Mali - Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4553 PROJECT PERFORMANCE AUDIT REPORT MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) June 6, 1983 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORhANCE AUDIT REPORT MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) TABLE OF CONTENTS Page No. Preface ......................................................... . . Basic Data Sheet ................................................ Highlights ...................................................... iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT SUMMARY ..................1.................. . II. SUPPLEMENTARY COMMENTS AND ISSUES ....................... 5 Delays, Revisions and Cost Overruns ..................... 5 Failure to Meet the Institutional Targets ............... 6 Future IDA Participation in Sector Development .. 7 Financial Results, Tariffs, Productivity ................ 8 Overdue Receivables ..................................... 10 Appendix ........................................................ 13 Attachment A: Comments from OPTM................................ 15 PROJECT COMPLETION REPORT I. Introduction ............................................. 21 II. Project Identification, Preparation and appraisal ........ 21 III. Project Implementation ................................... 24 IV. Operating Performance .................................... 33 V. Financial Performance .................................... 34 VI. Institutional Performance ................................ 36 VII. Economic Reevaluation .................................. 37 VIII. IDA Performance ....................................... 39 IX. Conclusion ............................................... 40 Annexes 1. Revisions of the Project (Physical Items) ................ 43 2. Statement of Income (1972-1978)........................... 44 3. Sources and Applications of Funds Statement .............. 45 4. Balance Sheets, Years Ending 1972-1978 ... ............... 46 5. Compliance with Covenants ................................ 47 6. Internal Rate of Return Calculations ..................... 49 Map - IBRD 3801 (PCR) 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.  - 1 - PROJECT PERFORMANCE AUDIT REPORT MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) PREFACE This report presents a performance audit of the First Telecommuni- cations Project in Mali for which a credit of US$3.6 million was approved in June 1972, for the Government of Mali to be on-lent to the Office des Postes et Telecommunications du Mali (OPTM). The credit became effective in April, 1973, and was fully disbursed in August, 1979. The Project Performance Audit Report consists of a Project Perfor- mance Audit Memorandum (PPAM) prepared by the Operations Evaluation Depart- ment (OED) and a Project Completion Report (PCR) prepared by the Telecom- munications Project Staff, Industry Department (INDD5). A special field visit was not undertaken but information gathered during processing of a credit for the Second Mali Telecommunications Project has been incorporated in the PCR. OED has reviewed the PCR, the Appraisal and President's Reports, the loan documents and other information in the Bank's files. The project has also been discussed with Bank staff and reviewed in relation to the appraisal of the Second Telecommunications Project. On the basis of its review, OED is generally in agreement with the principal analysis and the conclusions in the PCR. However, in addition to providing a summary of the main history, concept and results of the project the PPAM discusses the major problems affecting the project. It also com- ments on the failure to meet the institutional targets, the unsatisfactory financial results, the problems of low productivity and plant utilization related to high tariff levels and the Government overdue accounts receivable position. Following standard OED procedures, copies of the draft audit report were sent to OPTM and to the Government for comments. Those comments which were received are reproduced in the attachment to the PPAM and have been taken into account in preparing the final report.  - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) KEY PROEJCT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 4.3 (Rev. 6.9) 7.8 Overrun (%) - 81 (Rev. 13) Credit Amount (US$ million) 3.6 3.6 Disbursed 3.6 3.6 Cancelled - - Date for Completion of Physical Components 12/75 07/81 Proportion Completed by Appraisal *Target Date (%) - 0 Proportion of Time Overrun (%)- 200 (Rev. 66)* Internal economic rate of return (%) 13 24+- Financial Performance - Inadequate Institutional Performance - Inadequate Cumulative Estimated and Actual Disbursements (US$ millions) 12/31 As of June 30: 1973 1974 1975 1976 1977 1978 1979 1980 (i) Appraisal Estimate 0.15 1.00 2.80 3.60 - - - - (ii) Actual 0.04 0.10 0.14 1.80 1.90 2.80 3.40 3.60 (ii) as % of (i) 26 10 5 50 53 78 94 100 OTHER PROJECT DATA Actual or Item Original Revisions Est. Actual First Mention in Files or Timetable - - 1969 Government's Application - - 10/71 Negotiations - - 05/72 Board Approval Date - 06/15/72 Credit Agreement Date - - 06/28/72 Effectiveness Date - - 04/04/73 Closing Date 07/01/76 06/30/79 06/30/79 Borrower Government of Mali Executing Agency (beneficiary) Office des Postes et Telecommunications du Mali Fiscal Year of Borrower January 1 - December 31 I - iii - MISSION DATA Month/ No. of No. of Staff- Date of Item Year Days Persons weeks Report Identification 02/70 4 2 1.6 06/06/70 Appraisal 12/71 15 2 4.3 05/17/73 Supervision I 06/73 7 1 1.0 09/17/73 Supervision II 02/74 8 2 2.3 04/26/74 Supervision III 05/75 7 1 1.0 06/23/75 Supervision IV** 12/75 10 2 2.9 02/17/76 Supervision V 05/76 5 1 0.7 06/14/76 Supervision VI 03/77 6 2 1.7 06/01/77 Supervision VII 12/77 9 2 2.6 03/17/78 Supervision VIII 06/78 6 1 0.9 08/30/78 Supervision IX 03/79 8 2 2.3 04/04/79 Supervision X 05/80 5 1 0.7 06/13/80 Completion*** Total 17.7 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Mali Franc (MF) Year: Exchange Rate: Appraisal Year Average - 1971 US$1 = MF 512 Intervention years average - 1972-1978 US$1 = MF 463 Completion Year (1979) US$1 = MF 425 * Actual execution time from the Credit Agreement date = nine years; from reappraisal date = five years. ** Joint IDA/CCCE mission. *** There was no specific completion mission for this project. Information leading to this Project Completion report was collected during prepara- tion missions of the Second Telecommunications Project.  - iv - PROJECT PERFORMANCE AUDIT REPORT MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) HIGHLIGHTS The First IDA financed Telecommunications Project in Mali was designed to upgrade the existing very poor standards of service, rehabilitate and modernize the network and expand local and long distance facilities to meet priority demands for service with an emphasis on the regions and trade centers where the country's economic and administrative activities were concentrated. While the project concept appears basically sound, a number of technical problems were not identified by the consultants who prepared the project; also in view of the technical considerations - the small size of the orders and the local conditions - project cost estimates were unrealistically low. Additionally, some of the institutional targets, although soundly based, were perhaps overoptimistic given the existing local conditions and the considerable need to develop managerial and financial capability. From hindsight it would seem that the IDA appraisal should have uncovered some of of the engineering and project costing problems. Engineering consultants appointed for project implementation - a condition of credit effectiveness - identified a number of the technical problems. However, they also proposed further major expansion which IDA considered was both beyond the physical capacity of Office des Postes et Telecommunications du Mali (OPTM) for network expansion and was not justified on economic grounds. It was only in December 1975, four years after the ap- praisal, that a final design for the project was established on the basis of the original project/program being divided into two phases of which the project would constitute the first phase. In view of the major cost increases even for Phase I, some cofinancing was provided by the Caisse Centrale de Cooperation Economique (CCCE). The cost of the amended Phase I project exceeded the cost estimates for the original project by 81% and the revised estimates, prepared in 1975, by 13%. Completion targeted at appraisal for December 1975 was delayed by 5-1/2 years with full utilization of local exchange facilities yet to be completed. Due to the project delays, cost increases and low staff produc- tivity, and despite high tariffs, operating results showed a deterioration from 1975 through 1978, with a negative rate of return in 1978. With increased plant utilization as additional subscribers were connected, and the 1979 tariff increase, the provisional rate of return for 1980 was 13%. The recal- culated internal financial rate of return for the revised program was 24% compared with the appraisal estimate of 14% for the original project. - v - The revisions, weaknesses and delays in project execution, as outlined in the audit report, have had negative financial and economic implications. Despite this, however, the main targets set at the time of revision of the project have been met and the project has finally been successful in achieving major improvements in quality of service and in modernization of facilities. The number of subscribers increased by 23% by December 1979 and 38% by December 1980. IDA's performance at appraisal and during the early stages of the project was disappointing (in fairness, however, it should be stated that the system was near collapse at the time and presented special problems)..1/ However, valuable assistance was subsequently given in resolving the problems arising from the need to revise the project and meet the changed circumstances over the extended period of project execution. It is to be expected that continued participation in development of the sector will facilitate the necessary further institutional improvements and the development of facilities in line with the needs of the economy. The following topics which have been raised in the audit are of special interest: (i) the major delays, revisions and cost overruns with which this project was plagued, despite the use of consultants for project preparation, and the need for special consideration of "start up" projects in developing countries (PCR paras. 3.01 to 3.12 and PPAM paras. 19-24); (ii) the failure to meet the institutional targets and how far were these sufficiently objective and realizable in practice (PCR paras. 2.02, 6.01-6.03 and 9.01 and PPAM paras. 25-28); (iii) future IDA participation in development of the sector (PPAM paras. 29-33); (iv) the unsatisfactory financial results over much of the project period, the problems of low productivity and plant utilization, and the significance of high tariffs in a low income country (PCR paras. 4.02 and 5.01-5.04 and PPAM paras. 34-39); (v) the unsatisfactory overdue receivables position for Government and parastatal organizations (PCR para. 5.03 and PPAM 40-44); and (vi) the economic reevaluation of the project (PCR paras. 7.01-7.06). 1/ It is not unusual to face major problems in the initial phases of deve- lopment of a sector which has been neglected and has been organized on the basis of a quasi departmental structure. - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) I. PROJECT SUMMARY 1. Assistance from IDA in developing the Telecommunications Sector, based on a consultants' study made in 1965, was first sought in 1969. As a result of the need, established during an identification mission in February 1970, a further study of the finances of Office des Postes et Telecommuni- cations du Mali (OPTM) was carried out by financial consultants. The project was finally appraised in December 1971 and the Credit approved in June 1972 (PCR para. 2.01). 2. This was the Bank Group's first lending for telecommunications development in Mali. The project was designed to upgrade the existing very poor standards of service, rehabilitate and modernize the network and expand local and long distance facilities to meet priority demands for service with an emphasis on the regions and trade centers where the country's economic and administrative activities were concentrated. Proposals were also made, and included in the Credit Agreement, for major improvements in sector organization and operations with the assistance of technical experts and consultants (for procurement and project execution) who were to be retained as a condition of effectiveness (PCR paras. 2.02-2.05 and 3.01). 3. The cost of the project was estimated at appraisal to be US$4.3 million with a foreign exchange component of US$3.1 million. In addition to meeting 100% of the foreign costs, the credit of US$3.6 million was also intended to meet 45% of the local expenditures for installation of the main equipment items. It was expected that the project would be completed by December 31, 1975 (PCR Basic Data Sheet and para. 3.07, Credit Agreement and file research). 4. .While the project concept appears basically sound, a number of technical and accommodation problems were not identified by the original consultants who prepared the project, or at appraisal; also in view of the technical difficulties - the small size of the orders and the local condi- tions - project cost estimates were unrealistically low. Additionally, some of the institutional targets were perhaps overoptimistic given the existing local conditions and the need for considerable development of the tools required for effective operation and management (PCR paras. 3.02-3.05, 3.08- 3.11 and 6.01-6.03 and PPAM paras. 19-28). 5. There was an initial delay in effectiveness due to the borrower's failure to appoint consultants to assist in project procurement and execu- tion and to submit the required legal opinion. Due to the weaknesses in the initial design, major revision of the project became necessary and it was only in December 1975, 3-1/2 years after the Credit approval date, that the revised project got under way (PCR paras. 3.01-3.07 and PCR paras. 19-22). - 2 - 6. As a result of the low price estimates for the original project, replacement of obsolescent equipment which became necessary after appraisal and the limited financing available, the revised project consisted of a first phase covering only the more urgent items included in the original project. The cost of this revised Phase I project was estimated in December 1975 as US$6.9 million with a foreign exchange component of US$5.8 million. Caisse Centrale de Cooperation Economique (CCCE) agreed to cofinance tne project to the extent of US$2.2 million. Completion of the revised project was expected by December 1978 (PCR paras. 3.09 to 3.12 and PPAM paras. 19-21.) 7. All main components of the revised Phase I project were success- fully completed in May 1981, but certain local cable installations and connec- tion of some of the additional subscribers lines were only expected to be completed by the end of 1981. The total delay in project completion for the main components was 5-1/2 years, and the delay for the revised project, based on the revised target date, 2-1/2 years. Actual cost of the revised Phase I project at US$7.8 million exceeded the revised estimate by 13%. The foreign exchange cost remained US$5.8 million (PCR Basic Data Sheet and paras. 