Document of The World Bank FOR OFFICIAL USE ONLY CAMJ 2 t , L Report No. 7216-JO STAFF APPRAISAL REPORT HASHEMITE KINGDOM OF JORDAN A TELECOMMUNICATIONS PROJECT May 18, 1988 Industry and Energy Operations Division, Country Department III Europe, Middle East & North Africa Region Tbls document has a resuicted dibuton ad may be used by reOpnllys In the perfonne of eir offical dudes Its content may not othewse be disclosed wiho Wodid Bank a ntho*an. - tvs Currency Unit - Jordanian Dinar (JD) US$1.0 - JD 0.33 JDI.O - US$3.00 FISCAL TMAR Government and TCC: JanuarY 1 - December 31 WEIGT'S AND LUASURKS Metric System AIBKIATICS D ACROUY ARABSAT - Arab Satellite Organization DEL - Direct Exchange Lir DGP - Directorate Genes of Posts ICB - International Cc petitive Bidding INTELSAT - International Satellite Organization ITU - International Telecommunications Union NISC - National and International Switching Center OSP - Outside Plant PCM - Pulse Code Modulation PIP - Project Implementation Plan PIU - Project Implementation Unit RLU - Remote Line Unit SPC - Stored Program Controlled TCC - Jordan Telecommunications Corporation UNDP - United Nations Development Program - FOR OFFICIAL Ui ONLY JORDAN TECOSWNICAflONS COIPORATION (TCC) A TLON S PUOJKCr TANS OF CONTNTS Page No. LOAN AND PROJECT SUMMARY .................... ...................... iv-vl I. INTRODUCTION ............I..* ................................ 1 I1. THE TELECOMMUNICATIONS SECTOR ............................... I Sector Organization ....I............. , ........... Demand for Service *....................... ..... 2 Access to 2.............................................. 2 Usage of 3............................................ ... 3 Existing Facilities and Quality of Service .............. 3 Sector Goals and Strategy ............................... 4 Sector Constraints e. oo................................... 5 Rationale for Bank Involvement .......................... 6 III. THE PROJECT .. ....................... ....................... 7 Project Objectives ..... o........ 0 0.................. ..... 7 Project Description ........... ....... ................... 8 Project Cost o............................................ 10 Ctingecies....................................................... Project Financing ......... .0.0..0...0.0..0............... 12 ProcuremenLt o..........*ooo***oeo*oo*o*o*oooo 12 Contract Reviewooo oo ....................o..o..s....o..o. 14 Disbursements o.e.... o...ooo.. .oeo...................... 15 Project Implementation ..o...... ............ ...... .00.. 15 Perfurmance Monitoring .......00. ...................*.... 17 This report is based on the findings of an appraisal mission that visited Jordan in February-March 1988, comprising Messrs. Mohsen Khalil (Senior Financial Analyst), Gerald Buttex (Principal Telecom Engineer) and David Lomax (Principal Telecom Specialist). This document has a restited distribution and may be used by recipents only in the performance of their official duties Its contents may not otherwise be dislosed without World Dank authoriution. TAMLE OF CONTETiS - cont'd. Page No. IV. THE IMPLEMENTATION AGENCY ................. ......... . 17 Sector Commercialization ............... ................ 17 Organization and Management ............................. 18 Planning and Operations Management ...................... 19 Staff and Training.................................. .... 20 Accounting and Financial Management...................... 20 External Audi. ig.................. ............................ 21 Data Processing... 99999999 ................................. 21 Management Information Systemse................ . ........ .. 22 Institutional Development .... *......... 22 Technical Assistance.................e.................... 23 V. FINANCIAL ANALYSIS ................... 24 Past Performance ..99.9.9.9....... .. .................. 24 Present Position *9999999999**9*999*9999999 .............. 27 Accounts Receivables ............. 27 Foreign Exchange 28 Future Performance and Finances999.99999999999.99........ 28 VI. ECONOMIC ANALYSIS .................. 31 Benefits................................................. ,31 Tariffs and Pricing Policies.............................. 31 Fiscal Impact ........................................... 32 Least Cost Solutiou ........................ 33 Return on Investment ..................................... 33 Risks ..................... 33 Environmental and Health Effects ......................... 34 VII. CONCLUSIONS AND RECOMMENDATIONS ................................ 34 - iii - List of hmnezs Page No. 1. Forecast Demand and DEL Growth ............. .................... 36 2. Regional Distribution of Telephone Service ....O..................40 3. Basic Data - Jordan Telecommunications Facilities ...............41 4. Description of the Physical Components of the Project............42 5. Detailed Costs of 1988-1992 Investment Program ..................46 6. Procurement Packages for Goods and Services .....................47 7. Disbursement Schedule ............................... ............ 50 8. Project Implementationu.................... ......... .............. 51 9. Performance Indicators ............................... ........... 55 10. TCC Basic Organization Chart ....................................56 11. Consultants' Terms of Reference .................................57 12. Action Plans for Sector Restructuring and Institutional Development .................... .............71 13. Forecast Financial Statements, 1988-1992.. e........................73 14. Notes and Assumptions for the Financial Forecasts ...............76 15. Summery of Telecommunications Tariffs ........................... 80 16. Return on Investment ........................................... .81 17. Documents in Project File .......................................83 MAP: IBRD No. 20903 - Jordan - iv - ion" JODAN TCOTO o aION (TCC) A ClMWNCitTISn FIOJUCT LOAN AMD rcr SUW&R Borrower: Jordan Telecommunications Corporation, TCC. Guarantor: Hashemite Kingdom of Jordan. Loan Amount: $36 million equivalent. Terms: 17 years, including 5 years of grace, at standard variable interest rate. TCC will bear the foreign exchange and interest rate risks, and pay a 1% guarantee fee to the Government. Project The main objectives of the project are to: (a) formulate Objectives: and implement reforms to improve the overall policy framework for the commercialization of the telecommunications sector and TCC; (b) expand network capacity, improve service quality, increase geographic coverage and introduce new value-added services; (c) strengthen TCC's capacity to develop and implement competitive strategies for procurement, financing and system planning; (d) help the Government and TCC to revise telecommunications pricing policy and tariffs to reflect changes in the cost structure resulting from growth and technological change, and to adjust for shifts in market demand due to changes in Jordan's economic conditions and prospects; and (e) support TCC in conducting a review of its organizational structure, upgrading its management systems using modern information technology, and Implementing a human resource development program in technical, financial and management areas. Project The project, which covers TCC's entire revised 1988-92 Description: telecommunications investment program, comprises: (a) about 190 manmonths of consultancy services for sector restructuring and institutional development, particularly in the areas of organization and management, personnel and human resource development, accounting and finance, procurement and inventory management, management information systems and tariffs; (b) switching equipment for an additional 213,000 lines; (c) associated local networks and subscriber plant for the connection of about 235,000 new subscriber lines; (d) additional microwave and cable transmission links; (e) a new national and international switching center (NISC); (f) a new satellite earth station; (g) computer systems; and (h) ongoing works still to be completed, principally 30,000 lines of switching equipment and retained consultants to assist TCC in project planning and implementation. By end 1992, the project is expected to satisfy 82Z of expressed demand and to provide a coverage ratio of 12 lines per 100 inhabit-ants. -v - Project Benefits and Risks: The project will benefit most sectors of Jordan's economy. In particular, it would help the Government and TCC to enhance the efficiency and productivity of the telecommunications sector which should reduce investment and operating costs and increase resource transfers to the Goverument; achieve sector commercialization and iustitution building of the operating entity; expand geographic coverage and improve service quality; spread the benefits of development to rural areas; develop the information infrastructure for the services sector; aud contribute to employment creation. The main risk is the potential for delays in the identification, formulation and implementation of sector and institutional reforms. The Government, the Bank and TCC have agreed on appropriate action programs and on a monitoring system to ensure effective implementation. The conviction and commitment demonstrated by the Government and TCC to the proposed sector restructuring and institutional development plans indicate that this risk is manageable. There is also a risk that demand may grow more slowly than anticipated. The project, however, has been designed to allow for adjustments during implementation to reflect realized demand. Estimated Costs: --US$ Million Equivalent--- ITEMS Local Foreign Total I. ONGOING WORKS 10.5 17.7 28.2 UI. NEW WORKS Switching 5.1 48.9 54.0 Transmission 8.7 23.4 32.1 Local Networks -Cables & Heavy Equipment 2.7 48.0 50.7 -Construction & Installation 56.7 37.2 93.9 Buildings 6.3 1.2 7.5 Computer Systems - 2.1 2.1 Technical Assistance - 3.0 3.0 Nat/Int Switching Center 0.3 2.7 3.0 Satellite Earth Station 0.6 3.0 3.6 Subscriber Installations 3.6 14.4 18.0 Total Base Cost 84.0 183.9 267.9 Contiugencies Physical 7.5 13.5 21.0 Price 12.9 8.1 21.0 TOTAL NEW WORK COSTS 104.4 205.5 309.9 TOTAL PROJECT COSTSa/ 114.9 223.2 338.1 a/ TCC pays no taxes or custom duties. - vi - Fin cieg Plan: ---US$ Million Equivalent- local Foreign Total NEW WORKS IBRD - 36.0 36.0 TCC 104.4 38.4 142.8 Export and Mixed Creditsa/ - 79.2 79.2 Credit tied to procurementb/ 5.7 5.7 Other Financingc/ - 46.2 46.2 Subtotal 104.4 205.5 309.9 ONGOING WORKS TCC 10.5 - 10.5 Existing Loansd/ - 17.7 17.7 Subtotal 10.5 17.7 28.2 Total Costs 114.9 223.2 338.1 - - ai Export and mixed credits to be offered in conjunction with price and terms bidding. b/ French and Japanese financing for tied procurement for proprietary items. c/ Cofinancing for local networks, which will be partly financed by the Bank. d/ Japanese Protocol No. 4 and a Swedish soft loan. Estimated Disbursement: --- US$ Million Equivalentl - Bank FY 1989 1990 1991 1992 1993 1994 Annual 2.5 8.3 10.5 8.2 4.7 1.8 Cummulative 2.5 10.8 21.3 29.5 34.2 36.0 Economic Rate of Return: 31% MLap: IBRD 20903 - JORDAN JORDA JORDN ICOHNIC&TIONS CORPORATION (TCC) A TELECOhNC&TIONS PROJECT I. INTRODUCTION 1.01 The Government of the Hashemite Kingdom of Jordan has requested Bank assistance in financing the development of the country's telecommunications sector. Principal project objectives are focussed on reforming the regulatory and financial framework for the telecommunications sector; restructuring the implementing agency to function as a commercial entity with administrative and financial autonomy; improving its operating efficiency and profitability to reduce costs and maximize resource transfers to the Government; upgrading its technical, operational and managerial capabilities; and expanding the country's telecommunications network and increasing its geographic coverage. This will be the Bank's first lending operation in this sector in Jordan. 1.02 The estimated cost of the project is JD 112.7 million (US0338.1 million) with a foreign exchange component of JD 74.4 million (US$223.2 million). TCC will finance JD 51.1 million (US$153.3 million) from net internal cash generation, including JD 38.3 million (US$114.9 miliion) in local expenditures. The Bank would finance US$36.0 million of foreign costs for underground cables and associated equipment for local networks, as well as for technical assistance and computer equipment. Financing for switching and transmission equipment (US$84.9 million) will be secured through price and terms bidding with the exception of US$5.7 million, which will be financed under tied procurement for extension of existing equipment. II. THE TE NIC*IOES SECMR Sector Organization 2.01 Authority for public telecommunications and postal services is vested in the Ministry of Communications. The Jordanian Telecommunications Corporation (TCC), a fully Government-owned entity, is a semi-autonomous public agency in charge of the provision and operation of domestic and international telecommunications services. TCC has the monopoly of public telecommunications services: telephone, telex, telegraph and all other media of transmission, such as data and television. TCC also formulates sector policy and regulation and proposes tariffs which require approval by the Council of Ministers. Jordan has no domestic telecommunications manufacturing industry. Postal services are separately operated by the Ministry of Communications' Directorate General of Posts (DGP). -2- Demand for Service 2.02 As of end 1987, there were about 203,000 telephone direct exchange lines (DELs) in service and a waiting list of 85,000 registered applicants; implying that only 70X of expressed demand was satisfied. In addition to expressed demand, TCC estimates a suppressed demand of about 15,000 DELs in areas without service or with no present service expansion possibility. Thus, total demand is estimated at 303,000 DELs, with a 67% demand satisfaction. Demand for telephone service is expected to grow at about 10% per year over the 1988-1992 period. Demand projections are reasonable and based on the forecasting model generally used in the telecommunications industry. During 1983-87, which marked the beginning of the economic downturn in Jordan, expressed demand (with no consideration for latent demand) grew as 12% annually. Details regarding the demand study are given in Annex 1. By project completion in 1992, supply would meet 82% of projected demand with a capacity utilization of 80% and a telephone density of 12 DELs per 100 inhabitants. 