India - Seventh and Eighth Telecommunications Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7915 PROJECT PERFORMANCE AUDIT REPORT INDIA SEVENTH AND EIGHTH TELECOMMUNICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) JUNE 30, 1989 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRLrCY EQUIVALENTS Year Annual Average 1978 Appraisal year Loan 1592-,N US$1.00 - R% 8.19 1979 US$1.00 - 8.13 1980 Appraisal year Credit 1112-IN US$1.00 - Rs 7.86 1981 US$1.00 - Rs 8.66 1982 US$1.00 - Rs 9.46 1983 US$1.00 - RslO.10 * 1984 US$1.00 - Rs11.36 1985 US$1.00 = Rsl2.37 GLOSSARY OF ABBREVIATIONS C&AG - Comptroller and Auditor General DEL - Direct Exchange (telephone) line DOE - Department of Electronics DOT - Department of Telecommunications GOF - Government of France GOI - Government of India HCL - hindustan Cables Limited HTL - Hindustan Teleprinters Limited IPTD - Indian Posts and Telegraphs Department ITI - Indian Telephone Industries Limited MOC - Miristry of Communications MTNL - Mahanagar Telephone Nigam Ltd. (Bombay/Delhi Telephone Corporation) OCS - Overseas Communications Service OYT - "Own Your Telephone" - A system where advance payment of a relatively large deposit gives applicants priority status for obtaining telephone service PCM - Pulse Codv Modulation PCO - Public Call Office PCR - Project Completion Report R&D - Research and Development STD - Subscriber Trunk Dialing TAX - Trunk Automatic Exchange UHF - Ultra high Frequency radio VFT - Voice frequency telegraph VHF - Very high frequency radio VSN - Videsh Sanchar Nigam (Corporation created April 1, 1986 to operate international telecommunications service; formerly OCS) FISCAL YEAR April 1 - March 31 TI% WORLD BANK FOR OFCIAL USE ONLY WashIngton, DC 20433 USA OSco Ct oeer-ceWal Opesem lvah"24e1 June 30, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT; Project Performance Audit Report cn India Seventh and Eighth Teler-munic:tions Projects (Loan 1592-IN and Cred 12-IN) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on India - Seventh and Eighth Telecommunications Projects (Loan 1592-IN and Credit 1112-IN)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA SEVENTH AND EIGHTH TELECOMUNICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) TABLE OF CONTENTS Page No. Preface................................................................. i Basic Data Sheets.................................................... iii Evaluation Summary................................................... vii PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND ......................................... 1 II. THE PROJECTS ....................................... 4 The Seventh Telecommunications Project ............... 4 The Eighth Telecommunications Project ................ 9 III. PROJECT IMPLEMENTATION .............................. 16 Seventh Telecommunications Project .............. 16 Eighth Telecommunications Project ............... 18 IV. PROCUREMENT ......................................... 23 V. DISBURSEMENT ........................................ 26 VI. PERFORMANCE OF CONTRACTORS AND SUPPLIERS ............. 29 VII. PROJECT AND PROGRAM COSTS ............................ 30 VIII. TECHNICAL ASSISTANCE ................................ 31 IX. OPERATIONS .......................................... 32 X. INSTITUTIONAL PERFORMANCE ............................ 33 Staffing ......... ............................................ 33 Procurement ......... ......................................... 33 Audit ................................................ 33 Billing and Collection ....................................... 33 Tariffs 34.............................................. Sectoral Reform. ...................................... 34 XI. FINANCIAL PERFORMANCE ................................ 36 IPTD's Self-Financing Performance ............... 36 Resource Transfers from IPTD to GOI .................. 36 The Manufacturing Companies (ITI, HCL, HTL) ... 36 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authosization. TABLE OF CONTENTS (Cont.) Page No. XII. BANK/IDA PERFORMANCE ................................. 37 XIII. CONCLUSIONS ......................................... 40 Sustainability ................................ 40 Lesson to be Learnt, .................................. 40 PROJECT COMPLETION REPORT I. INTRODUCTION ................................................. 45 II. PROJECT PREPARATION AND APPRAISAL .................... 47 III. PROJECT IMPLEMENTATION ....................................... 54 IV. OPERATING PERFORMANCE ........................................ 63 V. FINANCIAL PERFORMANCE ........................................ 64 VI. INSTITUTIONAL PERFORMANCE .................................... 67 VII. PROJECT JUSTIFICATION ........................................ 70 VIII. BANK/IDA PERFORMANCE ......................................... 72 IX. CONCLUSIONS .................................................. 74 PCR ANNEXES 1. Compliance with Covenants ............................ 77 2. Performance Indicators .............................. 78 3. Estimated and Actual Project Costs ................... 80 4. P&T/DOT Income Statements ............................ 81 5. Organization Charts of DOT and MTNL................... 84 6. Summary of Tariffs .................................. 87 7. Return on Investment ................................. 88 PROJECT PERFORMANCE AUDIT PEPORT INDIA SEVENTH AND EIGHTH TELECOMMUNICATIONS PROJECTS (LON 1592-IN AND CREDIT 1112-IN) . PREFACE Th:.s Project Performance Audit Report (PPAR) represents the re- sults of a Performance Audit of the India Seventh and Eighth Telecommunica- tions Projects for which Loan 1592-IN of US$120.0 million and Credit 1112-IN of SDR 254.4 millionl/ were approved on June 9, 1978 and March 1981 respectively. The funds in both operations were made available to the Government of India (GOI) for its Post and Telegraphs Department (IPTD) and for onlending to three major GOI-owned telecommunications equipment manu- facturers: Indian Telephone Industries Limited (ITI), Hindustan Cables Limited (HCL) and Hindustan Telephonts Ltd. (HTL). The Agreement for Loan 1592-IN was signed on June 19, 1978 and following completion of the Subsid- iary Loan Agreements and other documents, became effective on October 30, 1978! the Agreement for Credit 1112-IN was signed on March 26, 1981 and became effective on June 24, 1*,81. There were changes in the irported items in both projects; also following the conclusion of an agreement be- tween GOI and the Government of France (GOF) for the manufacture of digital trunk exchange equipment in India, an amount of SDR 10.3 million, which was included in Credit 1112-IN to finance a new electronic switching factory at Palghat, was cancelled. Delayed procurement led to extensions of the clos- ing dates of both operations; the closing date of Loan 1592-IN was first extended 21 months from March 31, 1982 to December 31, 1983, and then a further six months to June 30, 1984; commitment fees or the loan amounted to US$1.2 million. The project was completed on December 31, 1984, after a delay of 3 years and 3 months. The closing date of Credit 1112-IN was extended one year to December 31, 1985; commitment fees on the Credit amounted to about US$1.5 million equivalent. The project was completed on December 31, 1985, after a delay of two years and three months. The Project Performance Audit Report consists of a Project Performance Audit Memorandum (PPAM), and a Project Completion Report (PCR) dated June 20, 1988 prepared by .La staff of Asia Regional Technical Department. The audit involved r!views of the PCR. the Appraisal and President's Reports, legal documents, Bank files, and the transcripts of the Executive Director's Meetings at which these Projects were approved. An OED mission visited India in November 1988 and had discussions with officials of IPTD (now the Department of Telecommunicatioi,s (DOT)), and the Department of Electronics (DOE) in Delhi, and officials of the three manu- facturing companies in Hyderabad, Madras, and Bangalore, all of whom had knowledge of the facts. 1/ US$314 million equivalent on January 31, 1981. - ii - The PCR which was based on a DOT report, accurately covers the important aspects of the project experience. However, although the PCR was prepared by Bank Staff having a knowledge of the Indian telecommunications sector, it lacks input from staff who were directly involved in the projects. Otherwise the PPAM summarizes and attempts, as far as possible, to avoid repetition of the details provided in the PCR, and in addition provides comments on the major aspects of the project. Following standard OED procedures, copies of the draft PPAR were sent to the Government and the Borrower. No comments were, however, received. - iii - PROJECT PERFORMANCE AUDIT REPORT INDIA SEVENTH AND EIGHTH TELECOMMUICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) BASIC DATA SHEET KEY PROJECT DATA Loan 1592-IN Appraisal Actual or Item Estimation Current Estimate Total project cost (US$ million) 818.5 608.0 Loan Amount (US$ million) 120.0 112.8 /a Date Physical Components Completed 9/30/81 12/31/84 Proportion Completed by Appr. Exp. date 100 65% Internal Financial Rate of Return 20! 142 Credit 1112-IN Total Project Cost (US$ million) 1619.4 1406.4 Loan Amount (US$ million) 314.0 298.5 lb Date Physical Components completed 9/30/83 12/31/85 Proportion Completed by Apprl. Exp. Date 100% 87% Internal Financial Rate of Return 18! 14% /a US$7.2 million cancelled. /b US$15.5 million cancelled. CUMULATIVE ESTIMATED &ND ACTUAL DISBURSEMENTS Loan 1692-IN Bank FY 1979 1980 1981 1982 1963 1964 1986 Appraisal Estimate (USS millions) E4.2 96.3 120.0 - - - - Actual (US$ milions) 34.4 60.3 66.1 79.5 96.7 103.8 112.8 Actual as % of Appraisal (1) 63.5 62.6 55.1 66.2 80.6 85.7 94.0 Date of Final Disbursement: 8/29/86 Credit 1112-IN Bank FY 1931 1982 1963 1964 1985 1986 1967 Appraisal Estimate (SDR millions) 82.2 90.8 178.0 240.3 252.4 4 - - Actual (SDR millions) 18.9 67.7 106.5 160.5 165.1 234.3 240.0 Actual as S of Appraisal (6) 58.7 63.5 59.7 66.8 76.4 96.8 99.1 Date of Final Disbursement: 6/13/86 / Credit reduced by SDR 10.8 million and SDR 2.1 million cancelled. - iv - PROJECT DATES Original Plan Revisions AcL-al Loan 1592-IN First Mention in Files 04-22-77 Negotiations 05-26-78 Board Approval 06-08-78 S.gning (Loan Agreements Date'i 06-19-78 Effectiveness 10-30-78 Closing Date 03-31-82 12/31/83 06/30/84 06/30/84 Credit 1112-IN First Mention in Files 05-02-79 Negotiations 02-10-81 Board Approval 03/17/81 Signing (Loan Agreements Date) C3/26/81 Effectiveness 06/24/81 Closing Date 12/31/84 12/31/85 :.2/31/85 STAFF INPUTS (staffweeks) Loan 1592-IN 1977 1978 1979 1980 1981 1992 1983 1984 1986 1988 1987 1988 TOTAL Preappraisal 1.1 34.2 - - - - - - - - - - 35.8 Appraisal - 48.3 - - - - - - - - - - 48.3 Negotiation - 9.1 - - - - - - - - - - 9.1 Supervision - - 3.7 19.4 13.4 12.7 6.2 9.7 2.1 .3 .1 3.4 71.0 Other - - - 1.7 .1 - - - - - - - 1.8 1.1 91.8 3.7 21.1 13.5 12.7 8.2 9.7 2.1 .3 .1 3.4 186.5 Credit 1212-IN Preappraisal - - - 3.2 15.6 .1 - - - - - - 18.9 Appraisal - - - .1 39.2 - - - - - - - 89.3 Negotiation - - - - 9.3 - - - - - - - 9.3 Supervision - - - - 8.6 16.2 21.7 28.8 24.2 8.7 3.6 4.5 108.8 Other - - - .4 3.9 - - - - - - - 4.3 0 0 3.2 16.1 59.1 16.2 21.7 28.3 24.2 3.7 3.8 4.5 180.8 - v - MISSION DATA Loan 1592-IN Date No. of Specializations Performance (Mo./Yr.) Persons Represented Rating Trend Preappraisal 08-09/77 2 ERG FNA - - - Appraisal 01-02-78 2 x x - Supervision I 05/79 2 x x - 1 2 Supervision II 10-11/79 2 x - - 1 2 Supervision III 05/80 1 - - ECN - - Supervision IV 07/80 3 x x - 1 2 Supervision V 06-07/81 3 X X - 1 2 Supervision VI 01/82 1 - x - 1 2 St,pervision VII 04-05/82 1 x - - 1 2 Supervision VIII 11-12/82 2 x x - 2 2 Supervision IX 06-07/83 2 X X - 2 2 Supervision X 01-02/84 3 x - x 2 2 Supervision XI 07/84 1 - - x 2 2 Supervision XII 11-12/84 5 x x x 2 2 Completion 06-07/87 2 x x - - - SUPERVISION RATING I II III IV V VI VII VIII IX X XI XII Disbursement 1 1 X 1 3 3 3 2 2 2 3 X Estimated Cost 1 1 x 1 1 1 1 1 1 1 2 X Anticipated Completion 1 1 X 1 3 3 3 3 3 3 3 X Compliance (Loan Cov.) 1 1 x 1 1 1 1 1 1 1 1 X Project Finances 1 1 x 1 1 1 1 1 1 1 2 X Management 1 1 x 1 1 1 1 1 1 1 2 X Procurement 1 1 x 1 3 3 3 3 3 3 3 x Reporting 1 1 x 1 1 1 1 1 1 1 1 X x - Not available in Files. MISSION DATA Credit 1112-IN Date No. of Specidlizations Performance (Mo./Yr.) Persons Represented Rating Trend Preappraisal 02/80 1 ENG - - - - Appraisal 07/80 3 X FNA ECN - - Supervision I 06-07/81 3 X X - 1 1 Supervision II 01/82 1 x - - 1 1 Supervision III 04-05/82 1 X - - 1 2 Supervision IV 11-12/82 2 x x - x x Supervision V 06/07/83 2 X X - X X Supervision VI 01-02/84 3 X - X 2 2 Supervision VII 07/84 1 - - X 2 2 Superviaion VIII 11-12/84 5 x x x 2 2 Supervision IX 04-05/85 5 x x x 2 2 Completion 06-07/87 2 x x - vi - SUPERVISION RATING I II III IV V VI VII VIII IX Disbursement 3 3 3 X X 2 3 3 3 Estimated Cost 1 1 1 X X 1 2 2 2 Anticipated Completion 1 1 1 X X 1 2 2 2 Compliance (Loan Cov.) 1 1 1 X X 1 1 1 1 Project Finances 1 1 1 X X 1 2 2 2 Management 1 1 1 X X 1 2 2 2 Procurement 1 1 1 X X 3 3 3 3 Reporting 1 1 1 X X 1 1 1 1 x - Not available in Files. OTHER PROJECT DATA Borzower: Government of India (GOI) Executing Agencies: IPTD, HCL, HTL, and ITI - vii - PROJECT PERFORMANCE AUDIT REPORT INiJIA SEVENTH AND EIGHTH TELECC.MNICATIONS PROJECT6 (LOAN 1592-IN AND CREDIT 1112-IN) EVALUATION SUMMARY 1. The two lending operations (Loan 1592-IN and Credit 1112-IN) to the Indian telecommunications sector, were a continuation of Bank Group lending to the sector which started in 1962. In six previous lending oper- ations between 1962 and 1976 the Bank Group had ssade available US$488 mil- lion to the sector. Both Loan 1592-IN, and Cre6it 1112-IN, which were for US$120 million, and SDR 252.4 (US$314) million respectively, were made to the Government of India (GOI) for its Post and Telegraphs Department (IPTD) which was responsible for domestic telecommunications and postal services in India, and the three GOI-owned manufacturing companies, Indian Telephone Industries (ITI), Hindustan Cables Ltd. (HCL) and Hindustan Teleprinter Ltd. (HTL). (PPAM, paras. 1.01-1.02) 2. With 3.6 million direct exchange lines (DELs) the Indian domestic telecommunications service is large by world atandards, however, its tele- phone density of about 0.4 DELs per 100 population, is one of the lowest in Asia. Many areas of the country are without telephone service and there is an acute shortage of local, long distance, and telex facilities. Demand is presently a function of supply; because of a huge latent demand, waiting lists are not representative of unfulfilled demand. The quality of service in all categories is inadequate, and because of this public confidence in the system has been eroded. (PPAM, paras. 1.02-1.03). 3. The main causes of the inadequacies of the domestic telecommunica- tions system have been identified as (i) serious under investment; (ii) GOI's excessively self-reliant and public oriented industrial and techno- logical development policies; (iii) the refusal to allow imports to compete with domestic products; (iv) the long delays in obtaining import clearance; (iii) a centralized sectoral organization which is quite unsuitable for a large, commercially oriented, high technology sector (PPAM, para. 1.04). 4. GOI has not been unaware of the serious inadequacies of the sector and since 1985 has taken the steps towards improving the sector. Postal and telecommunications services have been separated; digital and optical- fiber technologies have been introduced; two new public telecommunications corporations have been established, one for operating and developing the Bombay/Delhi telecommunications systems, and the other for operating the international services; and tiLe manufacture of telecommunications equipment is being liberalized (PPAM, para. 1.05). 5 The objectives for the sector are now to (i) raise public confi- dence in the service; (ii) slow dowrL the rate of growth of unsatisfied - viii - demand; (iii) extend telecommunications to rural areas; (iv) introduce new service to business users; and (v) raise off-budget resources for the sec- tor. (PPAM, para. 1.06) 6. Since 1962, Bank Group Loans and Credits have provided most of the foreign exchange for the sector, either for the import of plant and equip- ment, or for financing raw material imports for the three principal manu- facturing companies. The Bank Group has also assisted in the improvement- which have been made in the orgarization and managerial procedures of IPTD, and in improving the efficiency of the manufacturing companies. On matters of higher policy, the Bank Group seems to have been unable to have an ef- fective dialogue with core GOI agencies on the fundamental issues affecting the sector (PPAM, para. 1.07). 7. The first approach to a seventh project for the Indian telecommun- ications sector was a Bri3f setting out the then current status of the sector (including domestic manufacturing), and the Bank Group's past assis- tance to the sector. The principal problems at that time were identified as (i) chronic widening of the gap between supply and .emand; (ii) extreme- ly poor quality of service in both local and long distance systems; (iii) a need to modernize and expand the telex service; (iv) need for organization- al improvements within IPTD and for improvement in operational activities. In addition, although not reported at the time, equipment deliveries fell short of targets, deliveries were made out of sequence, quality was not always satisfactory and some costs were high. It was envisaged that the Bank would have an important role in IPTD's next phase of expansion through financing imports of electronic equipment and raw materials, and through advice in helping GOI and IPTD to review earlier decisions on switching and telepri.iter production (PPAM, para. 2.01-2.06). 8. The Bank sought to make the procurement for the telecommunications sector more consistent with that of other Bank Group projects, however a proposal to finance IPTD procurement through International Competitive Bidding (ICB), irrespective of source, whether it was manufactured by a foreign supplier or in Indian factories was unacceptable to GOI. The proposal conflicted with GOI's policy of prohibiting the import of materi- als which could be produced in India. However, GOI agreed to, and wel- comed, a proposal that the manufacturing companies should be appraised along with IPTD; and after a satisfactory appraisal the Bank would finance imported equipment and the import requirements of the factorics under ICB. A review of the manufacturing companies' procurement practices for raw materials found them to be consistent with those required in India by the Bank Group under industrial import credits. The same review recommended that for raw materials, the past practice of disbursing against invoices at a predetermined percentage, was the most appripriate way to assure the proper end-use of items financed by the Bank, and to keep the administra- tive process simple. (PPAM, para. 2.08) 9. The appraisal of the project, which included a review of the oper- ations of the three domestic factories serving IPTD took place in Jan- uary/February 1978 and a Loan was approved in June 1978. The estimated - ix - total cost of the project was US$818.5 million, including a foreign ex- change component of US$132.9 million, of which the Bank would finance lla$120.0 million and GOI US$12.9 million. The project consisted of four subprojects, one each for IPTD, ITI, HCL, AND HTL. The project was de- signed to achieve the objectives of the FY79-83 Telecommunications Plan, which were to (a) exparl the availability and improve the quality of ser- vice outside the major centers; (b) reduce the number and waiting time for high priority applicants; (c) upgrade the quality of service by reducing * traffic congestion and improving transuis3ion performance; and (d) steadily increase and upgrade local telecommunications manufacturing capabilities in the three companies, ITI, HCL, HTL. (PPAM, paras. 2.09-2.10) 10. The IPTD subproject consisted of the provision of a wide range of local, long distance, and telex equipment, including the raw material con- tent of ITPD's purchases from the domestic factories; and in addition test- ing and laboratory equipment for IPTD's research and training centers. The subprojects of ITI, HCL, and HTL consisted of the provision of plant and equipment for (i) replacing obsolete plant, (ii) increasing output, and (iii) testing and measuring equipment for strengthening R&D work. (PPAM, paras. 2.11-2.12) 11. In May 1979 during the identification phase of the eighth project, the Bank had expressed to GOI and IPTD its reluctance to continue financing significant quantities of imported raw materials, for the local equipment and cable manufacturers. GOI and IPTD, however, took the view that it was too early to phase out that component of Eank financing, because it assured a steady flow of a very wide variety of raw materials to the factories. GOI and IPTD contended that a phase out of raw materials financing should take place in a ninth project. At this time, IPTD envisaged a Bank loan of US$120 million, including US$60 million for raw materials. (PPAM, para. 2.13) 12. During the preappraisal phase for the eighth project it was per- ceived that the choice of s>itching system could be a problem: IPTD had not taken any decision concerning the adoption of electronic switching, and the current thinking was to establish a nev factory for the man-"facture of a different type of crossbar switching, from that currently produced by ITI. Due to earlier experiences with the introduction of crossbar switch- ing into the network, there was a reluctance to make a premature move into the production of electronic exchange equipment, even though the problems seemed to have been resolved. For this reason GOI was considering setting up a new crossbar factory; which would allow IPTD time to gain experience with different systems before selecting a suitable type. While this aspect was important to GOI, Bank staff felt that the balance of advantage favored the production of electronic exchanges, that G6I was being over-conserva- tive, and the new crossbar factory should not be built. (PPAM, paras. 2.14-2.16) 13. GO! was asked to review its decision. At the same time the Bank decided to prepare for an eighth project on the same lines as the seventh project. The Bank's views were conveyed to GOI and IPTD in August 1979, - x - and thereafter an intense dialogue took place between the Bank and IPTD on the switching policy to be adopted. (PPAM, paras. 2.17-2.19) 14. In June 1980, the Bank offered to send an appraisal mission whose terms of reference would instruct the mission to demonstrate conclusively, that the proposed technology choice represented the least-cost approach for sector development, in which case the mission would appraise a sector loan of US$160-200 million. If, however, the technology choice appeared to be such, that higher-than-necessary costs would be incurred in the future development of the sector, the mission would instead appraise a specific IPTD project, which would include dirrct oquipment imports for IPTD, plant for factory modernization, but exclude any raw material imports. A foreign exchange component of US$80-90 million could be considered for Bank financ- ing. (PPAM, para. 2.20) 15. GOI accepted the offer, and on arrival in India in July 1980, the mission was informed that GOI had taken the decision to proceed quickly towards the adoption of electronic switching, and would call for bids for collaboration in the manufacture in India of electronic rural automatic exchanges, and electronic local switching. Initially, a factory with a capacity of 500,000 lines per year would be built, which would be followed by a second similar installation. In the interim period, pending the availability of local electronic switching equipment, GOI had decided to import supplies of crossbar and electronic equipment, and establish a new crossbar switching factory capable of eroducing annually 200,000 lines. (PPAM, para. 2.21) 16. The Bank accepted this policy, and considered 'he decision to increase crossbar production as an insurance policy to cover potential problems should there be slippage with the new electronic system manufac- turing in India. The Bank therefore decided to fully support the telecom- munications sector, including financing raw materials, and components for the existing factories, and the provision of three new factories. As in the seventh project, the eighth project consisted of four subprojects, one each for IPTD, ITI, HCL, and HTL, and represented a comprehensive sector approach. The estimated total cost of the four subprojects was US$1,619 million, including a foreign exchange component of US$314 million, which would be financed by IDA. The IDA Credit of SDR 252.4 (US$314) million was approved in March 1981. (PPAM, para. 2.22) 17. The IPTD subproject was a portion of IPTD's three year (FY81-83) program, and its objectives were consistent with those of the five-year plan. The subproject provided for an expansion of service to rural areas, including a significant increase in rural public call offices, and an over- all increase in local and long distance telephone switching capacity, which was one of the primary bottlenecks in sector expansion, and additions to the telex network. Quality of service was to be improved and it was ex- pected that the introduction of electronic switching would begin. The subproject included a substantial program for upgrading the telephone net- work to improve overall performance. The estimated total cost of the sub- - xi - project was US$1,493 million, including a foreign exchange component of US$243 million. (PPAM, para. 2.23-2.25) 18. Each of the manufacturing company subprojects was in two parts; the first part was the continuation of the modernization and upgrading of the factories commenced in the seventh project, and the second part was for the establishment of a new factory with modern plant. The three subproj- ects included plant and equipment to replace obsolete machinery, and the provision and installation of machinery and equipment, and the provision of licensing and know-how for the new factories. The estimated costs were as follows: Foreign Total Cost including Exchange --------- US$ millions--------- ITI 43.3 25.1 HCL 66.1 36.8 HTL 17.0 9.1 126.4 71.0 19. Although at appraisal no serious delays were envisaged at apprais- al for the implementation of the seventh project, the project was completed with a three-year and three-month delay. Early in thL implementation pro- cess both the deliveries of domestic supplies of switching equipment and imports of electronic switching began to fall behind schedule. ITI, the supplier of domestic switching equipment, was being seriously affected by power shortages, and IPTD was failing to place orders, primarily because of the delay by GOI deciding on the future switching policy. The situation deteriorated further as power failures continued and the factories were beset with industrial strikes and lock-outs. Implementation targets were not met and the quality of service deteriorated. (PPAM, paras. 