3.07-3.13, PPAM paras. 20 and 21). 8. Other than for the high prices, no major problems were encountered in procurement. A study of procurement experience and problems in francophone countries was made in 1975 (PCR paras. 3.08 and 3.11, PPAM para. 23 and Appendix). 9. The initial consultants who carried out the 1965 study of the sector appear to have been responsible for many of the weaknesses in the initial project design. The consultants employed for procurement and project execu- tion although instrumental in bringing to light some of the problems in the original project design, did not perform to OPTM's satisfaction on meeting target dates and design criteria. Performance of the financial consultants, engineering consultants appointed under the CCCE credit and the technical and managerial experts was satisfactory although, due to staff changes, OPTM failed to obtain full advantage of the management experts' work (PCR paras. 2.01 and 3.17 to 3.21). 10. The rate of return on net fixed assets averaged 6.5% against a covenanted annual rate of 10%. The operating ratio averaged a very high 85%. Debt service coverage was acceptable, the lowest level reached being 1.9 times in 197 . Internally generated funds contributed a satisfactory 41% of the funds needed for the investment program (PCR paras. 5.01-5.02 and Annexes 2, 3 and 4 and PPAM para. 34). 11. OPTM-s billing and collection performance has been unsatisfactory. (However, billing has been computerized and significantly improved after com- pletion of the project). Overdue receivables from Government remain a dif- ficult problem and in 1980 were estimated to amount to about US$5.0 million or about 16 months billings. Furthermore, Government has not met the defi- cits on operation of the postal service on a timely basis. This has created - 3 - cash flow and liquidity problems and OPTM on their part have not met the servicing payments due to Government on the IDA credit. These matters have been the subject of discussions and letters from IDA to Government and OPTM but no effective action has been taken. Assurances were obtained as a condition for Board Presentation for the second project that satisfactory arrangements would be introduced to correct the position (PCR para. 5.03, Second Project Appraisal Report and PPAM paras. 40-44). 12. The tariff structure, which is a complicated one, has been developed gradually and was in need of review, as required under a covenant to the first Credit Agreement. OPTM, however, failed to meet this requirement, which has now been repeated in the Credit Agreement for the second project. Tariffs were increased in 1975 and 1979. Local call charges are now extremely high and may effect economic efficiency through encouraging use of less economic alterna- tives.!/ Revenue per telephone is high given the low per capita income. This taken together with the high operating ratio and low rate of returns, despite high tariffs, suggests low operational efficiency and poor productivity (PCR paras. 5.02 and 5.04 and PPAN paras. 34-39). 13. Accounting procedures have been significantly improved with the help of the financial consultants but financial and audit reports are still not available on a timely basis. Further improvements are called for under the second project (PCR para. 5.06). 14. The more general institutional achievements were disappointing due to frequent changes of senior management, reluctance in applying the agreed covenants and outside political, social and financial factors. Only 7 of the 18 covenants relating to organizational and financial matters were met. Review indicates that IDA's requirements were sensible in concept and neces- sary for efficient operation of the sector, but, given local circumstances, were not capable of full achievements within the time frame of the project. With minor omissions, due to changed circumstancep, they have been repeated as requirements for the second credit (PCR paras. 2.02, 6.01, 6.02, 9.01 and Annex.5 and PPAM paras. 25-28 and 33). 15. OPTM has been required by Government to recruit staff in excess of its requirements and reached a staff level of 240 per 1,000 lines (10-30 would be considered normal in a more developed country with figures in developing countries ranging up to about 100). The present staff level and low produc- tivity are a matter for major concern. OPTM has agreed at negotiations to improve the position under the second project. Overseas training for more senior staff has been satisfactory. Training of the lower level staff in Mali has been outside of OPTN's control and has been a factor in the overstaffing. The position is in process of being improved (PCR para. 6.03 and PPAM paras. 38-39). 16. The recalculated internal financial rate of return for the revised program was 24% compared with the appraisal estimate of 14% for the original project. In view of the additional benefits which will be obtained from a number of major program items, with relatively small additional investment, the economic rate of return is likely to exceed the presently calculated IFRR by a substantial margin (PCR paras. 7.05 and 7.06). 1/ See conflicting opinion of Region and Industry Department staff on para. 35. 17. It is not unusual to face major problems in the initial phases of development of a sector. Additionally in this case the project proposals prepared by OPTM's consultants failed to cover a number of significant issues. IDA's performance at appraisal in reviewing project design and cost estimates was also disappointing. Due to staff constraints supervision was also neglected during the initial stage of the project. However, valuable assis- tance was subsequently given in resolving the more immediate problems arising from the need to revise the project and meet the changed circumstances, over the extended period of project execution. Relations with OPTM and with Government were on the whole satisfactory (PCR paras. 8.01-8.03). 18. The revisions, weaknesses and delays in project execution had serious negative financial and economic implications; despite this, however, the main targets sei at the time of revision of the project were met and the project was finally successful in achieving major improvements in quality of service, modernization and expansion of facilities. Institutional achievements fell substantially short of expectations partly due to outside factors, how- ever, further major improvements are to be expected under the second project (PCR paras. 9.01 to 9.03). - 5 - II. SUPPLEMENTARY COMMENTS AND ISSUES Delayd, Revisions and Cost Overruns 19. The original project design appears to have been deficient in not making adequate provisions for accommodation, for long distance switching equipment and additional traffic capacity for the local Bamako exchange. During the course of project revision, additional replacement of obsolescent equipment (which could not have been foreseen at appraisal) became necessary due to the manufacturer discontinuing supply of spare parts. Moreover, the project cost estimates seem to have been based on experience with procurement for much larger installations and quantities of goods, without regard for local conditions. These factors had a significant bearing on the revisions which subsequently became necessary, and the delays and cost increases for the project (PCR paras. 3.01-3.13). 20. The PCR outlines in some detail the reasons for the delay in exe- cution of the project which overall took some 8-1/2 years to complete instead of a targeted 3 years. These included an initial delay in effectiveness due to failure by the Borrower to appoint consultants to assist in procurement and execution and to submit the required legal opinion. A subsequent delay of over 2 years resulted from the consultants review of the project content, their proposals for changes and OPTM and IDA's review of these proposals to establish the revisions which were possible and desirable within the limita- tions of available financing and OPTM's capacity to undertake the work. Effectively the revised project only got underway some three years after the commencement date anticipated at appraisal and then took 5-1/2 years to complete. 21. The PCR (paras. 3.09 to 3.13) also provides a very comprehensive analysis of project cost increases related to changes in project content. Cost of the original project (which with some additions became Phase 1 and Phase 2 of the revised program) increased by 116% in the revised program. Additional requirements and replacements of obsolescent equipment, if deducted from the total program cost, would reduce this figure to 90%. The cost of the revised Phase I project was 81% more than the estimated cost of the original project, but this does not compare like with like. There was a cost increase of at least 25% due to the high inflation rate experienced between 1972 and 1975, compared to the original appraisal estimates which allowed for a price contingency of only 3% over the expected three year period of project execu- tion. The cost increase due to the extended period of execution (1976-1981) has not been estimated. Currency parity increase caused an increase of 5.5%. It appears from an examination of individual equipment prices, based on later experience,that appraisal estimates were in the range of 40% to 80% of what would have been realistic. Actual cost of the revised Phase I project related to the revised estimates prepared in 1975 increased by a reasonable 13%. - 6 - 22. It is not clear how far the appraisal cost estimates were influen- ced by the size and quantity considerations referred to in para. 19. It is stated in the appraisal report, however, that estimates were based on those for similar projects in neighboring African countries. The limited evidence available does not support this claim.Y 23. During 1975, concern was expressed within the Bank/IDA regarding the limited extent to which non French firms were bidding on ICB tenders issued by the francophone African countries and the apparently high equipment prices which were being tendered. As indicated in the PCR (para. 3.11) this matter was made the subject of a special study which was concluded in November 1975. An outline of the considerations and the conclusions reached in the study is given in the Appendix to this report. 24. Even when consultants have been used to prepare a project, as in this case2/, greater care than usual should be taken by appraisal missions for "start up" projects to examine in considerable detail the state of exist- ing plant, the engineering of the project, the effects of local conditions on price and physical targets for execution, the size of the project and its components and their effects on equipment prices, and the experience with similar projects in similar countries. In "start up" projects, where there usually is an above average degree of uncertainty about costs, it may even be prudent to proceed with tendering for the im ortant components up to the stage of bid evaluation before Board presentation.. Failure to Meet the Institutional Targets 25. The PCR (paras. 2.02, 6.01-6.03 and 9.01) comments on the pro- posals for institutional development and the degree of success achieved under the project; in all only 7 of 18 covenants relating to institutional and financial matters contained in the Credit Agreement were met. The reasons 1/ The special study of procurement in francophone countries carried out in 1975 shows prices for similar installations in adjoining countries considerably in excess of the Mali appraisal estimates. For certain items such as long distance switching the Mali estimates appear low by any standard. The study prices were those ruling after the date of the Mali appraisal. The only evidence we have in files of prices prior to the appraisal is for Upper Volta where switching equipment prices were about 30% above the Mali estimates. 2/ It has been found in the sector that one of the major problems in the employment of consultants is their lack of knowledge of the special conditions applying in developing countries. 3/ The final revision of the Mali Project only became possible after the bids for the two main components were received (PCR para. 3.05). Receipt of bids for critical contracts before Board presentation now appears to be the practice on many projects in West African countries. - 7 - given in the PCR for the failure to meet the institutional targets seem well founded and consist of: (a) frequent changes of senior management, (b) a failure to understand (the need for) some of the covenanted re- quirements which were in some cases overlapping, (c) outside interference in the training and employment of staff; and (d) the social and political environment which did not support change. 26. The PCR's contention that some of the covenants were overlapping is supported. On the other hand, they were sensible in concept and it is noted from the appraisal report for the second project that two of the requirements which Government/OPTM failed to meet under the first credit were accepted as conditions for Board presentation and six others (some now com- bined) are included in the new Credit Agreement. The remaining three condi- tions are no longer appropriate due to changed circumstances. 27. Some progress was made in developing the capacity for project execu- tion (PCR paras. 3.19-3.20) and introducing a modern accounting system (PCR paras. 5.06). Shortfalls in achievement were substantially due to the failure on the part of both Government and OPTM to meet the covenants agreed at nego- tiation. The position was undoubtly influenced by the country's fiscal diffi- culties, the desire to provide employment, the many changes in top level management and political considerations in senior appointments. 28. It is reasonable to conclude that IDA's original aims for institu- tional improvements were soundly based and have substantially remained unchanged. They were clearly designed to provide the tools for effective management and improve the efficiency of operation of the sector. It is believed that if Government had given its full support to implementation of the requirements set out in the Credit Agreement, more significant improvement of the sectoral organization would have been possible under the first credit. There are, of course, a number of general considerations mentioned in para. 25 which have probably affected the position. Future IDA Participation in Sector Development 29. As has been outlined in the PCR Section III and commented on in paras. 19-22 of the PPAM, the project from its inception experienced many difficulties, delays and cost increases. When these were resolved, however, and a revised project defined, satisfactory progress was made and the revised physical targets were substantially met. It is reasonable to expect this im- proved performance to continue during a follow-up project. - 8 - 30. Following completion of the first project, telephone density in Mali at the end of 1980 was still only 0.06 per 100 population which is amongst the lowest in the world. Even the facilities which are available are concentratea at the main centres and 83% of the population live in areas with no telephone facilities. Although the first project has been satisfactorily completed it will be remembered that in its revised form it only covered part of the development program. A second project to continue the development program has received Board approval. 