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Program and Project Costs T Sh (millions) 1980 1981 1982 1983 1984 Total Local Network Cables and drop wires - 56.5 35.7 34.4 16.4 143.0 Interurban Network Overhead lines and rural/line carrier - 5.0 4.0 3.0 3.0 15.0 VHF, UHF and microwave link - 12.7 22.1 10.4 3.8 49.0 Multiplex equipment - 1.0 6.0 2.0 - 9.0 Power supply equipment - 2.0 1.0 1.3 .7 5.0 Telex and Gentex Teleprinters - 3.9 14.1 - - 18.0 Support for Installation and Operations Civil Works materials - 3.0 3.0 2.0 - 8.0 Spare parts - 4.0 4.0 - - 8.0 Vehicles - 2.0 2.0 1.0 - 5.0 Pilot Project - - 1.7 9.1 6.6 17.4 Training Training equipment and air conditioning - 6.0 6.0 5.0 - 17.0 Fellowships, study tours, and consulting services - .2 1.0 1.2 .3 2.7 Project Base Costs - 96.3 100.6 69.4 30.8 297.1 Physical contingencies - 4.9 4.9 3.0 1.2 14.0 Price contingencies - 11.0 25.2 25.4 17.4 79.0 Total Project Costs - 112.2 130.8 97.8 49.4 390.1 Other Program Costs (inclusive of contingencies) 301.3 248.8 284.1 324.1 166.1 1324.4 Total Program Costs 361.0 414. 421.9 215.5 1714.5  - 36 - ANNEX 5 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Schedule of Disbursements Disbursements During Cumulative Disbursements IDA Quarter at end of Quarter Fiscal Year & Quarter US$000's US$000's 1981 June 1981 0 0 1982 September 1981 0 0 December 1981 0 0 March 1982 250 250 June 1982 500 750 1983 September 1982 500 1,250 December 1982 1,000 2,250 March 1983 1,250 3,500 June 1983 2,300 5,800 1984 September 1983 1,500 7,300 December 1983 2,000 9,300 March 1984 2,000 11,300 June 1984 3,200 14,500 1985 September 1984 2,000 16,500 December 1984 3,500 20,000 March 1985 3,500 23,500 June 1985 2,000 25,500 1986 September 1985 500 26,000 December 1985 500 26,500 March 1986 500 27,000  TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) Telecommunications Project Implementation Schedule 1981 1982 1983 1984 1985 ,~~~ . 2- a_ - 4 -_- -- -_ - -_ - -4- 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 __3 4 Local Cable Networks D3 - a Interurban Network Overhead Lines and Carrier __ VHF Links and Rural Call Offices O - _ _ - - . - _ UHF and Microwave Links D3_ Multiplex Equipment - - - Telex Teleprinters CO , _ 0 - - _- Power Supply Equipment - - - Civil Construction Material Spare Parts 4I Air-Conditioning for Training Center and Vehicles O3 ^ --- _4 Pilot Project C - Fellowships, Study Tours, Consultancy Services -- M ARCH 19, 1981____ _ _ _ __ _ _l_X 0 Distribution of calls for bids World Ban k-22692 O Signing of contract and start of implementation I Completion of implementation, preliminary acceptance  - 38 - ANNEX 7 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Performance Indicators A set of indicators which would assist in monitoring TPTC's future performance during the project period is given below. TPTC is expected to indicate in its periodical progress report to the Bank the actual performance relating to the projected figures. For Fiscal Year Ending December 31: 1981 1982 1983 1984 1985 1. Additional telephone connections (DELs) installed 5,400 6,000 6,800 7,700 - 2. Additional telex lines installed 110 130 160 200 - 3. Number of employees per 1,00 DELs 72 67 63 58 58 4. Gross operating revenues (T Sh million) 461 565 692 850 979 5. Operating ratio (%) 51 52 52 51 52 6. Rate of return on revalued assets before tax (%) 24 24 22 22 23 after tax (%) 12 13 12 12 12 7. Current ratio (times) 3.1 3.4 3.6 4.0 4.7 8. Subscriber accounts receivables (as % of total telecommunications revenues) 40 35 30 25 25 9. Training (student-weeks)-L/ 8,500 10,500 12,000 14,000 14,000 10. Faults per DEL per year (average for all regions) 2.3 2.0 1.8 1.5 1.5 11. Duration of faults (%): -less than 24 hours 54 58 62 65 65 -24 hours or more 46 42 38 35 35 12. Vehicles in garage for service or repair (average vehicle-- calendar-days per year) 100 60 45 30 30 /1 One-third of the figures relate to postal training.  - 39 - ANNEX 8 Page 1 of 3 pages TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Schedule of Telecommunications Tariffs and Charges (in effect since February 1975) T Sh A. Telephone 1. Annual rental for a single telephone:-/ Individual line 480.00 Shared line 400.00 2. Installation costs: Initial charge for an installation at not more than 5.2 km from a central office2/ 300.00 Deposit is only required in certain cases and then with an amount decided specifically 3. Call charges: For an untimed local call 0.65 For an operator-timed interurban call, charge per minute (3 minute-minimum), depending on radial distance between caller and called 3 station 1.30-9.1G0- For an interurban call dialed by the subscriber, a unit fee of T Sh 0.65 is charged for a duration of call varying with the distance between the caller and the called station, from 30 seconds to 4.3 seconds. During "reduced rate period" the call duration for one unit charge is doubled For an international call: To Kenya or Uganda the same as for an inter- urban call within Tanzania 1/ Additional charge for multiple telephone. 2/ For greater distance an additional charge is made. 3/ For a call during "reduced rate period" the charge is one half.  - 40 - ANNEX 8 Page 2 of 3 pages T Sh To other countries, examples of charges per minute (with a minimum charge for three minutes): Ethiopia, Zambia 16.00 United Kingdom, Sweden 24.00 United States 30.00 Brazil 40.00 B. Telegrams 1. Internal tariff: Ordinary telegram, per word (10 words minimum charge) 0.30 Urgent telegram, per word (10 words minimum charge) 0.60 Press telegram, minimum charge for up to 40 words 1.65 For additional 10 words or part thereof 0.65 Greetings telegram, with a choice of 50 standard texts, per telegram 1.50 Extra charge for de luxe form 0.75 Transmission and delivery of telegram through telex ("printergram service"): telex call charge 75.00 Telegraphic address, per year 2. International tariff: Ordinary telegram, examples of charge per word (with a minimum charge for seven words): To Burundi, Rwanda, Ethiopia 1.50 To Zambia 0.85 To United Kingdom 2.60 To Sweden 5.30 To USA 3.10 To Brazil 8.30 For certain destinations letter-telegrams are accepted with the charge being one half of charge for ordinary telegram and minimum number of words being 22 Urgent telegram, charge per word double that of ordinary telegram Press telegram, the charge being approximately one third of that of ordinary telegram, with a minimum charge for 14 words C. Telex 1. Annual rental charge for a basic installationh 8,000.00 1/ For ancillary apparatus, like preperforator and autotransmitter, additional charges are made.  - 41 - ANNEX 8 Page 3 of 3 pages T Sh 2. Installation costs: The connection charge for a basic installationk/ within 5.2 km from the exchange_! 1,500.00 3. Call charges: For inland calls, manually connected, charge per three minute period, depending on the radial distance between the "charge points" 1.60-9.60 For inland calls, automatically switched, time length of writing per unit charge (at T Sh 0.80) varies with distance between "charge periods" from 90 seconds to 15 seconds For international calls, examples of charges per minute of writing (with a minimum charge for three minutes): To Burundi, Rwanda 21.00 To Ethiopia, Zambia 15.00 To United Kingdom 30.00 To Sweden 32.00 To USA, Brazil 43.00 1/ For ancillary apparatus, like preperforator and autotransmitter, additional charges are made. 2/ Additional charge for longer distance.  - 42 - ANNEX 9 Page 1 of 3 pages TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Study of Tariff Structure Draft Terms of Reference 1. The purpose of the study is to develop the principles which should guide formulation of an appropriate structure of tariffs for telecommunica- tions services in Tanzania, and to apply these principles in the form of a recommended structure of tariffs for application for 1982 through 1984. 