2.03 The project implementation would include several safeguards against overinvestment in the likely event that demand grows at a lower rate than anticipated. The project has been designed to allow for adjustments during implementation to reflect realized demand. Project resources can be redistributed to adjust for any supply/demand imbalances among regions. Moreover, the project implementation schedule can be extended to reflect actual growth patterns of total demand. For example, if demand grows at only 6% per annum and subsequently the project implementation is extended until 1994, planned supply would meet 88% of demand in 1994 with a capacity utilization of 80%, which is acceptable. Access to Service 2.04 Telephone density in Jordan as of end 1987 was about 7 DELs per luu a.jpulation, which compares well with countries of comparable GNP per capita (e.g. Syria 5.2, Malaysia 6.5, Costa Rica 9.0). Existing telecommunications services are concentrated in the urban areas; 63% percent of DELs in service are concentrated in the greater Amman metropolitan area which has only 41% of the population (Table 2.1 and Annex 2). About 270 towns and villages out of a total of about 850 Table 2.1: ACCESS TO 1 LEPECS (Ae of December 31, 1987) EXCHANGE DELS PER 100 POPULATION CAPACITY POPULATION AREA % Z Amman 41 63.2 10.9 Zarka 16 9.2 4.1 Irbid 9 8.2 6.3 salt 4 3.1 4.1 Mafraq 4 1.8 3.2 Dair Abu Said 4 0.9 1.7 Rest of Country 22 13.6 4.4 Total/Average 100 100.0 7.1 population centers in the country are provided with automatic telephone services covering 88% of Jordan's total population. Some 380 population clusters are provided with service by semi-automatic manual exchanges. Telex service is primarily used for public administration and international business and is concentrated in the capital city (90%). This service is being superceded by facsimile and data transmission. For this reason, and because the existing telex network has a low capacity utilization (65%), TCC is not planning any further telex expansion. Subscriber trunk dialing and international dialing is available to 90% of the subscribers who have direct access to over 50 countries. Automat'c telex service is available to all subscribers. Usage of Service 2.05 In the Greater Amman metropolitan area, 20% of telephone DELs are for business, 9% for Government, and 71% for residential premises. Depending on the exchange area, the percentage of DELs for business purposes varies from 58% in the city center to a low of 15X in the suburban areas. Although statistics are not available for the rest of the country, experience suggests a higher percentage of telephones for business outside the capital city. In terms of revenue, distribution by user group cannot be estimated because current billing does not differentiate between business and residential telephones. Existing Facilities and Quality of Service 2.06 Under the previous Sectoral Plan 1981-1985, a major improvement and modernization of Jordan's telecommunications facilities was achieved following the introduction of digital technology in the area of stored program controlled (SPC) switching, radio microwave links and cable - 4 - transmission. The digitalization of the telecommunications network has many operational advantages for the customers as well as for the operating entities. Digital equipment is produced at relatively low costs with much higher performance/price ratios than the previous analog technology. Moreover, digital technology has the capability to provide cost/effective data and other value-added services, which are today essential for managing modern business information networks. Access to international business information networks and data integration are highly facilitated with an in'rastructure of digital telecommunications networks. Digitalizationi al&ows easy integration of the national network and the extension of telephone and data servi_es to rural areas. 2.07 Presently, 68% of the existing telephone exchange capacity is made of electronic digital SPC equipment. With an installed capacity of 329,000 telephone exchange lines and about 203,000 DELs in service, exchange capacity utilization averages 67%, which is low but acceptable for a rapidly expanding network and provides lead time for further extensions. The national backbone of Lhe long distance transmission network consists of microwave routes (Map IBRD No. 20903), which link Jordan's long distance network to Iraq and Syria. The national and regional long distance network is being complemented by digital microwave transmission links. International service is provided through two Standard A satellite earth stations working with the Atlantic and Indian Ocean INTELSAT satellites and one small earth station working with the ARABSAT satellite system. Likewise, telex service is fairly well developed, with about 2,600 connected lines and a capacity of 4,000 lines. 2.08 With the recent introduction of state-of-the-art digital technology in switching and transmission, the percentage of unsuccessful long-distance call attempts due to system malfunctioning and congestion has dropped to as low as 1.0%; a service quality performance that is matched only in industrialized countries. However, a sizable 25% of unsuccessful calls are caused by subscribers' misdialing (12% dialing of nou-ex4sting codes or numbers, 24% iut. mplete dialing). This may be largely due to outdated telephone directoL'es and inaccessable information services. 2.09 Like most other developing countries, the development of outside plant, which includes local cable networks and subscriber installation, lags behind other components of the network in terms of capacity, quality and maintenance. Fault rates of about 60 per 100 lines per annum are reported (a reasonable target would be 10), which clearly indicates the scope for improvement in maintenance of cable networks and subscriber plant as well as in the quality of repairs. Improvement of maintenance and repair capability and restoring the balance of investment between outside plant and other parts of the network is one of the principal tasks to be undertaken under the project. Basic data on existing facilities are available in Annex 3. Sector Goals and Strategy 2.10 The Government's declared objectives for the telecommunications sector, as stated in the Five-Year Plan (1986-90), are to: (a) restructure the telecommunications sector along commercial lines in accordance with the national socio-economic objectives; (b) restructure TCC to function as a commercially-oriented entity with full autonomy; (c) rationalize TCC's organizational structure and upgrade its operational and management capabilities; (d) expand telecommunications services to meet unsatisfied demand and to increase geographic coverage; (e) automate rural telephony and improve both regional and international services; (f) enhance network quality and reliability; and (g) introduce specialized and new value-added services. 2.11 To substantiate the above goals, TCC's revised 1988-92 Investment Program (para 3.01) aims at increasing installed exchange capacity from 329,000 lines to 513,000 lines, i.e., an average growth rate of 10.0% per year. Over the same period, the number of connected DELs would increase from 203,000 to 400,000 lines, or 14.5% per year. The goal of the planned system expansion is to meet 82% of unsatisfied demand (para 2.02) while increasing geographic coverage to rural areas (para 3.01). To meet the policy and institutional goals, TCC will undertake a sector restructuring study and an institutional development plan under the proposed project (paras 4.04 and 4.18). TCC has already retained consultants to assist in strengthening its project planning, design and operations management functions and in training technical staff (para 4.08). Sector Constraints 2.12 In the past few years, TCC has sustained a 19% annual growth in connected telephone lines and has tripled its gross fixed assets while experiencing almost a full transition into new digital technology (paras 5.06 and 2.06). The recent rapid network modernization and growth of TCC, however, has not been accompanied by a comparable program for improving sector policies, and for upgrading TCC's organization, manpower skills and management systems. Most project development has been carried o-;t through turnkey contracts with procurement tied to bilateral financing, resulting in high expansion costs (para 4.08). Investment planning, project design, management and supervision have been performed by outside consultants (para 3.16). TCC is also constrained by the Government's administrative and financial procedures and lacks the autonomy to function as an efficient commercial entity (para 4.02). In addition, its present structure is highly centralized and lacks the management characteristics and certain basic functions of a commercial entity (para 4.05). Tariff levels and structure also have many discrepancies and need to be refocussed to meet socio-economic objectives, economic costs of services and demand patterns (para 6.06). - 6 - 2.13 Given the past rapid growth and modernization of Jordan's network, major sector reforms and considerable strengthening of TCC's operations and management capabilities are needed to enable sustained and more efficient sector development. Three main areas of concern stand out; namely, (a) the structure of the sector, (b) TCC's requirements for financial and administrative autonomy, and (c) TCC's organizational structure and management systems. These areas have been studied thoroughly during appraisal and will be addressed and tackled during project implementation in the framework of a sector commercialization plan and an institutional development plan formulated and agreed upon by the Government, the Bank and TCC (paras 4.04 and 4.18). Both plans form an integral and essential part of the project. The institutional development plan will also involve a study for revising and adjusting telecommunications pricing policy and tariffs. Rationale for Bank Involvement 2.14 With the trend towards globalization and the parallel growth in the use of information systems in world economy, the development of a modern telecommunications network in Jordan is of great importance in linking the country's manufacturing and service sectors to international markets. The rational development of the telecommunications sector can be instrumental in increasing domestic resource mobilization and alleviating infrastructure constraints, especially with regard to establishing small and medium scale industries and to spreading the benefits of development to Jordan's rural areas, both of which figure prominently in the Government's Five-Year Plan. In particular, the dominant services sector, which accounts for about 60% of GDP, depends critically on effective communications and modern business data/information services. Jordan can play a key role in the modernization of the Region's business information and management systems provided that the development of its educational programs and business sectors are linked to that of advanced information and communications systems. 2.15 The Bank's proposed support for telecommunications in Jordan is a key component of a broader Bank strategy designed to assist the Government to diversify the country's economy, promote exports through policy improvements and increased emp'.asis on the producti-e sectors and to strengthen the infrastructural base and institutional framework for improved economic efficiency and international competitiveness. Jordan's economy, particularly the dominant services sector, is highly dependent on effective communications and data/information services. The Bank worked closely with TCC to review the telecommunications investment program in the context of the current Five-Year Plan (1986-90) and the increasingly tight budgetary and resource constraints within the Jordanian economy, and considers that the proposed allocation to telecommunications and its approximate 5% share in total investment is appropriate, particularly given the expectation of high economic and financial returns from these investments. - 7 - 2.16 The Bank supports the Government's objectives in the telecommunications sector. Through this first telecommunications lending operation in Jordan, the Bank would play a major role in assisting the Government to: (i) improve the policy and institutional framework for the efficient long-term development of the telecommunications sector; (ii) implement a realistic investment program consistent with resource availabilities that would improve services and expand geographic coverage, especially to isolated rural areas; (iii) mobilize competitive financing resources for the program; and (iv) devise and carry out a program for the commercialization of the telecommunications sector and TCC's operations. The Bank has already been instrumental in helping TCC to rationalize its investment program and improve its procurement processes and their cost effectiveness. During project implementation, the Bank would continue these efforts and would help the Government to address critical sector issues and implement policy actions. III. THE PROJECT Project Objectives 3.01 The project would provide for balanced and integrated development of telephone facilities for the urban and rural areas. Telephone concentration in the Greater Amman area would decrease from its present level of 63% to 56% in 1992. Automatic rural telephone services would be extended to 62 new villages, or 82% of all towns and villages, covering 98% of the total population. The revised program projects a 14% annual growth of connected subscribers which would meet about 82% of projected demand for 1992, a marked improvement over the current situation (67% demand satisfaction). This planned growth rate seems reasonable and consistent with TCC's past performance, which averaged an annual rate of 19% during the period 1982-86. Furthermore, under the project, the installation of the backbone national and regional long-distance networks will be completed in 1990. 