31. On the institutional side the views of IDA on what is still neces- sary to place the organization of the sector on a sound commercial basis with tools for efficient management have not changed and have apparently been accepted now by Government and OPTM as desirable and achievable. However, based on past experience, it appears that a very firm position should be taken by IDA to ensure application of the covenanted conditions for the second project. This is essential to assure accountability, improved efficiency of operations and avoidance of past mistakes. 32. The second project is being undertaken on the basis of two compo- nents for which the foreign exchange financing will be provided by CCCE, Fonds d'Aide et de Cooperation (FAC) and IDA. Total cost is estimated at US$25.3 million with a foreign exchange component of US$18.3 million of which the IDA crbdit will provide US$11.0 million.l/ Additional major expansion consisting mainly of microwave systems, at a cost of US$24.8 million, is being carried out under other program works. The overall program is designed to cover the period 1981-85 and includes further rehabilitation and improvement of facil- ities; expansion of the local telephone network by about 4,000 lines; provi- sion of additional long distance microwave, UHF and VHF systems extending and improving services to both existing and many new areas (including the provi- sion of rural facilities); expansion and modernization of the telex network. The program has been based on the economic and administrative needs of the country and realistic forecasts of increases in demand. Price estimates, prepared by the consultants and based on recent experience in the area for similar types of equipment and quantities, appear realistic this time. 33. The second project continues the institutional aims aeveloped for the first project and suitable requirements have been agreed with Government and OPTM and included in covenants to the Credit Agreement. Financial Results, Tariffs, Productivity 34. The rate of return on net fixed assets for the period 1972-78 averaged 6.5% against a covenanted annual rate of 10% and actually became negative in 1978.2/ The operating ratio averaged a very high 85% (102% 1/ The second IDA credit of US$13.5 million also will finance US$2.5 million of local expenditures. 2/ The 1980 provisional figures indicate the rate of return will increase to 13% in that year. - 9 - in 1978). Debt service coverage was acceptable; the lowest level reached was 1.9 times in 1976. Internally generated funds contributed a satisfactory 41% of the funds needed for the investment program. A major tariff increase was made in 1975 with a smaller increase in 1979. Delays in payments by Government for telecommunications services and the failure by Government to settle deficits on operation of the postal service on a timely basis have created cash flow and liquidity problems. OPTM on its part has not paid Government the debt servicing charges for the IDA credit. Assurances were obtained that these matters would be corrected under the second credit (PCR paras. 5.01-5.02 and Annexes 2, 3 and 4). 35. The PCR (para. 5.04) comments on the fact that the 1975 tariff increase resulted in OPTM having amongst the highest tariffs in the world at that time. An examination of the tariff structure as further amended in 1979 shows the monthly rental charge on'the larger exchanges amounts to US$4.5 with a local call charge of 18 cents.l/ Installation costs together with an investment contribution amount to about US$200 per subscriber line. A security deposit of US$60 is also required. Long distance charges per 3 minutes range from 35 cents for 50 kms to US$1.25 for 200 kms. The PPAM concludes that the monthly rental and long distance call charges are not unreasonable. however, the local call charge is very high indeed and will tend to reduce economic efficiency and encourage use of second best alter- natives. Where call charges are extremely high, and given some elasticity of demand, they will have an effect on usage and the economic value of the service and may well distort resource allocation.y 36. It is required under a covenant for the first credit that OPTM should carry out a study of its tariff structure. This has not been done and the requirement has been repeated in the second credit that OPTM should by June 1983 undertake a study of the levels and structure of its telecommuni- cations tariffs. 37. Given the high local charges, it is interesting to examine the position in relation to the revenue per telephone line. This amounted to about US$700 in 1978..2/ Allowing for the low proportion of long distance 1/ Charges on the smaller exchanges are generally lower or include local call charges. The tariff structure as a whole is a complex one. 2/ Note: The Region and Industry Department staff are of the opinion that in Mali, there is little evidence that the tariff levels are encouraging use of less economic alternatives. Such tariffs reflect the capital cost of the system and the lack of economies of scale; they are aimed at increasing the net income from telecommunications to the Government. Furthermore, price elasticity is very low in Mali where usage is almost exclusively restricted to business and Government services. 3/ An increase to about US$1,000 is expected in 1980 resulting from the tariff increase and the extension of long distance facilities. Even in countries with extended long distance networks, annual revenues per line range from about US$250 to US$500. - 10 - revenues (30% instead of a more usual 50%), this figure is very high and must be a matter for concern in a poor country with low per capita incomes. Taken together with the recent unsatisfactory financial results, it also suggests low operational efficiency accompanied by poor productivity. 38. The present overstaffing of OPTM (PCR para. 6.03) is obviously one of the major problems affecting the sector. A staff level of 243 per 1,000 linesl/ is extremely high. Even if the country has an employment problem, it is counter productive to employ excess staff in the telecommuni- cations operational sector.!/ Due to the additional dust, they create and the tendency, with nothing better to do, to make needless readjustment of equipment faults tend to increase directly in relation to the number of staff employed.A/ 39. Poor financial results with high tariffs (which on economic grounds should not be subject to further major overall increase) will make it extreme- ly difficult to maintain financial viability as wages and salaries are raised. It is important, therefore, that special attention should be devoted to man- power planning and raising productivity of existing staff whilst restricting recruitment of new staff. It has been agreed in connection with the second project that OPTM will improve its telephone-to-staff ratio. Target indi- cators, setting out the expected improvements over the period of the project, were agreed during negotiations. Overdue Receivables 40. The PCR (para. 5.03) comments on the fact that although some im- provements were made in collections from private subscribers (with assistance of OPTM's auditor and more recently through the provision of a small com- puter), receivables from Government and parastatal organizations continued to rise and Government has continued to follow the practice of paying a fixed amount which only covers about 60% of actual charges. Data in the second appraisal report indicates that receivables at the end of 1980 totalled US$8.8 million with an amount of US$5.0 million estimated as overdue from Government. Total annual billings were US$6.7 million. Allowing a normal two months before accounts become overdue, payments are about 14 months in arrears. (A 1979 supervision report indicates that overdue public sector receivables in 1978 amounted to about 16 months billings). 1/ In an efficient and developed organization, a figure of from 10 to 30 would be expected. The fairly wide range depends on the other services provided (telegraphs, telex, etc.) and the amount of construction work performed by in house work force. 2/ Consideration might be given to the extended employment of work force staff for construction and installation work. 3/ A study some years ago made in Great Britain showed that wear and tear and reliability of equipment was adversely affected if unnecessary adjustments were made routinely. - 11 - 41. This matter has been the subject of repeated discussions and letters from IDA to Government and OPTM, but no effective action has been taken. Assu- rances were obtained as a condition for Board presentation of the second project that satisfactory arrangements would be introduced to correct the position. 42. The problem of settlement of overdue Government accounts is a particularly difficult and prevalent one in developing countries. While in many cases Governments themselves face fiscal constraints, it is fundamental to successful commercial operation of the telecommunications sector that bills should be prepared on a timely basis and paid promptly. Major delays in payment will inevitably result in cash flow and liquidity problemsl/ and may prejudice both the development of the network and the efficient operation of services. It also involves increased costs of operation in maintaining accounts, correspondence, etc. and a reduction in profitability. 43. It is obviously undesirable, in the event of delays in payment, to disconnect essential Government services and such action in the case of the less important lines is difficult if, as is usually the case, the telecom- munications entity is Government owned. Bank/IDA staff are also reluctant to recommend measures, such as suspending disbursements, which will penalize the entity rather than the delinquant subscribers. Despite the frequently repeated assurances obtained from Governments and operating entities and representations, even at high level, any improvements which take place are often only short term. 44. It is suggested that in future loans/credits, where the accounts receivable position for Government subscribers is unsatisfactory, consider- ation might be given to requiring a covenant that interest at say 2% per month might be raised on the overdue amounts outstanding. This might have a salutary effect as officials who are accountable for payments are unlikely to wish to face criticism regarding unnecessary and wasteful expenditures.2/ 1/ OPTM has not yet met its debt servicing obligations to Government under the credit so there are compensating adjustments to be made in the Nali case. 2/ Note: The Region and Industry Department are of the opinion that the proposed 2% interest penalty would not solve the problem of Government arrears which are due to insufficient budget allocations.  - 13 - APPENDIX Page 1 of 2 1975 STUDY OF PROCUREMENTS IN FRANCOPHONE AFRICAN COUNTRIES The following is a precis of the main issues and conclusions con- tained in and resulting from the study. General Issues 1. Bidding was adequately advertised in the press and embassies of the producing countries were informed. Adequate times were allowed for bids. The conditions set out in the specifications and bidding documents for microwave equipment followed the usual procedures and set normal international standards. In the case of automatic exchange equipment, although the documents again set normal standards, there was in some cases a special requirement that certain exchanges should be contained in cabinets. If sufficiently interested, how- ever, the main equipment suppliers in all countries could have met this requi- rement. In the case of one country, cable specifications were based on the French national one and might have presented problems to some suppliers. (In this particular case, some justification existed for standardization in order to facilitate jointing). Extent of Bidding 2. In the case of cable supplies and switching equipment all bids were from French suppliers. In the case of microwave and multiplex equipment bids were received from French, Belgian, Italian and American suppliers. Reasons for Lack of Wider International Competitive Bidding 3. The main reasons probably consisted of: (i) A lack of knowledge and experience by non-French firms of condi- tions in francophone African countries. Additionally, most suppliers have been required in their bids to include responsibility for complete installation services, even for relatively simple items, such as ducts and cable for which, in most other countries, instal- lation would be carried out by the entities concerned; (ii) The small size of the orders which discouraged non-French firms from committing their limited French speaking personnel to such orders or from establishing representation in the francophone African countries; (iii) Many of the larger international suppliers have French subsidiaries and associates and will not bid separately. - 14 - APPENDIX Page 2 of 2 Levels of Bids 4. The bid prices for the main equipment items were assessed as follows: (i) Cable supplies. Bid prices for the cables themselves were substan- tially in line with contemporary prices bid elsewhere for similar quantities and sized cables. Where installation was also required, prices appeared generally high but useful comparisons were not possible as most other administrations use their own work force for installation or employ local contractors. (ii) Exchange switching equipment. Prices ranged from 32% to 68% higher than those bid internationally for similar installations. Also, main exchange prices bid by the French suppliers were consis- tently lower for the larger installations. (iii) Microwave systems. As systems design is to some extent related to distances between population centres, the analysis was carried out on a cost per station basis. This showed that prices in the franco- phone countries were reasonably in line with those bid elsewhere for similar systems. The Mali price was however about 28% above the average. Conclusions 5. In the case of cable procurement even though prices were reasonably in line with those bid elsewhere, it was considered that where French stan- dards were proposed, the possible advantages of allowing other standards might be discussed with the borrowers taking into account any views they may have on needs for continued standardization. It should also be indicated that installation by the supplier is usually extremely costly when compared with the costs of the administration itself carrying out this not very technical work. 6. The procurement of switching equipment obviously presented rather special problems in view of the lack of interest on the part of the other international suppliers and the high prices being bid by the French suppliers. Translation of documents might help the bidders to some extent, but still left a commitment to make available French speaking installation engineers and if quantities are small, it was not likely to result in appreciable widening of the competition. What might be done in the case of future pro- curement would be to go to bid for larger quantities designed to meet requirements for an extended period and thus increase the attractiveness of the market. 7. In the case of microwave systems, prices were not unreasonably high and there was evidence of suppliers outside of France becoming interested in the market; this was likely to increase in the future. 