2. The basic approach to establishing an appropriate tariff structure will be that of marginal cost pricing, with the constraint that overall revenue generation must be sufficient to ensure financial viability of the telecommunications entity. Marginal cost, or the amount which would be saved to the economy if marginal demand (e.g., an additional telephone line, an additional call) were not met, may take either of two forms: (a) cost to the telecommunications entity of supply, where capacity exists to meet the demand; and (b) cost to the other competing user of doing without the service, where capacity is insufficient to meet the demand. Thus the study has to have both a cost accounting dimension and a demand assessment dimension, as well as to include a financial analysis to assess the adequacy of revenues generated from the point of view of financial viability. Cost Accounting 3. The purpose of this part of the work is to identify the marginal costs of the principal different telecommunications services offered, distinguishing between Dar-es-Salaam, major regional towns and country areas: (a) provision of telephone connection; (b) local calls; (c) long distance calls;  - 43 - ANNEX 9 Page 2 of 3 pages (d) international calls; and (e) telex, and same subcategories. Such costs will be specified in 1981 values. 4. The base of the calculations will be: (a) financial accounts of the enterprise; (b) operating records of the enterprise; (c) spot-checks to establish on a sample basis the marginal costs of particular services; and (d) relevant data available from other telecommunications administrations. Demand Assessment 5. The purpose of this part of the work is to assess the strengths of demand for each of the different services offered by the telecommunications entity, and the sensitivity of that demand to the prices which might be charged. This is needed for two purposes: (a) in order to estimate the cost to users (or potential users) of doing without the service, for cases where it is not possible to meet demand fully; and (b) in order to identify those services which are in least elastic demand (i.e., demand will be least affected by price changes), so that they should be made to bear the major part of any mark-up necessary to cover overheads and enable the tele- communications entity to attain overall financial viability. 6. This work will require thorough review of existing records on applications for service, calling rates, ineffective calls, etc., followed by surveys of a sample of existing and potential users in order to deepen knowledge of the strength of demand for the different services and of the amounts that customers would be prepared to pay for the different services (or that they would suffer as losses, or extra expenses, if the services were not available). Social and Developmental Considerations 7. Attention must be given, in connection with the Demand Assessment, to the possible need to charge certain incipient users, e.g., services in distant rural areas, or public call offices, at rates below those that would be indicated by marginal cost and financial viability considerations, as a means to stimulate socially highly desirable use. Certain limited cross- subsidization of this nature may be a worthwhile means of bringing telecom- munications facilities within the reach of development centers and poorer people who would otherwise be excluded.  - 44 - ANNEX 9 Page 3 of 3 pages Financial Analysis 8. The approximate tariffs for the different services (some of which may turn out to need to be cost-based while others may need to be more demand-based) must then be multiplied by estimated levels of service require- ments to assess total revenues for 1981 and the following five years. These should be compared with updated projections of costs, to assess the future financial status of the enterprise. 