3.02 Besides network expansion, the project aims at improving TCC's operating efficiency and profitability by reducing its operating and investment unit costs and at maximizing the contribution of the telecommunications sector to the country's economic strategy, especially with regard to efficient mobilization of domestic resources ard employment creation. The main sector and institutional objectives of the project are to: (a) assist TCC and the Government to formulate and implement, within an overall policy framework, sector reforms for the commercialization of the telecommunications services in Jordan and to allow TCC to function as a business operating entity; - 8 - (b) strengthen TCC's capacity to develop and implement coordinated strategies for procurement, financing and system planning that would help to reduce investment costs, especially in light of the Government's decision to move away from turnkey contracts and procurement tied to bilateral financing to international competitive bidding; (c) help TCC and the Government revise telecommunications pricing policy and tariffs to reflect the national macro and socio-economic policies, changes in the cost structure resulting from growth and technological change and to adjust for shifts in market demand resulting from changes in Jordan's economic conditions and prospects; and (d) support TCC in conducting a comprehensive review of its organizational structure, upgrading its management systems using modern information technology, and implementing a human resource development program in technical, financial and management areas. 3.03 The project represents TCC's revised 1988-92 investment program, and provides in addition, technical assistance for sector restructuring and institutional development. TCC's investment program has been drawn-up on the basis of the Government Five-Year Plan (1986-90). Because of delays in implementation, TCC had to revise the origiual 1986-90 program and extend its implementatiou to 1992. On this basis, a more realistic and achievable telecommunications investment program for the period 1988-92 was finalized and agreed upon during project appraisal. During negotiations, assurances were obtained that TCC will: (i) consult with the Bank before introducing any major changes in its investment program, which in the aggregate would involve more tharn 10% of the total amount of investments planned for the five-year program; and (ii) ensure that no such changes will be introduced unless TCC and the Bank have agreed that these changes are justified [para 7.01 (a)J. Project Description 3.04 In accordance with sector goals (para 2.10), the project comprises three main components: (a) ongoing works carried over from 1985 which include the expansion of existing telephone exchanges by about 30,000 lines; providing 12,000 lines of initial capacity in areas previously without service and constructing associated outside plant, and installing regional transmission routes (microwave and optical fibre cable) which would form the backbone of Jordan's long distance network connecting it with the Egyptian, Saudi-Arabian and Syrian networks. (b) new works which cover the provision and installation of: (i) 213,000 lines of telephone switching equipment of which 27,000 lines are met through redeployment of existing equipment. That includes: - establishment of 14 new primary centers and 76 small stand alone exchanges or concentrators with a total capacity of 170,000 lines; - extension of 4 primary exchanges and 31 small switching nodes by 25,000 lines; and - creation of 27 new switching nodes to be connected to existing primary exchanges with a total capacity of 18,000 lines. (ii) associated local networks and subscriber plant for the counection of 235,000 new subscriber lines in 620 cities, towns and villages. This includes 12,000 lines for which the exchange capacity exists from the previous investment program; (iii) 61 digital microwave links, 29 optical fiber junctions and 37 pulse code modulation (PCM) cable systems to provide for transmission links within multi-exchange areas and between primary exchanges and corresponding switching nodes; (iv) a new national and international switching center (NISC) with a capacity of about 5,500 circuits; (v) replacement of a satellite earth station antenna for international traffic via INTELSAT; in addition to (vi) consultancy services for sector restructuring and institutional development (paras 4.04 and 4.18); and (vii) acquisition and development of computer systems based on recommendations of the studies included under (vi) above; and (c) provision for future works relating to the next investment program that would presumably start in 1992 before the completion of the proposed 1988-92 program. Details of physical components are given in Annex 4 and illustrated in Map IBRD 20903. TCC's organization and the studies to be financed under the project's technical assistance are discussed in Chapter IV. - 10 - Project Cost 3.05 The total project cost is estimated at JD 112.7 million (USS 338.1 million) with a foreign exchange component of JD 74.4 million (US$ 223.2 million). This includes ongoing works (US$28.2 million) which are financed under existing bilateral credit agreements. The estimated cost of new works is JD 103.3 million (US$ 309.9 million) of which the foreign exchange component Is JD 68.5 million (US$ 205.5 million). Detailed project costs are in Annex 5 and summarized in Table 3.1. TAJKE 3.1: PROJECT COST SUIERY ESTIMATED COST JD Million US$ Million Item Local Forex Total Local Forex Total X I. ONGOING WORKS JPL-4 Projecta/ 1.8 3.5 5.3 5.4 10.5 15.9 56.4 Consultants 1.7 2.4 4.1 5.1 7.2 12.3 43.6 TOTAL ONGOING WORKS 3.5 5.9 9.4 10.5 17.7 28.2 100.0 II. NEW WORKS Switching 1.7 16.3 18.0 5.1 48.9 54.0 20.2 Transmission 2.9 7.8 10.7 8.7 23.4 32.1 12.0 Local Networks -Cables & Heavy Equipment 0.9 16.0 16.9 2.7 48.0 50.7 19.0 -Construction & Installation 18.9 12.4 31.3 56.7 37.2 93.9 35.1 Buildings 2.1 0.4 2.5 6.3 1.2 7.5 2.8 Computer Systems 0 0.7 0.7 0 2.1 2.1 0.7 Technical Assistance 0 1.0 1.0 0 3.0 3.0 1.1 NISC Transit Center 0.1 0.9 1.0 0.3 2.7 3.0 1.1 Satellite Station 0.2 1.0 1.2 0.6 3.0 3.6 1.3 Subscriber Plant 1.2 4.8 6.0 3.6 14.4 18.0 6.7 BASE COST 28.0 61.3 89.3 84.0 183.9 267.9 100.0 Physical Contingency 2.5 4.5 7.0 7.5 13.5 21.0 7.8 Price Contingencies 4.3 2.7 7.0 12.9 8.1 21.0 7.8 TOTAL NEW WORKS 34.8 68.5 103.3 104.4 205.5 309.9 115.6 TOTAL PROJECT COSTS 38.3 74.4 112.7 114.9 223.2 338.1 - a/ A project for network expansion financed under the 4th Japanese Protocol with the Jordanian Government. - 11 - 3.06 The project costs reflect estimated early 1988 prices based on TCC's experience with contracts relating to ongoing works and those signed for goods under previous projects, with adjustments taking into account actual trend in international prices for telecommunications equipment and in local prices for ci;ll works in Jordan. The project estimates are reasonable. TCC is exempt from payment of custom duties on imported goods and pays no taxes. Contingencies 3.07 Physical contingencies are 5% for switching aud transmission equipment, 7.5% for local networks and subscriber installations and 10% for buildings. Foreign price contingencies are based on estimated annual foreign cost increases of 1% from 1988 to 1990 and 3.5% thereafter. Local price contingencies reflect an estimated annual increase in local costs of 3% in 1988 and 5% thereafter. Project Financing 3.08 The proposed Bank loan of US$36.0 million (Table 3.2) would help finance underground and aerial cables, wires and heavy material for the construction of outside plant as well as consultancy services and computer systems. TCC would generate internally sufficient funds to fiuance all local costs and 18.7% of foreign costs (para 5.13), corresponding to a total contribution of US$153.3 million. Ongoing works (US$17.7 million) and the procurement of new proprietary equipment (US$5.7 million) would be financed through available bilateral credits. TCC intends to seek US$79.2 million financing in export and mixed credits to cover switching and transmission components. Experience from other telecommunications projects indicates that such financing is available in ample amounts. Therefore, this financing source can be considered reasonably assured. This leaves a gap of about US$46.2 million for local networks for which export credits are not typically available. For this compouent, the Government and TCC intend to seek bilateral/regional funds. 3.09 During negotiations, assurances were obtained that the loan would be declared effective only after TCC has secured cofinaning agreements, satisfactory to the Bank, in an aggregate amount of US$46.0 million to finance local networks (para 7.02 (a)). Furthermore, an agreement was reached that TCC shall finalize procurement and cofinancing agreements, in an aggregate amount of about US$80.0 million, to finance switching, transmission and other project components to be procured under price and terms bidding before June 30, 1989 [para 7.01 (b)J. - 12 - TABLE 3.2: FINANCING PLUN (US$ Mlito) Foreign Local Total Z New Worksa/ IBRD 36.0 - 36.0 11.6 TCC 38.4 104.4 142.8 46.1 Price and Termsb/ 79.2 - 79.2 25.6 Credit tied to procurementC/ 5.7 - 5.7 1.8 Other Financingd/ 46.2 - 46.2 14.9 Subtotal 205.5 104.4 309.9 100% Ongoing Works TCC - 10.5 10.5 37.2 Existing Loanse/ 17.7 - 17.7 62.8 Subtotal 17.7 10.5 28.2 100% Total Costs 223.2 114.9 338.1 a/ Estimated costs of new works include physical and price contingencies of 15%. b/ Export and mixed credits to be offered in conjunction with price and terms bidding. c/ French and Japanese financing for tied procurement. d/ Cofinancing arrangements for local networks, which will be partly financed by the Bank. e/ Japanese protocol No. 4 and a Swedish Soft Loan. Procurement 3.10 A detailed description of the packages of goods and services to be procured under the project is presented at Annex 6. Procurement arrangements for the new works are summarized in Table 3.3 below: - 13 - TABLE 3.3: ARRANGlMKNTS (US$ Nillion)a-- Project Price Component & Neg. Local ICBb/ Termsc/ Contrd/ Procur. Otherse/ Total a. Switching - 49.2 5.7 - - 54.9 b. Transmission - 23.7 - - - 23.7 c. Local Networks - Materials 49.2(22.8) - - 8.2 - 57.4(22.8) - Construction & installation 112.2 - - - - 112.2 d. Buildings - - - 9.2 - 9.2 e. Computer Systems 2.4(2.4) - - 2.4(2.4) f. Consultants - - - - 3.3(3.3) 3.3(3.3) g. Nat/Iut Switching - 3.0 - - - 3.0 Center h. Satellite Station - 3.3 - - - 3.3 i. Subscriber Plant 7.5(7.5) 8.4 - - _ 15.9(7.5) Total 171.3(32.7) 87.6 5.7 17.4 3.3(3.3) 285.3(36.0) Percent 60.OZ 30.7% 2.0% 6.1% 1.2% 100% Percent of Bank Loan 90.8% 9.2% Note: Figures in parentheses represent amounts to be financed by the proposed Bank Loan. a/ Including contingencies; excluding US$24.6 million equivalent for local expenditures covering local transport, TCC work force and force account. b/ Bank financed components will be subject to the Bank Procurement Guidelines. c/ International bidding with financing proposals. d/ Negotiated contracts for extension of existing equipment. e/ Bank Guidelines for the use of Consultants. - 14 - TCC's strategy is to procure the bulk of the network expausion under the proposed project through open tenders. TCC will undertake international competitive bidding, in *ccordance with the Bank's Guidelines, for the procurement of the following: (a) cables and heavy material required for the construction of local cable networks. This procurement package will be partly financed by the Bank under cofiuancing arrangements with sources to be identified (para 3.09); (b) wiring for the network subscriber plant (US$7.5 million); and (c) computer systems (US$2.4 million). The Bank's guidelines would also be applied for the selection of consultants for the technical assistance component (US$3.3 million). In the case the Loan is reallocated to be used for financing part of the construction and installation of local networks at an estimated total cost of US$112.2 million, local manufacturers of ducts and man-hole covers would receive preference of 15% or the import duty, whichever is lower. 3.11 International bids including financing offers (price and terms) would be invited for the provision and installation of local, long-distance and transit switching, microwave links, cable and optical fiber transmission, satellite earth station antenna and subscriber telephone installations for a total sum of US$87.6 million. Extensions of certain proprietary exchanges and transmission stations, estimated to cost about US$5.7 million, will be arranged through direct negotiations with existing suppliers. Although the project components mentioned under this paragraph will not be financed by the Bank, they do constitute an integral part of the project and are critical to project implementation and its overall performance. Hence, procurement, financing and implementation of all the project components should be closely coordinated. 3.12 Construction of technical buildings estimated to cost a total of US$9.2 million would be carried out under local bidding procedures advertised locally in accordance with the Government local procurement procedures. Contract Review 3.13 Prior Bank review of procurement documentation would be required for the eight contracts (all of them larger than US$1.0 million) for goods to be procured under ICB in accordance with Bank's Guidelines. Related bidding documents for these contracts have already been reviewed and cleared by the Bank and bid invitations issued. Prior Bank clearance will also be required for the short list of consultants, terms of references, letters of invitation, as well as for evaluation of proposals and contracts award, in accordance with Bank's Guidelines for the use of Consultants. To ensure that the sector commercialization and institutional development plans are carried out in accordance with the agreed action plans (Annex 12), it has been agreed by TCC during negotiations that letters of invitation to a short list of qualified consulting firms, approved by the Bank, will be issued by end May and contracts awarded in September 1988. - 15 - Disbursements 3.14 Disbursements for all contracts (partially or totally) financed by the Bank would be made against fully documented withdrawal applications. The estimated disbursement schedule for the project, based on the Bank profile for all sectors in Jordan, is shown in Annex 7. The loan will be closed on December 31, 1993. Proposed disbursements by category are shown below (Table 3.4): TABLE 3.4: DISOURSUHENT OF PROPOSED LOAN Amount Category US$ Millions Percentage Financed 1. Cables, wires and 27.05 100X of the CIF cost of directly heavy material imported goods; 100% of ex-factory associated with local cost of locally manufactured goods networks procured through ICB; and 80Z of local expenditures. 