8. Recent bids for cables, microwave systems and multiplex equipment have shown wider international interest in the francophone market. Unfortu- nately, we have no up-to-date information on switching equipment as this has, for the countries with which we are concerned, been supplied from France under French financing. - 15 - ATTACHMENT A MALI: FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) COMMENTS BY OPTM ON THE PROJECT PERFORMANCE AUDIT REPORT Tariff levels In the preface, seems to be a contradiction between the first page, which states: "... the problems of low productivity and plant utili- zation related to the need to maintain tariffs at reasonable levels"lY and page (iii) of the "Highlights" section: "The problems of low productivity and plant utiliza- tion. The significance of high tariffs ...." Increase in the number of subscribers On page (ii) of the "Highlights" section we read: "The number of working subscribers increased by 38%, while on page 20, paragraph 9.01, we find that "...23 percent more customers are being served...." Of these two contradictory figures, we feel that 38% is OED Note: The 23% was to more realistic. If we go back to paragraph 4.02 on page 13, we see Dec. 1979 and the 38% to Dec. 1980. that the number of subscribers rose from 3,400 in 1971 to 4,700 in Highlights revised to 1980, an increase of 1,300, certainly equivalent to 38% for the reflect this. whole of Mali. For Bamako, the increase is 54.8% (1,906 against 2,950). 1/ Translator's Note: This is indeed how this statement appears in the French version of the PPAR, whereas the English version has "the problems of low productivity and plant utilization related to tariff levels...." - 16 - Differences between estimated and actual project costs at the different stages We have reproduced in amended form the table appearing in paragraph 3.12 on page 10 (of the PCR - Translator) to give an overall idea of the various stages that culminated in the final project as adopted and executed. We have added two cost columns and three columns showing the percentage difference. From our table it will be seen that the increase in OED Note: See footnote added cost of the switching equipment is 15%, and not 10%, as stated to para. 3.13 on page 30. in paragraph 3.13. In the following table, costs are expressed in US$ million, and the exchange rate used is US$1 = MF 440 (1975), and US$1 = MF 418 (1978). First phase of project, Original Dec. 1975 Costs after Actual costs, Difference Estimate revision negotiation final project 4/1 4/3 4/2 1971 1976 1976 1 2 3 4 Telephone exchanges 0,60 2,14 3,00 2,47 +312% +18% +15% Local networks 0,40 0,68 1,00 1,62 +305% +62% +138% Transmission links 2,40 2,49 4,50 2,69 +12% -40% +8% Buildings 0,40 0,91 0,40 0,84 +110% +110% -8% Consultants 0,20 0,34 0,20 0,18 -10% -10% -47% Contingencies 0.30 0.34 0,20 _- -- -- -- TOTAL 4,30 6,90 9,30 7,80 +81% -16% +13% The revised credit allocation was approved on July 21, 1976 by IDA and on November 11, 1976 by Mali. - 17 - Annex 1 - Project revisions We feel that the first line of the last column should read "no change with second revision" instead of "no change with first revision"I/ since R6 has not been rehabilitated. Annex 2 - Statement of income On the basis of the balance sheets, we have computed the following figures for average net plant in service (the other figures are not rounded off): 2,273.5 instead of 2,273 2,296.7 " " 2,296 2,326.4 " " 2,327 OED Note: First six sets of figures are actuals. Final 2,441.2 " " 2,441 set is for 1978 estimate. See footnote added to Annex 2 2,732.8 " " 2,733 on page 44. 3,113.4 " " 3,113 3,771.0 " " 3,761 For the annual rate of return, we compute 7.9% instead of 8.1% in 1974 (actual) and 1.7% instead of 1.9% in 1977 (actual). It thus appears that the lowest positive actual rate OED Note: See corrections made of return over the period 1972-78 was 1.7% in 1977 instead of to para. 5.02 on page 34 and Annex 2 1.9%. on page 44. Annex 3 - Sources and applications of funds This annex includes the figures for computing part of the actual debt service coverage, but these "Actual" columns are left blank. According to our calculations, the actual figures are: I/ Translator's Note: The English version of the PPAR has 1no change with second revision," but the French version does have "no change with first revision," as quoted here. - 18 - For 1972: 11.9 For 1973: 16.1 OED Note: These additions have been made to Annex 3 on page 45. For 1974: 1.4 In addition, the forecast for 1978 is not shown. We make it 3.7. Annex 4 - Balance Sheets We believe that the forecast of 874.0 for cumulative depreciation in 1978 must be incorrect. This depreciation fore- cast, which rose from 618.8 (sic - Translator) in 1972 to 1,339.2 in 1977, suddenly drops to 874.0 in 1978, only just over the 1974 level. Unless we are mistaken, we believe this depreciation should be 1,570.4, giving in the third line a net fixed assets OED Note: See footnote added figure of 4,516.6. Using your figures, average net plant in to Annex 4 on page 46. service as shown in Annex 2 should have been 4,119.1 instead of 3,761.0. Internal rate of return on investment In paragraph 16 (page 5) of the Memorandum, we read: "The recalculated internal financial rate of return for the OED Note: Page revised program was 22%...," and in paragraph 7.05, (page 19) (ii) of Highlights and para. 16 on of the PCR, we read: "The internal financial rate of return page 3 have been for the revised development program using data now available corrected to 24%. is estimated at 24% (Annex 6)." From the data and description in the appraisal report it is difficult to identify the precise methodology used in the calculation. According to the methodology currently considered, the rate is 24%. - 19 - We should like to have detailed explanations on the new methodology being used, and to determine whether the rate is 22% or 24%. Annex 6 - Internal rate of return on the investment Paragraph 1 states that in 1992 the equipment will be dpproaching the end of its useful life, but no mention is made of its residual value or its removal cost. Can these two cost items really be omitted? In principle, the figures in the table in paragraph 4 are based: - For capital investment, on Annex 3 (Sources and Applications of Funds) - For operating costs and revenues, on Annex (Statement of Income) We understand that these figures have been adjusted, since they have been deflated to 1971 values, the base year for the comparisons. But there is no indication of the methodology and coefficient used for this purpose. In addition, all the data in Annexes 2 and 3 stop at 1978, which means that forecasts should have appeared in this table for subsequent years. However, only two figures are shown, in the Costs and Revenues columns, for 1979 and for 1992. It is easy to understand why capital investment should stop in 1978, but on the other hand it is difficult to imagine the absence of any costs or revenues during the period 1980-1991 (11 years). The figures for this period must have been estimated, and we should like to know the basic hypotheses used for this purpose. Paragraph 5 states that the "internal rate of return for the foregoing benefit stream is 24 percent," but this benefit stream is deduced from the above-mentioned table in which there is an omission of 11 years. It is therefore impossible to discount these streams to check whether the 24% does in fact cancel the net present value. - 20 - Looking at the Appraisal Report of May 17, 1972, we see that the table on page of its Annex 8 estimates that from 1980-1991 revenues will stabilize at an annual figure of MF 486 million, while costs over the period 1980-1990 will stabilize at 111 and become negative in 1991 to take account of the residual value of plant and buildings constructed for the project and having a life beyond that date. Page 2 indicates the useful life of the various project components, showing that only the microwave and transmission equipment will be fully depreciated (20 years). The local exchanges and networks and the trunk switching equipment have 10 more years of useful life, while the buildings have another 20. In view of the foregoing, we should be grateful if OED Note: Clari- fications and an you would give us complete information on your new method of additional column have been added calculation. With this information, we shall be able to use to Annex 6 on page 49. In addi- figures given in the Statement of Income and the Sources and tion, Bank staff will write to OPTM Applications of Funds, as well as projection hypotheses (1980- further explaining methods used in 1991) to arrive at the internal financial rate of return that calculating the return. you put at 24%/. Conclusions Like you, we deplore the long delay in project execution, mainly due to the face that half the project was underestimated by 81%, to OPT's inexperience in the fact of the planned institutional reforms, and to the shortage of young senior staff. Despite all this, and since this was Mali's first project of this kind, the project's goals have been achieved thanks to fruitful cooperation between IDA and OPT. The above comments will not lead to any major changes in the form or substance of the two documents you sent us. A few adjustments to the figures are all that is needed. We therefore wish to signify our approval of the PPAM and the PCR. Bamako, April 7, 1983. D.E.E.F. - 21 - MALI PROJECT COMPLETION REPORT FIRST TELECOMMUNICATIONS PROJECT (CREDIT 321-MLI) I. INTRODUCTION 1.01 Public telecommunications services in Mali are provided by two autonomous organizations: the Office des Postes et Telecommunications du Mali (OPTM) and the Compagnie des Telecommunications Internationales du Mali (TIM). OPTM is wholly owned by the government and provides all domestic telephone, telegraph and telex services in addition to operating postal services, a nationwide public checking account service, and a savings bank. TIM, which is jointly owned by the government (65 percent) and Compagnie France Cable et Radio (35 percent), provides common carrier facilities for Mali's international telecommunications. 1.02 In June 1972 IDA approved a credit of US$3.6 million to Mali (Credit 321-MLI), with OPTM as the beneficiary, to support the 1972-75 program for rehabilitation and expansion of the domestic telecommunications system and for assistance in institutional development. Project costs were estimated to be US$4.3 million, of which US$3.1 million would be foreign exchange. IDA was to finance US$0.5 million of the local costs and the remaining local costs of US$0.7 million were to be financed by internally generated funds. Proceeds of the IDA credit were onlent to OPTH at 7-1/4 percent interest for 20 years, including a four-year grace period. II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL Preparation, Appraisal and Negotiations 2.01 The project was partly based on a study carried out in 1965 by a consulting and advisory organization sponsored by the French government, and for the microwave link Bamako-Mopti, on the UNDP/ITU sponsored PANAFTEL study. In February 1970 an identification mission was sent to Mali during which the study was updated by OPIM in consultation with IDA. Based on the findings of the mission, IDA and government agreed that an in-depth study of OPTM's finances should be made before consideration could be given to the financing of a project. The study, financed by UNDP with IDA acting as the executing agency, was carried out in May/June 1971 by the a financial consulting firm. The government and IDA accepted,the main findings of the study and, following discussions with Mali government representatives in Washington in late September 1971, the project was appraised in December 1971. Negotiations between IDA and the Malian government were concluded on May 5, 1972, and the credit approved by the IDA Board of Executive Directors on June 19, 1972. Project's Objectives 2.02 As originally conceived, the project aimed at rehabilitating and expanding the principal local and long distance facilities in order to - 22 - improve the physical condition of the network, eliminating congestion, improving the quality of service and meeting the then anticipated demand through 1977. Particular importance was assigned to providing links with Mopti, San and Segou, three developing agricultural centers. (See paragraph 3.05 regarding project revision and decision to execute the project in two phases.) In addition to the physical plant, the project aimed at improving the institutional and operating aspects of OPTM through technical assistance in organization, management and accounting. Project Description 2.03 The project (original) consisted of the following: (a) rehabilitation of existing switching equipment, the addition of 1,000 lines to the Bamako automatic telephone exchange, and the replacement of manual equipment in five provincial towns by 1,300 lines of automatic switching equipment; (b) rehabilitation and expansion of existing cable and subscriber distribution networks; (c) construction of a microwave link between Bamako, Segou, San and Mopti, with multiplexing equipment and trunk switching equipment for 60 channels; (d) rehabilitation of open wire routes and construction of VHF spur links along the main microwave link Bamako-Segou- Mopti; (e) employment of consultants for the detailed engineering, procurement, supervision of project execution and reorganization of OPTM's accounting system; and (f) employment of a management expert to assist the director of telecommunications. Covenants 2.04 The credit and project agreements provided that: (a) the Borrower relend the proceeds of the credit to OPTM under a subsidiary loan agreement with terms and conditions approved by IDA (Credit Agreement Sections 3.01(b) and (c); (b) the Borrower make satisfactory arrangements for (i) making adequate working capital available to the Telecommunica- tions Department; (ii) settling of deficits of the Postal - 23 - and Financial Department of OPTM existing prior to 1968; (iii) covering any deficits arising from the operation of such departments; and (iv) ensuring the prompt payment of the Borrower of charges of the OPTM for services rendered to the Borrower (Credit Agreement Section 3.02); (c) OPTM employ three technical advisers to advise and assist in training personnel on day-to-day operations. (Project Agreement Section 2.02(b); (d) OPTM employ for three years an expert in organization and management acceptable to the Association (Section 3.01(b); (e) OPTM maintain accounting records to show separately the operating results and financial position of the Telecommunications Department for 1972 and thereafter; have its accounts audited by independent auditors; and submit to IDA certified copies of OPTM's financial statements not later than six months after the end of the fiscal year (Project Agreement Sections 4.01 and 4.02); (f) OPTM, with the assistance of financial consultants, reorganize its accounting system by the end of 1973, and by the end of June 1973 inventory and revalue its assets and revise its policies and procedures for collection of charges (Project Agreement Section 2.02); (g) OPTM would not modify its tariffs for telecommunications services without prior consultation with IDA (Project Agreement Section 4.04); (h) OPTM would not undertake any capital expenditure for telecommunications, other than under the project, in excess of US$75,000 unless IDA had approved the financing plan (Project Agreement Section 4.04); (i) OPTM would, immediately upon availability of data from its revised