9. Iterations may be required in order to produce a structure of tariffs that is consistent with financial viability. Final Results 10. The results of the study should be a recommended set of prices for the various services, with alternative possibilities where appropriate, and projections of the effect of application of such prices on the enterprise's revenues and financial performance. Recommendations should also be made as to how the tariffs should be adjusted over time in light of changes in costs including inflation. Resources Required 11. The study will require approximately six weeks of effort on the part of an economist, a financial analyst and an engineer, each with experi- ence in telecommunications, and supplemented by the necessary staff to assist with survey work.  -45 - ANNEX 10 Page 1 of 2 pages TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Return on Investment 1. The benefit period of the program extends from 1980-2000, when on average the equipment provided under the program is expected to have sub- stantially completed its useful life. 2. Capital expenditures are based on the estimated requirements during the program period, excluding preinvestments for future programs. Asset values have been adjusted to reflect 1980 values. 3. Incremental revenues assigned to the program are primarily based on the expected additional telephone and telex subscribers and the traffic increase brought about by the program. Incremental costs excluding depreci- ation and interest are based on the additional assets, traffic and staff requirements expected from the program. All revenues and costs have been deflated to bring them to their comparable 1980 price levels. 4. A summary of the program's incremental cost and benefit stream at 1980 price levels is as follows (in T Sh millions): Capital Operating Year Expenditure Costs Revenues Benefits 1980 459 - - -459 1981 303 15 70 -248 1982 237 33 139 -131 1983 127 53 218 38 1984 55 68 287 164 1985-2000 - 81 315 234 5. The internal rate of return for the above benefit stream is 17%. 6. Applying a shadow price for foreign exchange of US$1.00 = T-Sh 12.0, and estimating the future consumer surplus by tabulating over the program period the prices in real terms (1980 level) which existing subscribers and applicants are demonstrating a willingness to pay, and assuming that new  - 46 - ANNEX 10 Page 2 of 2 pages subscribers are prepared to pay the same real amount, the economic rate of return is 24%. Labor has not been shadow priced as TPTC mostly employs skilled staff of which there is no surplus in Tanzania. 7. A sensitivity analysis on the above rate of return shows that with 10% higher capital costs and 10% lower revenues the rate of return will be 19%.  TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION ITPTC) Organization Chart | Board of Directors | Off ice ofteCarairoctor Genetal _ Office of the CO",B tionScea D irec tor Ge net al Director Research Public Relationis and Corporate Planning Resouirce Planning Operational Network Transmission & & Project Postal Scheduling Planning OEngineerig Power Engineering Assistant Director General Assistant Director General Operations & Developinent Finance & Administration | Director Internal l n Director Finance 1 Telecommunications i and Accounts Director External/II _ Telecormmunications Accoults Finance Computer _ Director Postal .; Developmenit & _}DDirector Buildingsa: t 18 Regional Managers Regional Manager I . iHead Telecom. Head Postal | f Heads Traffic| munications Section | I Section I Section World Bank - 21686  - 48 - ANNEX 12 Page 1 of 2 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Profit and Loss Accounts 19781Y 197911 1980 1981 1982 1983 1984 1985 DELs at year end (000's) 35.0 38.3 43.1 48.5 54.5 61.3 69.0 69.0 Average revenue/DEL (T Sh) 7,600 7,900 8,300 9,130 10,043 11,047 12,152 13,367 Telexes (nos.) 350 426 515 624 755 913 1,115 1,115 Average revenue/telex (T Sh) 121,000 108,000 