2. Computer systems 2.15 100% of foreign expenditures and 802 of local expenditures. 3. Consultants 3.00 100% of foreign expenditures and 90% of local expenditures. 4. Unallocated 3.80 Total 36.00 The loan made to TCC will be at the standard variable rate for 17 years including 5 years of grace and guaranteed by the Government. TCC will bear the foreign exchange and interest risks, and pay to the Government a guarantee fee of 1% per annum of the principal amount of the Loan outstanding from time to time. 3.15 To facilitate timely project implementation, TCC would establish, maintain and operate, under terms and conditions satisfactory to the Bank, a Special Account in US dollars to which the Bank would make an initial deposit equivalent to about US$3.0 million. The Special Account would be replenished against withdrawal applications when the undisbursed balance of the account falls below an amount equal to 50% or less of the amount of the Special Account. Withdrawal applications would be supported by appropriate documentation. The Bank would be provided annually with an audit report of the Special Account [paras 4.14 and 7.01(e)1. Project Implementation 3.16 During the implementation of the previous 1981-1985 sectoral plan, TCC made extensive use of turnkey contracts that were planned by engineering consulting firms. Now, TCC is gradually building in-house - 16 - capabilities in the areas of engineering, investment planning, detailed project design, procurement, project management and supervision. The planning and the detailed design of the project, as well as the preparation of bidding documents, is the result of close cooperation between TCC and the retained engineering consultants, who are also helping TCC to organize project management and supervision and to improve network operations, maintenance and customer services. Switching and transmission equipment will be installed by the respective suppliers. Construction of technical buildings, manholes, and cable ducts will be carried out by local private contractors. Installation of underground and aerial cables and associated equipment, procured separately by TCC, will be installed bv local private contractors with the support of foreign suppliers. With the exception of installations in large new buildings that will be carried out by private local contractors under TCC's supervision, TCC staff will install most of the new subscriber plant. Overall project management, coordination, supervision and follow-up of various contractors' involvement, as well as acceptance tests will be carried out by TCC staff. 3.17 TCC's present organization is not yet tailored to deal on a permanent basis with the requirements of project planning, design, implementation and commissioning of a substantial expansion program. For its 1988-92 investment program, TCC has set up an ad-hoc Project Implementation Unit (PIU) headed by a Project Director reporting to the Director General, who has the overall responsibility for project implementation. The PIU is designed to serve as an interim organizational set-up for the duration of the project to carry out TCC's investment program effectively and to develop in-house capabilities in all aspects of project development (through on-the-job training and teaming with retained consultants) so as to reduce TCC's reliance on turn-key contracts and foreign expertise. As to the future integration of the functions of this unit into the organization and the optimal set-up for undertaking large-scale investment programs, this will be explo-.ed under the project's management studies in the framework of TCC's proposed institutional development plan (para. 4.18). 3.18 The project implementation plan (PIP), including the project organization, implementation schedule and manpower requirements is described in Annex 8. The plan takes into account TCC's available resources and those of the retained consultants. The PIU's director will be assisted by selected project managers with the support of the retained engineering consultants. Those managers, and other technical staff, for the PIU have to be identified, from within TCC or the outside, provided with the proper training, assigned project responsibilities and ultimately reintegrated permanently into the organization. According to the implementation schedule, additional recruits from outside TCC will have to be employed, trained by the Telecommunications College and then put on the job not later than 1990. Hence, TCC should immediately proceed with the necessary recruitment arrangements givea the existing administrative constraints for hiring additional staff (para 4.02). TCC has to employ or assign from within to the PIU 36 staff in 1988 and 12 staff in 1989. During negotiations, assurances were obtained that TCC will maintain the - 17 - Project Implementation Unit until project completion and will employ or assign additional staffiug and resources, according to agreed targets, to ensure effective project implementation [para 7.01(c)]. Performance Monitoring 3.19 TCC's overall performance during project implementation will be monitored by means of selected performance indicators relating to techuical, operational and financial perfcrrvance, subscriber counections, service quality, and staffing (Annex 9). Continuous monitoring of project physical implementation as well as TCC's operational and financial performance and efficiency will assist TCC in improving its management and allow timely corrective actions to be taken, when necessary. TCC will prepare annually for Bank review a comparative analysis of its actual performance against the target indicators. Baring negotiations, assurances were obtained that TCC will present performance targets for 1990 and each subsequent fiscal year for joint review with the Bank by October 31 of previous year, review progress with the Bank not later than June 30 of each year, and take all necessary corrective actions [para 7.01(d)]. While the targets for later years are indicative, those for 1989 were agreed by TCC during negotiations. IV. TME DIPEINI ACJfl/ Sector Commercialization 4.01 TCC was established in 1971 as a semi-autonomous Government-owned corporation. A ten-member Board of Directors, chaired by the Minister of Communications, is responsible for TCC policy and administration. TCC's Director General, who is appointed by the Council of Ministers, is also Deputy Chairman and Chief Executive in charge of TCC's management and operations. There is no private sector represeitation on the Board. The Law allows for two Board Members from the private sector appointed by the Gover=sent, but those have been instead selected from the academic field. The effectiveness of the Board is very much depeudent on the Chairman, who has the main authority to call for Board meetings. 4.02 Although TCC has the legal statute of a fiuancially and administratively autonomous entity, it remains truly a public sector institution governed by the Civil Service By-Law and fiscally tied to the Governmeut General Budget for both investments and operating expenditures. TCC's preeent Corporate Law grants the entity management and control 1/ At present, TCC represents the commercial telecommunications sector in Jordan. For development purposes, however, TCC and the sector should be differentiated because of the potential participation of the private sector, in case of commercialization, in the provision of telecommunications services in Jordan. - 18 - authority of its own financial resources and the freedom to deposit its funds in commercial banks (Law 29-1971, Articles 14 and 15). But in practice, TCC has no treasury function (para 4.13), nor has it control over its profits. Its major account is with the Treasury with minor accounts for operating cash and for settlement of contract retentions with the Central Bank of Jordan. Administratively, TCC lacks the authority to adjust salaries to changing market conditions and cannot freely hire and dismiss staff. In procurement, TCC is subject to the Government administrative procedures which are reportedly time consuming and ineffce:tive. 4.03 While the telecommunications sector is commercial in nature, its operating entity is constrained by the public administrative and financial regulations and procedures. The Government and TCC recognize the urgency for introducing major reforms to optimize the overall policy and institutional framework for the telecommunications sector. The objectives are to increase TCC's efficiency and productivity, maximize resource transfers to the Government and enhance the sector's contribution to the economy as a whole. Considering TCC's previous performance and potentials; organizational, operational, financial and personnel capabilities and limitations; and the overall sector development stage and needs, the Government has decided to give priority to sector commercialization as a necessary step towards privatization. This would imply restructuring TCC as a fully autonomous, administratively and financially, Government-owned corporation governed under private law. 4.04 The prospects of setting up TCC as a fully ,nmercial enterprise raise important issues regarding competition and regulation. For instance, there is the question of whether TCC should continue to have a monopoly over all public telecommunications services, or whethet some of these should be opened up to competition. Services such as data networks, mobile telephone and paging, which are not subject to large economies of scale, may be provided efficiently by private firms. This would enhance private sector participation in telecommunications, mobilize new rssources for investment, improve responsiveness to specialized business demands and free TCC to concentrate on the task of developing and efficiently operating, maintaining and managing the national infrastructure of basic telecommunications facilities. Another major policy concern regarding sector restructuring is that of resource transfer between the sector and the Government. This will eventually require policy decisions regarding tariffs, taxation of TCC and TCC's financial structure. Furthermore, relationships and role interplays between the Government, TCC and the private sector need to be examined. A sector restructuring plan has been formulated with the help of the Bank. During negotiations, assurances were obtained that TCC will carry out the study of the restructuring plan and the Government will take all necessary measures to facilitate its implementatila (paras 4.20 and 4.22). Organization and Management 4.05 A basic organization chart of TCC is at Annex 10. The existing structure ;flects a highly centralized functional/regional organization - 19 - biased towards operation with less emphasis on corporate planning and business development. There is no clear demarcation of operational responsibilities between headquarters and regions. In most cases, headquarters' responsibilities extend beyond policy and planning to management and control of some field operations and maintenance functions. Such a situation becomes unmanageable as the network continues to grow at its projected rate. A clear delineation between the central and regional responsibilities will be required preferably with operational and technical authorities decentralized to regions. 4.06 TCC is not organized and managed as a business. Its present structure does not have the management characteristics of a commercial telecommunications entity and it lacks some important functions, such as treasury, corporate planning and marketing. Managerial accountability is limited; service performance, financial performance, manpower and overall productivity of major organizational units and services are not regularly monitored. The existing structural linkages ar.ag the various functions are loose and should be reinforced to enhance TCC1s 'bility to manage growth, technological change, innovation and iLtegrEtion of new services. Its management functions need to be strengthened L..ough the introduction of new skills and modern systems using information technology. 4.07 In general, in order to improve TCC's operating efficiency and profitability two principle interrelated requirements stand out: (i) to provide TCC with the autonomy of a commercial entity; and (ii) to develop and implement a comprehensive organizational and management improvement program. Planning and Operations Management 4.08 In the past, most project development has been carried out through turnkey contracts in the framework of bilateral credit agraements. Investment planning has been done with substantial assistance from retained consultants, while system design and engineering have been mostly done by the equipment suppliers. The above approach had been associated with high expansion costs. For the 1988-92 investment program, TCC has decided to follow competitive procurement and untied financing strategies in order to reduce its investment costs and its dependence on foreign contractors. This would require TCC to strengthen its in-house planning, design, engineering, procurement and supervision capabilities, as well as build up experience in technical, commercial and financial aspects of international competitive bidding. For this purpose, TCC has recently retained consultants to help on all the above functions. To ensure effective transfer of know-how and on-the-job training, TCC staff are teamed with consultants in working groups in the various disciplines of network planning, system design, service operations, maintenance and customers' services. The experience in the planning and design of TCC's 1988-1992 investment program has been encouraging; TCC staff contribution has been substantial. The same approach is being carried over to other functions, in particular to procurement, project implementation and supervision. - 20 - Staff and Training 4.09 As of December 31, 1987, TCC employed about 3,300 staff or about 17 staff per 1,000 DELs, which compares well with newly industrialized countries (Brazil 15; Singapore 16; Portugal 17). This staff ratio has been achieved, however, without TCC's participation in project preparation aud implementation. In view of the future expansion of Jordan's network, TCC will have to hire additional staff, particularly telecommunications engineers and technicians but also qualified managers in operations, accounting, finance, and other business areas. At project completion, TCC expects to have 4310 staff with a staff ratio of 11 per 1,000 DELs. Hiring and training additional staff to meet the project requirements also pose a real challenge to TCC, and it appears obvious that the present administrative constraints to recruitment will have to be relieved for TCC to cope with future requirements. TCC lacks a personnel management system with a formalized performance evaluation system and criteria, as well as a manpower development plan consistent with operations and management requirements of network expansion and sector development. 