accounting system, review the level and structure of its domestic telecommunications tariffs in consultation with IDA (Project Agreement Section 4.05); (j) OPTM would, unless IDA agreed otherwise, take all necessary steps, including adjustments to telecommunications tariffs, to provide the Telecommunications Department revenue sufficient to produce an annual rate of return of not less than 10 percent beginning with 1977 (Project Agreement Section 4.06); - 24 - (k) OPTM would maintain a special bank account in its own name into which it would deposit quarterly in advance the funds necessary for carrying out the project and for the importation of materials and supplies for the maintenance of telecommunications equipment (Project Agreement Section 4.07); (1) OPTM would not, except with IDA agreement, incur any debt for its telecommunications operations unless its net revenue from such operations for the fiscal year next preceding such incurrence or for a later 12-month period ended prior to such an incurrence was at least one and one-half times the maximum debt service requirement for any succeeding fiscal year (Project Agreement Section 4.08); and (m) OPTM would not incur, unless otherwise agreed with IDA, any short-term debt for its telecommunications operations if such debt, together with all other outstanding short-term debt for such operations would exceed three months' average operating expenses for such operations during the fiscal year next preceding such incurrence or during a later 12-month period ended prior to such an incurrence (Project Agreement Section 4.09) 2.05 These covenants were designed to reinforce the financial integrity and improve the management of OPTM. At the same time, they addressed the problems associated with the financial viability of the Telecommunications Department by attempting to isolate its operations and financial decisions from those of the Postal and Financial Department of OPTM. III. PROJECT IMPLEMENTATION Credit Effectiveness and Project Start-up 3.01 Employment of engineering consultants was a condition of credit effectiveness. Because of the Borrower's failure to submit the required legal opinion on time and OPTM's indecision in the selection and appointment of the engineering consultant, the credit became effective after a nine- month delay, i.e., April 4, 1973. Further delays due to the consultant's proposal of a much larger and costlier project resulted in start-up in March 1974 (21 months behind schedule)(see paragraphs 3.02 to 3.07, 3.18 and 8.02). Revisions of the Project (Annex 1) 3.02 The engineering consultants appointed by OPTM started their assignment with an unexpectedly large and unjustified revision of the IDA appraised project (see paragraph 3.18) and subsequently proposed a broader - 25 - program encompassing about 10,000 lines of switching equipment and associated local networks' extensions versus 2,300 as appraised. IDA objected to this proposal because: (a) there was no demonstration that such a large project was economically justified, (b) it was well above OPTM's managerial and financial capability to carry out such a large expansion, and (c) no additional financing was available. This project revision, however, had the merit of pointing out some technical weaknesses of the original project, which was appraised with insufficient technical preparation (see paragraph 8.01), and was based on a consultants' study made in 1965, and on the part of the PANAFTEL study related to the transmission facilities Bamako-Mopti. 3.03 Also under the original project design the Bamako local telephone exchange was to be expanded by 1,000 lines only and this extension was to be installed with trunk switching and multiplex equipment in an annex to the existing telephone exchange building which was originally designed and still used for the sorting of postal parcels. The consultant study pointed out that the construction of an annex to such a building raised problems and would not be cost effective because such a solution would not provide adequately for future development. The existing 3,000 lines of switching equipment in Bamako included 2,000 lines of obsolete R6 equipment and 1,000 lines of PENTACONTA equipment. Interworking between the two systems was impeded by low switching speed, limited traffic capacity and internal accessibility of the R6 equipment, and the switching capability of the whole was limited to the functions of a purely local exchange whose outgoing and incoming traffic with the rest of the national network had to be handled by operators. 3.04 Taking into account the technical difficulties (paragraph 3.02) which were not identified before or at appraisal, IDA accepted necessary changes during the preparation of bidding documents, in order to make the system work. The consultant proposal of a 10,000-line project (paragraph 3.02) was finally turned down by OPTK and a first revision made before bidding was limited to (a) a separate exchange building for the new technical facilities in Bamako, (b) provision of 1,000 additional local lines in Bamako to compensate for the traffic limitations of the existing obsolete equipment, and (c) an adequate provision of trunk switching equipment in order to introduce STD between the new telephone exchanges included in the project, and to ensure the efficient use of the microwave link Bamako-Mopti. Provision of trunk switching equipment was particularly underestimated at appraisal (see Annex 2, first revision). 3.05 After evaluation of the somewhat limited bids for the two main components, sw&tching and transmission, it appeared that the project would experience a large cost overrun (see paragraph 3.09). Since most of the contracts were awarded to French suppliers, Caisse Centrale de Cooperation Economique (CCCE) agreed to join in the financing of the project up to a maximum of US$2.2 million equivalent. A final revision of the whole project was the result of a quasi-reappraisal made by a joint IDA/CCCE mission which visited Bamako in December 1975 fully four years after the original appraisal - 26 - had been made. At this occasion, it was agreed with OPTM to increase the switching capacity of the new Bamako local telephone exchange up to 4,000 lines. This increase was made necessary because the supplier of the existing 2,000 lines of obsolete R6 switching equipment decided to stop manufacture of parts required for maintenance, upgrading and adaptation (see Annex 1, second revision). As neither the government, nor OPTM, was able to close the gap in the financing plan, it was agreed that the project would be carried out in two phases and that all the proceeds of Credit 321-MLI would be needed to finance the first phase jointly with CCCE. This phase (see Annex 2, first phase) included the original project reduced by the Segou-Mopti section of the Bamako-Mopti microwave link and by the automatic exchanges of Mopti and Kayes, but expanded the total capacity of the new Bamako exchange from 2,000 to 4,000 lines as agreed before contract negotiations. The first phase of the revised project thus consisted of the following: (a) installation of switching equipment for 4,600 automatic exchange lines, 4,000 of which are in Bamako, 400 in Segou and 100 in Kati and in Koulikouro, and trunk switching equipment; (b) expansion and rehabilitation of the Bamako local network; (c) construction of the Bamako-Segou section of the microwave link Bamako, Segou, San and Mopti, with multiplexing equipment; (d) expansion by VHF of the spur routes Bamako-Kati and Bamako- Koulikouro; and (e) planning and implementation of a modern system of accounts and of billing and collection of charges for service; the revaluation of assets and carrying out a study of the levels and structure of OPTM's telecommunications tariffs. CCCE's Board approved the additional loan to OPTM in February 1976; the terms were 15 years, including a 7-year grace period and interest at 5-1/2 percent per year. Amendments to Schedule I (Withdrawal of the Proceeds of the Credit) and to Schedule II (Description of the Project) of the Development Credit Agreement were approved by the Association on July 21, 1976 and signed by the Malian government on November 11, 1976. The first phase of the project, as revised, was expected to be completed by December 31, 1978. 3.06 Priorities for retention of project items to be included in the first phase of the revised project were recommended by OPTM whose Telecommunications Department was assisted by the expatriate experts employed according to Sections 2.02(b) and 3.01(b) of the Project Agreement. OPTM's recommendations were reviewed by the joint IDA/CCCE mission and then submitted to the government for final decision. In accepting reluctantly to carry out the project in two phases, the government had to make the difficult - 27 - decision of delaying the achievement of a major project objective, which was linking Bamako to Mopti, the important business center of the fertile Niger/ Bani interior delta (paragraph 2.02). Priorities set up in deciding the final composition of the first phase were based, however, on the ground that rehabilitation and building up of a sound nucleus of basic telecommunications facilities and plant in the capital city were more essential than the construction of the entire microwave link from Bamako to Mopti, without appropriate local switching facilities and outside plant at both ends and along the transmission route. If this second alternative was selected as first priority, the microwave link would not have collected the potential long distance traffic and thus the operation of the facilities included in the first phase could not have been made profitable for the economy before the second phase materialized. Nevertheless, Segou, the second important city of the country, was included in the first phase with appropriate local facilities and a reliable microwave link to Bamako. The decision to postpone the Kayes telephone exchange and local network to the second phase was justified by the expected delays in the construction of the PANAFTEL microwave link from the Senegal border-Kayes-Bamako-Sikasso-Upper Volta border. As of mid 1981 this PANAFTEL route is not yet in operation although now near completion. Taking into account the existing financial and technical constraints, the above decisions made by the government and jointly supported by IDA and CCCE were correct. Implementation Schedule 3.07 The project, as appraised in 1972, was originally planned to be completed by the end of 1975. At the end of 1975, however, only two major contracts for switching and transmission equipment were signed and their manufacture had just started. At this point the implementation of the project had been delayed by almost three years for the following reasons: (a) due to the Borrowers' failure to submit the legal opinion on time and due to difficulties encountered by OPTM in hiring an engineering consultant, nine months were required to make the credit effective; (b) another year of delay was due to the fact that the engineering consultant unexpectedly proposed a new and more costly project, that IDA objected to (see paragraph 3.02); and (c) further delays were encountered in preparing the bidding documents and awarding the contracts (see paragraphs 3.04 and 3.05). Particularly, the award of the first two major contracts was delayed until a solution was agreed with the government, IDA and CCCE to solve the problems associated with the financing of the cost overrun. During this period (1975- 1976), the project was rated as a problem project by IDA and required a large amount of IDA staff attention to get started again. Although the first phase - 28 - of the revised project (paragraph 3.05) was planned to be completed by the end of 1978, further delays in building construction due to the shortage of cement in the country, added another five months to the project. Nevertheless, installation of switching and transmission equipment was satisfactorily completed and commissioned by May 1979. Duct construction for the Bamako local network was completed and all cables and connecting materials jointly financed by IDA and CCCE were fully delivered by mid 1979. Installation of the remaining parts of the Bamako local network is now proceeding satisfactorily with assistance of expatriate experts financed by bilateral technical assistance and is expected to be completed at the end of 1981. Procurement 3.08 With the help of the engineering consultants and expatriate experts in management, switching and transmission, who were working with OPTM's Telecommunications Department during the procurement phase of the project, OPTM did not have too many difficulties in dealing with procurement of equipment in accordance with Bank guidelines. OPTM's Telecommunications Department was also assisted by the ITU Technical Cooperation Department in reviewing the consultant award recommendations. However, due to the relatively small size of the contracts and a lack of knowledge of the local conditions and environment by most of the potential international telecommunications suppliers, ICB had very limited success in attracting competition and obtaining low prices. Cost of the Project 3.09 Due to the combined effect of an optimistic original cost estimate based on competitive 1972 world market prices, underestimation of the difficulties encountered with the existing switching equipment in Bamako, underestimation of the trunk switching equipment requirements, substantial delays in getting the project started, including the preparation of bidding documents, lack of effective international competition and unexpectedly high world inflation, as well as currency realignments between 1973 and 1975, evaluated bids for the two main project components, adjusted to include the supply and installation of 4,000 new lines in Bamako (paragraph 3.05), revealed that the cost overrun would be as high as 130 percent. In May 1975 an IDA supervision mission visited Bamako to assist OPTM in its negotiations with the lowest bidders for the two main contracts. The negotiations resulted in a reduction in the total cost of the project from US$9.8 million to US$9.3 million which, compared with the US$4.3 million estimated at appraisal, brought the total cost overrun net of taxes down from US$5.5 million to US$5.0 million. The increase of project costs due to currency realignment was about US$0.9 million. Detailed costs of the whole project (including 4,000 local lines in Bamako, paragraph 3.06) as revised after contract negotiation and their comparison with appraisal figures are given below. - 29 - - US$ Million*............... Costs of Revised Original Estimates Project (1975)** Item Local Foreign Total Local Foreign Total Telephone exchanges 0.1 0.5 0.6 0.3 2.7 3.0 Local networks 0.2 0.2 0.4 0.5 0.5 1.0 Transmission links 0.4 2.0 2.4 0.7 3.8 4.5 Buildings 0.4 - 0.4 0.4 - 0.4 Consultants and experts - 0.2 0.2 0.1 0.1 0.2 Contingencies 0.1 0.2 0.3 0.1 0.1 0.2 Total 1.2 3.1 4.3 2.1 7.2 9.3 * Exchange rates: 1972 - US$1 = MF 511; 1975 - US$1 = MF 440. ** Actual costs from the negotiated contract for switching and transmission equipment; revised estimates for the other components. 