3.01-3.04) 20. All three manufacturing company subprojects were completed with delays, both in the implementation of the physical aspects, and in the quality assurance programs which were being introduced to improve the qual- ity of output and efficiency of the factories. (PPAM, para. 3.05) 21. The staff appraisal report for the eighth project referred to the cdelays in the implementation of the ongoing seventh project; and to facili- tate timely decisions, and speed up the procurement process, it was decided to call for some of the equipment bids prior to the approval of the IDA Credit. In addition, some of the equipment would be procured through an extension of the contracts placed under the seventh project. Despite these arrangements and the absence of unusual risks associated with the project, the implementation of the eighth project was delayed two years and three months. (PPAM, para. 3.06) 22. In February 1982, IPTD and ITI representatives visited the Bank to determine *he manner in which a scaled down installation of the new ITI factory at Palghat could be achieved, given the high prices from the bid- - Xii - ders. It was decided to call for rebids from the three responsive bidders. However, in April 1982, it was reported that there was uncertainty whether GOI would go ahead with the implementation of Palghat. GOI was apparently, at that time, considering a bilateral arrangement with the Government of France (GOF) for the production of digital telephone switching equipment in India, and if the arrangement materialized the proposal to establish the digital trunk switching plant at Palghat would likely be dropped. In this event, GOI would propose an alternate use for the funds allocated to Palghat in the IDA Credit. IDA Projects staff concurred with this propo- sal. (PPAM, para. 3.07) 23. Following the July 1980 decision, GOI had asked for tenders for the establishment of an electronic switching factory with a production of 500,000 lines annually. The Bank had cleared the technical specifications on a non-committal basis, in anticipation of an eventual nii.th project. GOI had received the GOF proposal in December 1981. GOI accepted the pro- posal and signed a comprehensive collaboration agreement in July 1982. Subsequently, in August 1983, GOI cancelled the Palghat tender, and decided to expand the Indo-French Agreement to cover the manufacture of electronic equipment at Palghat. In a letter dated December 13, 1983, GOI proposed an alternate use for US$25.' million, included in the IDA Credit for Palghat and for the modernization of three ITI factories. After a delay of six months IDA decided that US$12.8 million of the US$25.1 million should be c ncelled, but US$12.3 million could be reallocated under specified condi- tions. Despite further representations from GOI, IDA refused to change the decision. (PPAM, paras. 3.08-3.12) 24, Implementatinn of the project suffered seriously; procurement delays were caused by (i) the delay by GOI in reaching a decision on switching technology, (ii) procedures within IPTD for the preparation of bidding documents and bid evaluation, and (iii) the need for IPTD to have clearance before contracts could be placed. The network upgrading program also suffered badly, reportedly primarily because of limitations on budge- tary resources. Implementation targets were not achieved, and quality of service, while showing improvement in some areas, remained unsatisfactory. (PPAM, paras. 3.13-3.16) 25. With the signing of the Indo-French collaboration agreement the ITI subproject virtually disappeared. The new HCL cable factory, which was completed with a delay of about one year, is now working smoothly. HCL also decided not to upgrade the plant for the production of paper core cables, the production of wh.ch was to be phased out. Due to protracted debate with the GOI bureaucracy on technology and manufacturing policy, the HTL electronic teleprinter factory was so delayed, that most of the pay- ments due on the contract became payable after the closing date of the Credit. The factory is now working well. (PPAM, para. 3.17) 26. The files show that, because of serious weakness in bidding/evalu- ation procedures, Bank/IDA to have been generally uneasy with IPTD's pro- curement practices. Bank/IDA was also concerned that delays in procurement might lead to procuring equipment of old design and perhaps at high prices. - xiii - Ambiguities in bidding documents and evaluations, and delays in awarding contracts caused questions to be raised by Suppliers, Executive Directors and Embassies. In discussions during the audit. DOE reported that procure- ment delays had occurred because IPTD had not followed GOI regulations; the projects had not been cleared with DOE, before being submitted to the Bank/IDA. It is not clear from the files when formal clearance to import was given prior to bidding; however, under more recent experience, Bank staff report that under the ninth project, DOT formally advised the Bank prior to negotiations that DOE t-learance had been obtained for the proejct imports. However, extensive delays have subsequently occurred. If DOE's contention is correct, Bank/IDA have been financing telecommunications projects which have not been cleared according to GOI regulations. Bank/IDA should ensure that DOE's clearance has been given before financing future projects. The Bank/IDA has been and continues to be, unable to resolve procurement delays. (PPAM, paras. 4.01-4.07) 27. Disbursements or both lending operations lagged considerably throughout the implementation period. Commitment fees on the two opera- tions totalled US$2.7 million. Both staff appraisal reports stated that the quality, and prices, of supplies from domestic factories were competi- tive with world standards, however reports and memoranda in the files pro- vide contradictory evidence to this statement. Given the decision to dis- burse Bank/IDA funds on a percentage basis against factory invoices, the failure by Bank/IDA to fully appraise the manufacturing companies was a fundamental error in both operations. (PPAM, paras. 5.01-5.04) 28. The performance of indigenous manufacturers was poor. The perfor- mance of foreign suppliers was, in general satisfactory. (PPAM, paras. 6.01-6.02) 29. Both lending operations, although designated as project loans, were appraised as sector loans. The appraisal costs for the IPTD subproj- ects were based on average costs for individual groupings (local switching, trunk switching, transmission etc) irrespective of type, size, and location of the individual installations. The subprojects mainly consisted of a large number of small, individual works. Since it was not feasible to provide the estimated costs of the individual installations at appraisal, and the actual costs of the installations were not available at IPTD head- quarters, the audit was unable to make objective comments on cost compari- sron. The two IPTD subprojects were parts of larger IPTD programs which were implemented over a seven year (FY79-85) period; IPTD only completed 71? of its expectEd capital expenditure for that period and oniy 52? of that part of the program which was outside the two IPTD subprojects. (PPAM, paras. 7.01-7.04) 30. The improvements to quality control assurance which were imple- mented in the manufacturing companies and IPTD, were made on the recommen- dations of a consultant who was provided at IDA expense. Subsequently, IDA agreed to reallocate US$0.5 million of the Credit to provide additional external technical assistance to help implement the quality assurance program for ITI. Other technical assistance was provided under the collab- - xiv - oration agreements for the new cable and electronic teleprinter factories. The Indo-French collaboration agreement provided for extensive technical assistance to IPTD on electronic systems. (PPAM, paras. 8.01 and 8.02) 31. Given the considerable delay experienced in implementing both projects, and particularly the failure to complete the network upgrading program, little improvement was shown in zhe quality of service during the implementation period of the projects. The ninth telecommunications proj- ect appraisal in January/February 1986 reported continued poor quality of service due to sub-standard equipment from domestic manufacturers, poor maintenance, lack of spare parts and tools, shortage of local and long distance facilities, and ineffective traffic management. (PPAM, para. 9.01) 32. Although IPTD's management structure remained unThanged through 1984, a number of institutional improvements were successfully completed in IPTD's internal organization. Staffing ratio, although excessively high, showed improvement. and further improvement is expected by 1990. However, procurement performances for both projects was unsatisfactory; significant delays occurred in finalizing and auditing IPTn's accounts; and IPTD's billing and collection performance deteriorated; in this respect the audi- tor has called for imediate action to make significant adjustments to IPTD's receivables account. Tariffs were maintained in real terms during the period 1979-1983, however, reportedly because of public complaints of poor quality of service, no tariff increases were made in 1984 and 1985. A substantial tariff increase was made in December 1986. (PPAM, paras. 10.01- 10.07) 33. Following a review of the findings and recommendations of a "Committee on Telecommunications", GOI took the first steps towards reform- ing the sector. However, achieving the overall needed reforms in the sec- tor will be a lengthy, and difficult process, because of the size of the sector, its heavy centralized organization, with deeply implanted GOI poli- cies, regulations and procedures, and different interests involved. (PPAM, pa-as, 10.08-10.10) 34. IPTD's earnings deteriorated over the implementation period of the projects mainly because of the high level of staff expenses, the delay in implementing the development program, the lack of improvement in the qual- ity of service, and the failure to make adequate tariff increases. Taking the postal deficits into account, IPTD's actual financing performance was lower than estimated at appraisal. There was a net transfer of funds from IPTD to GOI over the period FY79-85. Although affected by power outages and industrial action, the financial performance of the manufacturing com- panies was, in general, acceptable. (PPAM, paras. 11.01-11.05) 35. Bank/IDA performance was generally satisfactory. Relations with IPTD continued to be close, however, relations between Bank/IDA and core GOI Agencies were on an "arms-length" basis, and Bank/IDA was unable to have an effective dialogue with GOI on the fundamental issues plaguing the sector. Bank/IDA failure to fully appraise the manufacturing companies was - xv - a fundamental error. In hindsight it would seem that the IPTD subproject in the eighth project was too widespread, optimistic, and ambitious. Al- though supervision may have .een influenced by budgetary constraints, Bank/IDA field supervision was totally inadequate, however the workload at headquarters for procurement was heavy. Projects staff, omitted to explain to IPTD and ITI that it was normal IDA policy to cancel 'project savings' and accepted that an alternative use could be proposed for the unused Palghat and factory modernization funds. Bank/IDA showed flexibility in making justified reallocations of funds, and, in general dealt promptly with a large number of procurement matters. The improved quality assurance measures proposed by the Bank's consultant, brought about greater awareness of the need to improve the quality of domestically produced equipment. However, follow up of quality assurance by the Bank group was inadequate; there was virtually no supervision of the quality assurance program after July 1981. (PPAM 12.01-12.03) 36. The Loan and Credit provided substantial financial contributions towards the cost of additions to the domestic telecommunications network; for the upgrading of existing factories of the manufacturing companies, and for establishing new modern cable and electronic teleprinter plants. A number of organizational improvements were successfully achieved within IPTD, and improved quality assurance, and quality control programs, were implemented in the manufacturing companies and in IPTD. However, because the fundamental problems affecting the efficiency of the sector wer not addressed, both IPTD subprojects fell short of achieving their appraisal operational, and development expectations. With new investment and im- proved quality assurance, not only should the quantity Ed quality of the output from the factories be higher, but overall efficiency should improve, and enable the companies to withstand competition when liberalization takes hold. The collaboration agreements with foreign firms should stimulate the companies and open up new horizons. (PPAM, paras. 13.01-13.02) 37. Provided the equipment is of adequate quality, and is installed to operate alongside equipment, compatible in all aspects, and is adequately maintained, there should be no difficulty in sustaining the benefits from the new installations provided to IPTD under both projects. The sustaina- bility of the benefits from IPTD's institutional improvements should pre- sent no problem. Similarly, the benefits to the manufacturing companies from the new plant and equipment and improved quality assurance programs should easily be sustainable. (PPAM, para. 13.03) 38. The Bank has endeavored to address some specific issues through the ninth lending operation. However, progress has not been encouraging. There continues to be important sector and subsector issues which would need to be addressed if prjects are to be fully successful. The Bank's inability to facilitate change in these matters has mainly beea due to the absence of constructive dialogue between the Bank and responsible decision -akers in India. This lesson cannot continue to be ignored and there is ..eed of substantial dialogue between the Bank and GOI. The Bank's strategy for future lending to the sector should be formulated on the outcome of those discussions. (PPAM, para. 13.04-13.05) - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA SEVENTH AND EIGHTH TELECOMMUNICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) I. BACKGROUND 1.01 The large area of India, and its huge population, exceeding 800 million, widely dispersed throaghout the country, creates a need for a large and efficient telecommunications service. While successive govern- ments have recognized this need, and have seen the telecommunications sys- tem grow to 3.6 million direct exchange lines (DELs), there is still much more to be done to bring the service to an acceptable level. 1.02 Although there have been recent changes in the sectoral organiza- tions, the telecommunications sector remains government-owned. Up to the end of 1984, which included the period when most of the implementation of the projects under audit was carried out, the sector comprised: (i) The Indian Posts and Telegraphs Department (IPTD) within the Ministry of Communications (HOC), which operated the Domestic Telecommunications1/ and Postal Services; (ii) the Overseas Communications Service (OCS), a separate Government agency, also within the HOC, which operated the international service to non-adjacent countries; and (iii) the Telecommunications Manufacturing Industry, of which three major companies were the government-owned, Indian Telephone Industries (ITI), Hindustan Cables Limited (HOL) and Hindustan Teleprinters Limited (HTL), in addition, there were small-scale industries, some of which acted as sub-contractors to the major manufacturers, and others as direct suppliers to IPTD. 1.03 The domestic telecommunications system is comparatively large by world standards. However, the average telephone density is only about 0.4 DELs per 100 population, and is one of the lowest in Asia; Malaysia (6.3) PhLlippines (1.2), Thailand (1.1) Sri Lanka (0.7). Many areas of the coun- try are still without telephone service, and there is an acute shortage of facilities in both the local and long distance systems. Demand is present- ly a function of supply, and waiting lists are of no guide to unfulfilled demand, since there is a huge latent demand from prospective subscribers who, because of the long waiting period, which in some areas exceeds 3h years, do not make their inscriptions. The quality of service, while re- cently showing improvement in some aspects, is still inadequate in all categories. Due to equipment malfunction or system congestion, failure rates in local calls are high; similarly, because of poor maintenance, and 1/ Included service to adjacent countries. - 2 - imbalance between the local and long distance systems, subscriber trunk dialing (STD) failure rates are excessively high. Under these circum- stances public confidence in the system has, in recent years, beer. somewhat aroded. 1.04 The principal causes of the inadequacies in the domestic system have been identified as follows: (i) Serious underinvestment exacerbated by delayed decisions on plan allocations, and annual investment budgets; (ii) the Government of India (GOI) excessively self-reliant and public sector oriented industrial and technological development policies, which make IPTD's progress largely dependent on that of the three manufacturing companies, and particularly that of ITI. IPTD was obliged to accept all the output of the factories, priced on a cost-plus basis, even when it was of significantly inferior qual- ity, and delivered both with delay and out of sequence. Up to recently, there has been no internal competition, and imports have not been (and still are not) allowe,! to compete with domestic production, and long delays Ere experienced in obtaining import clearance; (iii) a centralized sectoral organization, with deeply embedded bureau- cratic regulations and procedures, quite unsuited to a large com- mercially-oriented high technology sector. Inadequate delegation of authority at the local level. Frustration of the many compe- tent and conscientious staft by low salaries, promotion by senior- ity, and lack of performance incentives. 1.0- GOI has not been unaware of the serious inadequacies of the tele- communications sector, and in 1981 appointed a "Committee of Telecommunica- tions" to review the operations and develonment of the sector, and make recommendations on the needed reforms. Following the review of the Commit- tee's findings, GOI has taken the first steps towards improving the sector. The postal and telecommunications services have been separated; digital and optical-fibei Lechnologies have been introduced; two new public telecommun- ications corporations have been set up (the first, to operate and develop the Bombay and Delhi systems, and the other, to operate and develop the international telecommunications services); and the manufacture of telecom- munications equipment is being liberalized. 1.06 As explained in the Staff Appraisal Report for the Ninth Telecommunications Project, the objectives for the sector are now to: (i) Raise public confidence by improving quality of service; (ii) slow down the rate of growth of unsatisfied demand by accelerating network expansion; because of the limited financial resources, the goal of eliminating or reducing the waiting lists has been sus- pended; - 3 - (iii) extend telecommunications to rural areas; (iv) introduce new services for business users; (v) raise off-budget resources through higher profits and the sale of bonds. 1.07 The World Bank Crcup has been &ssociated with the sector since 1962, and nine lending operations totalling US$1.145 million have been approved, including US$345 million for the Ninth Project, which is still in course of implementation. These loans/credits have provided most of the foreign exchange for the development of the sector, either for the import of finished plant and equipment, or for the financing of raw material im- ports for the three main manufacturing companies. The Bank Group has also assisted in the improvements which have been made from time-to-time in the organizational and management procedures or IPTD, and in improving the efficiency in the factorL_. of the manufacturing companies. On matters of higher policy, the Bank's record is mixed and the Bank seems to ),ave been unable to have an effective dialogue with core "GOI" agencies on tne funda- mental issues which have plagued the sector. II. THE PROJECTS 2.01 The projects under audit, the Seventh and Eighth Bank Group Projects in the Indian Telecommunications Sector were a continuation of previous Bank lending to the sector. The Seventh Telecommunications Project 2.02 The files show the first major Approach to a seventh project to be through a Sector Brief dated May 17, 1977, which reviewed, inter alia, previous Bank operations, the importance of the domestic industry to the sector, the sector problems, sector and project strategy, Bank role, and project issues. 2.03 In the previous six operations the Bank had provided US$368 mil- lion for the sector, principally for meeting IPTD's foreign exchange re- quirements for expansion &nd modernization. The Bank had financed direct imports of cables and equipment for expansion, and starting with the second operation, had reimbursed the foreign exchange costs of raw materials and components of the domestic factories used in supplying equipment and cables to IPTD. In addition, the Bank had endeavored to bring about organization- al and institutional improvements in IPTD, as well as supporting the design and research operaticns of IPTD, and in the industrial units. 2.04 The Brief also explained that the key aspect in maximizing the overall development of India's elecommunications sector, had been the con- solidation of indigenous manufacturing capacity, and associated research and development in the IPTD and in the manufacturing units. India, it contended, was able to design and manufacture most types of equipment (ex- cept the recently developed electronic exchanges and latest type transmis- sion systems) and cables required for its system development, though not in sufficient quantities. The benefits had been: (a) large savings in foreign exchange, while obtaining final product prices and quality, generally comparable with those in industrial countries; (b) additional employment; (c) spread of light engineering technology; (d) standardization of equipment; (e) close planning and programming relationships, between suppliers and IPTD, which had reduced costs, effort, and delivery periods; (f) lower stocks and assured supplies of spares and expansion components; (g) close collaboration in R&D; and - 5 - (h) expL,sion in the utilization of India's considerable human capabilities for sophisticated scientific and industrial work. Since the allocation of foreign exchange to the telecommunications sector had been the principal factor in restricting the size of investment, the need to expand and rely on the production of domestic industries became almost compulsory. For these reasons GOI and IPTD viewed local manufacture of telecommunications supplies as very important, and imports of telecom- munications equipment and cable were only permitted after a protracted and detailed scrutiny at several levels. 2.05 The principal problems of the sector at that time were stated to be: (a) a chronic widening of the gap between demand and supply, because of underprovision of facilities over the entire network due to financial constraints, and to other factors exogenous to IPTD or domestic industrial units; (b) extremely poor quality of service in both local and long distance systems: (c) need to modernize and expand the telex service; (d) absence of an organization within IPTD for traffic engineering and network management; and (e) a need for general institutional improvements over a wide range of operational activities. However, in addition, although not reported at the time equipment deliveries fell shurt of targets, sometimes deliveries were made out of sequence; quality was not always satisfactory and the costs of some items were high. 2.06 It was considered that the Bank would have an important role in IPTD's next expansion program through financing imports of electronic equipment, and raw materials to help maximize production in the domestic factories, and through advice in helping GOI and IPTD to review earlier decisions on the interim production of crossbar exchanges. The Bank role in the decisions on change of production of switching and teleprinters would be significant. though perhaps limited to informal participation and exchange of information of the experience in other countries (see para. 12.02). 