4.10 Current training arrangements for engineers and technicians are satisfactory. TCC ensures specialized staff training through its Telecommunications College in Amman, which is an intermediate college that grants a diploma of telecommunications engineering after a university bachelor's degree. An important feature of the College is the in-service technicians program, which aims at enabling the engineers and technicians to cope with new technological developments. The College is well-organized and has adequate faculty resources to cope with TCC's training requirements; but needs to modernize its facilities, upgrade its existing technical training curriculum and introduce certain management courses to train a larger number of staff in modern digital technology and project management. The College is currently undergoing an improvement program of its training capabilities and facilities with the help of the Swedish Telecommunications Training Center (Teleskolan) and ITU (financed by UNDP). TCC seems to have no difficulty securing financing for its training development programs through grauts. Accounting and Financial Management 4.11 TCC operates on a zero-base cash budget, as other Government agencies. Operating and investment expenditures are authorized annually through the Government's budget law. At the end of each fiscal year, the balance of TCC's generated funds less expenditures, is automatically transferred to the Government budget (para 5.03). Investments are subject to the Government's five-year plans. At its own initiative, however, TCC established a parallel system of commercial accounts. Independently audited commercial accounts are available for 1981 up to 1986. 4.12 The accounting function has been recently reinforced by appointing an Assistant Director General for Finance and qualified senior accountants from the private sector. While this represents a major step - 21 - towards reorienting and strengthening the accounting practice at TCC, the critical need still exists for the development of a modern computerized analytical accounting system, which would allow TCC to assess the productivity of its organizational units and the profitability of various servLces in addition to providing managers with key financial information for effective decision making. Presently, the accounting unit does not possess or have access to computer facilities and its procedures are those of a government agency. As part of the institutional development plan, TCC will develop and introduce a modern analytical accounting system (para 4.18 (c)). 4.13 TCC's financial function is not organized and managed as it should be in a commercially-oriented service corporation. The commercial accounts, which are prepared only once a year, are not being used as a regular management tool for either performance measurement, planning or control. TCC had incurred significant exchange losses (para 5.09) because it had neither the authority nor the internal expertise to hedge against foreign exchange risks. Project financing is arranged through the Ministry of Planning. Cash management is non-existent despite the fact that TCC has been a major source of funds, and internal cash generation is expected to further increase during the proposed project period (para 5.13). In order for TCC to function as a business entity, it should develop its own financial management capabilities in addition to effective accounting systems. The question of introducing a treasury function will be explored as part of the sector commercialization and organizational studies (para 4.18 (c)). External Auditing 4.14 TCC has annual audits of its accounts performed by qualified external auditors, since 1981. In previous years some delays were experienced in the preparation and auditing of TCC's commercial amounts which should be alleviated with the recent appointment of new management (para 4.12). During negotiations, assurances were obtained that TCC will furnish audited financial statements to the Bank, including an audit report of the Special Account, within six months after the end 'S vaok fi-I yea [para 7.01 (e)j. Data Processing 4.15 TCC does not have its own computer facilities but utilizes instead the computer center of the Royal Scientific Society. Consequently, processing telephone applications and connecting new subscribers lag behind exchange and cable network construction and result in low capacity utilization for some exchanges. Monitoring and reporting data for operations and customer service are fragmented and not regularly collected and processed. Furthermore, the reliance on the services of an external computer center sometimes causes delays in processing telephone bills (issued monthly) and hinders monitoring of payments and accounts receivable. For TCC to be able to modernize its management functions, it should acquire its own computers and have control over the development of - 22 - application software systems to ensure relevance to its specific operational and management needs. The project includes US$2.1 million, to be financed by the Bank, for the acquisition and development of computer systems (para 3.05). Management Information Systems 4.16 TCC's management reporting is fragmented and there is no formal structure for information flow. The concept of management with information; creating a management data base, organizing data collection, flow and processing to support decision making for operations and management is still a novelty to TCC. The difficulty of developing effective management information systems is compounded with the unavailability of computer resources. A study for the development of an integrated management information system will be conducted in the framework of TCC's institutional development plan (para 4.18 (d)). The objectives and design of such system would be linked to TCC's reorganization plan. Institutional Development 4.17 In parallel with sector restructuring, efforts should be directed towards the reorientation of the management culture of TCC and streamlining its operational and management functions along commercial lines. The Bank has worked closely with TCC to formulate a comprehensive institutional developmeut plan, which would be undertaken during project implementation, to enable TCC to cope with sector requirements. The main objectives of the above mentioned plan are: (1) to allow TCC to function as an efficient and effective commercial enterprise; and (2) to achieve the objectives of its 1988-92 investment program. Such objectives could be more effectively realized by granting TCC full administrative and financial autonomy. The sector restructuring study and the institutional development plan are closely interrelated and hence should be jointly implemented and well coordinated. 4.18 A number of areas of manawement studies critical to the Jii - ; ;;h-^- --; _ - (a) organizaticdul structure and omi ' anagement; (b) Dersonnel sy - aud humaii resource development; (c) financial and accounting systems, including the development of a treasury function; (d) management information and decision support systems, including computerization of key functional and operational applications; (e) procurement and inventory management system; and (f) tariffs and pricing policies; - 23 - Terms of reference, which have been agreed with the Bank, are listed in Annex 11, and action plans for implementation and review of recommendations are given in Annex 12. Technical Assistance 4.19 About US$3.0 million has been allocated within the Loan to cover the full costs of cousultaucy services on sector restructuring and institutional development. The technical assistance program covers two principle sets of studies: sector reform and inastitutional development. 4.20 The sector reform studies relate to sector restructuring aud tariff studies, which would require the involvement of both the Government and TCC. During negotiations assurances were obtained that TCC will: (i) take all measures necessary to ensure that the sector restructuring and tariff studies shall be completed and a copy thereof furnished to the Bank by July 31, 1989; (ii) carry out a mid-term review of the studies with the Government and the Banuk by April 30, i989; and (iii) following completion of the studies, the Goverument, the Bank and TCC will exchange views on the studies' recommendations and TCC will, on the basis of said exchange of views, carry out a Sector Reform Program approved by the Government, in accordance with the following schedule: tariff restructuring and adjustment by January 31, 1990, and sector commercialization by July 31, 1990 [para 7.01(f)]. 4.21. The iustitutional development studies focus on improving TCC's organization, management functions and manpower skills. During negotiations, assurances were obtained that TCC will: (i) undertake all studies on institutional development under terms of reference acceptable to the Bank, and in accordance with the implementation schedule at Annex 12; (ii) furnish to the Bank quarterly progress reports and conduct semi-aunual reviews with the Government and the Bank on interim results of the studies; and (iii) following completion of the studies, exchange views with the Government and the Bank on the studies' recomendations, and on the basis of such recommendations and exchange of views, prepare a Management De-alopiaeu.t Prcgr:? i and complete the implementation of said Program by October 31, 1991 [para .1 0i 4.512 The Governme'.t has a key role to play in achieving sector commercialization, and to a cercain extaint ...n the instituttioal eavelopmeDt of TCC. Hence, assurances were obtained during negotiations from tLe Government that it will take all necessary measures for carrying out the Sector Reform Program and the Management Development Program, after exchanging views with the Bank on the studies' recommendations [para 7.01 (J)]. - 24 - V. FINANCIAL ANALYSIS Past Performance 5.01 TCC operates on a zero-base cash budget, as other Government agencies. Operating and investment expenditures are authorized annually through the Government's budget law. At the end of each fiscal year, the balance of TCC's generated funds less expenditures, is automatically transferred to Government's budget. Investments are subject to the Government's five-year plans. At its own initiative, however, TCC established a parallel system of commercial accounts. Independently audited commercial accounts are available for 1981 up to 1986. 5.02 Table 5.1 summarizes TCC's financial results during 1982-86. TCC has been a profitable enterprise, capable of sustaining fast growth without recourse to Government funds for either operation or investment, and with reasonable borrowing requirements. On average TCC achieved 28% annual rate of return on net assets in service based on historical value. This is high, partly because TCC pays no income taxes. With an assumed 35% tax rate2/, the average rate of return would drop to 19%, which compares well TABLE 5.1: TCC - SUMMARY OF PAST FINANCIAL RESULTS (JD million) FY Ending December 31 1982 1983 1984 1985 1986 Operating revenues 16.9 27.4 32.7 40.0 42.0 Operating expenses 8.1 8.5 11.2 16.4 16.0 Operating income 8.8 18.9 21.5 23.6 26.0 Net incomea/ 8.0 17.6 18.6 20.5 18.5 Net transfers to (from) Government 1.9 (4.7) 2.8 5.3 13.3 Rate of return(%)b/ 20 41 38 24 19 Net internal cash generation(%)c/ 62 62 62 12'- 89 Operating ratio(%) 4 3 3 4 Currant ratio 2.3 1.9 1.6 2.2 2.0 Debt/Debt+Equity(%) 24 27 32 35 41 Current (JD) Revenue/DEL 200 278 281 285 250 Direct Cash Operating Cost/DEL 76 67 71 80 62 Constant (1986) Revenue/DEL 224 297 290 285 250 Direct cash operating Cost/DEL 85 72 73 80 62 a/ Operating income less interest, write-offs for bad debt and obsolete stock. b/ On average net fixed assets in service. c/ As a percentage of construction requirements after payment of debt service. 2/ The corporate income tax structure in Jordan is progressive with a 35% ceiling. - 25 - with other telecommunications enterprises in the developing world. Assets were last revalued in 1976, but this does not materially change the conclusion because TCC's assets are likely to be overvalued. Until recently TCC had mainly relied for expansion on turnkey contracts financed through tied and bilateral credits which resulted in high investment costs. 5.03 During 1982-86, TCC financed about 63% of investments for expansion from internally generated funds (after debt service) and was able to make payments to the Government equivalent to about 28% of net income. The rate of transfers to the Government by TCC falls short of the average corporate tax rate in Jordan. But this does not alter the profitability picture of TCC since it has maintained a debt leverage ratio lower than 40%, implying that most of TCC's generated cash flow has been retained for investment. 5.04 As a measure of TCC's efficiency, direct cash operating cost per DEL had been maintained at 25% of revenue per DEL, which is satisfactory. Revenue per DEL in real terms remained almost the same until 1986, after which telephone usage started slowing down with the economy. Operating ratio had been consistently below 40% with personnel costs accounting for 60% of total operating expenses. 