3.10 The largest cost overrun was experienced with the switching equipment. The total cost of US$3.0 million compared to US$0.6 million, included: (a) supply and installation of eight standby diesel generators at a cost of US$280,000, and (b) training of OPTM's technicians in the new system and one year of maintenance by the supplier at a cost of US$176,000. These items which are essential to the project were not included in the project at the time of appraisal. Taking into account the increase in number of local lines and the provision of essential trunk switching equipment and operator switchboards, the unit prices were about US$300 per line equivalent in Bamako and about US$570 in the small provincial exchanges. These figures compare with the appraisal estimated price of US$184 per line, including price and physical contingencies, and represent 63 percent and 210 percent unit price increases respectively. The transmission component of the project which included the 960-channel microwave link Bamako-Segou-Mopti with multiplex equipment for 60 channels and 4 VHF spur links experienced also an 87.5 percent cost overrun, although no significant changes were made during the detailed design which could have affected the bid prices as compared to appraisal estimates. The 63 percent, 210 percent and 87.5 percent increases in prices above expressed in US dollars include a 5.5 percent increase due to currency realignments and at least 25 percent increase due to the high inflation rate which was experienced between 1972 and 1975, whereas the original appraisal estimates provided for a very optimistic 3 percent price contingency over the expected three-year period of project execution. 3.11 An internal Bank study made in July 1975 at the request of the Western Africa Region, confirmed that the prices obtained in Mali were substantially higher than those obtained in other parts of the world and - 30 - reflected not only the small size of the contracts which did not attract meaningful international competition, but also the fact that installation took place in a landlocked country where transportation is difficult and costly and where technical skills are scarce and need to be imported at high cost. 3.12 Because of shortage of financial resources to carry out the whole revised project, priority items were selected to execute a first phase only (see Annex 1) and paragraphs 3.05 and 3.06). The project costs limited to the first phase, as estimated at the time of the joint IDA/CCCE mission and the actual costs are summarized below: ---------- US$ Million* First Phase of Revised Project (Annex 1) Estimates Actual Item Local Foreign Total Local Foreign Total Telephone exchanges 0.214 1.925 2.139 0.248 2.226 2.474 Local networks 0.141 0.541 0.682 0.840 0.783 1.623 Transmission links 0.248 2.238 2.486 0.282 2.405 2.687 Buildings 0.418 0.491 0.909 0.679 0.164 0.843 Consultants and experts - 0.341 0.341 - 0.180 0.180 Contingencies and other investments 0.084 0.260 0.344 -. -. -. Total 1.105 5.796 6.901 2.049 5.758 7.807 * Exchange rates: 1975 - US$1 = MF 440; 1979 - US$1 = MF 418. 3.13 The actual cost of the project, US$7.8 million equivalent, was 13 percent higher than the US$6.9 million estimated in December 1975 when the project was reappraised. In local currency, however, the actual cost was only 7.5 percent higher than the revised estimate. The remaining 5.5 percent difference was due to further currency realignments made betweeen 1975 and 1979. The largest cost variation was in the local network, mainly in the construction of ducts financed by OPTM. This difference in cost is explained by an increase in quantity of cable and material required for the rehabilitation and the extension of the Bamako local network and also by the fact that no appropriate design of the network and the associated civil works was available at the time of the revision of the project because of the unsatisfactory performance of the first consultant (paragraph 3.18). The 15.5 percentl/ increase in cost of the switching equipment is mainly due to the purchase-of additional switching equipment required to increase the traffic capacity of the Bamako telephone exchange (paragraph 3.18). The actual cost, as indicated above, does not include an estimated additional 1/ Includes a 5.5 percent increase due to currency realignment. OED Note: See also amended form of table in para. 3.12 as suggested by OPTM (page 16). - 31 - US$0.5 million, mainly local funds for salaries of OPTM staff, and bilateral grant for salaries of expatriates still required to fully complete the cable installation (paragraph 3.06). Disbursements 3.14 The estimated and actual annual disbursements of the IDA credit were as follows: Accumulated Disbursements - - - US$ Thousands - - - Fiscal Year Appraisal Estimates Actual 1972-1973 150 40 1973-1974 1,000 100 1974-1975 2,800 140 1975-1976 3,600 1,800 1976-1977 - 1,900 1977-1978 - 2,800 1978-1979 - 3,400 1979-1980 - 3,600 Final disbursement was made on August 3, 1979. The slippage in disbursements was due to the problems explained in paragraphs 3.02 to 3.07. However, once the contracts for IDA-financed goods and services were finalized and signed, OPTM sent to IDA, without substantial delay, applications for payments directly to the suppliers. Credit Allocation 3.15 The original, the revised and the final allocation of the proceeds of the credit were as follows: Credit Allocation (US Dollars) Category Original Revised 1976 Final I. Switching and local networks 716,000 1,370,000 1,713,335.49 II. Transmission 2,173,000 1,400,000 1,410,636.39 III. Civil works 198,000 480,000 287,302.85 IV. Consultant 98,000 190,000 178,725.32 V. Unallocated 190,000 160,000 -. Total 3,600,000 3,600,000 3,600,000.00 - 32 - The revised credit allocation was approved by the Board of IDA on July 21, 1976 (paragraph 3.05). Operations 3.16 Before installation of the switching equipment was completed, OPTM and the government expressed doubts regarding the future performance of the new switching system and equipment procured under the project. These doubts were raised following operating problems encountered with similar switching equipment which was already in operation in other West African countries. However, assurances were obtained from the contractor that the technical problems had been identified and solved. Since commissioning, OPTh is satisfied with the quality and performance of the equipment and plant obtained through contractors. The equipment and material was supplied and installed in accordance with the specification. Performance of Consultants, Contractors and Suppliers 3.17 The Credit Agreement required the employment of an engineering consultant, an expert in organization and management of telecommunications and three technical advisers, as well as financial consultants. 3.18 The engineering consultants appointed by OPTM were partly responsible for the initial delays in project execution. According to Section 2.02 of the Project Agreement, the engineering consultant task should have been: (a) assistance to OPTM in procurement of goods and services and (b) the supervision of works. Nevertheless, taking unexpected actions the engineering consultants started their assignment with a large revision of the scope of the IDA appraised project (paragraph 3.02). Lack of continuity in IDA engineering staff and lack of close supervision at the time of project start-up (paragraph 8.02) contributed to the problem. As a result, the engineering consultants proposed a larger and costlier project which IDA objected to, and that OPTM finally turned down (paragraphs 3.02 and 3.04). In addition, with the exception of the transmission component, the consultant's design of the new Bamako telephone exchange building, switching and local networks, as well as the corresponding bidding documents, were not satisfactory and had to be amended by expatriate experts (paragraph 3.19). Finally, OPTM decided to cancel this consulting firm's contract and appointed another one for the supervision of project execution and inspection of equipment at the factory, and for checking on site installation and operating performance. Performance of the second firm of consultants was satisfactory. 3.19 According to the Project Agreement, OPTM appointed an expert in organization and management to assist the Director of the Department of Telecommunications in organizing OPTM's telecommunications operations. The selected expatriate worked closely with the engineering staff and proposed improvements in the technical operations and administrative procedures which - 33 - could have been beneficial to OPTh. In addition to his main tasks, this expert also assisted OPTM's Telecommunications Department in project design, amendment to bid specifications and bid evaluation to compensate for the weakness of the first firm of engineering consultants (paragraph 3.18). Unfortunately, the Director of Telecommunications who benefited from this assistance left the service of OPTM before implementing the expert's recommendations and his successors were reluctant to implement them (paragraph 6.01). 3.20 As stipulated in the Project Agreement, OPIM employed three expatriate technical advisers, one in each of the three main technical fields: switching, transmission and local networks. These advisers were financed by the Fond d'Aide et Cooperation (FAC)--aid agency of the French government. Their assistance was appreciated, notably during project execution and commissioning of the new installations. 3.21 Performance of the financial consultants has been satisfactory (paragraph 5.06). 3.22 The suppliers and contractors have generally performed in accordance with their contractual obligations. IV. OPERATING PERFORMANCE 4.01 Since commissioning the new Bamako exchange in May 1979, delays in obtaining a dial tone have virtually disappeared and connections are clearer, resulting in a substantial improvement of telephone service. Direct long distance dialing, which is now available to most of OPTM's clients, has also contributed to improved service. 4.02 At the time of appraisal in 1971, OPTM had 3,400 connected direct exchange lines (DELs) and an exchange capacity of 5,200. Demand was growing at about 8 percent annually and it was estimated that capacity would be fully utilized by 1974, provided that distribution facilities were made available. The original targets of 5,600 DELs and an exchange capacity of 7,500 by the end of 1977 were pushed forward to 1978 when the project was revised in early 1976. As of December 31, 1979, after commissioning the transmission and switching facilities included in the first phase, the total exchange capacity was 8,300 lines, 5,900 of which were automatic, but due to delays in completing the local networks, OPIM had only 4,188 DELs in operation. In 1980, the number of DELs increased by 12 percent to reach 4,700 DELs on December 31, 1980. However, there are still 1,800 registered waiting applicants a majority of whom should be connected as the local network installation progresses (paragraph 3.07). - 34 - V. FINANCIAL PERFORMANCE Financial Results 5.01 No meaningful comparison of the financial results can be made with the original appraisal expectations since the project was delayed, revised, split into two phases, and is still not physically completed as originally envisioned. Nevertheless, comparisons of the forecasted financial statements of the Telecommunications Department are shown in Annexes 2, 3 and 4. An analysis of the actual performance of this department from the beginning of 1972 to the end of 1978 indicates that it has been able to provide through internal cash generation about 41 percent of the funds needed to carry out its investment program. Borrowing from the Postal/Financial Department for investment provided about 15 percent of the requirement and the remaining 44 percent came from IDA and CCCE. On this count, the performance in carrying out a MF 4,850 million (US$10.2 million) investment program appears to have been reasonably good. On the other hand, during the same period additional funds borrowed on a short-term basis from the Postal/Financial Department amounting to about MF 1,000 million (US$2.5 million) were used to increase inventory of stocks far beyond needs. Management seemingly ignored the advice of IDA and its own auditors on this matter. The apparent reasonable performance of the Telecommunications Department with respect to self-financing masks the fact that it could have done considerably better. Return on Investment 5.02 Operating results, as measured by the rate of return on average revalued net fixed assets in operation, reveal a deteriorating trend since 1975, a year in which the rate of return rose to 14.3 percent following a tariff increase. In 1977 the rate of return had dropped to 1.8 percent and in 1978 was negative. During the same period, the operating ratio rose from 71 percent to 102 percent reflecting rising operating costs without corresponding increases in revenues. It was also a period during which the book value of net assets in operation doubled while revenues rose less than 20 percent. The major contributing factor to this situation was that OPTM did not complete the local network component of the revised project and thus was unable to connect new subscribers to the system and increase operating revenues. IDA applied some pressure on OPTM in requesting substantial progress in completing this project component as a condition of appraisal of the proposed second telecommunications project, and finally OPTM obtained bilateral technical assistance for this purpose (paragraph 3.06). Performance in 1979 was considerably better than in previous years, and in 1980 it is estimated to be much better than in 1979. Several factors combined contributed to the improvement in 1980, notably a significant increase of the number of connected subscribers and an increase in long distance traffic as a direct result of the project. In 1980 the rate of return on revalued net fixed assets in use is estimated at about 13 percent, which is above the 10 percent return required by the Project Agreement - 35 - (Section 4.06). Due to delays in preparation of the 1980 financial statements and the 1979 and 1980 audit reports it is not possible to determine the precise rate of return for 1979 and 1980 (paragraph 5.06). Billing, Collections and Working Capital 5.03 Throughout the project period, the Telecommunications Department rarely succeeded in bringing its billing up to date and collections have lagged causing accounts receivable to rise and effective working capital to be deficient. OPTM's auditors, under a separate contract, have spent an enormous amount of time in an effort to identify clients and bring records up to date. Some success in improving collection from private telecommunications clients was achieved but receivables from government and parastatal organizations continued to rise through 1980. Covenants in the Credit Agreement which require the government to make arrangements for making adequate working capital available to the Telecommunications Department and ensure prompt payment of charges for services rendered to the government have not been met. To date, the government follows the practice of paying, each quarter, a fixed amount which has covered only about 60 percent of the actual charges. Due to fiscal constraints, numerous discussions with, and letters to, government and OPTM have not resulted in effective action. Settlement of differences between the government and OPTM regarding the amount of arrears on telephone and telex bills, as well as satisfactory arrangements, with target dates, for payments is one of the conditions for negotiation of the proposed second credit. Tariffs 5.04 Under the terms of the Project Agreement, OPTM was required to review the level and