2.07 The issues were conveyed to GI in a letter of July 1, 1977. In addition, the Bank informed GOI that it would like to explore alternative procurement arrangements which would make the telecommunications' projects more consistent with other Bank Group projects in India, and this could be done either by: - 6 - (1) Financing IPTD equipment procured through International Competitive Bidding (ICB) irrespective of supply, whether or not it was supplied by a foreign supplier or ar. Indian factory; or (2) appraising both IPTD, and the factories, and financing imported equipment, plus the import requirements cf the factories, compris- ing capital equipment and raw materials to the extent that these are procured under ICB, or for certain specialized items other appropriate international procurement. A project proposal was received from IPTD in July 1977 and this was preap- praised in August 1977. During that visit the mission was informed by GOI and IPTD that proposal (1) above would not be acceptable, as it conflicted with GOI's policy of prohibiting the import of material which can be pro- duced in India, and particularly when the price, delivery, and quality of deliveries from local factories was in line with international levels. Also, from a practical point of view, India, with its large investment in manufacturing facilities, and its commitment to providing employment to its people, could not take the chance of losing the contract to a foreign bid- der, who possibly was submitting a bid below cost to secure the markec. With regard to proposal (2) GOI, IPTD, and the company managements, wel- comed a Bank appraisal of factory operations, since they considered that such appraisal could only help operating efficiency. 2.08 A review of ITI's purchasing practices for raw materials and com- ponents showed them to be consistent with those required in India by the Bank Group under industrial import credits. Tender evaluation was thorough and it was clear that their motivation was to buy at the best price, re- gardless of country of rigin. It was also recommended that the Bank's past disbursement pract. e of disbursing against invoices at a pre-deter- mined percentage, which represented the average foreign exchange content (excluding propriety items) of the products supplied from each factory, was the most appropriate way to assure proper end-use of items financed by the Bank, and to keep the administrative process simple. 2.09 The appraisal of the project, which included a review of the oper- ations of the three domestic factories serving IPTD, took place from Janua)y 15 to February 11, 1978; there were no major issues, however, aris- ing from the factory reviews, it was agreed that all three manufacturing companies should introduce properly documented quality assurance programs. The project consisted of four subprojects, one each for IPTD, ITI, HCL, and HTL. Negotiations took place in May 1978 and a loan of US$120 million was approved on June 8, 1978. The estimated total cost of the overall project was US$818.5 million, including a foreign exchange component of US$132.9 million, of which US$120.0 million would be financed by the Bank, and US$12.9 million by GOI. The project was expected to be completed by September 30, 1981, and the closing date of the loan was fixed for March 31, 1982. 2.10 The overall Bank-financed project was designed to help achieve the objectives of the Telecommunications Plan which were: - 7 - (a) to expand the availability and quality of service outside the big urban centers of Delhi, Bombay, Calcutta, and Madras, to comple- ment GOI development policy of encouraging development in backward and rural areas, small towns and new growth centers. By 1983 it was expected that some form of telephone service would be extended to all towns with population greater than 5,000, and to some vil- lages with a ;opulation greater than 2,500 in the hilly and back- ward areas; (b) to reduce the number and waiting time of the high priority OYT2/ applicants; (c) to upgrade the quality of service by reducing traffic congestion and improving transmission performance, in both the local and long distance network; and (d) to steadily increase and upgrade local telecommunications manufac- turing capabilities in the three companies ITI, HCL and HTL. 2.11 The IPTD subproject; which in monetary terms amounted to 94Z of the project, was an identifiable portion of IPTD's three year (FY79-81) program, which in turn was part of the five year (FY79-83) Telecommunica- tions Plan. For comparison purposes, the estimated costs of the IPTD plan, program, and subproject were as follows: Total Cost Foreign Local ---------(US$ millions)---------- IPTD Five Year Plan (FY79-83) 2,682 600 2,082 IPTD Three Year Progr,.m (FY79-81) 1,527 326 1,2r, IPTD Subproject 772 110 E The subproject represented about 50Z of the total estimated IPTD tele- communications investment during the period FY79-81, and consisted of the following: (a) Provision and installation of about 340,000 lines of local tele- phone exchange equipment; (b) provision and installation of subscribers' cable and associated equipment which would permit the connection of about 260,000 new DELs; (c) provision and installation of about 7,500 long-distance public call offices in rural areas; 2/ OYT abbreviation for "own your telephone" and represents a scheme whereby potential subscribers receive priority status in obtaining a telephone in return for relatively large advance deposits (at appraisal--US$581). - 8 - (d) provision and installation of about 38,000 lines of trunk exchange equipment; (e) provision and installation of about 2,000 lines of electronic telex switching equipment; (f) provision and installation of coaxial cable line transmission equipment, cable pressurization equipment, microwave and UHF/VHF radio equipment and PCM cirrier systems to upgrade and extend the trunk and junction network; and (g) provision and utilization of testing and laboratory equipment for IPTD's Telecommunications Research Center, Training Center and Technical Development Circle. The total estimated cost of the IPTD subproject was US$771.8 including a foreign component of US$110 million, US$100 of which would be financed by the Bank, and US$10 million by GOI. The Bank loan included US$60 million for the foreign exchange component of purchases from the domestic fac- tories. 2.12 The subprojects of the three manufacturing companies consisted oft ITI Subproject (a) Provision and installation of production and tool room machines to replace obsolete machines, and to upgrade production facili- ties and output at the Bangalore and Naini factories; (b) :rovision and installation of modern testing and measuring equipment at the Bangalore, and Naini factories, to improve efficiency and quality of output; (c) provision and installation of equipment to update, and expand the micro-circuit laboratory at Bangalore; and (d) provision and installation of new computing facilities for im- proved management and production control at Bangalore. The total cost of the subproject was estimated at US$23.6 million, including a foreign exchange component of US$10.3 million, all of which woulu be financed by the Bank. HCL Subproject (a) Provision and installation of cable production machines, plant, and testing equipment, to replace obsolete machines and equip- ment to increase output of: (i) large size telephone cables from the Rupnarainpur factory by approximately 402; - 9 - (ii) small size jelly-filled distribution cable from the Hyderabad factory by approximately 1002; and (iii) small diaaeter coaxial cable form the Rupnarainpur factory by approximately 100?. (b) Provision of research and development equipment for work on op- tical fiber cable technology. The total cost of the subproject was estimated at US$19 mil- lion, including a foreign exchange component of US$10.4 mil- lion, of which US$7.5 million would be financed by the Bank. HTL Subproject (1) Provision and installation of production and tool room machines, to replace obsolete machines in the production and tool room units of the Madras factory; and (2) provision and installation of testing and measuring equipment to strengthen HTL's research and development capability. The total cost of the subprcject was estimated at US$4 million including a foreign exchange component of US$2.2 million which the Bank would finance. The Eighth Telecommunications Project 2.13 The first mention of an Eighth Telecommunications Project in the files, was in the Terms of Reference of a Bank supervision and identifica- tion mission to India in May 1979. During that mission, in discussions on an eighth lending operation, GOI and IPTD were informed of the Bank's re- luctance to continue financing significant quantities of imported raw ma- terials for the local telecommunications equipment and cable manufacturers in any future operations. GOI and IPTD, however. took the view that it was too early to commence phasing out that component of the Bank's financing; they considered such a phase out should commence at the time of the Ninth Telecommunications Project. Raw materials financing they contended, en- sured a steady flow of a very wide variety of raw materials to the fac- tories. IPTD expressed the wish to have the loan appraised in the fall of 1979, and approved by mid-1980, in order to carry on the raw materials imports without much of a gap, and to enable orders to be placed for addi- tional switching equipment, to provide continuity of delivery following the Sixth and Seventh Loan deliveries. At that time, IPTD envisaged an eighth loan to be as follows: US$ millions Direct imports of finished products 40 Raw materials for local facilities 60 Production equipment for factories 20 Total 120 - 10 - 2.14 During the mission Bank staff perceived that the choice of switch- ing system could be a problem. IPTD had not taken any decision concerning the adoption of electronic switching, and it did not appear inclined to do so in the near future. The current thinking at that time involved the establishment of a new factory, under negotiated terms for the manufacture of a different type of crossbar switching from that currently produced by ITI. 2.15 ITI had faced problems in the production of its crossbar system largely due to the high traffic level per line, and the repeat calling conditions existing in India, which was due in part to the low rate of growth and penetration. This had led to some disillusionment in relation to the system then in operation, even though the problems seemed to have been resolved; the system was working well in India, and in at least one country to which it had been supplied under Indian aid. 2.16 Resulting from the earlier experiences with the introduction of crossbar into the network, there was a reluctance to make a premature move into the production of electronic exchange equipment. For this reason consideration was being given by GOI to setting up a new crossbar factory producing a different system from that presently in production by ITI. Bank staff felt that GOI's decision was at a very advanced stage, and while reconsideration of the decision was desirable, it was unlikely that GOI would agree to a change at such a late stage, particularly since one of the main reasons for not proceeding with production of electronic exchange equipment at the time, was IPTD's desire to gain experience with different systems to help selection of a suitable type. Bank staff considered that while this aspect was important to GOI, the balance of advantage favored the production of Stored Program Control (SPC) electronic exchanges, and that GOI was being over conservative. A decision to produce a new crossbar system was considered unwise for the following reasons. (a) The cost/benefits and service advantages of electronic systems were such that they were being adopted as standard in most parts of the world; (b) Although small-scale productio- of electronic PABXs was understood to be in hand in one of ITI's subsidiary factories, ITI should also be producing electronic long distance and telex equipment. One electronic factory would provide the optimum solution for producing all types of electronic switching equipment; (c) A new electro-mechanical switching equipment factory would take longer to get into full production, and would involve higher capi- tal cost than an electronic equipment factory of the same capac- ity; (d) Training for production for a new electronic system would be as eacy as for a new crossbar system, and would provide valuable spin-off advantages to other electronic industries in India; - 11 - (e) The potential for export, and the development of a viable indus- try, for the equipment produced in the proposed new factory; would be reduced with probable early redundancy, due to obsolescence. 2.17 The views of the mission were supported in the Bank and it was decided to ask GOI to review its decision to set up the factory. At the same time, however, it was decided to prepare for an eighth lending opera- tion on the same lines as the seventh Project, i.e. (a) imports of equip- ment tc meet the gap between priority requirements and maximum production of the present factories, (b) include to the extent possible, increased production of current type of crossbar equipment; new production facilities in exiating factories to manufacture SPC Electronic PBXs, telex, and trunk exchanges, independent of the larger decision, PCH equipment, rural VHF systems; and (c) finance for raw materials of the factories to prevent disruption and to maximize current production. 2.18 It was considered that the type of project envisaged for the eighth lending operation would enable the Bank to maintain close contact with IPTD, and to help in making the technical production related, organi- zational, and other decisions, as well as to provide advice and finance to help factories maintain short-term production, and to set up production of a number of badly needed items. It was also considered that additional Bank input was needed for institution building, the reduction of network congestion, rural telephone penetration and policy, particularly tariff policy issues designed to maximize the efficient allocation and use of existing and new investment. 2.19 The Bank's views were conveyed in letters to IPTD and GOI on August 1-2, 1979. Thereafter an intense dialogue took place between the Bank and IPTD, in addition to the discussions within GOI, on the policy to be adopted for switching equipment. 2.20 In June 1980, the Bank informed GOI that it was prepared to send an appraisal mission whose terms of reference would instruct the mission to assess, whether the sector development and manufacturing plans were consis- tent with long term least-cost approach, for the provision of telecommuni- cations equipment and services in India. If the proposed technology choice, and service provision, could be demonstrated conclusively to repre- sent the least-cost approach for sector development, the mission would be instructed to appraise a sector loan of about US$160-200 million. If, however, technology choice, and/or service provision, appeared to be such, thr.t higher-than-necessary costs would be incurred in the future develop- ment of the sector, the mission would instead be instructed to appraise a specific IPTD project. Such a project would consist mainly of direct equipment imports, and would include some factory modernization, but would exclude the broader sector related raw materials component. Such a project would command a foreign exchange component of about US$80-90 million, which would be considered for Bank financing. - 12 - 2.21 GOI accepted the offer, and the mission was informed on arrival in Delhi in July 1980, that a decision had been taken by GOI to proceed quick- ly towards the adoption of electronic switching technology. GOI had de- cided: (a) To install only electronic switching equipment in the future for trunk and telex switching; (b) To call for bids for collaboration in the manufacture in India of an electronic switching system, and for consultancy in 'produc- tionizing' an Indian designed electronic rural automatic exchange, and a 100-2,000 line electronic PABX; (c) To proceed with the completion of specifications and call for bids possibly by January 1, 1981, for collaboration in the manufacture of an electronic local switching system in India. Initially a factory with a capacity of 500,000 lines per year would be built, which would be closely followed by a second similar installation. (d) During the interim period, pending the availability of regular supplies of the local electronic swi,ching, to import additional supplies of crossbar and electronic equipment and to quickly es- tablish a new facility at Rae Bareli to produce up to 200,000 lines of crossbar (electro-mechanical) equipment per year. 2.22 The Bank considered the above policy as acceptable, and the deci- sion to increase indigenous production capacity of electro-mechanical switching, was viewed as an insurance policy to cover potential problems should there be slippage, or severe technical problems, with the new elec- tronic system manufacturing in India. It was therefore decided to fully support the telecommunications sector, including the financing of raw ma- terials and components for the existing factories, and the provision of three new factories; an IDA Credit of SDA 252.4 (US$314) million was nego- tiated in February 1981, and approved in March 1981. The project, as in the seventh project, comprised four subprojects; one each for IPTD, ITI, HCL, HTL, and represented a comprehensive sector approach. The estimated total overall cost of the four subprojects was US$1,619 million, including a foreign exchange component of US$314 million, which would be financed by IDA. It was expected that the project would be completed by September 30, 1981; the closing date for the Credit was fixed for March 31, 1982. 2.23 The IPTD subproject was a portion of IPTD's three year (FY81-83) program, which was embodied in the five year (FY81-85) Telecommunications Plan; the latter had been developed from the previous Five Year Plan (FY79-83). The subproject represented about 722 of the total estimated IPTD telecommunications investrient during the period FY81-83. For comparison purposes the estimated costs of the IPTD plan, program and subproject were as follows: - 13 - Total Cost Foreign Local ---------US$ millions------ IPTD Five Year Plan (FY81-85) 4,285 n.a n.a IPTD Three Year Program (FY81-83) 2,060 444 1,616 IPTD Subproject 1,493 243 1,25U 2.24 The objectives of the IPTD subproject, so far as the network de- velopment was concerned, were consistent with those of the Five Year Plan, i.e. expansion of the service to the rural areas, a significant increase in rural public call offices, and an overall increase in telephone switching capacity, which was the primary bottleneck on sector expansion. During the project period it was hoped to make a concerted effort to improve the qual- ity of service, and it was expected that the introduction of electronic switching would begin. In parallel with, but mainly separate from the construction program, the IPTD subproject Included a program for upgrading the telephone network, to be implemented during the project period; this network upgrading was designed to improve overall performance in terms of frequency of fault conditions, duration of faults, quality of transmission and switching performance. Given the delays which were being experienced in the seventh project, the physical targets for FY81 through FY83 were, with the exception of long distance public call offices, revised downwards and new targets established for FY84 onwards. 2.25 The IPTD subproject had the following major physical features: (a) Provision and installation of about 700,000 lines of local tele- phone switching equipment; (b) provision and installation of about 3,700,000 pair kilometers of underground telephone cables; (c) provision and installation of about 630,000 direct exchange lines; (d) provision and installation of about 11,000 long distance public call offices; (e) provision and installation of about 1,600 telephone exchanges (mostly small rural automatic type); (f) provision and installation of about 40,000 automatic trunk switch- ing terminations; (g) provision and installation of about 6,200 telex subscriber's ser- vices; (h) provision and installation of about 12,000 telegraph offices; (i) provision and installation of computing equipment for the four metropolitan districts of Bombay, Delhi, Madras and Calcutta; - 14 - (j) provision and installation of plant, equipment and raw materials for the IFTD's workshops; (k) provision of testing and measuring equipment for the Telecommuni- cations Research Center and the Training and Technical and Development Circles of IPTD; (1) provision and installation of transmission equipment for trunks and junctions; and (m) provision and installation of plant and equipment for the network upgrading program. The estimated total cost of the IPTD subproject was US$1,493 million in- cluding a foreign exchange component of US$243 million, which IDA would finance, and which would include US$80 million for direct imports of equip- ment, and US$163 million to cover the foreign exchange costs of imported raw materials and components, included in the purchases by IPTD from the domestic factories. 2.26 The subprojects for ITI, HCL and HTL, were bLoadly defined and were part of their five-year plans; each subproject had two parts. The first part was a continuation of the modernization and upgrading programs which had been commenced in the seventh project, and would provide for maintaining, and modestly increasing production, improving quality and reliability, and improving the research and development facilities. The second part of each subproject provided for the establishment of a new factory with modern plant. The physical features of the respective sub- projects are given below: ITI Subproject (a) Provision and installation of testing and measuring equipment, and production and tool room machines to upgrade and modernize the existing Bangalore, Naini and Rae Bareli factories; and (b) provision and installation of equipment and machinery, and provision of licensing and know-how, for an electronic switch- ing factory at Palghat. The estimated total cost of the subproject was US$43.3 million including US$25.1 million foreign exchange which would be fi- nanced by IDA. The foreign exchange for the Palghat factory was estimated at US$12.8 million. HCL Subproject (a) Provision and installation of cable production machines, and plant and testing equipment, to replace obsolete machines, and increase production output at the existing factories at Rupnarainpur and Hyderabad; and - 15 - (b) provision and installation of machinery and equipment for a new cable manufacturing plant to be constructed at Hyderabad. The estimated total cost of the subproject was US$66.1 million, including US$36.8 million foreign exchange, which would be financed by IDA. HTL Subproject (a) Provision and installation of machines and equipment for ma- chine shop, electroplating line, heat treatment plant, and -ool room, and modernization of the inventory control of the stores of the existing factory in Madras; and (b) provision and installation of machines and equipment and provi- sion of licensing and know-how, for a new electronic teleprint- er factory at Hosur. The estimated total cost of the subproject was US$17 million, including US$9.1 million foreign exchange, which would be financed by IDA. - 16 - III. PROJECT IMPLEMENTATION Seventh Telecommunications Project 3.01 The January/February 1978 appraisal did not envisage any serious difficulties with the implementation of the IPTD subproject, although it was reported that some works of the project, notably electronic exchanges, which were new, would require special attention by IPTD. and careful moni- toring by the Bank, in order to achieve an installation date of April/June 1981. No problems were foreseen in implementing the factory subprojects. Each company had prepared a detailed implementation plan, and accommodation for the new plant was available. The project was completed by December 31, 1984 with a delay of 3 years and 3 months. 3.02 Given the constraints in the netwotk, any failure in the supply and quality of the switching equipment would have negative repercussions for achieving the objectives set at appraisal. GOI's policy of prohibiting the importation of materials which can be produced in India, left IPTD very much dependent on domestic production of switching equipment; under these circumstances supplies from the domestic factories, which represented 76Z of the local switching for the project, were crucial. 3.03 As early as May 1979, a supervision miss. n reported that not only was the domestic supply of switching equipment behind schedule, but imports of electronic switching were also falling behind because IPTD was failing to place the orders, even though the bids had been received. Serious shortfalls in the availability of switching equipment from ITI, were being caused by power shortages, which had been occurring since 1977. The reason for the failure of IPTD to place orders, was attributed at the time to the delay by GO in deciding the future switching policy. The equipment supply situation deteriorated further when production was hindered by industrial strikes and lockouts in ITI's factories from December 1980 through May 1981. With the shortage of equipment, the expansion of the telecommun- ications network had not proceeded in accordance with the forecasts. The project was due to be implemented over three years and completed by September 30, 1981; IPTD's achievements again;t the principal implementa- tion targets for the three year period FYs 79-8.. were as follows: Z Achieved DELs 71 Local switching capacity 64 TAX-trunk switching 50 Long distance public call offices (PCOs) 92 Telex capacity 37 Underground cable 76 Construction program expenditure 57 - 17 - Table 3.2 of the PCR shows that most of IPTD's targets for FY81 were even- tually completed with a delay of one to two years, with the most serious delay (more than two years) occurring in the installation of the trunk switching. 