5.05 As of end 1986, the breakdown of TCC's total telephone revenues was as follows: (a) international services (71%); (b) installation fees (12%); (c) rental fees (12%); and (d) local calls (5%). International revenues have so far constituted the bulk of telephone revenues but are likely not to increase as in the past due to economic downturn in neighbouring countries and return of many Jordanian workers from abroad. Revenues from local calls have been minimal because subscribers have been entitled to 1,000 free local calls whose charges are presumably included within a rental fee of JD 27 per DEL. Beginning 1987, the number of free calls was increased to 2,000 and international rates were decreased on average by 28%. Subscription rates are quite high averaging JD 130 per DEL. Telex revenues as a percentage of total operating revenues have dtcliL.d trom 2Xa 1n I9o Lt iLo i; Q9P7 reflecting the slowdown in economic activities rand change in technology. The above financial nerformance reslilLs demonstrate clearly major discrepancies in the tariff structure which need to be reviewed aud adjusted Lo reklect actual economic costs and demqnd patterns (discussed in detail in para 6.06). - 26 - TABLE 5.2: TCC - BALANCE SHWE=T (JD '000)) FY Ending December 31 1982 1986 ASSETS Gross Fixed Assets 53189 159274 Less: Acc. Depreciation 10740 25114 Net Fixed Assets 42449 134160 Work in Progress 16888 24407 Long-term Investments 2492 3811 CURRENT ASSETS: Cash 531 2437 Accounts Receivable 6014 27974 Less: Doubtful Accounts 375 2000 Net Accounts Receivable 5639 25974 Other Debtors 38 138 Inventory 1629 2054 Total Current Assets 7837 30602 TOTAL ASSETS 69666 192980 LIAWILITIES Equity: Government's Contribution 42308 46964 Retained Earnings 6104 56079 Total Equity 48412 103046 Debt Outstanding: Long-term Debt 15324 72021 Current Liabilities: Cur. Portion of LT Debt 802 7437 Suppliers 1782 4789 Contract Retentions 293 2146 Accrued Expenses 458 893 Total Current Liabilities 3335 15266 Reserves & Other: Sub/cont to projects 811 762 Subscribers Deposits 884 1556 Indemnity Reserves 900 330 Subtotal 2595 2648 Total Liabilities 21254 89934 TOTAL EQUITY & LIABILITIES 69666 192980 m - Current Ratio 2.35 2.00 Debt/Debt + Equity 0.24 0.41 - 27 - Present Position 5.06 Table 5.2 shows the balance sheet as of December 31, 1986 and that of 1982 for comparison. The figures show that gross fixed assets tripled in value over a four-year period which reflects TCC's very rapid expansion. By contrast, the debt/debt+equity ratio had only increased from 24% to 41%, implying that TCC had self-financed a good portion of its investments. The current ratio of 2.00 is satisfactory provided TCC's receivables are solvent (para 5.08). Current assets consist almost entirely of accounts receivables (85%). Accounts payable consist mainly of amounts payable to suppliers/contractors and current portions of long-term debt. Accounts Receivable 5.07 Telecommunications accounts receivable as of end October 1987, were an estimated JD 21 million (or 7 months of billing), of which JD 1.2 million were attributed to telex services. Government's share was a mere JD 1.6 million reflecting no serious Government arrears problem. A preliminary accounts receivable aging schedule (Table 5.3) shows that receivables accumulated during 1987 correspond to 25% of billing (3 months), which is reasonable. This figure is mostly due to delays of up to 3 months in the issue, distribution and accounting of telephone bills of the Regions. The problem is less acute in the Greater Ammei area where TCC follows a monthly billing cycle and where the collection rate in 1987 had been 85-90%. TABLE 5.3: TCC - ACCOUNrS RECEInVABS AGiNG SCHEDULE (JD 'TO00) Public Private Year Telephones Telephones Telex Total 1985 578 2,598 168 3,344 1986 364 3,765 196 4,325 1987 (up to 11/1) 628 8,761 703 10,092 Subtotal 1,570 15,124 997 17,761 Disconnected Lines - 2,949 180 3,129 TOTAL 1,570 18,073 1177 20,890 5.08 Accounts receivables of 1986 and before (JD 10.7 million) make up over 50% of total receivables, which represent a serious financial concern for TCC. Beginning in 1988, TCC has started implementing new billing and - 28 - collection procedures which have already produced favorable results. It is estimated that at least 50% of receivables prior to 1987 will be collected under the new procedures. TCC will have to determine the degree of solvency of whatever remaining unpaid bills and decide on appropriate write-off policies. Up to end 1986, TCC has written off JD 2 million worth of bad debt. Further write-offs will be necessary to account for uncollectable bills, most of which correspond to business closures caused by the slowdown of the economy in Jordan and in neighboring oil countries. During negotiations assurances were obtained that TCC will furnish to the Bank, by end December 1988, a detailed aging schedule of accounts receivable and will implement a plan, satisfactory to the Bank, to provision for all outstanding bad debt over the project period [para 7.01(h)]. For the purpose of financial projections, it was conservatively assumed that the whole JD 10.7 million that date back to 1986 and before would be written off to arrive at a receivables level of 90 days of billing in 1992. Foreign Exchange 5.09 TCC's exposure to foreign exchange fluctuations has been drastic over the past few years. The previous investment program had been financed mainly through bilateral and mixed credits denominated in Japanese Yen and French Francs. The appreciation of both currencies vis-a-vis the Jordanian dinar has caused major losses in current accounts and expenditures as well as inflating TCC's outstanding long-term debt. The cumulative foreign exchange losses during 1982-86 were JD 4.7 million and the value appreciation of long-term debt was JD 12 million. The exchange losses have been absorbed by TCC although it has been the responsbility of the central monetary authorities to manage TCC's foreign exchange exposure as part of the country's overall cash and debt management. If TCC is to become financially autonomous and managed as a business entity, it would have to develop its own in-house treasury capabilities in order to hedge against future exchange risks and manage effectively its cash and debt portfolios (paras 4.04 and 4.18). Future Performance and Finances 5.10 There are three main factors that distinguish past financial results from future performance. First, future investment unit costs are expected to decrease substantially (almost by half what was incurred during the previous program) as TCC shifts towards more competitive procurement and financing strategies. Second, the expected change in Jordan's economic structure is likely to cause major shifts in demand patterns and levels for telecommunications services. Operating revenue per DEL is expected to drop in nominal terms from JD 250 in 1986 to JD 212 in 1989 and then remain at the same level until 1992. Third, TCC is expected to maintain, and even enhance, its efficiency by lowering its direct cash operating cost in nominal terms from JD 60 per DEL in 1987 to JD 55 per DEL in 1992. This would be achieved through a reduction in staffing per subscriber line and increasing staff productivity with the use of new digital technology. The - 29 - net result would be an increase in overall internal cash generatica (para 5.13). Key projected financial indicators are summarized it. Table 5.4. 5.11 Forecast financial statements for FY 1987-1992 are i.- Aat- Financial figures for previous years are included for comparisor. .1 and assumptions are in Annex 1d!. For analysis purposes, tariffs e maintained at 1987 levels during the project period and telepholne a;<e raele traffic per DEL are assumed to decrease. TABLE 5.4: TCC -]FORECAST FINANCILAL PURFO~CAW (JD MillioA) Draft FY Ending December 31 1987 1988 1989 1990 1991 1992 Operating revenues 43 49 57 65 74 84 Operating expenses 17 28 32 36 40 44 Operating income 26 21 25 29 34 40 Net income 16 16 18 22 26 32 Funds Available to Government 8 14 9 20 25 27 Rate of return(X) 17 lA 13 15 17 20 Net internal cash generation(%) 73 258 77 130 152 222 Operating ratio(%) 41 55 57 55 54 52 Current ratio 2.0 2.2 2.1 2.0 2.2 2.2 Debt Service Coverage ratio 2.3 2.8 3.1 3.4 3.8 4.5 Debt/Debt+Equity(%) 45 44 45 46 48 47 Receivables (days) 270 210 180 150 120 90 Operating Revenue/DEL (JD) 217 221 212 212 212 212 Direct Operating Cost/DEL (JD) 60 60 59 57 55 55 5.12 Despite substantial investments during the project period, almost doubling network size, the financial indicators would remain satisfactory. The operating ratio would stabilize at around 55%. Rate of return on net fixed assets in service would decrease in the project's early stage because of anticipated decline in international revenues, but then would increase to 20% in 1992. Debt service coverage would be adequate at over 3.0 times. The debt/debt + equity ratio would remain at less than 50%, with the assumption that TCC would only retain the minimum funds required for maintaining a current ratio above 2.0 times. During the project period, TCC would generate cash flow in excess of internal financing requirements, available for transfers to the Government, equivalent to 85% of net income. 5.13 Sources and applirations of funds during the project implementation period are summarized in Table 5.5. TCC's projected capital - 30 - structure and the corresponding funds flow were based on the proposed project financing plan (para 3.08). Interest rates and terms for the cofinancing component were considered to be comparable to those of the Bank. Interest rates for export and mixed credits were conservatively estimated at 5.0%. Under the above assumptions, TCC would achieve an internal cash generation averaging 145%, thus exceeding construction requirements by a considerable margin. TABIZ 5.5: TCC - FORECdiST SOURCES AND APPLICATIONS OF FUNDS (1988-92) (JD Million) JD (mln) US$(mln) Percent SOURCES Internal Cash Generation 239 717 103 Less: Debt Service 68 204 29 Net internal cash generation 171 513 74 Borrowings: - Proposed IBRD 12 36 5 - Other external borrowings 48 144 21 Subtotal 10 180 26 TOTAL SOURCES 231 693 100 APPLICATIONS Crnstruction requirements - Proposed Project 112 336 48 - Preinvestments 5 15 2 Subtotal 117 351 50 Change in working capital 17 51 7 Change in L-T investments 1 3 1 Funds available for Government 96 288 42 TOTAL APPLICATIONS 231 693 100 Hence, TCC should be able to finance all local costs relating to its investment program, including indirect foreign exchange, and make transfers to the Government of JD 96 million. During negotiations, assurances were obtained that TCC will achieve a net internal cash generation not less than 50% of investment expenditures on a moving three year average basis in any one year during the project implementation period [para 7.01 (i)3. - 31 - VI. ECONOHIC ANALYSIS Benefits 6.01 Benefits from the proposed project will reach most sectors of Jordan's economy and will be felt throughout business and Government. A direct benefit would be increased efficiency and productivity of the telecommunications sector, achieved through sector commercialization and institution building of the operating entity, which should reduce investment and operating cosst and increase resource transfers to the Government. 6.02 For business, improved telecommunications will enchance management efficiency, improve coordination of economic activities and so facilitate increased business productivity. This will provide invaluable support to initiatives to strengthen Jordan's economic growth through developing a wider industrial base for export-oriented goods and technical services. In particular, stimulation of the financial intermediary sector and other segments of the services sector is highly dependent on the availability of modern and efficient information and communications systems (para 2.14). The expansion and improvement of telecommunications services will directly and indirectly assist in absorbing the returning emigrant workers and in creating new employment (TCC is expected to add 1000 employees during project implementation) for a growing population characterized by excess supply of university graduates. 6.03 For rural communities, improved access to service would facilitate integration of rural areas with the rest of the economy, improve the efficiency of production and marketing of agricultural produce, and support the growth of small village-based businesses. Telecommunications would also support the extension and enhancement of health, education, government administration and other services to rural areas, which is a major Gover:nment objective. 6.04 For the Government itself, the proposed project would provide three main benefits. First, the project would facilitate improvements in the efficiency of Government administration in a way similar to improvements in business efficiency. Second, improvements in the structure of TCC's tariffs (para 6.06) would improve the efriciency of resource use within the sector through improving the structure of subscriber demand in relation to resource costs. Finally, revenues that would be generated from investments included in the project would mobilize substantial domestic resources for Government at a time of growing budgetary constraints. Tariffs and Pricing Policies 6.05 Telecommunications tariffs as of end 1987, are summarized in Annex 15. Tariff overall levels are sufficient to provide an operating profit and cash level (para 5.12) to satisfy cash flow and rate of return requirements (paras 3.08 and 6.10) and to transfer funds to the Government while maintaining adequate liquidity positions (para 5.13). Tariffs were - 32 - reviewed in 1983, and in early 1987. International tariffs were arbitrarily reduced in 1987 on average by 28X since they were considered high by international standards. This would require an increase of almost 40% in international traffic to make up for the decrease in tariffs. As international calls dominate the revenues of TCC, a detailed demand and usage analysis should have been carried out prior to the tariff level changes. 6.06 The structure of tariffs and the policy for establishing pricing levels have many discrepancies (para 5.05) and should be refocussed towards meeting the national socio-economic objectives, demand and economic costs of services. The current tariff structure provides 2,000 free local calls for up to 6 minutes each. This high level of free calls distorts usage patterns, particularly since there is no analysis of median call length to establish the validity of the six-minute free call duration or the number of free calls. Telephone usage revenues for TCC are heavily distorted towards international services with these being about 90% of total usage revenues, (excluding opportunity values of free calls imbedded in the rental fee). Installation fees, which represent 40% of domestic revenues and 16% total revenues, are a non-recurring annual revenue and are dependent upon network expansion. Following completion of the proposed investment program, network expansion will drop off considerably and heavily reduce this revenue source. Pricing of leased circuits and value-added services is substantially above economic costs, thus adversely affecting demand for specialized services. All of the above, particularly in light of the planned network expansion, implies the necessity for reviewing pricing policies, tariff structure and levels. As part of the institutional development and sector reform, TCC will carry out a tariff study, under terms of reference approved by the Bank, and will agree on the implementation of tariff adjustments necessary for TCC to meet the financial requirements contained in the Performance Indicators (para 4.18 (f)). The study's terms of reference are given in Annex 11. Fiscal Impact 6.07 There is no formal nrocess of resource transfer from TCC to the Government. TCC pays no customs duties, taxes or dividends; a situation which is liable to change in case TCC is fully commercialized. Nevertheless, TCC is taxed indirectly where all generated funds in excess of internal financing of investment expenditures are automatically retained by the Government at the end of each fiscal year (para 5.03). Transfers from TCC to the Government in the last two years amounted to almost 60% of net income. 