structure of its domestic telecommunications tariffs in consultation with IDA. Due to lack of external assistance as well as reliable financial data, OPTM has not been able to carry out a formal tariff review. However, OPTM decided to increase its telecommunications tariffs by 28 percent in April 1975 which resulted in OPTM having among the highest tariffs in the world at that time. OPTM did not consult IDA and the January 1975 supervision mission had neither been informed of OPTM's intention nor expressed the need of such an increase. There is no evidence that IDA commented on this 28 percent tariff increase which was included in OPTM's financial projections of the first phase of the revised project in December 1975 (paragraph 3.05). A small additional tariff increase was implemented in 1979. More reliable financial data is available now to OPTM management and a review of the tariff structure is proposed to be undertaken in conjunction with the proposed second telecommunications project under preparation. Capital Expenditures Outside the Project 5.05 Control over capital expenditures which exceeded US$75,000 in any one year outside the project was a feature of the Project Agreement. The requirement limiting such expenditures without IDA's approval of the - 36 - financing plan was not observed. However, most of these investments were financed from grants and did, therefore, not affect the financial resources available for the IDA project. It was estimated, for example, that such investments exceeded the limits, on the average, by a margin of four to one during 1972/1975. A number of these investment items procured from grants outside of the project were technically overprovisioned and booked of values greatly exceeding prevailing world market prices. Accounting System and Audit 5.06 Aided by a consultancy firm, considerable progress in accounting has been made during the project period. There have been ups and downs, but the continuity of the accounting firm's personnel has been a very positive factor in an environment where OPTH has frequently changed personnel and management. OPTM's accounts now permit the preparation of separate accounts for the Telecommunications Department and the Postal/Financial Department. Reports are still not available on a timely basis, making them much less useful to management than they should be. As indicated in the preceding paragraphs, there are areas requiring more positive action by management before the operation of the system can be considered satisfactory. In the early years of the project, reports prepared by the auditors were not satisfactory and did not meet expected standards but, partly as the result of IDA assistance and supervision guidance, the main quality has gradually reached a reasonable standard. Timeliness remains a continuing problem attributed to the lack of an internal consolidated accounting function within OPTM. This problem is currently being addressed as a part of the preparation for the proposed next IDA project. VI. INSTITUTIONAL PERFORMANCE 6.01 Efforts to improve institutional performance concentrated on organizational and management advice, finance and accounting reforms, staff training and financial reporting. Due, in a large measure, to changes in key personnel (three general directors of OPIM and three directors of telecommunications over the nine-year project period) there was limited progress in improving organization and management despite the considerable efforts of outside experts and IDA supervision missions. Noncompliance with a number of covenants, not by deliberate action but more likely by a failure to adequately understand requirements and the lack of an adequate flow of information, are indicative of the lack of success in this area. 6.02 In the financial and accounting areas, somewhat better but erratic progress has been achieved. Renewed efforts at government level, particularly with respect to the use of depositors funds, of the postal checking acount system, are required to put OPTM on a financially viable basis. A new accounting system has been installed and independent auditors - 37 - are struggling to get management to take actions necessary to enable an unqualified audit. As of 1980 areas still needing attention include the registers of fixed assets, the billing and collection operation, the inventory of stocks, and the reconciliation of accounts with other agencies. A lack of a unified financial management hampers further progress, but renewed efforts in reorganizing it under the responsibility of a Financial Director are being made in preparation for the proposed next IDA project. 6.03 Institutionalized training of OPTM staff is provided abroad (France, Switzerland, USSR, etc.) for senior staff; at the multinational telecommunications school in Rufisque (Senegal) and the multinational postal school in Abidjan (Ivory Coast) for higher-middle level staff. Training of skilled labor, technical operators and junior administrative postal staff is provided at the national posts and telecommunications school in Bamako. This school is under the Ministry of Education and has been acting quite independently of OPTM's needs of staff. OPTM being the school's main customer, was during the project period obliged to accept graduates in numbers not required for its operations. As a consequence, between 1972 and 1979 OPTM's staff has increased from 632 to 1,017 persons. The ratio of employees per 1,000 DELs has increased from 186 to 243, which is among the highest in the world. At appraisal, a ratio of 125 per 1,000 DELs was expected at the end of 1977. Despite IDA advice, the government was reluctant to transfer the posts and telecommunications school to OPTM, which would have been able to adjust the enrollment of new students as well as the training programs in function of the future needs of its operations. Recently, however, the situation has changed in the framework of the preparation of the proposed second project. Both the intake of new students and training programs are now under the supervision of a commission with members from the Ministry of Education, the OPTM management, the school management, the corps of teachers and two elected students. This arrangement is acceptable as an interim solution until such a time as OPTM can take over the school. VII. ECONOMIC REEVALUATION Project Achievements 7.01 Overcoming one of the bottlenecks in economic development and improving the efficiency of public administration were the prime objectives of the project. In part, this has been achieved; Segou and other provincial towns have now been linked with the capital and reliable service is available. Bamako's service capability has been expanded and the quality of service greatly improved. During execution of the project solutions to problems with consultants and the financing of a cost overrun have been satisfactorily resolved. On the other hand, institutional reforms have not met expectations possibly because they were too ambitious especially with reference to the time factor given the numerous management changes in OPTM - 38 - and the social and political environment. With some of the technical and physical problems having been overcome, further IDA involvement in the sector can be concentrated on organization, management and training problems. Project Spin-off 7.02 The construction of the technical buildings and civil works for the expansion of the local network and the construction of the microwave link provided local employment. The project had no known negative environmental effect. Least Cost Solution 7.03 Dimensioning of technical facilities and plant, as well as planning and timing of their installation and construction play an important role in telecommunications during the selection processs of the least cost solution, which will finally affect the actual design of each particular project component. The initial project as appraised which was conceived to link Bamako, Segou and Mopti (paragraph 2.02) underestimated the technical constraints and the obsolescence of the existing switching equipment and outside plant which were supposed to originate the long distance traffic to be routed through the new microwave link, as well as the inadequacy of the existing exchange building which did not provide for adequate installation and future expansion. Even if apparently less costly in terms of initial capital investment, the original project in such conditions, would not have returned the expected benefits. Consequently, taking into account the existing constraints, the IDA project as redesigned by the consultants and expatriate experts, proposed by OPTM and accepted by IDA, was likely the least cost solution to meet the physical project objectives. The difficult decision of executing the project in two phases had to be made because of lack of financial resources although it was known that this solution was expected to involve additional costs. 7.04 Factors, such as future subscriber concentration, physical features along the routes involved and future traffic requirements, were considered in arriving at least-cost solutions. For example, a microwave system was selected over the coaxial cable alternative for the Bamako-Segou section and VHF radio links were chosen over open wire lines for spur route expansions as being the most economical way of providing service. Some items added to the expansion program outside the project, however, may not have represented the least cost alternative (paragraph 5.05). Internal Rate of Return 7.05 The internal economic rate of return estimated in the appraisal report was 13 percent. However, from the data and description in the appraisal report it is difficult to identify the precise methodology used in the calculation. According to the methodology currently considered the most appropriate, recalculating an "as appraised" internal financial rate of - 39 - return yields a figure of 14 percent. The internal financial rate of return for the revised development program using data now available is estimated at 24 percent (Annex 6). This is higher than the 14 percent which would have been estimated at the time of appraisal primarily because of the tariff increases which took place in 1975 (paragraph 5.04). 7.06 The economic rate of return, however, is considerably higher than 24 percent since: (a) the internal financial rate of return calculation takes into account no increases in incremental revenues due to project components as from fiscal year 1980 onwards despite existing spare capacity on the microwave link installed and the technical buildings built under the revised program; (b) indirect external benefits such as increased efficiency and better administration in other sectors (transport, health, agriculture, public service, etc.) from improved telecommunications services have not been fully accounted for; and (c) consumer surplus has not been quantified despite a large unsatisfied demand for services. VIII. IDA PERFORMANCE 8.01 In retrospect, the project selected for financing was unquestionably necessary and helped to avoid many of the consequences of an obsolete and rapidly deteriorating system. The project, however, was appraised without sufficient preliminary technical planning and preparation which could have enabled OPTM and IDA to identify many of the difficulties encountered during the later detailed design which could have prevented project revision and possibly negated the need for the difficult decision by the government to execute the project in two phases. The project was overambitious, not only in the sense that costs proved to be higher than expected, but also in the sense that expectations for institutional change were clearly too high and expected to occur too quickly. In adjusting to the technical constraints and to cost increases, IDA was supportive. IDA cooperated actively in the revision of the project and in the search for the additional resources needed to go ahead. Experience in the situation that IDA found itself in 1975 with respect to delays in final preparation and unreliable cost estimates has now been addressed by the inauguration of the project preparation facility and this mechanism is being used to prepare for the next expansion phase. - 40 - Supervision 8.02 Because of IDA staff constraints (no French speaking telecommunica- tions engineer available) supervision was neglected during project start-up, which contributed to the initial problems (paragraph 3.18) and delays. From June 1973, however, supervision of the project was more intense. Other visits and discussions with technical and financial consultants, auditors and agencies, such as CCCE and ITU, were likewise numerous. Absence of timely reporting by OPTM complicated the supervision process. In future operations, reporting should be stressed and greater efforts made to have them become a part of the internal OPTM management system. Working Relationship 8.03 The working relationship between IDA, the government and OPTM has on average been good. Lack of reliable and timely data was a serious handicap in dealing with problems at all levels. Nevertheless, goodwill prevailed and to the extent possible under the circumstances of project delays and covenant noncompliance, cooperation was obtained and advice considered. Covenants 8.04 A statement setting out the compliance with covenants is contained in Annex 4. IX. CONCLUSION 9.01 The project was one of the first in the telecommunications sector in a relatively poor West African country, and it is now evident that: (a) preparation of the project was not sufficiently advanced at the time of appraisal and initial supervision was inadequate; (b) the capability of the beneficiary institution was overestimated; (c) there were probably too many covenants which were somewhat overlapping, and not well understood by the successive OPTM managers; and (d) the social and political environment did not support change as rapidly as hoped. However, even with the delays in construction and installation, as well as a lack of substantial institutional improvement, the results in a number of respects are positive: telephone service, for those who have lines, is greatly improved; there is direct long distance dialing; an increase in exchange switching capacity has greatly decreased the time required for obtaining a dial tone; 23 percent more customers are being served and the quality of voice communication is noticeably better. 9.02 Technical assistance was made available to the project in several ways: individual advisers were hired and firms engaged; personnel was - 41 - trained at foreign institutions and at a manufacturer's facility. Given the situation which prevails in such countries as Mali where highly competent individual advisers are reluctant to stay for the period required to effect changes, it would appear that the better practice would be to engage consulting firms, counting on them to provide continuity when individuals are changed. This seems to have worked reasonably well in the financial areas where the consulting firm, after a number of years of experience, has an in-depth knowledge of OPTM's operations and the staff's capabilities, and continues to be a stable element in a changing environment. There has not been this continuity in the technical areas and the possibility of obtaining long-term technical assistance arrangements with a telecommunications operating entity from a developed country rather than engaging individual experts should be explored. In the training area, it was noted that training abroad, particularly for skilled labor, did not work well. The timing of the training and the need for particular skills was not well understood by management. Another method of training a particular group of skilled workers is now being inaugurated and will involve Telecommunications Department personnel working alongside expatriate technicians while installing cables to complete the first phase of the revised IDA project. Whether the results will be better is problematical, but they should be evaluated in designing any future operations. 