3.04 Most indicators, showed that the quality of service had deteri- orated; the following statistics for FY81 are indicative of unsatisfactory performance. ALL INDIA AVERAGES - FY81 Complaints/100 stations/month 57.3 Faults/100 stations/month 39.0 Avei:ge duration of faults/hours/month 6.7 Z Failure of local network calls/month 7.7 Z Failure of manual trunk calls/month 28.7 /a I Failure of STD calls (level 0, busy hour)/month 57.3 % Failure of telex calls/month 52.7 ja Excludes international calls. 3.05 The ITI, HCL, and HTL subprojects were completed with delay, and in the case of HCL, with modification; an amount of US$4.2 million included in the loan for HCL production machinery being cancelled reportedly, be- cause of delayed procurement. The implementation of the Quality Assistance programs, which had been agreed at negotiations were also delayed. In this respect, following a third review of factory operations in June/July 1981 the consultant's conclusions were as follows: (a) Quality Assurance. While IPTD had taken a positive step by ap- pointing a general manager for the customer quality organization, progress in quality assurance in the factories had, generally, been disappointing and previous target dates had not been re- spected. It was found necessary to establish revised target dates: ITI - June 1980 to October 1981 HCL - March 1980 to December 1981 HTL - June 1980 to December 1981 The consultant reported "until probably documented quality control procedures are implemented, and closely monitored by factory man- agement and P&T (IPTD), there will continue to be doubts in regard to product quality." (b) Factory Testin& Equipment. Evidence of some attention being given to the provision of proper testing equipment at the factories was reported. Despite improvements, a considerable amount of obsoles- cent testing equipment was still in use. In some cases, the type - 18 - of equipment to be purchased was still at the investigation stage. The consultant reported *until modern testing equipment is pro- vided at the factories, it will be necessary to rely to a large extent on the testing officers' ability to interpret results from obsolescent, and at times, hard-to-read testing equipment with subsequent risk to product quality.' (c) Factory Manufacturing and Assembly Processes. The provision of new plant had resulted in noticeable improvement in some manufac- turing processes. Replacement of obsolescent plant was progress- ing in all factories; and would result in improved productivity and product quality in the basic manufacturing shops. Assembly operations at the ITI and HTL factories were still labor-intensive and very little, ii any, improvement could be noticed. Retention of existing obsolescent assembly methods on equipment which still has a considerable production future would result in rising costs. As an example, the stated cost of a straight line telephone from ITI to IPTD was (excluding tax on finished product) approximately US$39. This price was high by world standards and could be re- duced considerably by a reasonably simple work study of the assem- bly lines. (d) R&D Activities. R&D was well established in the ITI complex. HCL had a R&D piogram which had recently been approved by the GOI. HTL had limited R&D facilities. IPTD and HTL were recommended to take an early decision on R&D work in the field of teleprinters. A Bank/IDA supervision mission of April/May 1982 reported progress being made in ITI, HCL, and HTL, on the implementation of the consultants recom- mendations of June/July 1981; some of the recommendations had been imple- mented and the remainder were in the process of being implemented. A fur- ther Bank/IDA mission of November/December 1982 confirmed that the three companies were implementing quality assurance and control measures, and IPTD was monitoring the factory procedures and output; however the mission considered that it would take some time for the measures to be seen in the improvement of the quality of the plant and equipment in the telecom- munications network. (To be effective both of these missions should have included an expert on factory production and management; the Bank/IDA staff did not have the expertise to give guidance, or make a judgement on the progress made in the factories.) Eighth Telecommunications Project 3.06 The Staff Appraisal Report (SAR) for the eighth project referred to the delays which were being experienced in the implementation of the ongoing seventh project, and in order to facilitate timely decisions it was proposed to call for some of the bids prior to the approval of the IDA Credit. This would apply to new computing equipment, eiectronic trunk switching, and switching for small rural exchanges. In a number of cases equipment would also tco procured by extending contracts placed under the seventh loan. Reportedly there were no unusual risks associated with the - 19 - project, however, the SAR did state that there could be delayed physical implementation due to unforeseen circumstances. The Credit was signed in March 1981, and as early as August 1981, a supervision mission reported delays in the delivery of equipment. The project was completed by December 31, 1985, after a delay of two years and three months; the delay of the seventh project was three years and three months; given the large widespread investment involved in these projects and the length of the delays, the economic loss to the Indian economy must have been very high. 3.07 In February 1982. representatives from IPTD and ITI visited the Bank to determine the manner in wh1ch they could proceed with the pro- curement of a scaled iown installation for the manufacture of digital trunk switching at Palghat, given the high prices submitted by the three respon- sive bidders. It was agreed that the three bidders would be invited to rebid against a reduced schedule of requirements. By May 1982, the factory building had been completed and the rebids had been received. However, during the interim the component had run into further difficulties. In April 1982, a mission reported that there was uncertainty about the imple- mentation of the Palghat installation as originally planned. GOI was at that time, apparently considering a bilateral arrangement with the French Government (GOF), for the production of digital telephone switching equip- ment in India, in collaboration with CIT-ALCATEL; and if the arrangement materialized the proposal to establish digital trunk exchange manufacture at Palghat would likely be dropped. GOI would then propose to IDA an al- ternate use for the funds allocated for Palghat; IDA Projects staff, in a letter of June 16, 1982 to IPTD concurred with this proposal. 3.08 Following its July 1980 decision (see para. 2.21). GOI, in March 1981, had asked for tenders for the establishment of an electronic switch- ing factory with a production capacity of 500,000 lines annually. The Bank had cleared the technical specifications on a non-committal basis, in anti- cipation of an eventual ninth project. Meanwhile, in December 1981, GOI had received a proposal from GOF for comprehensive collaboration, covering the transfer of know-how, and setting up production facilities for the CIT- ALCATEL's E103 system in a factory with a capacity of 500,000 lines annual- ly; .,&D collaboration between French CNET, and Indian TRC Research estab- lishments; the supply of 200,000 lines of E10B-type finished equipment to IPTD; and technical assistance from the French P&T, through its subsidiary SOFRECOM, in areas related to the digital switching systems. GOI accepted the proposal and signed the agreements on July 24, 1982. The location of the new factory would be at Gonda, in Uttar Pradesh. and was expected to have the rated capacity by 1988. Subsequently, GOI decided to award the factory, for which the Bank had cleared the specifications, also to CIT- ALCATEL; this second factory would be built at Bangalore (Karnataka). 3.09 Since the Indo-French agreement stipulated the feasibility of manufacturing digital trunk exchange equipment, as well as local exchange equipment, GOI, then began to reconsider the advantages and disadvantages of having a separate electronic digital trunk exchange factory with differ- ent technology at Palghat. ITI had, in the meantime, asked the bidders for Palghat for a further four months extension of bid validity to end-March - 20 - 1983. At the same time, ITI, and IPTD, informed IDA that, in case GOI cancelled Palghat in the forn envisaged in the Credit Agreement, they were discussing an alternate subproject to be submitted for IDA's approval. This understanding was accepted, and confirmed by IDA in a letter to ITI, dated January 1983. 3.10 In August 1983, GOI decided to cancel the Palghat tender and ex- pand the Indo-French agreement to cover the manufacture of TAX and PABX electronic equipment at Palghat, and accordingly in a letter to IDA dated August 2, 1983, inquired about the possibility of diverting funds earmarked for Palghat and for modernization at the Bangalore, Naini, and Rae Bareli factories, towards the procurement, on the ICB basis, of some of the world market items for the new Bangalore electronic switching factory under the Indo-French agreement; this would cut down the delay in establishing manu- facturing capacities. In a subsequent, Ministry of Finance letter dated December 13, 1983, GOI formally requested that US$25.1 million of the IDA Credit be reallocated for the procurement of goods and services for the electronic switching factory, the specifications for which had been cleared by the Bank and which was the subject of a global tender floated under ICB procedures. No reply was forthcoming from IDA, and in a second letter dated May 5, 1984, the Ministry of Finance asked for the matter to be given priority, and resolved quickly. IDA's position was communicated to 00I on June 5, 1984 in a letter to the Ministry of Finance. IDA decided that the Credit funds (US$12.8 million) for the Palghat factory should be cancelled. The decision was based upon the recognition that since, (i) GOI's decision to award the contract to CIT-ALCATEL precluded the participation of other firms under ICB, and (ii) supplementary financing for the Palghat factory would be provided from other sources, the Credit funds allocated to the factory would no longer be required for the purpose for which they were originally intended, and should therefore be cancelled. Such cancellation was in line with IDA policy on project "savings". 3.11 With regard to the US$12.3 million allocated for the modernization of v 'sting ITI factories at Bangalore, Naini, and Rae Bareli, in view of the ict that, unlike the Palghat factory component, the ITI factory up- grading and modernization component would no longer be carried out, IDA was prepared to consider a reallocation of the funds for the procurement of other goods and services provideL (i) the goods and services were within the scope of the project; (ii) they were specific, well-defined, and their financing could be justified on project grounds; and (iii) the funds as- signed to them could be disbursed by Credit closing date. 3.12 Further representations were made by GOI to IDA on June 29, 1984, on September 14, 1984, and during discussions at the 1984 Bank/Fund Annual General Meetings, but IDA refused to change its decision. 3.13 The implementation of the eighth project suffered seriously be- cause of delays in procurement; firstly, by the delay by GOI at reaching a decision on switching technology, secondly, by the procedures within IPTD for the preparation of bidding documents, and bid evaluation, and thirdly, by the need for IPTD to have the clearance from departments (DOE and DGTD) external to IPTD, before contracts could be placed. - 21 - 3.14 The network upgrading component slipped badly; one of the largest items in the program was the construction of ducts for main cables in the major areas, however only about 25% of this work had been completed by FY84. The target for the replacement of iron wire with copper drop wire was achieved, however other targets remained unfulfilled. Reportedly the program was delayed by limitations on budgetary resources. As a result of the near neglect of the network upgrading program, there was little or no improvement in the quality of local network performance over the project period. 3.15 The project was expected to be implemented over a three-year period and be completed by September 30, 1983. At the appraisal of the eighth project, the implementation targets for DELs, local switching capac- ity, and TAX, for the period FY81-83, which had been fixed at the appraisal of the seventh project were revised downwards. IPTD's actual achievements against the revised targets for the period were as follows: Z Achieved DELs 71 Local switching capacity 70 TAX-trunk switching 34 Telex capacity 41 Long distance PCOs 53 Table 3.2 of the PCR shows that most of the targets for FY83 were eventual- ly completed with a delay of one to two years. 3.16 Quality of service, however, while still unsatisfactory, showed some improvement. The principal statistics for FY81 and FY83 were as follows: All India Averages FY81 FY83 57.3 Complaints/100 stations/month 47.1 39.0 Faults/100 stations/month 36.2 6.7 Average duration of faults/hours/month 9.0 7.7 Z Failure of local network calls/month 5.3% 28.7 Z Failure manual trunk calls/month 26.92 /a 57.3 Z Failure STD calls (level 0, busy hour)/month 47.2% 52.7 Z Failure of telex calls/month 58.0% /a Excluding international calls. 3.17 The implementation performance of the manufacturing companies was as follows: (a) ITI Cubproject. With the signing of the Indo-French collaboration agreement the ITI subproject virtually disappeared; and only about - 22 - US$2.2 million of the Credit was used for equipment; US$12.8 mil- lion for the Palghat factory was cancelled, and the balance was reallocated, and used for the purchase of urgently needed under- ground cables. (b) HCL SubproJect. The new cable factory was completed, and initial production started in 1985, with a delay of about one year on the date given at appraisal. In the upgrading and modernization com- ponents of the subproject, HCL decided not to upgrade the plant for the production of paper core cables following a decision to phase out production. The audit showed the new factory at Hyderabad to be working smoothly, and reportedly, there were no problems with the collaboration agreement; production was satis- factory. (c) HTL Subproject. The electronic teleprinter factory component was delayed substantially; due to protracted debate within the GOI bureaucracy on technology and manufacturing policies, the collab- oration agreement was only concluded in May 1985, and therefore most of the payments under the contract became payable after the closing date of the Credit. The plant which was to have been located at Hosur, was finally located in HTL's complex at Madras; alternate use for the new Hosur building is under consideration. The audit showed the collaboration agreement to be worl-ing well; staff training is taking place both in India, and in France. Production started in March 1985, and 3,500 electronic eleprint- ers were assembled from kits in FY87; production is expected to increase to 11,000 units by 1990. - 23 - IV. PROCUREMENT 4.01 Reference has been made earlier in this report to the delays in project implementation; which were caused by the procurement practices of IPTD and GOL. This chapter discusses a few examples from the procurement experience during the implementation of the two projects. 4.02 The files indicate the Bank/IDA to have been generally uneasy with IPTD's procurement practices. An internal memo of April 5, 1984 stated: "...Since it has become abundantly apparent in recent months that IPTD has serious weaknesses in its bid- ding/evaluation procedures.....For example, the ambiguities in IPTD bid documents are clearly a major contributing factor to the inordinate time taken to evaluate bids." On October 3, 1984, and November 5, 1984, following IPTD's decision to consider a bid for coaxial equipment as non-responsive, after over two and a half years after bid opening, the Bank/IDA expressed its deep concern at the serious delays that were occurring in deciding on evaluation and award of tenders. 4.03 In September 1980, IPTD sent to the Bank bidding documents for computers; these were cleared in October 1§80. The documents had been prepared by GOI's DOE, the central procurement agency for all GOI computer systems. Bids were issued one yeat later in November 21, 1981 and the tenders were opened on January 25, 1982. The evaluation committee had made its final report on April 5, 1983. Some delay could be attributed to the nature, and complexity of the procurement, and the fact that the Evaluation Committee consisted of experts from six agencies in three cities. In July 1984, more than two years after bid opening, IPTD wrote to the Bank/IDA requesting agreement to award the contract to ICIM of India for an ICL computer at a total of US$4,094,760. The Bank/IDA requested IPTD to send the detailed evaluation report as the documentation sent was a short sum- mary and did not contain the information and data required for the Bank/IDA's review. IPTD's detailed report was received on October 9, 1984. The Bank/IDA never received an explanation for IPTD's fifteen months delay in communicating the recommendations to the Bank/IDA. A quote from a re- lated memo dated November 1, 1984 stated "...the history of this case is an indication of the malady that plagues handling of most procurement cases by IPTD..." 4.04 In a sector where technical development is rapid, the Bank/IDA was concerned that procurement delays might lead to procuring equipment of old design and perhaps at high prices. On March 12, 1984, HCL requested clear- ance for placing repeat orders for machines. The Bank's telexed reply stated, "Our review indicates that the original bids for these machines were invited over two years ago in early 1982, r - 24 - and the bids received in June and September 1982. In the period of over 18-21 months since then, machine designs would have improved and, if a new tender is announced, other suppliers zould also bid for similar machines at perhaps more competitive prices. We do not consider compatibility a factor justifying the large repeat order valued at over US$1.5 million equivalent as each machine is used independently and its working and output are not directly linked with other equivalent machines... We therefore suggest you invite fresh bids for the three nachines amending as necessary the techni- cal specification to ensure larger bidder participa- tion..." A similar reply on the same date was sent to IPTD concerning a repeat order for computerized traffic monitoring equipment. 4.05 However, the files indicate that it was not only the Bank/IDA who was concerned with the delays in procurement. The following is a quote from a tele received in the Bank on June 7, 1983 from a bidder for the (HTL) electronic teleprinter transfer of technology contract. "We would like to point out that we have answered to this call of tende% under World Bank regulations, two years ago. The Jecision for the successful tenderer is not yet taken, and the Indian authorities have asked the competitors to extend the validity of their offers up to the 31st July 1983. This is the third extension. This important delay in the final decision put us in a very difficult position about prices and production schedules..." In this case there was a fourth extension of the validity of bids until October 31, 1983, and only after considerable correspondence was IDA able to give clearance on January 9, 1984; because of these delays most payments became due after the closing date of the Credit. IDA complained to GOI about the inordinate delay by HTL in the evaluation of bids, and submission of the evaluation repcrt, and the further delay by GOI in making the award. The files show that IDA had received representations from Executive Directors, and from Suppliers, to which it could not reply. 4.06 Ambiguities in bidding documents and evaluations, and delays in making contract awards caused questions to be raised by Suppliers, and sometimes on their behalf, Executive Directors, and Embassies. These matters, which are time consuming, add to the already heavy work load of the Project, and Procurement Advisory Staff in the Bank; and because of the need for consultation within the Bank, cause further delays in the review- ing process, however above all they tend to raise doubts among Suppliers about Bank/IDA procurement policies. - 25 - 4.07 During the audit, the procurement delays were discussed with offi- cials of both DOE and IPTD (now DOT) in Delhi. DOE is required, under GOI regulations, to be satisfied that imported goods are not competing with domestic production; these enquiries often result in delay, even when IPTD has certified that the items of plant and equipment are not available in India. Delays are also caused when domestic firms erroneously claim to be able to supply the equipment in question. However, DOE informed the audit that IPTD had not been following GOI regulations; IPTD had not requested DOE's clearance of its development programs before sending them to the Bank/IDA. IPTD (DOT) officials, on the other hand, stated that such a requirement would cause an inordinate delay in the whole planning and development process. It is not clear from the files when formal clearance to improt was given prior to bidding, however, under mor recent experience Bank staff report that under the Ninth project, DOT finally advised the Bank prior to negotiation that DOE clearance had been obtained for the project imports. However, extensive procurement delays have subsequently occurred partly because additional DOE clearance is required prior to ministerial clearance of award and prior to placement of orders. Successive uperations have shown that the Bank/IDA has been, and continues to be, unable to resolve these procurement delays. In the Ninth operation, as a requirement, a large proportion of the bids were opened before Board presentation, yet the delays in awarding contracts have continued. - 26 - V. DISBURSEMENT 5.01 Loan 1592-IN. Because of procurement delays, loan disbursement lagged significantly throughout the implementation period; at appraisal it was expected that the loan would be fully disbursed by June 30, 1981, how- ever as of that date, disbursement was only 55Z complete. The closing date was extended twice, firstly to December 31, 1983, and then to June 30, 1984; finally disbursements continued until March 29, 1985, and an amount of US$7.2 million was cancelled. This amount related to variations in exchange rates after contracts had been placed, and delays in procurement by HCL. Commitment fees on the loan totalled US$1.2 million. 5.02 Credit 1112-IN. Delayed procurement, as in the case of Loan 1592-IN, was the main cause of the consistent lag in disbursing the Credit. At appraisal, disbursements were expected to be complete by December 31, 1984; at that date only 70Z of the Credit had been disbursed. The closing date of the Credit was extended to December 31, 1985, however, disbursements continued until August 13, 1986. SDR 12.4 million, of which SDR 10.3 million related to the Palghat factory, was cancelled. Commitment fees totalled SDR 0.9 (US$1.5) million. 