6.08 During the project implementation period, TCC is expected to generate a cash surplus of JD 96 million (equivalent to 85% of net income) in excess of investment financing requirements, which can be made available for Government use (para 5.13). What is lacking, however, is a formal policy that would govern resource transfer from TCC and the sector (in case private participation is allowed for the provision of certain specialized services under sector commercialization) to the Government. Such policy - 33 - issues as taxation of TCC, TCC's financial structure as a business operating entity, and TCC's fiscal relations with the Government will be tackled in the proposed sector restructuring study (para 4.04). Least Cost Solution 6.09 The project (para 3.04) repre, its the least cost solution for providing the service levels planned in using modern digital technology already introduced in the telecommunications network. The timing and dimensioning of various elements in the system as well as the design and comparisons of alternative network configurations are the result of careful studies made by TCC in close cooperation with retained engineering consultants. These technico-economic studies are based on world-wide recognized engineering practices. Return on Investment 6.10 The internal financial rate of return on TCC's 1988-92 investments is 25% (Annex 6). The quantifiable economic rate of return is about 31%. These estimates understate total project benefits, since they do not take into account t1 e total consumer surplus or the substantial secondary benefits accruing to the economy from improved telecommunications. Risks 6.11 The project's main risks are the potential delays in the identification, formulation and implementation of sector and institutional reforms. The Government, the Bank and TCC will agree on appropriate action programs and on a monitoring system to ensure effective implementation. The conviction and commitment demonstrated by the Government and TCC to the proposed sector restructuring and institutional development plans indicate that this risk is manageable. On the physical side, there are no unusual risks associated with the project. With the help of experienced consultants, the project has been adequately planned and the inputs required for various project components have been properly determined and timed. The same consultants have been retained to assist in project implementation, iriproving operations management and in training. Staff requirements for project implementation and network operations have been defined, agreed by the Bank and are expected to be available as required. Invitations to bid for goods to be financed by the Bank have been issued. Tender documents for the other main components of the project, namely switching and transmission, have been reviewed by the Bank and are expected to be issued before Board presentation. Potential cofinanciers have been identified and negotiations are underway. One source of uncertainty may be due to slower economic growth in Jordan than anticipated and its potential impact on demand patterns and levels for telecommunications service (para 2.03). Another source of risk may arise out of delayea physical implementation due to delays in the execution of buildings, civil works, - 34 - and/or installation of plant and equipment. A sensitivity test on the rate of return (Annex 16) indicates that a 20% reduction In benefits would reduce the estimated economic rate of return to 26%. Furthermore, a two-year delay in benefits but with no postponement of costs would reduce the estimated economic rate of return to 19%. A combination of a 20% increase in capital expenditures and operating costs combined with a 20% reduction in revenues, which is extremely unlikely, would reduce the estimated economic rate of return from 31% to 20%. Environmental and Health Effects 6.12 The proposed project is expected to have no adverse environmental and health effects. On the contrary, more efficient use of telecommunications would substitute for personal transportation and correspondingly reduce environmental pollution and promote energy conservation. In addition, improved telecommunications services would facilitate dispersion of health services and emergency care. VII. CONCLUSIONS AND RECO)EUDATIONS 7.01 During negotiations, the following assurances were obtained that: (a) TCC will: (i) consult with the Bank before introducing any major changes in its investment program, which in the aggregate would involve more than 10% of the total amount of investments planned for the five-year program ; and (ii) ensure that no such changes will be introduced unless TCC and the Bank have agreed that these changes are justified (para 3.03); (b) TCC shall finalize procurement and cofinancing agreements, in an aggregate amount of about US$80.0 million, to finance switching, transmission and other project components to be procured under price and terms bidding before June 30, 1989 (para 3.09); (c) TCC will maintain the Project Implementation Unit until project completion and will employ or assign additional staffing and resources, according to agreed targets, to ensure effective project implementation (para 3.18); (d) TCC will present performance targets for 1990 and each subsequent fiscal year for joint review with the Bank by October 31 of previous year, review progress with the Bank not later than June 30 of each year, and take all necessary corrective actions (para 3.19). Agreement on 1989 targets was reached during negotiations; (e) TCC will furnish audited financial statements to the Bank, including an audit report of the Special Account, within six months after the end of each fiscal year (para 4.14); - 35 - (f) TCC will: (i) take all measures necessary to eusure that the sector restructuring and tariff studies shall be completed and a copy thereof furuished to the Bank by July 31, 1989; (ii) carry out a mid-term review of the studies with the Government and the Bank by April 30, 1989; and (iii) following completion of the studies, the Government, the Bank and TCC will exchange views on the studies' recommendations and TCC will, on the basis of said exchange of views, carry out a Sector Reform Program approved by the Government, in accordance with the following schedule: tariff restructuring and adjustment by January 31, 1990, and sector commercialization by July 31, 1990 (para 4.20); (g) TCC will: (i) undertake all studies on institutional development under terms of reference acceptable to the Bank, and in accordance with the implementation schedule at Annex 12; (ii) furnish to the Bank quarterly progress reports and conduct semi-annual reviews with the Government and the Bank on interim results of the studies; and (iii) following completion of the studies' recommendations, and on the basis of such recommendations and exchange of views, prepare a Management Development Program and complete the implementation of said Program by October 31, 1991 (para 4.21); (h) TCC will furnish to the Bank, by end December 1988, a detailed aging schedule of accounts receivable and will implement a plan, satisfactory to the Bank, to provision over the project period for all outstanding bad debt (para 5.08); and (i) TCC will achieve a net internal -ash generation not less than 50% of investment expenditures on a moving three year average basis in any one year during the project implementation period (para 5.13). In addition, assurances were obtained from the Government that: (j) The Government will take all necessary measures for carrying out the Sector Reform Program and the Management Development Program, after exchanging views with the Bank on the studies' recommendations (para 4.22). 7.02 The following is a condition of effectiveness: (a) TCC shall have secured cofinancing agreements, satisfactory to the Bank, in an aggregate amount of US$46.0 million to finance local networks (para 3.09). 7.03 Subject to agreement on the above, the proposed project is suitable for a Bank loan of US$36 million at standard terms. -36 - ANNEX 1 Page 1 of 4 JORDAN JORDAN TELECON(DNICATIONS CORPORATION (TCC) A TELCOHMMDUICATIONS PROJECT FORECAST DEM AND DEL GROWTH 1. Forecasts of demand have been carried out by consultants and as part of the revision of the Development Plan. These forecasts have focussed on the growth in the demand for connection to the national network for telephone service, that is, the number of direct exchange lines (DELs). Other elements in the demand that affect network planning are the number of leased circuits, and the traffic generated per connection. 2. Demand projections have been based on a standard forecasting model that is commonly used in the telecommunications industry. Demand is measured as the sum of connections, the waiting list for connection and suppressed demand. At the start of the planning period, these elements of demand totalled just above 300,000: DEL Connections 203,000 Waiting List 84,800 Suppressed Demand 15,000 Total Demand 302,800 The figure for suppressed demand is probably underestimated, as customers are unlikely to register their interest in connection in areas not yet linked to the network. Taking the demand estimate at face value, the proportion of demand satisfied is 67%. 3. The growth in demand for exchange lines date can be approximated by an exponential curve. However, the use of a simple exponential curve as a forecasting method will eventually lead to overoptimistic projections as the penetration of exchange lines increases. Demand is therefore related to basic parameters: the rate of economic growth and the rate of growth and distribution of population. 4. In principle, the relative price of telecommunication services is also relevantl/. In the forecasting work under review, no account has been 1/ The standard forecasting model for DEL demand is: Demand Growth = Constant + b.GDP per capita + c.Popn Growth + d.Relative Price bf Telephone Service where the Constant and the coefficients b, c and d are to be estimated. -37 - ANNEX 1 Page 2 of 4 taken of the effect on demand of the expected long term fall in relative price of telecommunication services and to this extent the demand estimates are understated. The demand for leased circuits has been particularly suppressed by high prices charged. 5. The estimated rate of growth of demand for DELs in the revised Development Plan is 10% per annum, if the base is taken as total demand as estimated above. The forecasting model is long term; demand is estimated to continue to grow at 5.5% to the year 2005. Only the projections for the plan period to 1992 are reviewed in this Annex. Forecasts for later years are in any event subject to revision in future planning rounds. Economic Growth 6. The ratio of the growth in demand for telephone service to the rate of growth of GDP per capita is a measure of the income elasticity of demand. Studies in other countries at varying levels of development and over many years indicate income elasticity at between 2 and 4. Jordan is likely to be at the upper end of this range because of the high proportion (over 60%) of the ecotomy accounted for by services. Demand for telephone service has been shown to be particularly sensitive to growth rates in the service sector. Direct measurement of income has not been fully met and estimates of unmet demand are not reliable. 7. For the forecast period, an annual average growth rate of GDP of 4% has been assumed. Jordan's economy is sensitive to events in neighbouring countries and the rate of economic growth can vary substantially from year to year. During the last ten years, annual rates of growth have varied from 1 to 11%. On recent trends, 4% is a reasonable estimate which is also consistent with the Bank's economic projections for Jordan. Population Growth 8. Jordan's population has been growing at a rate of 3.5% per annum, and this is expected to continue for some years, This rapid rate of population growth is likely to have a complex effect on demand. On the one hand, the rate of growth of GDP per capita will probably be no more than one per cent per annum. On the other hand, the increase of population will contribute to demand independently of income level. 9. The combined effect of GDP growth and population growth alone should be to increase demand by at least 7% per annum (the calculation is as follows: forecast growth in GDP per capita is 1.1% a year; multiplied by income elasticity of 4 gives a growth rate of 4.4 from existing population; add population growth of 3.5% gives a combined growth rate of 7.9%). Population Distribution 10. The distribution of population will add to the growth of demand. As the predicted penetration rate, and hence demand, increases with the size of the population centre, the rapid long term growth in population will have a - 38 - ANNEX 1 Page 3 of 4 slightly geared effect on demand. An additional factor tending to increase the rate of growth of residential demand is the expected fall in the average size of households. 11. The base for projections of population distribution is the 1979 Census, which provided data on employment and households. Using this data, several categories of population centre were identified and separate penetration rates were projected for each category. Local network planning has been based on the projections for the year 2005, but the numbers for later years can be revised once the results of the next Census, to be held in 1989, are available. 