112,000 112,000 112,000 112,000 112,000 112,000 Average DEL (000's) 33.3 36.6 40.7 45.8 51.5 57.9 65.2 69.0 Average telex (nos.) 321 388 470.5 569.5 689.5 834.0 1,014.0 1,115.0 T Sh (million) Operating Revenue Telephone revenue (T Sh million) 255.0 288.0 337.8 418.2 517.2 639.6 791.7 922.3 Telex revenue (T Sh million) 39.0 46.0 52.7 63.8 77.2 93.4 113.6 124.9 Connection charges 3.0 3.0 2.9 4.1 4.6 5.2 6.0 6.0 Miscellaneous 15.0 15.0 17.0 17.0 18.0 18.0 18.0 18.0 312.0 352.0 410.4 503.1 617.0 756.2 929.3 1,071.0 Less international fees 14.0 23.0 33.8 41.8 51.7 64.0 79.2 92.2 TOTAL NET REVENUES 298.0 329.0 376.6 461.3 565.3 692.2 850.1 979.0 Operating Costs lleadquarters and operating 49.0 62.0 65.6 68.9 72.3 75.9 78.7 82.6 Accommodations 10.0 11.0 11.4 12.0 12.6 13.2 13.9 14.6 Maintenance 22.0 29.0 31.9 42.0 54.7 67.8 78.8 84.2 Training 7.0 10.0 9.9 10.4 10.9 11.4 12.0 12.6 Miscellaneous 21.0 11.0 10.0 10.0 10.0 11.0 11.0 11.0 Depreciation 17.0 27.0 38.0 50.0 65.6 81.3 94.6 101.0 Pension 7.0 7.0 7.1 7.5 7.9 8.3 8.7 9.1 Total costs before inflation, interest and tax 133.0 157.0 173.9 200.8 234.0 268.9 297.7 315.1 Inflation - - 12.2 32.6 60.6 89.6 134.3 188.0 Total costs before tax and interest 133.0 157.0 186.1 233.4 294.6 358.5 432.0 503.1 Loss on posts (estimated) - (1) 1.0 1.5 2.0 2.5 3.0 3.5 TOTAL COSTS 133.0 156.0 187.1 234.9 296.6 361.0 435.0 506.6 Net before tax and interest 165.0 173.0 189.5 226.4 268.7 331.2 415.1 472.4 Interest 11.0 12.0 17.5 34.0 43.7 59.0 69.0 63.1 Taxable surplus 154.0 161.0 172.0 192.4 225.0 272.2 346.1 409.3 Taxation 70.0 60.0 86.0 96.2 112.5 136.1 173.1 204.6 NET PROFIT 84.0 101.0 86.0 96.2 112.5 136.1 173.0 204.7 /1 Unaudited accounts, taxation for 1978 and 1979 is provisional. 1980-85 accounts are projections.  - 49 - ANNEX 12 Page 2 of 2 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Notes and Assumptions with Respect to Projected Profit and Loss Accounts 1. As per program forecasts DEL's are increased at about 12-1/2% per annum. 2. Average revenue/DEL anticipated to increase at 10% per annum reflecting both improved and expanded services. 3. Telex machines are increased at 20% per annum as per program forecast. 4. Telex revenue is held constant reflecting no increase due to compensation by greater use of telephones. 5. Headquarters and operating and accommodations estimated to increase at 5% per annum in real terms. 6. Maintenance equivalent to 5% of gross assets in real terms. 7. Depreciation equivalent to 6% of gross assets. 8. Inflation is based on 8% per annum on foreign exchange content of operating costs and 17% per annum for local costs. 9. Taxation estimated at 50% of taxable surplus assuming depreciation equivalent to capital expenditure allowances.  - 50 - ANNEX 13 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Estimated Source and Application of Funds (T Sh million) 1980 1981 1982 1983 1984 Sources Net profits 86.0 96.2 112.5 136.1 173.0 Add depreciation 38.0 50.0 65.6 81.3 94.6 Self generated funds 124.0 146.2 178.1 217.4 267.6 Net borrowings 241.0 290.0 332.5 339.0 171.1 Total Sources 365.0 436.2 510.6 556.4 438.7 Applications Program investments 301.3 361.1 414.8 421.9 215.5 Increase (decrease) in-/ net current assets, non operational assets and reserves 63.7 75.2 95.8 134.5 223.2 Total Applications 365.0 436.2 510.6 556.4 438.7 Self-generated contributions to program investments (%) 41 40 43 52 124 /1 The large buildup in current assets is represented by cash being the result of having to borrow foreign exchange while at the same time having plenty of local currency.  - 51 - ANNEX 14 Page I of 2 TANZANIA TANZANIA POSTS AND TELECOMMUNICATIONS CORPORATION (TPTC) TELECOMMUNICATIONS PROJECT Balance Sheets (T Sh million) 1! 1/ 1978- 1979- 1980 1981 1982 1983 1984 1985 ASSETS Fixed Assets - Gross 482 573 637.2 839.3 1,093.5 1,355.5 1,576.5 1,684.4 Accumulated depreciation 163 187 224.3 274.3 339.9 421.2 515.8 616.8