5.03 The prices for domestic supplies from the three manufacturing companies were based on productinn costs plus an agreed mark-up as a profit margin. The ITI and HCL agreements with IPTD at that time, provided for profit margins on sales of 107; HTL's margin was about 1.5Z. In both opera- tions, Bank/IDA disbursement for IPTD purchases from the local factories was made against an agreed percentage of the invoiced prices to IPTD, up to the totai amounts included in the Loan and Credit for such purposes, which were US$60 million and US$163 million respectively. The percentages to be disbursed on invoiced prices were: Loan 1592-IN Credit 1112-IN ITI 25Z 24Z HCL 361 40Z HTL 6Z 6Z Both appraisal reports stated that the quality and prices being paid by IPTD for supplies from the domestic suppliers were competitive by world standards; however reports and memoranda in the files provide contradictory evidence to this statement. Some pertinent comments in the files are given below on the aspects of quality, and price of supplies from the manu- facturing companies. Quality (i) One of the contributing causes of the problems of IPTD's poor network and quality of service has repeatedly been identified as the poor quality of supplies coming out of the domestic factories; - 27 - (ii) In the second (October 1979) review of telecommunications factory operations, the consultant reported: mIt was apparent from discussions with the DOT (IPTD) and ITI, that one of the inhibiting factors in attaining a satis- factory quality level of switching and transmission equip- ment, is the inconsistent and low quality level of purchased electronic components of local manufacture, and the subse- quent need for screening with its attendant risks., *The P&T (IPTD) and factory managements must make concerted and continuous efforts to ensure that the quality and relia- bility of locally produced components (including special raw materials such as copper clad laminate for PCBs) is upgraded and maintained at a specified quality level'. "...and until such time as the local component industry can clearly demon- strate its competence to manufacture ir. a consistently accep- table quality level there is no real alternative other than to import from proven foreign manufacturers.' Prices (i) In the third (June/July 1981) review of telecommunications factory operations the ccnsultant reported on the high cost, by world standards, of a straight line telephone from ITI (para. 3.05). (ii) A sector report of March 14, 1984, while acknowledging that domes- tic manifacturing industries may have been more competitive sever- al years ago, before the widespread application in the developed countries of electronic technology, stated, "In addition to the quality problem, domestic output largely consists of equipment, embodying old technologies, the prices of which significantly exceed those which could be (and are) obtained overseas by a large purchaser such as India, for modern equipment lines. In the case of crossbar exchanges, and telephone instruments, the purchase prices paid by the TB (Telecommunications Branch) apparently ex- ceed current international prices by as much as 75%-150%, an as- yet-to-be-determined proportion of this differential is due to customs duties, other taxes, and overvaluation of the rupee, but a considerable proportion is probably not. Costs of Strowger ex- changes also appear high, but costs in this field are hard to compare as the technology is essentially obsolete and is rapidly disappearing elsewhere; however the per-line cost to the TB is twice the current FOB cost to India of French digital electronic exchanges. More detailed, but slightly dated information on cable production, indicates that even after deducting duties on materi- als and taxes on output, and shadow pricing labor, domestically produced cables may cost 75% more than international CIF quota- tions..." - 28 - 5.04 The purchasing procedures of the manufacturing companies for their raw material: and components were found satisfactory at the preappraisal stage of the seventh project (para. 2.08). However, the review of factory operations, which was made at the appraisal stage, and followed by two subsequent reviews, was not an appraisal of the manufacturing companies; the available information indicates that insufficient attention was given at appraisal to the important aspects of factory costs and prices and par- ticularly, the relation between factory prices and international prices. Given the decision to disburse Bank/IDA funds on a percentage basis against factory invoices, the failure to fully appraise the manufacturing companies was a fundamental error in both operations. - 29 - VI. PERFORMANCE OF CONTRACTORS AND SUPPLIERS 6.01 The unsatisfactory performance of indigenous manufacturers was one of the principal reasons for delays in project implementation. Not only did deliveries fall short of targets because of power failures, and indus- trial disputes, but supplies were delivered out of sequence and with un- satisfactory quality. The new form of contract introduced by GOI from April 1, 1986, provided penalties for late delivery, for delivery out of sequence, and for poor quality. 6.02 The performance of foreign suppliers was, in general, satis- factory. In the Seventh project, a supplier delivered defective machinery which was subsequently corrected; in the Eighth project a contractor failed to deliver within the scheduled time, and was granted an extension. - 30 - VII. PROJECT AND PROGRAM COSTS 7.01 Paragraph 3.10 and Annex 3 of the PCR provide tables, compiled from IPTD information, showing the actual overall expenditure of the two projects incurred under broad expenditure headings, and the corresponding amounts estimated during appraisal. The PCR gives the principal reasons for the differences in actual and estimated figures. 7.02 Both lending operations, although designated as project loans, were geographically so extensive and large, that in reality, they were sec- tor loans, and, so far as IPTD was concerned, were appraised as such. The IPTD subprojects in both operations, mainly consisted of a large number of small, individual works. The appraisal costs were estimated for individual groupings (local switching, trunk switching, transmission, etc.) on overall average cost for local and imported equipment, irrespective of type, size, and location of the individual installation. Since it was not feasible to provide the estimated cost of individual installations at appraisal and the actual costs of the installations were not available at IPTD headquarters, the audit is unable to make any objective comments on cost comparisons of individual components or parcels of components. 7.03 The audit was informed by IPTD that continuous comparisons are now being made between domestic factory prices and international prices for similar equipment. Following an investigation into factory costs and prices, by the Bureau of Indian Costs and Prices (BICP) a new form of con- tract was introduced by GOI from April 1986 for purchases by DOT from the domestic manufacturers. 7.04 IPTD's overall capital program for the period FY79-85 was esti- mated to cost Rs 44,037 million, which included Rs 20,640 million for the two Bank Group financed projects. Annex 4, page 3, of the PCR indicates that the total expenditure on the overall program during the same period was only Rs 31,165 million or 71Z of the amount forecast. However, when the actual expenditure of Rs 19,081 million for the two Bank Group projects is extracted, IPTD is shown to have only executed 522 of its expected capi- tal expenditure program for works outside those projects; this represented a serious shortfall in investment in the network. - 31 - VIII. TEChNICAL ASSISTANCE 8.01 As part of the appraisal of the seventh project, the Bank financed a consultant to review the factory operations of the three manufacturing companies, ITI, HCL and HTL and the quality assurance and quality control arrangements within IPTD. Following his recommendations, programs for improved quality assurance and quality control were drawn up for the fac- tories and also for IPTD. To assist in the implementation of these mea- sures. ITI requested the assistance of an expatriate consultant in product engineering, tool design, R&D in hybrid micro-circuits and LSI facilities; the Bank agreed to reallocate US$0.5 million of the loan to cover the re- lated expense. To assist in their programs, particularly in staff train- ing, HCL called Dn the National Institute of Training and Industrial Engineering (NITIE; and the Indian Standards Institute; and HTL called in a local Quality Standards Institution for a similar role. By the end of 1982 Bank staff reported progress in the implementation of improved quality assurance and control, both in the factories, and in IPTD; the latter hav- ing established a Quality Assurance Wing which was beginning to have influ- ence on material purchases, and on the quality assurance procedures in all three factories. 8.02 During the implementation of the eighth project, foreign technical assistance was made available to HCL through a collaboration agreement for the new cable factory at Hyderabad, and to HTL under a similar agreement for a new electronic teleprinter factory at Hosur; unfortunately, because of the delay in awarding the contract, the technical assistance to HTL was only provided after the Credit had been closed. A collaboration agreement for the manufacture of digital trunk switching at Palghat was included in the project, however this component was cancelled when GOI decided to use the Indo-French agreement for the manufacture of trunk switching. The Indo-French agreement provided for the transfer of know-how for the CIT- ALCATEL, E10B electronic switching system; technical assistance from French P&T through SOFRECOM, in areas of network planning, software adoption, and management; and R&D collaboration between French CNET and India TRC Research establishment. The technical assistance, provided in the Bank/IDA financed projects, and particularly in the Indo-French Agreement, has brought substantial benefits to the Indian telecommunications sector, and it will have a significant impact on the future development of the sector. - 32 - IX. OPERATIONS 9.01 Given the considerable delay in implementing both projects, and particularly the failure to complete the network upgrading program, signif- icant improvement in IPTD's operations could hardly be expected even by the revised completion date of the eighth project--December 31, 1985. This was confirmed by the appraisal mission for the ninth telecommunications project in January/February 1986. At that time, the mission reported continued poor telephone density, inadequacy in quality of service, particularly in failure rates of local inter-exchange calls, due to er!uipment malfunction or system congestion. The reasons for the poor quality of service were given as, (i) sub-standard equipment from the domestic manufacturers, (ii) poor maintenance, (iii) lack of spare parts and tools, (iv) shortage of local, and long distance facilities, and (v) ineffective traffic manage- ment. In discussions during the audit, the view was expressed by IPTD officials that perhaps too much emphasis may have been given to expansion, at the cost of maintenance, and while quality assurance and quality control improvements are having a positive effect on the quality of factory output, the system is still suffering from equipment malfunction from the installa- tion of past poor quality equipment; in addition there is a continued shortage of spares. During the audit, IPTD officials presented selected fault statistics for FY88 for the four metropolitan centers which showed eistinct improvement on the targets prepared during the 1986 appraisal, however, considerable further improvement will still be necessary to bring service to acceptable levels. - 33 - X. INSTITUTIONAL PERFORMANCE 10.01 During negotiations of Loan 1592-IN and Credit 1112-IN, agreements were reached between GOI and the Bank/IDA for the implementation of insti- tutional improvements, including a strengthening of IPTD's Economic Research Cell, and a widening of its duties; the establishment of a Materials Management Group;, submission of IPTD's audited accounts; improv- ing quality assurance procedures in the manufacturing companies, and in IPTD, and the extension of IPTD's management information system, to include a series of performance indicators for measuring improvement in quality of service. These measures were all implemented, although in some cases with delay. Apart from minor organizatiotal changes, IPTD's management struc- ture remained unchanged through Decembe, 31, 1984. Some pertinent institu- tional aspects are discussed below. Staffing 10.02 IPTD's staffing ratios, although excessively high, showed reduc- tion from 178 per 1000 DELs in 1978 to 96 per 1000 DELs in 1986. GOI has imposed a freeze on recruitment, and with extensive staff retraining and upgrading, it is hoped to achieve a target of 75 per 1000 DELs by 1990. Procurement 10.03 From the perspective of Bank/IDA, the overall procurement perfor- mance for both projects was unsatisfactory. Audit 10.04 IPTD maintained two sets of accounts, a conventional system of cash accounts for reporting to the Government, and a commercial system. Both systems are subject to audit by the Controller and Auditor General. The Loan/Credit Agreements required IPTD to submit provisional accounts to the Bank Group within four months after the close of the fiscal 7ear, and the audited accounts within a reasonable time thereafter. Provisional accounts have generally been submitted on time, although there have been some delays. Significant delays have, however, occurred in finalizing the accounts, and in their audit, and the audited accounts for FY83, FY84, and FY85, were received almost two years after the end of the fiscal year. Under the ninth loan, it was agreed that provisional accounts would be submitted to the Bank within six months of the end of the fiscal year; finalized accounts would be submitted when they are sent for audit; audit reports would be received in the Bank no later than nine months after the close of the fiscal year. Billing and Collection 10.05 The PCR accurately sets out the status of IPTD's receivables posi- tion, however since FY85 there has been further deterioration. During the audit, the high receivables balance was discussed with DOT's Deputy - 34. - Director General (Finance); he confirmed that DOT had been maintaining a strict disconnection policy, and the reason for the high ratio of receiv- ables was that the receivables balance included irrecoverable amourts which needed to be written-off, and for which it would be necessary to give an explanation to GOI's Committee of Accounts. However, on leavin3 Delhi, the audit was handed a copy of the FY87 audited accounts, and it was observed that the Director of Audit had requested immediate action to resolve (i) a difference of Rs 97 million between DOT's book figures of accounts receiv- ables, and the figures supplied by district accountants, and (ii) an amount of Rs 75 million, which had been realized by the Post Office on account of bills, and had not been adjusted through the remittance account. Clarifi- cation would also be needed for the reduction in the reserve for bad and doubtful debts in FY87, when the book figure of receivables increased by 17% in that year. Only when these matters are clar4fied would it be possi- ble to make any judgement on the level of DOT's receivables. Tariffs 10.06 The objectives of IPTD's tariff policy were (i) to earn a reason- able rate of return and maintain a high self-financing ratio in line with Bank/IDA covenants, (ii) given the scarcity of supply, constrain demand for new connections, (iii) maintain low rates in the rural regions, and (iv) encourage efficient utilization of capacity. In line with this policy, significant advance refundable deposits (OYT) were demanded for priority in the allocation of new lines; higher rates were charged for calls above specific bi-monthly limits; DELs rentals were varied upwards with the in- creasing size of the exchange area; and long distance charges were based on distance and time of day. 10.07 From 1979 through 1983 IPTD made several tariff increases, (in- cluding substantially raising the priority (0YT) deposit) which maintained tariffs in real terms during that period. However, reportedly because of complaints of poor qualit ' of service, no tariff increases were made in 1984 and 1985. A substantial increase was made in December 1986. Sectoral Reform 10.08 One of the main underlying causes of the shortcomings in the Indian telecommunications sector has been IPTD's institutional and organi- zational structure, which is not suitable for the operation and development of a large commercially oriented sector. Following a review of the find- ings and recommendations of the "Committee on Telecommunications", GOI took the first steps towards reform. The Postal and Telecommunications Services were separated as from January 1, 1985, and a new Department of Telecommun- ications (DOT) was formed within the Ministry of Communications (MOC). As from April 1, 1986, two public corporations were established, the Mahanagar Telephone Nigam Ltd. (MTNL) to operate, and develop the Bombay and Delhi networks, and Videsh Sanchar Nigam (VSN) to take over international opera- tions beyond the adjacent countries. Internal telecommunications (includ- ing those to adjacent countries), outside the Bombay and Delhi areas, will be operated and developed by DOT. After these changes, it is hoped that - 35 - within the sector institutions there will be greater delegation of author- ity to the field units, which should result in improved investment planning and budgeting, and better operations and development; there was evidence to the audit that wider delegation is beginning to take place. 10.09 Reform has not only been limited to the Institutions; to promote competition among the manufacturers supplying the sector, and to provide greater reliability of supply, GOI has decided to develop multiple sources of supply of telecommunications equipment. In March 1984, it was decided to allow the private sector to manufacture subscriber terminal equipment (telephone instruments, PABXs, and teleprinters), and telecommunication cables, and to take up to 49% equity in joint ventures with Central/State Governments, to manufacture switching and transmission equipment. Licenses have been granted to a number of domestic private firms to produce tele- phone instruments, automatic switching equipment having capacities up to 2000 lines; and small size cables. Foreign investment is not prohibited in the sector, and several foreign firms are believed to be reviewing the possibility of manufacturing in India. 10.10, Achieving the overall needed reforms in the sector will be a lengthy, and difficult process, because of the size of the sector, its heavy centralized organization with deeply implanted GOI policies, regulations and procedures, and the different interests involved. - 36 - XI. FINANCIAL PERFORMANCE 11.01 The PCR correctly describes the earnings performance and financial position of IPTD. The high level of staff expenses, the delay in imple- menting the development program, the lack of improvement in the quality of service, and the failure to maintain tariffs in real terms, all contributed to the deterioration in IPTD's earnings performance. IPTD's Self-Financing Performance 11.02 The PCR (para. 5.6) gives IPTD's self-financing ratio for telecom- munications as 84Z of capital expenditures for the period FY79-85, however, this ratio does not take into account the postal deficits which were fi- nanced from telecommunications surpluses over that period. Taking the deficits into account, the self-financing ratio was only 542. During the appraisals of the seventh and eighth projects, it was estimated that IPTD would have self-financing ratios, after postal deficits, of 69% and 65Z respectively. Resource Transfers from IPTD to GOI 11.03 Using the figures in the financial tables of the PCR, and the staff appraisal report for the ninth project, it is estimated that over the period FY79-85, excluding customs duties paid by IPTD, but including the postal deficits financed from telecommunications surpluses, the inflow and outflow of funds between GOI and IPTD, were approximately in balance, at about Rs 9.7 billion. However, customs duties paid by IPTD over that period, were not less than Rs 2.5 billion; there was therefore a net trans- fer of resources from IPTD to GOI, equivalent to not less than 82 of IPTD's capital expenditure during the period. The Manufacturing Companies (ITI, HCL, HTL) 11.04 Although a general review of the finances of the three companies took place at both appraisals, a detailed financial appraisal was not car- ried out. At the appraisal of the eighth project, an evaluation of the past financial performance of the companies made by the Bureau of Public Enterprise (BPE), in the Ministry of Finance was found to be acceptable. 11.05 The financial performance of the thr.e companies varied over the period FY79-85, however it was generally found to be acceptable. The oper- ating results of the companies were affected to different degrees, by power outages, and industrial action; in particular, in FY81 IT1 was shut down for more than six months because of strikes. HTL's profits declined sig- nificantly in FY83, however, this was corrected with price increases, and profits were substantially better in FY34. - 37 - XII. BANK/IDA PERFORMANCE 12.01 During the appraisal and implementation phases of the two proj- ects, the past close relations between Bank/IDA and IPTD were continued and the Bank/IDA performance was, in general, satisfactory. While the main role of the Bank/IDA was to provide badly needed foreign exchange for the expansion of the telecommunications network, Bank/IDA was mainly respons- ible for identifying and pushing for the organizational improvements which took place during the project implementation phase within IPTD; these in- cluded, the extension of the management information system through the refinement of monitoring indicators, upgrading of materials management, and the development of an Economic Study Cell. In addition, the Bank/IDA was instrumental in providing funds for (i) upgrading factory plants; (ii) new cable and electronic teleprinter factories; and (iii) identifying and im- proving the material quality assurance and quality control measures in the manufacturing companies. 12.02 Despite the Bank Group's heavy financial involvement in the sec- tor, the Bank/IDA's relationship with core GOI Agencies, where higher level policy decisions are taken, appears to have been on an "ams-length" basis and results were mixed. It seems Bank/IDA were not able to have in these projects, and in past projects, an effective dialogue with GOI on the issues which have plagued the sector. On the fundamental policy issue of the introduction of electronic technology, Bank/IDA advice, which, as the files show, was forcibly stated, appears to have strongly reinforced progressive views, and helped establish policy. Strong Bank opposition to the establishment of the last crossbar factory at Rae Bareli, unfortunately went unheeded. Complaints to high level GOI officials on the consistent delays in procurement, which have their origin in GOI policies, regula- tions, and procedures, also yielded no result. 12.03 The undermentioned are some general comments on Bank/IDA perfor- mance on specific aspects of the two projects: (i) The Bank/IDA failed to have addressed the fundamental issues affecting the sector; (ii) The failure on the part of the Bank/IDA to carry out full appraisals of the individual manufacturing companies were funda- mental mistakes in both operations. Since the disbursement of Bank/IDA funds for raw materials was to be made on factory prices, insufficient attention was given to the quality end price aspects of factory output; (iii) For the eighth lending operation, IPTD. in May 1979 envisaged a loan of US$120 million; the Bank, in June 1980, offered a sector loan of US$160-200 million; the final Credit was made in March 1981 for US$314 million. At the time of the appraisal of the project, significant delays were already occurring in the seventh operation and also in the remainder of IPTD's program. Given the - 38 - delay, of 2 years 3 months, which was experienced in the implemen- tation of the eighth project, and the fact that, during the period 1979-85, IPTD only completed 712 of its overall capital expendi- ture program and 52Z of the capital expenditure outside the Bank/IDA financed projects, in hindsight, it would seem that the IPTD subproject in the eighth project was too widespread, opti- mistic and ambitious; and it may have been preferable to have had a smaller project enabling greater impact to be brought on lim- ited, but specifically defined, areas; (iv) The PCR correctly and adequately describes the Bank/IDA perfor- mance on field supcrvision. Although supervision may have been influenced by budgetary constraints, given the size and scope of the projects, Bank/IDA supervision was totally inadequate, and it is quite understandable that, in discussions during the audit, IPTD staff should express the opinion that Bank/IDA supervision was not necessary. The figures in the PCR however, only give one aspect of supervision. Total supervision figures show that field work represented only 41, and 212 respectively, of total supervision of the seventh and eighth projects and the remaining time (42, and 86 staff weeks respectively) was spent mainly on procurement work at Headquarters; the project files substantiate the heavy procurement work, particularly on the eighth project. Bank staff have suggested that better supervision time allocated to the two projects would then probably have been greater, and resolving IPTD procurement problems would not have detracted from the time available for supervision of the manufacturing projecL. (v) In letters to IPTD on June 16, 1982 and ITI on January 14, 1983, IDA projects staff omitted to explain that it was normal IDA policy to cancel "project savings", and instead accepted that ITI should propose an alternative use for funds, which had been included in the Credit for the ITI Palghat factory and other factory modernization components. This was unfortunate because subsequently, after review, IDA management, against the repeated representations of GOI, decided to cancel the amount which was included in the Credit for Palghat. The files indicate a delay of almost six months by IDA in replying to the Financial Secretary's letter of December 13, 1983 on this matter. (vi) Bank/IDA showed flexibility in making justified reallo;ations of funds in the Loan and Credit to meet the needs of the benefici- aries; (vii) Bank/IDA, in general, dealt promptly with a multitude of procure- ment matters which were often difficult; the audit found only one letter complaining of delay. (viii) By proposing improved Quality Assurance programs in the manufac- turing companies, and in IPTD, the Bank laid a foundation for improved quality of output and efficiency in the factories, ano - 39 - also brought greater awareness to IPTD of the need to improve the quality of domestically produced equipment. However, follow up of quality assurance by the Bank Group was inadequate; there was virtually no supervision of the quality assurance program after July 1981. - 40 - XIII. CONCLUSIONS 13.01 The main achievement of the two projects was to provide a sub- stantial financial contribution towards the cost of additions to the domestic telecommunications network. A large amount of foreign exchange was provided by the Bank/IDA for the import of plant and equipment for the local, long distance and telex services, for upgrading existing factories of the three manufacturing companies; for raw material imports; and for establishing modern cable and electronic teleprinter plants. During the implementation of the projects a number of organizational improvements were successfully achieved within IPTD, and improved quality assurance and quality control programs were implemented in the three manufacturing companies and in IPTD. 13.02 Because the fundamental problems affecting the efficiency of the sector were not addressed, both IP'rD subprojects fell short of achieving their appraisal operational, and development expectations. The subprojects of the manufacturing companies, with the exception of that for ITI in the eighth project, which was virtually cancelled, are expected to achieve their objectives. With modern equipment and plant, and improved quality assurance, not only should the quantity and quality of tha output of the factories be higher, but the overall efficiency should improve, and enable the companies to withstand competition when liberalization takes hold. The collaboration agreements with the foreign firms should stimulate the com- panies and open up new horizons; the exposure to new technologies will enable them to turn to new products for which there is a huge market. Sustainability 13.03 Provided the equipment is of adequate quality, and is installed to operate alongside equipment, compatible in all aspects, and is adequately maintained, there should be no difficulty in sustaining the benefits aris- ing from the new installations provided to IPTD under both projects. The sustainability of the benefits from IPTD's institutional improvements should present no problem, provided they are updated and developed as the institution progresses. Similarly, the benefits brought to the manufactur- ing companies through, the installation of new plant, the collaboration agreements with foreign firms, and improved quality assurance programs, should easily be sustainable, and as experience is gained, further ex- panded. Lesson to be Learnt 13.04 The PCR (paras. 