12. Some 60% of subscribers are located in the Greater Amman area. The detailed forecasts for this area substantially affect the national total. The Master Development Plan for Greater Amman published in 1986 provided a more up to date basis for projections than was available elsewhere. 13. Outside Amman, the deterrent effect of high installation fees and the limited reach of the existing network has surpressed demand. In future, a higher proportion of expansion will be accounted for by these areas. 14. The sum of the local area projections of demand corresponded well with the national total, estimated separately. Excess Demand 15. In practice, the growth in the number of DELs will continue to be supply constrained throughout the plan period. Growth in network capacity is projected at about 10% per annum to 1992, that is, at the same rate as demand. The number of connected DELs however is expected to grow at a slightly faster pace, on average at 14.5% per annum, as a result of the increased proportion of investment in outside plant during the expansion program 1988-1992. Conclusions 16. The forecasts of demand underlying the development plan are satisfactory. Network expansion and DEL connections are planned to grow at a rate of 10% and 14.5% per annum over the plan period, respectively. Examination of underlying economic and demographic projections suggests growth in demand will be sustained at the rate of 8-10% per annum. This lower, more robust, estimate will not affect the plan targets because of the overhang of uanet demand. That is, the planned rate of expansion in the number of DEL connections will satisfy the demand if demand grows at no more than 9% per annum. The forecasts for later years will be revised when the results of the 1989 Census of Poupulation are available. JORDAN AMEX 'L JORDAN TELECOMMUNICATIONS CORPORATION (TCC) A TELECOMMUNICATIONS PROJECT FORECAST DEMAND AND DEL GROWTH 600.000 - 500,000 - Expressed * - 400,000 - Network Capacity - - 00~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 300.000 - _ __ 200.0o 0 - -- _ __ _ __ _ 100~~~~~~~~~~~~~~~~~~~~~~ 100o000 o I , , I I ' 1986 1987 1988 1989 1990 1991 1992 E1*41908d - 40 - ANNEX 2 JORDAN JORDAN TE ECOMMD 1CATIONS CORPORATION (TCC) A TECOHNOCATIONS PROJECT Regional Distribution of Telephone Service (As of December 31, 1987) DELs No. of DELs in Population % of % of Per 100 Waiting Network Service (100)1/ DELs Population Population List Amman 128,134 11,719 63.2 41 10.9 36,619 AJloan 1,784 664 0.9 2 2.7 1,784 Aqaba 3,497 416 1.7 1 8.4 308 Dair Abi Said 1,834 1,052 0.9 4 1.7 3,238 Hanina 1,802 813 0.9 3 2.2 3,545 Irbid 16,666 2,659 8.2 9 6.3 10,906 Jarash 2,636 815 1.3 3 3.2 1,395 Maan 1,980 553 1.1 2 3.6 122 Madaba 5,895 929 2.9 3 6.3 2,809 Mafraq 3,582 1,102 1.8 4 3.2 3,596 Ramtha 2,883 550 1.4 2 4.8 635 Salt 6,158 1,268 3.1 4 4.1 3,560 Zarka 18,611 4,517 9.2 16 4.1 15,885 Rest of Country 6,812 1,625 3.4 6 4.2 404 Total 202,908 28,682 100 Too 7.1 84,806 1/ Based on the 1979 census updated and projected forward. - 41 - ANNEX 3 JORDAN JORDAN TEE1COUUNICAflIES CORPORATION (TCC) A TMPCOWNJlOS NDSCT asilc Data - Jordan Telecamications Facilities (ha of December 31, 1987) 1987 1992 TELEPHONE SERVICE Telephone Switching Units -Automatic 85 191 -Nanual 350 200 Installed capacity -Automatic 316,502 498,000 -Manual 13,220 3,000 Connected main lines (DELs) -Automatic 190,715 400,000 -Manual 7,264 876 -Exchange fill (automatic exchanges) 60% 80% -Percentage of automatic DEL 96% 99% -Public call offices/PCO 1 7 -Coin Boxes 80 180 Telex exchanges -Installed capacity 4,000 4,000 -Telex DELs 1,178 2,500 -Exchange fill 29% 63% INTERNATIONAL FACILITIES Satellite earth station 3 3 -International satellite circuits 570 1,001 International terrestial circuits -Installed international switch capacity 900 1,800 -Installed circuits 276 396 - 42 - ANNEX 4 Page 1 of 4 JORDAN JORDAN TELCONWNICATIOS OORPORATION (TCC) A TIECONIWNIC&TIOK PROJECT Description of the Physical Ca-poaents of the Project General 1. The proposed project is TCC's 1988-92 investment revised program. Jordan back-bone long distance transmission routes, including regional transmission links with neighbouring countries have already been established under the previous investment programs. Therefore, the proposed project mainly aims at the development of the local telephone networks accross the country and at increasing the network penetration into the less developed rural areas. Under the project, the expansion of the domestic and international long distance facilities will be consequently limited to the supply and installation of an additional national and international transit switching center (NISC), introduction of transit switching facilities in Irbid, switching and signalling modifications in the existing exchanges, additional multiplex equipment on the existing transmission routes to cope with the additional traffic resulting from the expansion of the telephone subscriber base, and the replacement of a worn-out satellite earth station antenna. Existing facilities at the beginning of the project 2. The first semi-electronic exchanges (SPC analog FETEX-100 of Fujitsu) were introduced in Jordan in 1979, but in 1984, Jordan entered in the digital switching era with the introduction of the FETEX 150 of Fujitsu, Japan and the ElOB from Alcatel, France and the phasing out of the electro-mechanical switching systems which is now fully completed. As of February 1988, the total installed switching capacity in the country amounts to 316,000 lines, 79,000 of which or 25% being of analog SPC FETEX-100 of Fujitsu and 6,300 or 2% of semi-electronic PENTEX from Plessey). The 230,700 lines of local digital switching equipment are divided between ElOB of Alcatel 65% and FETEX-150 35%. The long distance network is a star centered on the National Switching Center (NSC) located in Amman. The NSC is a SlOB switch with an installed capacity of 4,500 trunks. The international gateway is also a digital switch of type MT-20 of Thomson, France with an installed capacity of 3,400 trunks of which about 600 are used on international routes. The domestic long distance transmission network is predominantly digital with the exception of the microwave route Amman-Aqaba, which is close to the end of its economic life. - 43 - ANNEX 4 Page 2 of 4 Technology 3. The expansion under the proposed project will further increase the coverage of the country with facilities using the digital technology to about 85% of the total installed capacity. DigitalisatioA of the network has the following advantages: - the progress in the electronic components technology has been extraordinary over the last years and the resulting large-scale integration of circuits enables the production of relatively low-cost equipment. - compared with electromechanical switching systems and analog transmission systems, digital systems facilitate the introduction of a large variety of new services as well as the enhancement and quality improvement of existing services; - another important aspect of digital systems is their capability to integrate within a single domestic network, not only the transmission, switching and control functions, but also to integrate different telecommunications services and forms of transmission of information which results in cost reduction; - finally, digital technology allows lower cost expansion of facilities to the rural areas. The drastic reduction of optical fiber transmission cost has also made possible to introduce this new technology into the metropolitan junctions and primary areas networks where justified by the route capacity and the distance between nodes. Local Telephone Networks a) Local Switching 4. The Amman multi-exchanges area presently accounts for 63% of the total number of subscribers. Under the proposed project, the balance in favor of network development outside of the Greater Amman area will increase. However, although decreasing to 41% at the end of the project, the Greater Amman area will still dominate the Jordan network. Outside of Amman, the urban networks of the cities of Irbid and Zarqua will become multi-exchanges areas with the addition of new primary exchanges in Irbid Shamali and Zarqua Shamali. The telephone networks expansion has been conceived in such a way that the possibility remaias open for the introduction of a third digital switching system into the domestic network, depending on the outcome of the international bidding. In this respect, - 44 - ANNEX 4 Page 3 of 4 all 14 new primary centers totalling 116,832 lines to be created under the project and 76 small nodes stand-alone exchanges or concentrators totalling 53,008 lines to be linked to them within the new primary exchange areas, will be awarded following international competitive bidding. Switching equipment of ten existing switching nodes (9 E1OB RLU's + 1 Fetex 150 RSU) totalling 21,352 + 6,020 lines which htave to be replaced by newly created primary centers will have to be relocated within primary exchange areas whose primary exchange is of the same existing system (FETEX or EOB). Since equipment of those nodes is installed in containers, the redeployment should not raise too many difficulties. Expansion within 8 existing primary exchange areas under the project (7E1OB + 1 FETEX) includes expansion of 4 primary exchanges by 6,184 lines, 31 small nodes by 18,622 lines and creation of 27 new nodes totalling 18,278 lines. Most of the switching equipment to be relocated will be used to carry out these expansions. Extension and modifications of the existing exchanges as well as redeployment will have to be procured from the original suppliers of the FETEX and ElOB systems under negotiated contracts. Overall the installed switching capacity in the country will increase by 185,552 lines, 169,840 of which will be of new equipment purchased under ICB to be located in new created primary areas, the balance of 15,712 lines results from expansion of existing switching equipment by 43,084 lines within ElOB and FETEX 150 primary areas, less 27,372 lines of dismantled and relocated existing equipment. Details regarding the population clusters affected by the project as well as the list and capacities of the switching nodes to be created, expanded and redeployed is available in the Project File. b) Cable Networks 5. This project component includes expansion of local cable networks in about 620 cities, towns and villages, representing about 350,000 distributed main cable pairs (MDF) available for immediate and future cornection of subscribers. This project component comprises civil work construction of ducts and installation of cable systems, for the primary and secondary levels of the local distribution networks and also for inter-exchange junctions in the three multi-exchange areas. The proposed network expansion is estimated to ilclude about 2,525 km of underground duct cables, 10,790 km of buried cable and 29,936 km of aerial cable in the less populated areas. TCC's planning unit designed the duct system capacity for about 20 years of expansion, the primary and secondary cable systems for 5 years demand in the metropolitan areas and cities. c) Transmission 6. As noted under Para 1 above, the transmission component under the project is mainly for the creation of new junctions links within the multi-exchange areas and between the new primary centers and the small switching nodes attached to them. Single mode optical fibre cables with 2 or 4 fibre pairs working at the wavelength of 1,300nm and microwave radio - 45 - ANNEX 4 Page 4 of 4 links in the 8 or 15 GHz bands are planned to carry either 8 or 34 Mbit/s on the new routes. On some ex'.sting metallic pair cable routes, there will be new 2 Mbit/s PCM systems installed. Furthermore, there will be some extensions by new metallic pair cables to be used for PCM. Overall this project component comprises 61 short distance microwave links (one hop sometime using a passive relais) 29 optical fibre rontes totalling 728 pair-km, 37 PCM. cable routes totalling 181 km each with 10 X 2 Mbit/s PCM systems, and PCM systems expansions on existing PCM cables on improved pairs of junctions cables. This project component also comprises the redeployment and extensions of existing transmission routes with Alcatel and NEC equipment and the supply and installation of surveillance systems monitoring the alarms and the transmission characteristics of each route. Long Distance and International 7. The following items are included in the project to cope with the traffic increase expected from the network expansion. (a) The existing National Switching Center in Amman which has reached its expansion capacity will have to be supplemented by the creation of an additional transit center. A national and international switching center (NISC) will be installed under the project. The NISC is planned for 450 analog international circuits and 170 2 Mbit/s digital interfaces (170 X 30 - 5100 ccts) for national or inte^,national traffic. A transit function will also be introduced in Irbid so that the traffic between the Northern pr'Saary areas will be independent from the NSC's in Amman. (b) Under the project, system modifications and some expansion or re-arrangement of the trunk routes are required in the existing primary exchanges, and in the NSC; increase of processor capacities, and modification of the R2 signalling system. Furthermore, TCC has included under the project the introduction of the CCITT common channel signalling system Nr7 (C7), and the full synchronization of the digital network. (c) The antenna of the Indian Ocean satellite earth station is worn out and repair costs without guarantee are excessive. A new satellite earth station and facilities for digitel transmission antenna are planned under the project. JNl TE9.TOJICATWS cm0RAITSnN (Tc) A TEl.CCJ4CTW PROJEWT OIAUlD COStS OF 196-1992 WVESUI flilr N (D '000) 1968 196 190 1991 1 TOTAL Locl Poras Tftal Local Forau Total Loal Fora Total Local Forx Total Local F.,.i Total Loal Forox Total 1. ON016 WOR .WL-4 Projad 1760 3801 8 1 0 0 0 0 a 0 0 0 0 0 0 0 17088 018 61 cm. hlast 496 618 106 84 5M e12 420 6W 10 314 484 768 16 944 412 17C0 248 418 TOTAL ODIOS N S 2200 4114 S19 874 S8 912 420 607 10 814 484 7U 16 94 412 8m S7 98 it. W Vo saitalng a 12 90 M 29 8614 597 7648 70 861 a6 S4 172 1418 18 9 l64 16000 0 Transmisson 0 0 0 027 147 2806 732 2401 818 160 61 49 86 262 U5 19 7M 1064 -Cab le A "NM Uslpvmt . 61 I1196 1187 10141 1069 40 696 7 24 4091 r45 0 0 0 87
Группа Всемирного банка · Staff Appraisal Report
Jordan - Telecommunications Project
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