9.03 Assuming that IDA participates in financing a second telecommunications operation, efforts at institutional improvement can take on a different dimension by setting timed targets for various actions and by standing firm behind covenants in any agreements. By having more modest and yet specific objectives, it may be possible to deal more effectively with the problems inherent in the present system.  MALI OFFICE DES POSTES ET TELECOMMUNICATIONS DU MALI (OPT) FIRST TELECOMMUNICATIONS PROJECT Revisions of Project (Physical Items) Original Project First Revision Second Revision First Phase of Items December 1971 Before ICB Before Contract Negotiations Revised Project 1. Local Sw;itching Bamako rehabilitation 2,000 lines rehabilitation 2,000 lines dismantling of R6 no change with of R6 + 1,000 new lines of R6 + 2,000 new lines 4,000 new lines second revision Segou 400 no change no change no change Mopti 400 no change no change pontponed to second phase Kayes 300 no change no change postp6ned to second phase Kati 100 no change no change 100 Koulikoro 100 no change no change 100 2. Trunk Switching undetermined, small, trunk switching no change trunk switching inadequate provision for 96 circuits for 60 circuits W 12 operator switchboards no change no change for operators 3. Local Networke Bamako extension of 1,000 lines no change rehabilitation + 2,000 lines no change + 5 provincial towns extension of 1,500 lines no change no change postponed 4. Transmission Microwave link 960 channels + no change no change section Segou-Nopti Bamako-Segou-Mopti multiplex for 60 ch. postponed to second phase VHF links Bamako-Kati 1 no change no change no change Bamako-Koulikora 1 no change no change no change Segou-Dioro 1 no change no change postponed to second phase Mopti-Bandiagara 1 no change no change postponed to second phase 5. Buildings Bamako, Mopti, Kayes extension of existing new buildings to Bamako, Mopti no change with buildings in Hopti and in Bamako and Keyes, new buildings in first revision Keyes postponed to Kati and Koulikoro second phase MALI TELECOMMUNICATIONS DEPARTMENT OFFICE DES POSTES ET TELECOMMUNICATIONS DU MALI (OPT) FIRST TELECOMMUNICATIONS PROJECT CREDIT 321-MLI Statement of Income (1972-1978) (in millions of MF) 1972 1973 1974 1975 1976 1977 1978 Fore- Fore- Fore- Fore- Fore- Fore- Fore- Actual cast Actual cast Actual cast Actual cast Actual cast Actual cast Actual cast Revenues Telephone - local 380 389.0 456 415.0 486 451.0 595 490.0 ( 543.0 ( 589.0 ( 700.0 - long distance 165 135.0 170 146.0 195 161.0 246 235.0 ( 833 312.0 ( 798 342.0 ( 899 320.0 - international 9 9.0 9 9.0 14 9.0 28 9.5 ( 9.5 ( 10.0 ( 18.0 Telegraph 113 130.0 146 130.0 152 130.0 167 128.0 ( 300 128.0 ( 320 127.0 ( 326 150.0 Telex 51 60.0 67 65.0 73 71.0 121 79.5 ( 87.5 ( 95.0 ( 160.0 Miscellaneous 25 25.0 17 25.0 21 25.0 14 25.0 27 30.0 56 30.0 105 35.0 Total Operating Revenue 743 748.0 865 790.0 941 847.0 1,171 967.0 1,160 1,110.0 1,174 1,193.0 l3 l,8- Expenses Salaries 261 309.0 280 324.4 317 340.6 350 357.6 418 375.5 478 393.3 555 380.0 Other expenses 243 220.4 263 231.4 320 243.0 346 267.3 458 280.7 464 294.7 567 432.0 Depreciation 74 90.8 112 93.6 122 100.9 142 145.9 174 190.5 184 195.9 229 225.0 Total Operating Expenses 578 620.2 655 649.4 759 684.5 838 770.8 1050 846.7 1126 884.9 1,351 1,037.0 Income (before interest) 165 127.8 210 140.6 182 162.5 333 196.2 110 263.3 48 308.1 (31) 346.0 less interest - 0.2 - 8.5 - 40.7 38 100.0 18 137.3 11 145.4 - 156.0 Net Income 165 127.6 210 132.1 182 121.8 295 96.2 92 126.0 37 162.7 (31) 190.0 Rate of return 7.42 8.8% 9.22 9.9% 7.92 11.0% 14.3% 8.3% 4.52 8.5% 1.8Z 10.1% neg. 9.2% Operating ratio 78 83 76 82 80 81 71 80 91 76 96 74 102 75 Average net plant in servicey 2,230 1,445.9 2,273 1,416.7 2,296 1,479.4 2,327 2,357.0 2,441 3,111.8 2,733 3,041.7 3,113 3,761.0 Sources: Forecasts 1972-1977 staff appraisal report Forecast 1978 supervision report 2/19/76 (project revised) Actual 1972-1973 supervision report 2/19/76 Actual 1974-1975 supervision report 6/10/77 Actual 1976 supervision report 4/4/79 Actual 1977 supervision report 6/13/80 Actual 1978 audit report 7/31/80 f For actual unrounded figures, sea OPT coments on page 17. OPT has shown forecast for 1978 as 3,771.0. TELECOMMUNICATIONS DEPARTMENT OFFICE DES POSTES ET TELECOMMUNICATIONS DU MALI (OPT) FIRST TELECOMMUNICATIONS PROJECT CREDIT 321-MLI Sources and Applications of Funds Statement (in ilions1 of MF) 1972 1973 1974 1975 1976 1977 1978 Fore- Fore- Fore- Fore- Fore- Fore- Fore- Actual cast Actual cast Actual cast Actual cast Actual cast Actual cast Actual cast Sources of Funds Internal cash generation Net income before interest 165.0 127.8 210.0 140.6 182.0 162.5 307.0 196.2 92.1 263.3 51.9 308.1 (31.0) 346.0 Depreciation 74.0 90.8 112.0 93.6 122.0 100.9 142.0 145.9 158.8 190.5 167.1 195.9 217.9 225.0 Total Internal Cash Generation =79 -1KT T= -n3UT w 7WTT -T47 .T 13WW -rTr. TIVTT -Z= pTu Wr 7T7(T Adjustment reserves 620.0 - - - 947.2 - - - - - - - - - Subscriber deposits - 0.8 - 0.9 - 1.0 1.7 1.1 1.5 1.2 - 1.3 - - Borrowings Postal/financial dept. loan 34.0 - - - - - 322.8 - 408.7 - 580.7 - 582.9 - IDA credit - 50.8 - 285.0 52.7 975.2 730.2 530.7 10.2 - 79.9 - 508.6 145.0 Caisse Centrale - - - - - - - - - - - - 763.3 243.0 Future loan - - - - - - - - - 175.0 - 200.0 - - Total Borrowings TU7- -- =1 T U76777 1 53T?7 -= u75o- .T 155mm -88T Total Sources of Funds 893.0 270.1 322.0 520.1 1,303.9 1,239.6 1,513.7 873.9 671.3 630.0 879.6 705.3 2,041.7 959.0 Application of Funds Revaluation of assets 659.0 - - - - - - - - - - - - - Capital construction 1972-1975 program 175.0 102.0 173.0 411.0 733.9 1,076.0 946.2 590.0 324.3 - - - - - Future program - - - - - - - - - 250.0 674.6 310.0 1,823.3 723.0 Miscellaneous works - - - - - - - - - 175. 120 130 410 739,076.0 946.2 590.0 324.3 250.0 674.6 310.0 1.82-3.3 723.0 Debt service - amortization Postal/financial dept. loan 20.0 19.5 20.0 19.5 219.9 19.5 - 32.7 - 32.7 - 32.7 - - IDA credit - - - - - - - - - 73.7 - 73.7 - - Caisse Centrale - - - - - - - - - - - - - - Total Amortization 20.0 19.5 20.0 19.5 219.9 19.5 - 32.7 - 106.4 - 106.4 - - Debt service - interest IDA credit - 0.2 - 8.5 - 40.7 - 100.0 - 130.8 - 125.5 - 107.0 Caisse Centrale - - - - - - - - - - - - - 49.0 Future loan - - - - - - - - - 6.5 - 19.9 - - Total Interest - -TU"- - -7 - Tvs- - -f Total Debt Service 20.0 19.7 20.0 28.0 219.9 60.2 - 132.7 - 243.7 - 251.8 - 156.0 Change in working capital 39.0 148.5 129.0 1.1 350.1 23.4 567.5 71.2 347.0 56.3 205.0 63.5 218.4 80.0 Contribution to Government - - - 80.0 - 80.0 - 80.0 - 80.0 - 80.0 - - Total Application of Funds 17 1 Tif 1! T 1I5T 7T S1V 677TY 7 -W 17T 765T 2-7, T rF. Debt Service Coverage 12.0 11.1 16.1 8.4 1.4 4.4 - 2.6 - 1.9 - 2.0 - 3.7 Sources: Forecasts 1972-1977 - Staff appraisal report; 1978 supervision report, 2/19/76 Actual 1972-1973 supervision report 1974-1978 Actual 1974-1978 audit reports MALI TELECtMUNICATIONS DEPARTE"NT OFFICE DES ?OSTES ET TMECMMICATIONS DU MALI (0PT) FIST TELECOHUNICATIONS PROJECT CREIT 321-I.1 Balance Sheets 1972 1973 1974 1975 1977 1978 P'ore - ore- - Fore--Forew e- ro; Foe ore- Actual cast Actual cast Actual cast Actual cast Actual cast Actual cast Actual cast Assets Gross fixed assets 2,243,0 2,041.6 2,416.0 2,122.6 3,097.2 3,361.6 3,313.1 4,124.5 3,627.3 4,205.5 4,222.1 4,364.5 4,773.4 6,087.0 Lees Depreciation - 618.6 112.0 712.2 807.7 813.1 949.7 959.0 1/109.3 1.146. 1 275. 1.339.2all 493.3 874.00/ Metfied "gets 22407 :W23040 1410.4 2 289.3 2. 363.4 365 ~ 53,058. 2 946. 3 025.3 3.8 5,213.0 Work In progress - 3,z 'Fzv 9.(a 4. Invsentories 41A.0f 407.0n 456.0(_ 720.0 -57i.0(11 5400 693.9( 350.0, 698.1 520.0 963.3( 670.0 t6 400.0 Def erred charges 1 .7; Q U Current assets: Covernment treasury - 146.7 - 110.8 - 98.2 - 104.4 - 106.7 - 110.2 - 349.0 Receivables - subscribers 586.0 260.0 948.0 273.0 876.1 295.0 1,266.3 354.0 1,512.6 395.0 1,765.0 440.0 1,925.0 500.0 - others 90.0 70.0 61.0 80.0 59.7 80.0 97.2 80.0 118.4 70.0 632.4 70.0 822.0 45.0 - Spverament equipment 176.0 - 176.0 - - - - - - - - - - - - postal deficit 133.0 - 297.0 - - - Total Current Assets 975.0 476.7 1,482.0 463.8 935.8 473.2 1,363.5 529.4 1,731.0 571.7 637.5620.2 2,747.0 094.0 Tota Asets3,64.02,36.14,22.02,61.2 3,850M 3,595.7 59203.7 4,096.0 5,741.2 4,197.8 7,8. 4,6. 9806 6,507.,0 Total Assetse 3 0 ,4. ,1 ____ ___ . * 1 54304980 Liabilities Equity Capital 1,787.0 1.136.1 1.787.0 1.156.1 135.0 1.156.1 135.0 1.156.1 135.0 1.156.1 135.0 1.156.1 135.0 1.767.0 Surplus 596.0 604.2 806.0 656.3 3,013.5 698.1 3,320.5 714.3 3,419.7 760.3 3,471.6 843.0 3,440.5 1,750.0 Total Equity 2,383.0 1,760.3 2,593.0 1,812.4 3,148.5 1,854.2 3,455.5 1070.4 3,554.7 1,916.4 3,606.6 1,999.1 3,3MS 3,537.0 long ters debt Loan from postal/financial dept. 480.0 368.6 464.0 349.1 244.1 316.4 576.9 285.7 985.6 251.0 1,566.4 218.3 2,149.3 - IDA credit - 50.8 - 355.8 52.7 1.311.0 782.9 1,768.0 793.1 1,694.3 873.0 1,620.6 3,381.6 1,550.0 Catae Centrale - - - - - - - - - 763.3 1,000.0 Future loan - - - 175.0 - 375.0 - - Total long term debt 480.0 419.4 464.0 684.9 296.8 1,627.4 1,359.8 2,051.7 1 2,120.3 2 2,213.9 4,294.2 2,550.0 Current liabilities Postal department 484.0 - 786.0 - - - - - Sundry creditors 287.0 107.5 399.0 94.4 404.7 81.4 388.4 67.5 407.8 54.7 1,134.5 41.0 1,940.9 420.0 Current maturities - 19.5 - 19.5 * 32.7 - 106.4 - 106.4 - 106.4 - - Total Current Liabilities 771.0 127.0 1.185.0 113.9 404.7 114.1 388.4 173.9 407.8 161.1 1,134.5 147.4 1,940.9 420.0 Total Liabilities 3,634.0 2,306.7 4,242.0 2,611.2 3,850.0 3,595.7 5,203,7 4,09.0 5,741.2 4,197.8 7,180.5 AA360.4 9,810.6 6,507.0 Sources: Foreastse 1972-1977, staff appraisal report Forecaste 1978, supervision report, 21/19/76 Actual 1972-1973, supervision report, 2/19/76 Actual 1974-1978, audit reports / At appraisal in 1971 forecasts were made up to 1977. The forecast for 1978 was based on information available io 1976. OND Notew The discrepancy in forecast depreciation between 1977 and 1978 is due to different sources of information as noted in S/ above. The recalculation of all figures forecast for 1978 based on data available In 1971 is not considered Worthwhile for the purpose of this report. MALI TELECOMMUNICATIONS DEPARTMENT OFFICE DES POSTES ET TELECOMMUNICATIONS DU MALI CREDIT 321-MLI Compliance with Covenants Section of the Agreement Brief Description of the Covenant Credit Project Compliance Comments IDA approval of subsidiary loan 3.01 (b) Yes agreement Change in terms of subsidiary loan 3.01 (c) No Minister of Finance and agreement required IDA approval Commerce waived interest differential between the IDA credit and the inter- est stipulated in the Subsidiary Loan Agreement without IDA approval. Working capital to be made 3.02 (i) No OPTH depositors' funds available to Telecommunications were used for working Department capital requirements. Government to settle past deficits 3.02 (ii) Yes of Postal/Financial Department Government to cover any deficits of 3.02 (iii) No 1976 ad 1977 deficits Postal/Financial Department at the totaling MF 91.5 million end of each year. have not been paid. 00M Government to ensure prompt payment 3.02 (iv) Non See paragraph 5.03. X of charges for services to o U1 Government OPTM to employee three technical 2.02 (b) Yes advisers on operatons and training OPTM to employ an expert in 3.01 (b) Yes organization and management OPTK to produce separate financial 4.01 Yes statements for the Telecommunica- tions Department from 1972 onward OPTM to submit independent audit 4.02 No See paragraph 5.06. reports within six months after the end of the year OPTK to reorganize accounting, 2.02 (a) Yes Problems in implementa- revalue assets, and revise 4.03 tion of billing and procedures for collection of collection persist. charges with assistance of financial consultants OPTM to modify tariffs only after 4.04 (a) No See paragraph 5.04. consultation with IDA OPTM to limit capital expenditures 4.04 (b) No See paragraph 5.05. in excess of US$75,000 unless financial plan was approved by IDA OPTM to review level and structure 4.05 No See paragraph 5.04. of tariff in consultation with IDA OPTH would provide revenues to 4.06 No See paragraph 5.02. Telecommunications Department sufficient to produce a 10% annual rate of return beginning in 1977 OPTM to open a special bank account 4.07 No An account was opened but for quarterly advances to never used because OPTM Telecommunications Department is oblidged by law to deposit its funds with the Treasury. 0 OPTM to limit long-term debt 4.08 Yes OPTM to limit short-term debt 4.09 No See paragraph 5.01. - 49 - ANNEX 6 MALI OFFICE DES POSTES ET TELECOMMUNICATIONS DU MALI (OPTM) FIRST TELECOMMUNICATIONS PROJECT CREDIT 321-MLI Return on Investment 1. The benefit period of the program extends from 1972 to 1992, when on average the equipment provided under the program is expected to approach the end of its useful life. No residual values of fixed assets have been taken into account as the discounted real values of these would be minimal. 2. Capital estimates are based on the estimated requirements during the program and investments have been adjusted to reflect 1971 values. 3. Incremental operating costs and revenues are those associated with the investment program and have been deflated to 1971 values. As from 1980 on, they are assumed to remain constant. 4. The following is a summary of the program's incremental cost and benefit streams, in million of Mali francs, at 1971 price levels. Capital Operating Operating Net Year Investment Costs Revenues Benefits 1972 159 - - (159) 1973 144 (8) 111 (25) 1974 551 19 164 (406) 1975 643 14 321 (336) 1976 201 94 284 (11) 1977 377 69 267 (179) 1978 930 90 323 (697) 1979 - 286 580 294 1980 ) to 1992 ) - 261 1,236 795 5. Internal rate of return for the foregoing benefit stream is 24 percent.  12° 8° 0 - 4^ MALI TELECOMMUNICATION PROGRAM nA L G E R I A 1972-1975 1972-1975 C 20 EXISTING Microwave PROGRAM n Tessalit 20 McowneF-*... -20' --- Carrier on O H line --- V H F radio ••••••••••••. (25) Number of lines (400) ® National capital • Regional capitals - - International boundaries Navigable rivers (July-Jan) Flood areas Bourem 0 100 200 300TOM OUCTOU (0) Gourma Rharous Kilometers GOUNDA T O U GA EOG S 16 M A U R I T A N I A Niafounke 0 Ansangoaenk . - . - ... . - O R A I _..-J- Yelomane o NIORO DU SAHEL (60) P E U L.H Lobbengo Douentzo Tamboo Diema Teeku(O400) DOG NN I G E R KAYES 0oMourdiah Niono(25) -a 00) Bandiagera, •- jMcn - - nn- Bofoulabe MaIn'NDn Bankass < op K okonia M r C.D o Banamba(0 S EGOU (400)' -4 - ge .Tomnia1 - . i-Ii ~ ~ -.-_SAN(50IC ~Koulikoro (100) !a _1 S N Kee Kito (60) Dioroo BIo . U P P E R V O L T A c)BA AKO Fana M l N l A N K Ar +1000)ALGERIA tAYA 12 --- OUGADOUGOU 1 SPAN S a ae -Area covered by mop G U N E AMALl BOU UN (50)> SIKAiSSO (200NG Yanfolip \oKolon eboaUPEl t,, 0isi anak , .T4~ r Ni I LlOlA E e' dG H A N A SN EROON I v O R y '2A R C A S '- 8 0 T uT Y