9.4 and 9.5) correctly sets out some of the less- ons which have been learned from the projects under audit. The Bank has endeavored to address some specific issues through the ninth lending opera- tion, however, progress to date has not been encouraging. There continues to be important sector and subsector issues on manufacturing, procurement, and institutional development which inhibit maximum development of the - 41 - sector and which would need to be satisfactorily addressed if projects in the Indian telecommunications sector are to be fully successful. 13.05 The Bank's inability to facilitate change in these matters in the past has been mainly due to the absence of constructive dialogue between the Bank and responsible decision makers in India. This lesson from past lending cannot continue to be ignored; there is, therefore a need for sub- stantial dialogue between the Bank and GOI on the problems affecting the sector, and on GOI's short, medium, and long term plans for improving its efficiency. The Bank's strategy for future lending to the sector should be formulated on the outcome of those discussions. - 43 - PROJECT COMPLETION REPORT INDIA SEVENTH AND EIGHTH TELECOMMUNICATIONS PROJECT (LOAN 1592-IN and CREDIT 1112-IN) Industry, Trade and Finance Division Technical Department Asia Regional Office - 45 - INDIA SEVENTH AND E.GITH TELECOMMUNICATIONS PROJECTS LOAN 1592-IN AND CREDIT 1112-IN PROJECT COMPLETION REPORT I. INTRODUCTION 1.1 The Bank has been associated with the telecommunications sector in India since 1962 through nine lending operations (six credits and four loans). The first five credits and two loans for a total amount of US$368 million financed most of the foreign costs of six 1/ successive telecommunications projects. These six projects dealt only with the requirements and development program of the Posts and Telegraphs Department (P&T), the operating agency. In June 1978, the Bank approved a loan (Loan 1592-IN) of US$120 million for the seventh telecommunications project. This project was different in that it was based on a comprehensive approach to the whole telecommunications sector of India. The four beneficiaries were P&T and its three major domestic suppliers viz Indian Telephone Industries Limited (ITI), Hindustan Cables Limited (HCL) and Hindustan Teleprinters Limited (HTL). The intent was to enable the indigenous industry to expand and modernize so that it might meet the material needs for implementation of P&T's development programs with quality products delivered on time. The loan was closed on June 30, 1984. A credit (Credit 1112-IN) of SDR 252.4 million (US$314.0 million equivalent) to the same four beneficiaries was signed on March 26, 1981 and closed on December 31, 1985. The eighth project that it supported was also a sector project. These two projects are the subject of this compl2tion report. Another loan (Loan 2813-IN) of US$345 million for the ninth telecommunications project, which is currently in progress, was signed on June 29, 1987. 1.2 At the start of the seventh project, public telecommunications services in India and with adjacent countries were provided by P&T, which operated under the Ministry of Communications (MOC). A separate government agency, the Overseas Communications Services (OCS), which also operated under MOC. provided international telecommunications services to non-adjacent countries. 1.3 In a major institutional reform, the Department of Telecommunications (DOT), was separated from the Department of Posts in January 1985. On April 1, 1986, two public corporations were established under MOC--the Mahanagar Telephone Nigam Limited (MTNL) to operate the Bombay and Delhi tele- phone networks and the Videsh Sanchar Nigam (VSN) to take over the functions of OCS. DOT continues to operate the domestic network in the rest of India. 1.4 The telecommunications equipment manufacturing industry is largely government-owned. The three major manufacturers are ITI, HCL and HTL. These three manufacturers are supported by a large number of small private firms acting as subcontractors. ITI and HTL come under the ambit of the Ministry of 1/ The third project was financed jointly by Loan 615-IN and Credit 153-IN. - 46 - Communications and HCL under the Ministry of Industry. In a major policy shift announced in March 1984, the private sector is now allowed to manufac- ture subscriber terminal equipment and telecoumnunications cables and to take up to 492 equity in joint ventures with central/state governments to manufac- ture switching and transmission equipment. Licences have been granted to a number of firms and DOT has begun a systematic effort to increase competition in domestic procurement by encouraging such private- and joint-sector suppliers. - 47 - II. PROJECT PREPARATION AND APPRAISAL A. Seventh Telecommunications Project (Loan 1592-IN) Preparation, Appraisal and Negotiations 2.1 During implementation of the sixth telecommunications project, the Government of India (GOI) discussed Bank assistance in financing the foreign exchange cost of the three-year FY79-81 program of a rolling P&T five-year (FY79-83) plan and the telecommunications factories' upgradation and moderni- zation program. An appraisal mission visited India in January/February 1978 and negotiations took place in May 1978. Loan 1592-IN for US$120 million was approved by the Bank's Board of Directors on June 8, 1978 and the loan agree- ment was signed on June 19, 1978. Project Objectives 2.2 The project objectives, in line with those of the five-year plan were the following: (a) expand the availability and quality of service outside of the four metropolitan areas of Bombay, Delhi, Calcutta and Madras; (b) concentrate metropolitan city investment and expansion in such a manner (in view of investment constraints) as to reduce the number and waiting time of the pending high priority 0YT applicants;2/ (c) extend services into the rural areas by opening 7,500 public call offices (15,000 over the five-year period); (d) provide high-grade, reliable large-capacity transmission media between important regional and subregional centers; (e) extend automatization of the trunk telephone service and improve manual trunk services; (f) upgrade the traffic performance of botii the local and long-distance networi.s; (g) provide adequate equipment, machinery, technical assistance support, etc., to (i) step up the research projects in the Telecommunications Research Center; (ii) improve and develop the training facilities; (iii) make the testing and quality control organization more effec- tive; and (iv) step up production in the P&T workshops, commensurate with requirements of the plan; (h) expand and upgrade the production capacities of the three major domestic telecommunications factories so as to enable a coordinated 2/ 0YT stands for "own your telephone" and represents a scheme in which potential subscribers who pay relatively large advance deposits (currently, Rs 5,000 to 8,000 depending on exchange system capacity) receive priority status for obtaining a telephone connection. - 48 - and balanced expansion of the two interdependent groups, viz P&T and the factories; and (i) improve the efficiency and quality of the testing methods in the factories so as to ensure the quality of their products. Proiect Description 2.3 The project was a sector project which comprised four parts--the P&T subproject which covered part of P&T's telecommunications development program over the fiscal years 1979 through 1981 and one subproject each in respect of the three enterprises, ITI, HCL and HTL covering part of their program of upgradation and expansion of manufacturing facilities. Specifically, the project included the provision and installation of the following: Part A (P&T): (a) about 340,000 lines of local telephone exchange equipment; (b) subscribers' cable and associated equipment which would permit connection of about 260,000 new DELs; (c) about 7,500 long distance public telephones in rural areas; (d) about 38,000 lines of trunk exchange equipment; (e) about 2,000 lines of electronic telex switching equipment; (f) coaxial cable line transmission equipment, cable pressurization equipment, microwave and UHF/VHF radio equipment and PCM carrier systems to upgrade and extend the trunk and junction networks; (g) testing and laboratory equipment for P&T's Telecommunications Research Center, Training Centers, and Technical and Development Circle (provision only); Part B (ITI): (h) production and tool room machines to replace obsolete machines and upgrade production facilities and output at the Bangalore and Naini factories; (i) modern testing and measurinp equipment at the Bangalore and Naini factories to improve efficiency and quality of output; (j) equipment to update and expand the micro-circuit laboratory at Bangalore; (k) new computing facilities for improved management and production control at Bangalore; - 49 - Part C (HCL): (1) cable production machines and plant and testing equipment to replace obsolete machines and equipment to improve outputs from the Rupnarainpur and Hyderabad factories; (W) research and development equipment for work on optical fiber cable technology (provision only); Part D (HTL): (n) production and tool room machines to replace obsolete machines in the production and tool room units of the Madras factory; and (o) research and development and testing and measuring equipment to strengthen HTL's research and development capability. Project Cost Estimate 2.4 The cost of the project was estimated at Rs 7,040.0 million (US$818.4 million equivalent) with a foreign exchange component of Rs 1,143.0 million (US$132.9 million equivalent). The break-down of costs by subproject is given in Table 2.1. Table 2.1: PROJECT COST ESTIMATE (Seventh Project) Subproject Local Foreign Total Local Foreign Total ------ Rs million /a -------- ------ US$ million /a-------- P&T 5,692.6 946.0 6,638.6 661.8 110.0 771.8 ITI 114.2 88.8 203.0 13.3 10.3 23.6 HCL 75.0 89.0 164.0 8.6 10.4 19.0 HTL 15.2 19.2 34.4 1.8 2.2 4.0 Total 5,897.0 1,143.0 7,040.0 685.5 132.9 818.4 Ia Includes contingencies. 2.5 Foreign costs included US$60.0 million equivalent of foreign exchange costs of imported raw materials and components used in the goods and equipment purchased by P&T from the domestic manufacturers. Of the foreign costs, Bank was to finance US$120.0 million and GOI the remaining US$12.9 million (US$10.0 million in the P&T subproject for local exchange equipment and US$2.9 million in the HCL subproject for import of a steel sheathing plant for telephone cables). The local costs were to be financed by the entities concerned. - 50 - Covenants 2.6 In addition to the Bank's standard covenants on procurement, manage- ment and reporting, the main covenants in the Loan Agreement provided that Government shall: (a) transmit to the Bank, for each fiscal year, provisional accounts of the telecommunications branch of the P&T (the Branch) not later than four months after the close of the fiscal year to which they relate and, within a reasonable time thereafter, certified copies of the audited statements and auditor's reports; (b) cause the Branch to take all measures required to realize an arnual rate of return of not less than 11Z on the average net value of its fixed assets in operation; (c) not later than March 31, 1980, review or cause to be reviewed the value of the net fixed assets in operation of the Branch and, commencing with fiscal year 1981 cause, if necessary, the value of its net fixed assets to be adjusted for purposes of calculating the rate of return; and (d) unless and until the rate of return shall have been calculated as provided in covenant (c) above, cause the Branch to take all measures necessary to produce each year funds from internal sources equivalent to not less than 60Z of its annual capital expenditures. 2.7 In addition to the Bank's standard covenants on procurement, manage- ment and reporting, the main covenants of the Project Agreement provided that ITI, HCL and HTL shall each: (a) not later than March 31, 1980 strengthen its quality assurance proce- dures in a manner satisfactory to GOI and the Bank; and (b) furnish to the Bank as soon as available, but in any case not later than six months after the end of each fiscal year, certified copies of its audited financial statements and auditor's report. 2.8 The status of compliance with these covenants is indicated in Annex 1, and para. 2.16. B. Eighth Telecommunications Project (Credit 1112-IN) Preparation, Appraisal and Negotiations 2.9 During implementation of the seventh telecommunications project, GOI developed a new five-year plan (1981-85), which partially overlapped and superseded the previous 1979-83 five-year plan which was the basis for the seventh telecommunications project. GOI requested IDA's assistance in financing the foreign exchange cost of the initial three-year (1981-83) program of this revised P&T five-year plan, the extension of the upgradation and modernization programs of ITI, HCL and HTL and the expansion of their manufacturing capacities. An appraisal mission visited India in July 1980 and - 51 - negotiations took place in February 1981. Credit 1112-IN for SDR 252.4 mil- lion (US$314 million equivalent) was approved by IDA's Board of Directors on March 17, 1981 and the Credit Agreement was signed on March 26, 1981. Proiect Objectives 2.10 The project objectives, in line with the ten-year (1981-90) long-term plan, were basically similar to those of the seventh project and were directed towards attaining the ten-year objectives of (i) provision of telephone and telex connections on demand by 1990; (ii) f._' automation of the local tele- phone exchange network; and (iii) availability of a telephone within five kilometers of most inhabited locations in the country. Additional objectives were to: (a) increase manufacturing capacity at the three factories; and (b) exploit new technologies to reduce the cost and improve the quality of the telecommunications services. Project DescriDtion 2.11 Like the seventh project, the eighth project comprised four subpro- jects relating, one each, to P&T, ITI, HCL and HTL. The P&T subproject which covered part of the P&T's development program over the fiscal years 1981 through 1983 was based on a 1981-85 five-year plan--first part of the ten-year long-term plan--which aimed at raising considerably the levels of investment in telecommunications. This subproject also contained a network upgrading element as a direct attempt to improve quality of service. During the project, it was proposed to adopt new technologies and to establish iiitial manufacturing capacity for the new systems. 2.12 In the factory subprojects, there was a segment in each covering modernization and upgradation of existing production facilities (an extension of the programs included for the factories as subprojects in the seventh tele- communications project) and a segment covering the establishment of a new factory. Specifically the project included the provision and installation of the following: Part A (P&T): (a) about 700,000 lines of local telephone switching equipment; (b) about 3.7 million pair kilometers of underground telephone cables; (c) about 630,000 direct exchange lines; (d) about 11,000 long distance public call offices; (e) about 1,600 telephone exchanges (mostly small rural automatic type); (f) about 40,000 automatic trunk switching terminations; (g) about 6,200 telex subscribers' lines; - 52 - (h) about 12,000 telegraph offices; (i) computing equipment for each of the four metropolitan districts of Bombay, Delhi, Madras and Calcutta; (j) plant, equipment and raw materials for the P&T telecommunications factories; (k) testing and measuring equipment for the Telecommunications Research Center, Training Centers and Technical and Development Circle of P&T (provision only); (1) transmission equipment for trunks and junctions; (m) plant and equipment for the network upgrading program (provision only); Part B (ITI): (n) testing and measuring equipment and production and tool room machines to upgrade and modernize the existing Bangalore, Naini and Rae Bareli factories; (o) equipment and machinery, and provision of licensing and know-how, for an electronic switchirg factory at Palghat; Part C (HCL): (p) cable production machines and plant and testing equipment to replace obsolete machines and equipment to increase production output at the existing factories at Rupnarainpur and Hyderabad; (q) machinery and equipment for a new cable manufacturing plant to be constructed at Hyderabad; Part D (HTL): (r) machines and equipment for machine shop, electroplating line, heat treatment plant and tool room and modernization of the inventory control of the stores of the existing factory in Madras; and (s) machines and equipment and provision of licensing and know-how, for a new electronic teleprinter factory at Hosur. Project Cost Ectimate 2.13 The cost of the project was estimated at Rs 13,599 million (US$1,619.4 million equivalent) with a foreign exchange component of Rs 2,638 million (US$314.0 million equivalent). The break-down of costs, by subproject, is given in Table 2.2. F - 53 - Table 2.2: PROJECT COST ESTIMATE (Eighth Project) Sub'roject Local Foreign Total Local Foreign Total -------- Rs million LA ------- ------ US$ million Ia-------- P&T 10,496 2,041 12,537 1,250.0 24J.0 1,493.0 ITI 153 211 364 18.2 25.1 43.3 HCL 246 309 555 29.3 36.8 66.1 HTL 66 77 143 7.9 9.1 17.0 Total 10.961 2,638 13.599 1,305.4 314.0 1.619.4 la Includes contingencies. Foreign costs include US$163.0 million equivalent of the foreign exchange content of purchases from domestic factories. IDA was to finance the foreign costs in full. Local costs were to be financed by the entities concerned. Covenants 2.14 In addition to IDA's standard covenants on procurement, etc., the main covenants of the Credit Agreement provided that Government shall: (a) submit to IDA, for each fiscal year, provisional accounts of the telecommunications branch of the P&T (the Branch) not later than four months after the close of the fiscal year to which they relate and, within a reasonable time thereafter, certified copies of the audited statements and auditor's reports; and (b) cause the Branch to take all measures required to realize an annual rate of return of not less than 11 on the average net value of its fixed assets in operation. 2.15 In addition to IDA's standard covenants on procurement, etc., the main covenants of the Project Agreement provided that ITI, HCL and HTL shall each furnish to IDA as soon as available, but in any case not later than six months after the end of each fiscal year, certified copies of its audited financial statements and auditor's report. Compliance with Covenants 2.16 The status of compliance with covenants under Loan 1542-IN and Credit 1112-IN is indicated in Annex 1. The beneficiaries generally complied with the covenants except for: (a) delays on the part of P&T ir the submission of audited financial statements and reports (para. 6.4); and (b) delays on the part of the three manufacturing enterprises in imple- mentation of the quality assurance program (para. 3.6). - 54 - III. PROJECT IMPLEMENTATION Loan/Credit Effectiveness and Project Start-up 3.1 Loan Agreement 1592-IN specified September 18, 1978 as the terminal date for effectiveness of the loan. In addition to the standard conditions, the special conditions of effectiveness for this loan were: (a) execution of a project agreement on behalf of ITI, HCL and HTL, duly authorized or ratified by them; and (b) execution of subsidiary loan agreements between GOI and ITI, HCL and HTL respectively, duly authorized or ratified by them. The project agreement between the Bank and ITI. HCL and HTL was signed on June 19, 1978 and the subsidiary loan agreements in September/October 1978. After Bank clearance of these subsidiary loan agreements, and all other condi- tions of effectiveness having been et, the Bank declared the loan effective on October 30, 1978. Start-up action on the project was fairly prompt. However, procurement action on direct imports by P&T, representing about 5Z of the total costs of the P&T subproject, was unduly delayed (para. 3.4). 3.2 The special conditions of effectiveness for Credit 1112-IN were the same as specified for Loan 1592-IN. The project agreement between IDA and ITI, HCL and HTL was signed on March 26, 1981. All necessary documentation having been submitted, the credit was declared effective on June 24, 1981, which was the terminal date for effectiveness specified in the Credit Agreement. Start-up action on the project was prompt. Proiect Revision 3.3 There were no major revisions in the scope of either the seventh or eighth projects. However, consequent to GOI's decision in 1980 to manufacture digital TAX equipment in India (included in the ITI subproject of the eighth project), P&T decided, with Bank's/IDA's approval, to restrict imports and obtain its requirements of TAXs from indigenous production. Funds thus released under the loan and credit were utilized to meet the needs in other areas arising out of shortfalls in domestic production (paras. 3.13 and 3.14). The main changes in imported items under Loan 1592-IN and Creiit 1112-IN are indicated in Table 3.1. - 55 - Table 3.1: CHANGES IN IMPORTED ITEMS Item Original Rev1sed Loan 1592-IN TAX 18,500 lines 6,000 lines Telex 2,000 lines 6,964 lines Transmission Equipment -- multiplex equipment -- broadcast carrier system -- hypergroup translating equipment transmission additional microwave and UHF equipment systems Credit 1112-IN Local switching equipment 100,000 lines 105,800 lines TAX 10,800 lines 0 lines Telex 5,300 lines 0 lines Electronic teleprinter -- 2,000 Transmission equipment transmission additional transmission equipment equipment including multiplex equipment Cables cables additional cables The total TAX and telex equipment to be imported under both projects were 29,300 lines and 7,300 lines respectively. P&T (DOT). however, imported only 6.000 TAX lines and 6,964 telex lines and covered the balance from domestic manufacture. Increases in other items balanced shortfalls in domestic manufacture. Implementation Schedule (A) Seventh Proiect 3.4 At appraisal, the seventh project was expected to be completed by September 30, 1981. The P&T targets for the FY79-81 period indicated in the SAR of the seventh project were substantially met, except in respect of TAX capacity, by end September 1982. TAX capacity target was met by end July 1983 (Table 3.2). However, installation of direct imported items of all subpro- jects (representing about 72 of total cost) was completed only in 1984. The major reasons for the delay were (a) shortfall in supply of equipment from the domestic factories, particularly ITI, due to power rationing and industrial disputes. (The shortfall was particularly severe in FY81 when production in ITI was disrupted for nearly five months due to labor strikes and factory lockouts); (b) delay in decision on type of electronic switching equipment to adopt--analog or digital--and in subsequent procurement action (orders for switching equipment were placed in July 1980 for local exchanges, May 1981 for trunk exchanges and December 1981 for telex exchanges against SAR target of March 1979); and (c) cumbersome procurement procedures for imported equipment - 56 - requiring cooperation between several GOI departments. There were also imple- mentation delays in respect of the three factory subprojects due to delayed procurement action. Table 3.2: P&T's IMPLEMENTATION PERFORMANCE SUMMARY FY ending March 31 1979 1980 1981 1982 1983 1984 1985 Local switching capacity 1 2,260 2,475 2,705 ('000 lines) 2 2,511 2,736 3,036 3 2,188 2,336 2,469 2,612 2,827 3,054 3,307 Direct exchange lines 1 1,966 2,161 2,371 ('000 lines) 2 2,186 2,386 2,646 3 1,868 2,016 2,149 2,296 2,466 2,668 2,898 Long distance PCOs 1 10,787 13,287 16,287 2 16,830 20,830 24,830 3 11,732 13,830 15,710 17,294 19,627 20,986 25,200 TAX switching capacity 1 42,450 45,550 63,750 (terminations) 2 48,770 57,270 82,042 3 34,000 40,300 46,570 50,370 54,520 80,620 85,770 Telex capacity 1 22,750 24,650 26,550 (lines) 2 23,015 24,215 29,415 3 21,025 22,015 22,765 23.927 25,067 33,585 39,094 Telex sub- scribers 1 16,440 18,240 20,040 2 19,483 20,683 24,183 3 16,447 17,983 19,332 20,420 21,496 22,527 26,287 1 - FY79 - 81 targets as indicated in SAR of the 7th project. 2 - FY81 - 83 targets as indicated in SAR of the 8th project. 3 - Actuals. 3.5 Procurement action by the manufacturing enterprises was slow, result- ing in delays in provision of needed test equipment and replacement machines. As a result, improvements in quality of products were delayed (para. 3.6). The procurement delay also resulted in cancellation of about US$4.2 million under category 4 of the loan due to late arrival of goods ordered by HCL. - 57 - 3.6 All three enterprises were required to strengthen their quality assurance procedures not later than March 31, 1980. A Bank-financed consul- tant reviewed the operations of the factories during project appraisal in 1978 and made specific recommendations for implementation of improved quality control procedures and manufacturing techniques. Two further reviews were conducted by him in October 1979 and July 1981 to assess progress on the implementation of the program. P&T established a Customer Quality Assurance wing of the Technical and Development Circle at Bangalore on July 1, 1979. This wing was given responsibility for acceptance testing of purchased equip- ment, monitoring of factory production quality, upgrading of specifications, control of quality relaxations and analysis of feedback data from the field. However. lack of proper testing equipment reduced the wing's effectiveness in the early years. At the factories, development of the necessary manuals/pro- cedures delayed implementation of the quality assurance program till late 1981/early 1982. Delays in purchase of the requisite testing equipment and replacement of obsolescent plant financed under the loan also delayed antici- pated improvements in productivity and product quality. With availability of test equipment, ITI now tests inwards goods on a 10OZ basis. It has also established vendor ratings, with inspection of the vendor's manufacturing processes where necessary. Meetings are also held regularly between DOT and the three enterprises to help resolve quantity and quality problems and discuss scheduling. B. Eighth Project 3.7 At appraisal, the eighth project was expected to be completed by September 30, 1983. The P&T targets for the FY81-83 period indicated in the SA1 of the eighth project were substantially met, except in respect of PCOs, TAX capacity and telex subscribers, by end March 1984 (about 6 months behind schedule). The targets with respect to PCOs, TAX capacity and telex sub- scribers were met by end December 1984. However, installation of direct imported items of all subprojects (representing about 92 of total cost) was completed only in 1986. Table 3.2 gives a comparison of achievements vis-a- vis P&T targets in respect of some key performance indicators over the period 1979-1985 covering both projects. 3.8 The network upgrading program which was implemented in parallel with the main construction program during the eighth-project period experienced heavy slippage. Of the 369 km of ducts to be constructed during FY81-83 only 93.8 km had been finished by end FY84. There were similar slippages in other works. However, the effect of this program is beginning to be reflected in the quality of service (para. 4.4 and Annex 2). 3.9 Procurement action by the manufacturing enterprises started early under the eighth project. Bids for the new factories were received and, in the case of ITI, evaluation of proposals completed, as targetted, by end 1981. However, consequent to the decis;on of GOI to finance the Palghat factory under a French bilateral agreement, the credit allocation for this component (SDR 10.29 million) was cancelled. While the new factory at HCL started production almost on schedule, the ITI factory at Palghat and the HTL factory at Hosur were delayed by more than three years due to change in collabora- tor/delay in technology decision, respectively. With decision to introduce new technology, ITI also revised its plan for plant upgradation. Released funds were diverted to the P&T subproject (see para. 3.14). - 58 - Proiect Costs 3.10 Annex 3 indicates the estimated and actual costs for the two projects. These are suamarized in Table 3.3 below: Table 8.3: SUMMARY OF PROJECT COSTS (Re mllon) 9 Actual to Apprasal Estimat* Actual Appraisal Estimate Item Foreign Loca I Total Foreign Local Tote I Foreign Local Total Seventh Project (Loan 1592-IN) PAT 946.0 5,692.7 6,636.7 1,027.2 5,0865 6,113.7 108.6 89.4 92.1 ITI 88.$ 114.2 203.0 78.4 115.3 198.7 86.3 101.0 95.4 HCL 89.0 76.0 164.0 72.2 76.4 148.6 61.1 101.9 90.6 HTL 19.2 15.2 34.4 20.9 15.5 36.4 106.9 102.0 106.8 Total 1,143.0 5,997.1 7.n4O.1 %,199.7 5.293.7 6492.4 104.9 89.8 92.2 Eighth Project (Credit 1112-IN) PAT 2,041.8 10,496.0 12,587.8 2,361.7 9,451.9 11,818.6 115.7 90.1 94.2 ITI 211.0 163 364.0 18.7 8.0 26.7 / 8.9 5.2 7.3 HCL 309.1 248.0 555.1 366.7 268.4 835.1 118.6 109.1 114.4 HTL 77.2 65.9 148.1 57.8 56.6 118.4 74.9 84.4 79.2 Total 2,639.6 10,960.9 13,599.6 2,804.9 9,783.9 12,588.8 106.3 80.6 92.6 e Excludes Palghat factory cost of Re 337.2 m (total). As can be seen, actual costs are within 8Z of estimated costs in both cases. The differences between estimated and actual costs of the seventh project reflect (i) restriction in imports of long distance switching (para. 3.3) and (ii) reduced procurement of testing equipment under the P&T subproject (compensated by additions under the eighth project), and (iii) savings due to exchange rate fluctuations. The differences between estimated and actual costs of the eighth project reflect (a) restriction in imports of long distance switching, (b) exclusion of Palghat factory costs funded by bilateral sources, and (c) cost overrun on the HCL factory. Disbursements 3.11 Table 3.4 provides a comparison of the estimated and actual disburse- ment of Loan 1592-IN. - 59 - Table 3.4: CUMULATIVE DISBURSEMENTS (LOAN 1592-IN) (US$ million) Bank FY Appraisal Actual Actual as 2 ending June estimate of appraisal estimate 1979 54.2 34.4 63 1980 96.3 60.3 63 1981 120.0 66.1 55 1982 79.5 66 1983 96.7 81 1984 103.8 86 1985 112.8 /a 94 /a Although the loan closing date was June 30, 1984. the Bank agreed to honor withdrawal applications received up to March 31, 1985. Last disbursement was made on March 29, 1985. The balance amount of US$7.2 million was cancelled. 3.12 Table 3.5 gives a comparison of the estimated and actual disbursement of Credit 1112-IN. Table 3.5: CUMULATIVE DISBURSEMENTS (CREDIT 1112-IN) (SDR million) IDA FY Appraisal Actual Actual as 2 of ending June estimate appraisal estimate Lc 1981 32.2 18.9 59 1982 90.8 57.7 64 1983 178.0 106.2 60 1984 240.3 160.5 67 1985 252.4 Ia 185.1 76 1986 234.3 97 1987 240.0 /b 99 /a Credit amount was reduced to SDR 242.11 million on March 12, 1985 conse- quent to decision of GOI to utilize French bilateral aid for construction of ITI's new factory at Palghat. Lb Although credit closing date was December 31, 1985, IDA honored withdrawal applications received up to August 1986. Last disbursement was made on August 13, 1986. The balance amount of SDR 2.143 million was cancelled. /c 1985 to 1987 figures based on reduced credit amount of 242.11 million. - 60 - Loan/Credit Allocation 3.13 Reallocation of Loan 1592-IN between categories was done in September 1983, to reflect changes in the items directly imported (para. 3.3). An amount of US$7.231 million was cancelled at the final disbursement. The cancelled amount reflects savings of about US$3.0 million under the P&T sub- project resulting from variations in exchange rates after contracts were placed and an undisbursed amount of about US$4.2 million under the HCL subpro- ject. Table 3.6 indicates the original and revised allocation and final dis- bursement (reflecting actual disbursements) of the loan proceeds under the various categories. Table 3.6: ALLOCATION OF LOAN PROCEEDS (LOAN 1592-IN) (US$ thousand) Loan Allocation Final No. Category Original Revised La disbursement Part A 1-a Local, trunk and telex exchanges 22.000 12,000 10,657 1-b Coaxial cable systems 2,000 764 764 1-c Radio and PCM systems 7,500 18,760 16,809 1-d Material and equipment for P&T workshops 3,500 4,600 3,947 1-e Laboratory and testing equipment 5,000 3,760 4,552 2 Goods to be purchased by P&T from ITI, HCL and HTL 60,000 60,123 60,123 Subtotal 100,000 100,000 96,852 Part B 3 Goods and services to be imported by ITI 10,300 10,300 10,540 Part C 4 Goods to be imported by HCL 7,500 7,500 3,393 Part D 5 Goods to be imported by HTL 2,200 2,200 1,985 Total 120,000 120,000 112.769 Lb /a Revised in September 1983. /b Balance amount cancelled. 3.14 The original allocation under Credit 1112-IN was revised in March 1985. Consequent to GOI's decision to financL the new ITI factory at Palghat under a French bilateral agreement, the allocation of SDR 10.29 m for this component was cancelled. The allocation for the upgradation of the tTI factories was reduced to reflect ITI's decision not to proceed with upgrada- - 61 - tion of certain plant consequent to decision to introduce new technology in several areas of production. The savings under this category and those arising out of P&T's decision to restrict imports of TAX and telex equipment were utilized to purchase other equipment to compensate for the shortfalls in domestic production (para. 3.3). Consequent to its decision to phase out the production of paper core cables, HCL decided not to upgrade plant relating to this type of cables. The funds allocated for upgradation of this plant were utilized to cover the cost overrun of the new cable factory. Due to delays in finalizing the contract for the HTL factory at Hosur, most payments (to be made over a period of five years) became due after the closing date. The allocation under category 5 was consequently reduced. The revised allocations reflected the expected utilization of funds by the closing date, after cancel- lation of the SDR 10.29 million allocated for the Palghat factory. An addi- tional amount of SDR 2.143 million was finally cancelled. Table 3.7 'ndicates the original and revised allocation and final disbursement of the credit proceeds under the various categories. Table 3.7: j%LLOCATION OF CREDIT PROCEEDS (CREDIT 1112-IN) (SDR thousand) Credit Allocation Final No. Category Original RevisedLa disbursement Part 1-a Local exchanges 24,120 23,000 24,990 1-b Trunk exchanges 10,450 - - 1-n Telex exchanges and teleprinters 3,620 2,340 2,248 1-d Computing facilities 3,220 4,290 3,554 1-e Materials and equipment for P&T factories 4,820 6,390 6,244 1-f Testing and measuring equipment for research, training, and Technical and Development Circle 4,820 3,290 2,659 1-9 Transmission equipment 9,640 20,910 20,911 1-h Testing and measuring equipment for network upgradation includ- ing underground cables 3,620 11,910 11,805 2 Goods to be purchased by P&T from ITI, HCL, HTL 131,020 132,570 132,562 Part B 3 Goods to be imported by ITI 20.180 1,850 1,334 Part C 4 Goods to be imported by HCL 29,580 30,690 29,136 Part D 5 Goods to be imported by HTL 7,310 4,870 4, 24 Total 252,400 242,110 239,967 /b /a Revised in March 1985. /b The balance was cancelled. - 62 - Relportini 3.15 P&T submitted regular quarterly reports on the physical progress of the project and operations. However, the audited financial statements were not received within a wrearonable timew as covenanted. There was, however, an improving trend, the delay reducing from about 28 months for the FY79 accounts to 12 months for the FY85 accounts. Procurement 3.16 There were no unusual problems with procurement except for delays in supplies from indigenous suppliers and substantial delays in placing orders on foreign suppliers (para. 3.4 and 3.5). To avoid such delays under the ninth project, the Bank required DOT to take advance procurement action on major items before presentation of the loan proposal to the Board. Bids for goods valued at about 73Z of the loan amount were opened and necessary import clearances for the goods obtained by DOT before this deadline. In addition, Bank's approval on award recommendation in respect of goods valued at 40% of the loan amount were also obtained. This advance in procurement action was, however, subsequently offset by delays in placement of orders. Performance of Contractors and Suppliers 3.17 The performance of contractors and suppliers was generally satisfac- tory. However, supplies froa, indigenous factories were consistently below planned levels due to power rationing, industrial disputes, etc. Addition- ally, supplies from ITI did not always follow the desired sequential order/ timing, resulting in delayed completion of works. Performance of the Implementing Agencies 3.18 P&T did make some institutional progress. The quality assurance program has been established albeit with some delay (para. 3.6). P&T has also made considerable progress in improving customer service. There have been some important developments in promoting zompetition amongst P&T's suppliers. For example, since March 1984, the private sector is allowed to manufacture subscriber terminal equipment (such as PBXs, telephone instruments and tele- printers) and cables and to take up to 492 equity in joint ventures with central/state governments to manufacture switching and transmission equipment. However, significant areas of production remalaed closed to private-sector competition, leaving Government enterprises with an effective monopoly position, with concomitant effects on product prices and quality. During negotiations for the ninth projec", assurances were obtained that DOT and MTNL will: (a) continue to take all Ation necesiary to expand competition in domestic procurement; and (b) introduce commercial contracts for single source purchases from public sector enterprises, effective April 1, 1987. The pricing agreements recently negotiated with ITI, HCL and HTL contain incen- tives to encourage the enterprises to produce the quantity and quality of equipment as agreed with DOT. - 63 - IV. OPERATING PERFORMANCE 4.1 Over the five-year period FY79-83 covered by the seventh and eighth projects, P&T expected to increase the capacity of local telephone exchanges from 2,050,000 lines (on April 1, 1978) to 3,036,000 (on April 1, 1983) and DELs from 1,774,000 lines to 2.646,000 lines. However target dates in the project implementation schedule for achieving these goals did not have any allowance for delays due to unforeseen circumstances. Most project objectives were met by April 1, 1984. with remaining objectives reached by December 31, 1984. Credit 1112-IN was, however, only closed on December 31, 1985 due to delay in the components involving imported items (para. 3.7). 4.2 Regarding penetration into the hinterland, on March 31, 1985, 45Z of the 45,000 towns with population exceeding 2,000 had telephone service as against 33Z at the start of the seventh project oa April 1, 1978. PCOs increased from 8,000 to 25,000 and telegraph offices from 17,591 to 35,000. 4.3 P&T's (nIOT's) performance on demand satisfaction worsened during the project period. As of March 31, 1986, 75? of expressed demand (working lines plus registered applicants) for telephones was satisfied, down from 90Z in 1978. The total waiting list for telephone service grew from about 200,000 to 1,067,000 and the average time for a prospective subscriber to receive service increased from about 2h years to 34 years as the 7.3? p.a. network growth failed to match the 10Z p.a. demand growth over the period. These figures understate actual demand as (a) many people are reluctant to pay the registra- tion fee with distant prospects of a connection, and (b) no waiting lists are kept in areas without service. DOT's Economic cell estimates the actual demand (working lines plus registered and unregistered demand) on that date to be around 6.0 million as against the expressed demand of 4.2 million. 4.4 The quality of service has generally improved though it is still below desirable levels and appr-'sal targets of the eighth project. Annex 2, Page 2 indicates the performance over the period 1981-86. The quality improvement is noticeable in areas outside the four metropolitan centers except in respect of the average duration of faults. Quality of service in the metropolitan areas, however, did not show much improvement and even worsened in some parameters. - 64 - V. FINANCIAL PERFORMANCE Financial Performance 5.1 Detailed financial statements of P&T/DOT are provided in Annex 4. A summary is given in Table 5.1. 5.2 P&T/DOT's financial performance slowly deteriorated over the project implementation period. The rate of return on net fixed assets in operation declined from 26Z in 1979 to 17? in 1985 on a historical cost basis as compared with the appraisal estimates of 289 in 1979 and 202 in 1985. On a revalued basis, the rate of return declined from 152 in 1981 to 122 in 1985 (revaluation of assets started with the FY80 accounts). The operating ratio (ratio of operating expenses to operating income) increased from 572 in 1979 to 66Z in 1985. The actual rbsolute amounts of net operating income and net profits lagged behind the appvaisal estimates throughout the period. The deterioration continued in 1986 and 1987, with the rate of return on a historical cost basis dropping to 122 in 1986 and 72 in 1987. The operating ratio (operating expenses to operating revenues) increased to 722 in 1986 and 832 in 1987. The return on a revalued basis in 1986 was 82 and lower than the covenanted level of 112. The further decline of DOT's profitability in 1987, with a rate of return of 72 (historical cost basis) vis-a-vis 122 in 1986, was mainly attributable to the separation of MTNL which covers the most profitable areas. Under the ninth project, the rate of return covenant was changed to the effect that the rate should be calculated on the revalued consolidated assets of DOT and MTNL and should not fall below 112. However, the actual rate for 1987 on this basis has not been calculated yet because a review of revaluation formula for DOT and MTNL and physical verification of MTNL's assets are still pending. On a historical cost basis, the consolidated DOT/MTNL return on average assets is estimated to be about 142 in 1987, and the return for MTNL alone on the same basis was 202. Despite the deteriora- tion, DOT's profitability is expected to be higher for 1988 due to the impact of the last substantial tariff increase effective December 1986. 5.3 A major reason for the declining profitability was the continuous increase in staff expenses. Staff expenses increased at 17.72 p.a. during the period 1979-86 compared to the appraisal estimate of a 12.5? per annum increase during 1979-85. Staff expenses and operating expenses per DEL were consistently substantially higher than the appraisal estimates. In addition, cash operating expenses per DEL in real terms (1979 price) decreased only marginally from 1979 (Rs 1.410) to 1986 (Rs 1,321) by 12 p.a. However, the increase in revenues was much slower and smaller than that of expenses. Total revenues on current terms rose 13.62 p.a. over the period of 1979-86. While the actual telephone revenues per DEL on current terms are in line with the appraisal estimates, the real term revenues per DEL declined by 3.82 p.a. from 1979 (Rs 2,431) to 1986 (Rs 1,854) (vis-a-vis a 12 p.a. decline of cash operating expenses) due to the insufficient increase in tariffs. Financial Position 5.4 In spite of slowly deteriorating financial performance, P&T/DOT's financial position remained strong, with a high level of liquidity and sound capital structure. P&T/DOT has been able to finance from internal sources a Table 5.1: FINANCIAL PERFORMANCE SUMMARY a FY ending March 31 1979 1980 1981 1982 1983 1984 1965 1988 1987 / Total Revenues (Rs million) Appraisal 5,957 8,927 6,917 7,940 9,262 10,969 12,029 aa. a.e. Actual 5,352 5,928 6,578 7,095 9,378 10,861 12,426 13,079 12,882 Total Operating Expenses (Re mill ion) Appraisal 3,k29 3,692 4,009 4,808 6,312 8,064 6,914 n.m. .M. Actual 3,072 3,493 4,135 4,607 6,007 6,671 6,176 9,473 10,249 Operating Ratio (% historical basis) Appraisal S3 63 6 58 67 56 54 A.S. .8. Actual 67 69 63 62 64 83 66 72 83 Rate of Return (5, revalued basis) Appraisal n.a. n.a. 16.0 14.9 14.2 14.0 14.0 n.s. a.&. Actual n.s. 17.1 15.4 14.6 13.0 13.7 11.8 7.6 a. Tol.Revenue/DEL (Rs. current terms) Appraisal 2,616 2,766 2,817 2,897 3,099 3,286 3,450 n.s. n.*. Actual 2,431 2,j06 2,712 2,967 3,867 3,684 3,58 3,840 n.e. Operating Expenses/DEL (Rs, current terms) Appraisal 1,694 1,799 1,844 2,016 2,111 2,160 2,180 na.. n.e. Actual 1,708 1,799 1,988 2,163 2,523 2,677 2,936 3,124 a.@. Current Ratio (times) Appraisal 1.6 1.6 4.6 3.5 3.8 3.6 3.4 A.A. n.A. Actual 4.3 4.. 4.9 4.7 4.6 4.4 4.9 4.2 3.7 Debt-Equity Ratio (S) Appraisal 28 28 21 22 22 22 21 n.s. a.S. Actual 21 16 15 16 14 1. 20 9 10 Accouats Receivable (days) Appraisal 53 64 60 60 59 69 69 n.a. a.&. Actusl 568 61 67 64 81 76 I8 83 105 Net Internul Cash Ceneration Ratio (X) Appraisal 99 90 87 71 67 87 66 a.. n.s. Actual 116 114 117 77 75 74 70 61 49 Debt Service Coverage Ratio (times) Appraisal 13.1 14.6 10.6 9.0 7.6 7.3 7.2 n.a. n.D. Actual 11.0 10.4 9.0 8.3 6.3 6.3 6.1 3.8 2.8 a Appraisal estimates for 1979-00 are from the Seventh Project appraisal report; estimates for 1981-85 are from the Eighth Project appraisal report. /b Unaudited; after separation of MTNL. - 66 - large part of its investmerc program, which itself was modest and smaller than the appraisal estimates (t'e actual total amount for 1979-85 was Rs 31 billion vis-a-vis the appraisal estimate of Rs 44 billion). The long-term debt-to- equity ratio has been satisfactory and const.antly lower than the appraisal estimate throughout the project period. As end of 1985, the ratio was 20/80. The current ratio has been always above four times. 5.5 The level of accounts receivable has been satisfactory, but the trend is worsening. During 1979-83, accounts receivable averaged about two months of total billing, which is satisfactory. However, it gradually increased from 58 days in 1978 to 83 days in 1985, and to 105 days in 1987, as compared with the appraisal estimates of 59 days in 1985. Sources and Application of Funds 5.6 P&T/DOT's cashflow situation has been quite satisfactory, though it is deteriorating. For the whole 1979-85 period, the net internal cash genera- tion ratio was 842 of the capital expenditurep. For the same period, the debt service coverage ratio was as high as seven t i. However, these indicators were on the downward trend reflecting the dec1 ning profitability. The net internal cash generation ratio declined from 1152 in 1979 to 51. in 1986. The debt service coverage ratio also decreased from 11 times in 1979 to 4 times in 1986. Revaluation of Assets 5.7 In compliance with Loan Agreement 1592-IN, P&T completed in March 1980 a revaluation study on the life and current value of its fixed assets. Consequently, net .ixed assets in operation as of March 31, 1980 were revalued by about 25% with an index of 6Z p.a. applied subsequently. This was broadly in line with the past experience of other available indices of manufacturing costs of telecommunications' equipment and components. However, in light of reduced world inflation and falling (somewhat below the general inflation rate) "realP prices for telecommunications' equipment, it has been agreed (under Loan 2813-IN for the ninth project) that DOT and MTNL would review jointly with the Bank, by March 31, 1988, the annual adjustment index used for revaluation of assets. However, this has not been completed yet. DOT's and MTNL's telecommunications' assets will continue to be revalued on a memorandum basis, in accordance with the present revised index for use in determining their rate of return performance. However, in accordance with GOI rules the revaluation is not used for other internal purposes. Financial Performance of ITI, HCL, HTL 5.8 The financial performance of ITI and HCL was good, as expected, pri- marily due to their cost-plus pricing agreements with P&T/DOT. The actual . rate of ITI's net income after tax to total assets for 1983 was 7.7?, compared with the appraisal estimate of 5.82 (the financial performance of these three companies were projected only up to 1983 at appraisal). The same rate for HCL in 1983 was 6.0Z compared with the appraisAl estimate of 5.22. HTL's finan- cial performance, which had been poor in the past, improved noticeably in 1984 with the rate of return (net income after tax/total assets) of 4.2Z vis-a-vis 2.5Z in 1983. This was primarily due to a 402 prIce increase on teleprinters. - 67 - VI. INSTITUTIONAL PERFORMANCE Organization and Management 6.1 P&T's management structure remained virtually unchanged from the commencement of the seventh project to January 1. 1985, except for some minor organizational changes, such as strengthening of the Economic Study cell in 1981, and setting up an independent traffic engineering group. In a major institutional reform in January 1985, the Department of Telecommunications (DOT) was separated from the Department of Posts. On April 1, 1986, the Mahanagar Telephone Nigam Limited (MTNL), a public corporation, was estab- lished with responsibility for operation and development of the networks in the metropolitan areas of 8ombay and Delhi. The organization charts of the two entities are given in Annex 5. Staff Recruitment, Training and Development 6.2 DOT has no problem in recruitment of staff at different levels. At the commencement of the seventh project, the Telecommunications Branch of the P&T had a staff ratio of 139 per 1,000 DELs. This was reduced to about 96 per 1,000 DELs by March 31, 1986 at the end of the eighth project. Over FY79-84, total staff increased by about 6Z p.a. but in FY85 and FY86 staff growth was virtually halted by a Government ban on hiring. Staffing standards for some categories were revised during 1984-86. Through further revisions of staff standards, restriction on staff sanctions for new equipment installed and cadre restructuring, DOT hopes to lower the staff ratio to 75 per 1,000 DELs by 1990 (end of the ninth project). 6.3 DOT's training programs for telecommunicatiuns staff are adequate both in quality and quantity. There are 26 circle/district training centers for operative staff and 13 regional training centers for junior supervisory staff. In addition, the Advanced Level Telecommunications Training Center provides training for middle- and top-level staff from India and neighboring countries. Senior management training is given at the Telecommunications Training Center at Jabalpur. During 1979-85, those receiving training grew at about 5.5Z p.a. roughly equal to the growth in staff. About 122 of those eligible for training received it in any given year. About 802 of the courses were induction courses and 202 refresher courses. Since 1986, DOT has shifted the emphasis from induction courses to on-the-job refresher and upgrading courses, in accordance with its objective to retrain staff displaced by new technology. The ratio of induction to refresher/upgrading courses is expected to be 10/90 by end 1990. Five regional training centers are being upgraded with ITI/UNDP support, and with Bank financing proviced under Loan 2813-IN (ninth telecommunications project) for purchase of needed equipment. Accounting and Audit 6.4 Financial reporting within P&T has been on a commercial basis since 1972, but Parliamentary control remains on a cash basis. Both accounts are audited by the Comptroller and Auditor General (C&AG). The loan/credit agree- ments required that provisional financial statements be submitted within four months of the close of the fiscal year (i.e. by the end of July of the corres- ponding year) and that audited financial statements be submitted within a reasonable time thereafter. The reports were submitted as follows: - 68 - Date Submitted to IBRD/IDA Reporting Year Provisional Audited FY 1979 August 20, 1979 July 28, 1981 1980 July 28, 1980 May 25, 1982 1981 August 13, 1981 October 10, 1982 1982 August 19, 1982 July 20, 1983 1983 September 13, 1983 September 9, 1984 1984 n.a. February 7, 1985 1985 n.a. March 20, 1986 6.5 The delay in submission of audited accounts for FYs 1979 to 1985 was partly due to the late closing of accounts (on average, 10 months after the close of the fiscal year) and partly to delay in audit. Efforts by P&T and the staff of C&AG to reduce the delays have resulted in some improvement in subm.ssion of audited accounts to the Bank/IDA since FY81. Under Loan Agreement 2813-IN (ninth telecommunications project), DOT and MTNL are required to submit the audited financial statements no later tha nine months after the close of the fiscal year. Billing and Collection 6.6 P&T monitors the billing and collection performance in all districts and circles effectively. In March 1982 the quarterly billing system was replaced by a bi-monthly billing system. Billing in the four metropolitan cities is computerized. P&T has been following a sti:ict disconnection policy for nonpayment of bills after 25 days and is also authorized to disconnect Government services for nonpayment. During FY79-83 accounts receivable averaged about two months of total billing but the accounts receivable worsened to about three months of total billing in FY85. While still satis- factory, efforts are on hand to reduce it to the FY79-83 level. Although recorded excess-metering complaints are not parti'-larly high (0.6Z - 1.0? of bills issued), customer dissatisfaction with the jilling system is consider- able, especially regarding the STD service which is charged on bulk billing basis. Under the ninth project, automatic message accounting facilities are to be introduced in all telephone exchanges within the four metropolitan areas. This will enable provision of itemized bills on STD calls and should help restore customers' confidence and also improve management control over billing and collection. Tariff3 6.7 An annual tariff exercise is conducted by DOT (P&T) mainly with a view to augmenting its internal resources for its development programs. Recommendations for tariff revision are approved by the Government and placed before the Parliament. During 1979, P&T introduced a differential tariff - 69 - structure for its local telephone services. In September 1980, P&T increased the rates for trunk calls by about 302 - 502, depending on the distance. The rates for local calls were also increased. In July 1981, P&T increased the local call charges further and raised the OYT deposit requirements by 50-70% depending on the size of exchange. The revisions in March 1982 increased the rental charges by 502 and the quarterly billing system was changed to a bi- monthly billing system with corresponding changes in the local call slabs. The tariff revisions effected from March 1, 1983, related to long distance circuit rentals which were increased by 1002. Installation charges and rates for telephone extensions and additional and auxiliary facilities of tele- printer machines were also revised upwards by about 502. There were no further revisions till December 1986 when tariffs were raised by 202 on average. Details of the tariffs are given at Annex 6. - 70 - VII. PROJECT JUSTIFICATION Proiect Achievements 7.1 The two projects generally achieved the physical installation targets, though with delay. Availability of telephone service outside the four metropolitan areas improved. However, the goal set at the start of the eighth project of being able to meet telephone and telex connections demand by 1990 is far from being realized in the foreseeable future. Expressed demand satisfaction fell from 902 in 1978 to 75Z in 1986 but, if latent demand is also taken into consideration, demand satisfaction was only 50Z. The average time for a prospective subscriber to receive service increased from about 2-1/2 years to 3-1/2 years. 7.2 Though the two projects did not include any component on institution building, some institutional progress (para. 6.1) was achieved during the projects' period with establishment of public corporations for telephone service for the metropolitan areas of Bombay and Delhi, and international telecommunications service. Government also liberalized industrial policy to permit greater competition among domestic suppliers. Results of these changes are being monitored under the ninth project. 7.3 At the factories, the quality assurance program has been implemented and management at highest level is committed to quality assurance. This is beginning to show results. DOT's and MTNL'S efforts to increase competition in domestic procurement by encouraging private- and joint-sector suppliers should also give additiotial impetus to the public sector companies to improve the quality of their products, though, as noted previously, important areas of production remain closed to the private/joint sector. 7.4 The projects' objectives to upgrade and modernize plant and increase manufacturing capacity at the three factories rere also achieved. Manufacture of digital switching equipment and electronic teleprinters was initiated during the projects' period. Proiect Spin-off 7.5 The project provided substantial support to the domestic telecommuni- cations manufacturing sector through ITI, HCL and HTL. Ancillary-industries which supply goods to these factories also benefited indirectly. Least Cost Solution 7.6 The design of the projects at appraisal represented the least cost solution. The cost of the indigenously manufactured equipment had then been assessed to be in line with, if not cheaper than, the cost of similar imported equipment. A review in 1984 confirmed that this was still valid as the high customs duties on finished telecommunications equipment (then averaging 145Z) wiped out the differential price advantage (before customs duties) enjoyed by certain types of equipment. The changes made in the imported items during project implementation did not change the overall scope of the project nor the validity of the least cost solution. - 71 - Rate of Return 7.7 Given the difficulty in separating the economic benefits of the seventh and eighth projects from those of other projects executed in parallel to them, the internal financial rate of return was calculated for P&T's 1979-85 investment program which encompasses both projects. The overall rate of return was 142 against the estimate of 202 at appraisal of the seventh project, and 18Z at appraisal of the eighth project (Annex 7). The economic rate of return could not be reliably estimated due to data insufficiency. However, it should be higher since it would also include: (a) indirect exterual benefits to other sectors, such as transport, agri- culture, public services etc. from improved and expanded telecommuni- cations; and (b) consumer surplus, which is estimated to be large given the high unsatisfied demand. - 72 - VIII. BANKIDA PERFORMANCE Overall and Specific Performance 8.1 The overall Bank/IDA performance in the implementation of these two projects was satisfactory. However, supervision of the projects was less than adequate (para. 8.3), mainly due to their complexity and the wide geographic distribution of project works. A major weakness in the Bank's/IDA's project appraisal concerned its optimistic estimates of implementation and disburse- ment, in spite of delays experienced in earlier projects. The projects also did not address fundamental issues affecting sectoral efficiency. The follow- up ninth project was structured to address some of the shortcomings in the design of the seventh and eighth projects. It seeks to address several of the key issues and problems, particularly procurement procedures, domestic compe- tition arl institutional improvements and, unlike earlier projects which covered the whole country, is limited in coverage to the networks in the four metropolitan cities and the long distance network which interconnects them. 8.2 Bank/IDA's role in these projects was basically that of a financier. Its influence on institutional reform was marginal and limited to some internal management improvements in the P&T and the manufacturing companies. On the technological issue of the introduction of digital electronic techno- logy in the network, its advice facilitated establishment of the policy although decision was not as prompt as desired. It also provided guidance to the GOI, P&T and the manufacturing companies on desirable institutional developments in the sector. Bank's/IDA's ability to encourage efficiency on the telecommunications manufacturing side was constrained botih by rigidities in Government policy, which contributed to lack of domestic and international competition, and the lack of consistent policy and technical expertise in the Bank to supervise this component. Supervision 8.3 The Bank's/IDA's supervisory efforts were inadequate. Only 27.8 staffweeks were spent in the field in supervising the seventh project over a time span of about 5-1/2 years and 21.4 staffweeks on the eighth project in about 4 years. This corresponds to about 5 staffweeks per year on each project. This was grossly inadequate considering the nature of these projects, including, as they did, subprojects irvolving four entities and covering a vast area geographically. Supervision missions were also combined with preappraisal/appraisal missions for the follow-on projects. It is likely that during such missions, attention was directed more towards the follow-on project than the ongoing one. Supervision of the factory subprojects in the early stages of the seventh project was good. Two Bank misslons in October 1979 and June 1981 included the stme production engineering consultant who, after review of the operations of the three factories during project appraisal in 1978 had made a series of recommendations in the area of quality assurance procedures. Following his review of the progress in implementation of these recommendations, Bank was able to provide additional guidance to the factories' managements. Subsequent supervision missions did not, however, closely analyse the performance of the factories as Bank staff did not have the necessary expertise in production engineering/industrial matters. There - 73 - was also a lack of continuity of Bank staff assigned to these projects after June 1982 which affected the quality of supervision. Working Relationship 8.4 The Bank/IDA maintained a good working relationship with the Government and the four beneficiaries. All four entities made all relevant information readily available to Bank/IDA staff and the response to enquiries was always prompt and adequate. However, Bank/IDA staff were not in a position to address, and discuss with Government, fundamental reforms in the policy or institutional framework which could have led to major efficiency improvements. - 74 - IX. CONCLUSIONS 9.1 The overall achievements of the two projects was fair. The P&T component of the projects achieved their major physical objectives with 6 months to 15 months delays. However, the 7.52 p.a. network growth failed to match the 10Z p.a. demand growth and expressed demand satisfaction fell from 902 in 1978 to 75Z in 1986. While the quality of service did not reach appraisal targets, there was improvement in the availability and quality of service in minor towns and rural areas. The overall productivity of the staff improved from 139 staff/1,000 DEL in 1978 to 96 staff/1,000 DEL in 1986. However, both the quality of service and staff productivity are still low in comparison with even that in many other equivalent developing countries. Though P&T's overall financial position remains strong with a high level of liquidity and sound capital structure, financial perfr-rmance slowly deterio- rated. Some institutional reform was achieved though this was not an expressed objective of either of the two projects. However, the effect of this reform on overall sectoral efficiency, to date, appears to be marginal. 9.2 The performance of the three manufacturing enterprises was fair. With "cost-plus' price structure, guaranteed purchase by P&T (DOT) and hardly any domestic or internetional competition, there was little incentive for these enterprises to reduce costs or meet quality standards. Supplies were consistently below planned levels. The quality assurance program was delayed and significant improvements in product quality are yet to be achieved. However, substantial improvements in manufacturing performance can be achieved only through major changes in the entities' economic environment (e.g., further increases in domestic competition and reduction in protection from international competition), increased efficiency of operations and a further tightening of quality control. Though the two projects did not directly address the first two issues, GOI's policy shift in 1984 (para. 1.4) and subsequent efforts by DOT and MTNL to introduce competition in domestic procurement (para. 7.3), as well as the pricing agreements recently negotiated by DOT with the three enterprises (para. 3.18) are steps in the right direction. 9.3 In retrospect, Bank's estimates of project implementation and disbursement were optimistic. Supervision effort was inadequate, and no attempt was made to address fundamental issues affecting sectoral efficiency. 9.4 In the course of these two projects, a number of lessons have been learned by the Bank, some of which have been taken into account in the design of the follow-on ninth project (Loan 2813-IN). Major conclusions are as follows: (a) The capacity of the Indian telecommunications network in both subscriber lines and traffic capability is so small In relation to expressed and prepaid demand that there are obvious great economic benefits to be reaped from rapidly accelerating its development through massive investments in new equipment and obvious costs throughout the economy and polity from not doing so. (b) Radical improvement in the quality of service cannot be achieved without expanding the network, correcting imbalances, and rehabili- - 75 - tating and replacing worn and fault-prone network components. Major management changes are necessary such as delegation of considerable planning and implementation authority and responsibility to field units. (c) In the absence of adequate funds and implementation capacity to meet the network capacity and quality-of-service objectives on an all- India basis, it would be better to concentrate funds and efforts on a Ocrasho program limited to a few well-defined areas. Strong finan- cial, economic and network efficiency considerations make the major metropolitan areas the prime contenders in such a case. (d) No major improvement in sectoral efficiency can be achieved without addressing the fundamental issues/constraints arising out of GOI's policies affecting the cost and quality of telecommunications equip- ment manufactured in India. (e) Future direct Bank involvement in the telecommunications manufactur- ing sector must not be undertaken without a thorough evaluation of the status of, and prospects for, economic efficiency of production. 9.5 Lessons learned during these projects have had an impact on the design of the follow-up ninth project. Its coverage was limited to the operating agencies, DOT and MTNL--a separate project covering the manufactur- ing enterprises was proposed but did not materialize--and focuses on a narrower segment of the network relating to the four metropolitan cities. It also addresses some institutional issues. To avoid the delays experienced under previous projects, and accelerate project implementation, DOT was required to take advance procurement action on major items before presentation of the loan proposal to the Board (para. 3.16). In addition, the project made provision for use of consultants to advise on the inter-related issues of (i) delegation of authority to field units in planning, resource allocation, project sanctioning, etc. and (ii) DOT's investme.t planning and budgeting process. However, the ninth project also does not address the fundamental constraints to which the telecommunications sector is subjected. Further, the results on the institutional front have not been encouraging. After an encouraging start, progress on procurement (of imported goods) has been slow. Of evaluated bids for goods worth about US$191 million, orders had only been placed, as of end February 1988, for goods worth about US$67 million. The average time taken from bid opening tc placing of order was about 20 months which included 10-12 months after Bank clearance of bid evaluation. Appoint- ment of consultants, expected by September 30, 1987, is now a year behind schedule. 9.6 Since 1962, eight lending operations totalling US$800 million to the telecommunications sector have provided most of the foreign exchange for India's telecommunications development, particularly during the earlier years when relatively little bilateral financing was available. In a sector where expansion was constrained by heavy reliance on self-generated funds to finance the investment program, the availability of Bank funds allowed for a faster development of the network and, in addition, eiabled P&T to undertake programs of quality assurance, modernization of the telex network, introduction of new technologies etc. which might not, otherwise, have been possible. The Bank - 76 - group also played a part in the limited management improvements within the P&T, including, first, separation of financial accounts and, later, complete separation of the posts and the telecommunications branches, improvement in the materials management system, creation of a management information system, refinement of performance monitoring indicators and the creation of an Economics Study cell to analyze pricing, demand and investment issues in the sector. However, the impact of these institutional improvements on the operational efficiency of P&T, and later DOT, was marginal. Serious institu- tional problems still exist in DOT as exemplified by the lengthy procurement delays to which all projects were subject. The improvements in performance of the manufacturing enterprises (ITI, HCL and HTL), which were also covered under the seventh and eighth projects, were also minor. Thus, while the projects would be considered to be generally successful in terms of physical expansion and financial performance, the improvements i institutional/sector efficiency were limited, basically because the projects did not address the fundamental problems and constraints of sector development and efficiency. These cannot be removed without major sector reforms and appropriate policy changes which, in the past, the Government has not been willing to discuss seriously with the Bank. The Bank, on its part, will need to engage in a more effective dialogue with GOI, if it wishes to provide support in this effort. - 77 - ANNEX I INDIA SEVENTH AND EIGHTH TELECOMIUNCIATIONS PROJECTS (LOAN 1592-IN and CREDIT 11Z-I) PROJECT COMPLETION REPORT Compliance with Covenants Section of Agreement Agreeent Brief description of covenants 1592-IN 1112-IN Compliance and comments The Branch /a to furnish its LA 4.02 CA 4.01 Yes with delay. Provisional provisional accounts not later than accounts submitted within four to four months after the close of the six months. Audited statements fiscal year and, within a reasonable submitted after considerable delay time thereafter, certified copies of but improved from about 27 months the audited statements and auditor's for FYs 1979 and 1980 to about 12 reports months for FYs 1984 and 1985. The Branch to realize an annual rate LA 4.03 CA 4.02 Yes till dY 1985. Dropped to 8 of return of noa less than 11s on in FY 1986. average net value of its fixed assets in operation The Branch to review, not later than LA 4.04 Ces March 31, 1980, the value of its net fixed assets in operation and commencing with FY 1981, to ijust, if necessary, its fixed asse- for iurposes of calculatng the rate of :eturn The Branch to produce each year LA 4.05 Yes funds from internal sourcEs equivalent to not less than 60% of its annual capital expenditures, unless and until the rate of return shall have been calculated as provided in covenant above Yes with delay. Implementation ITI, HCL and HTL to each strengthen PA 3.02 - effectively started towards end its quality assurance procedures not 1981 later than March 31, 1980 ITI, HCL and HTL to furnish, not PA 4.02 PA 4.02 Yes later than six months after the end of each fiscal year, certified copies of its audited financial statements and auditor's report /a Branch - Telecommunications Branch of the P&T Department. Note: LA - Loan Agreement; CA - Credit Agreement. ?A * Project Agreement. INDIA SEVENTH AND EIGHTH TELECOMMUNICATIONS PROJECTS (LOAN 1592-IN AND CREDIT Ill2-IN) PROJECT COMPLETION REPORT Performance Indicators 1979 1980 1981 1982 1983 1964 1985 Years ending %srch 31 Est./a Actual Est./a Actual Fart.7b Actual Est./b Actual Est./b Actusl get. Actual . Financial Total telephone revenues per average DEL (Re) 1,618 2,431 2,768 2,606 2,617 2,712 2,897 2,967 3,099 3,387 3.285 3,584 3.450 3.56 Total cash operating expenses per average DEL (Re) 1,350 1,410 1,402 1,485 1,476 1.657 1,59! 1,823 1,643 2045 1,637 2,249 1,605 2,456 Rate of return (Z revalueu basis) U.S. na.. n.. 17.1 16.0 15.4 14.9 14.6 14.2 13.6 14.0 13.7 14.0 11.8 $ Operating ratio (2) 53 51 53 59 58 63 58 62 57 64 56 63 54 66 Nonfinancial Local switching capacity ('000) 2,260 2,188 2,475 2,336 2,511 2,469 2,736 2,612 3,036 2,827 - 3,054 - 3.307 DELs ('000) 1,966 1,868 2,161 2,016 2.186 2,149 2.386 2,296 2,646 2,466 - 2.668 2,696 Staffl1,000 DELS - - - 134 150 134 146 t36 140 134 - 129 - 1l9 Long distance PCO (number) 10,787 11,732 13,287 13,830 16,081 15,710 20,630 17,294 24,630 19,627 - 20,966 - 25,200 Tax capacity (4 wire) (lines) 45,450 34,000 45,550 40,300 48,770 46,570 57,270 50,370 82,042 54,520 - 80.620 - 85,10 /a Estimation from Staff Appraisal Report for the Seventh Project (Loan 159Z-IN). ib Estistion from Staff Appraisal Report for the Eighth Project (Credit 312-IN). ** - 79 - ANVU 2 PS3TTzof 2 INDIA Srr ria AM ItIE TRLCONUUICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) nPr cour TION RIPOrt Perforanace Indicators Appraisal Actuals targets Actuale Quality of service indicators TV7IT' e 1961 a 195I 1982 18 1984 I.Mlr 'TW Complaints per 100 Stations/Month Metropolita s districts 35.0 49.0 45.2 42.5 43.1 40.0 36.1 Major districts 35.0 57.0 51.3 44.0 43.8 38.4 31.0 Minor districts 45.0 82.0 69.7 65.0 59.2 48.6 44.0 Circles 50/40 66.0 52.0 46.9 53.9 48.4 46.0 All India 54.0 56.0 57.3 51.4 47.1 49.4 44.3 40.5 Faults per 100 Stations/Month Metropolitan districts 25.0 30.0 30.7 29.8 30.2 27.5 28.4 Major districts 25.0 38.0 32.6 30.7 30.2 28.0 26.5 Minor districts 31.0 51.0 46.1 43.6 40.6 35.2 33.6 Circles 45/30 53.0 42.4 39.6 41.7 39.4 36.1 All India 42.0 40.0 39.0 37.2 36.2 36.1 33.2 31.9 Average Duration of Faults (Hours) Metropolitan districtc 4.0 13.0 23.9 19.5 23.4 22.4 20.3 Major dist.icts 2.5 6.0 7.7 6.9 7.8 7.3 6-A Minor districts 3.0 4.0 5.5 5.8 5.2 4.1 4.1 Circles 2.5 1.0 3.3 3.3 3.4 2.9 2.9 All India 7.6 5.4 6.7 10.5 9.0 10.3 9.5 9.2 % Failure of Calls in Local Network Busy Hour ecEropolitan districts - Local 3.0 - 3.5 3.3 4.8 - Junction 6.0 - 13.3 13.1 20.6 - Major districts - Local 2.0 - 2.3 1.0 1.0 - Junction 2.5 - 8.8 3.4 3.7 - Minor districts - Local 3.0 - 3.0 3.5 3.0 - Junction 4.5 - 6.7 6.1 3.5 - I Effective Manual Trunk Cal:s Metropolitan districts 72.0 62.0 63.0 61.4 61.5 62.1 63.4 Major districts 75.0 68.0 68.0 69.9 69.4 69.6 71.0 Minor districts 75.0 66.0 66.3 66.8 66.1 66.5 68.3 Circles 75.0 71.0 74.5 75.3 74.9 75.1 75.6 All India 77.0 75.0 - - - - 72.9 73.2 74.0 % Failure STD Calls (Level 0. Busy Hour) 1Tropolitan districts 35.0 - 76.0 /4.0 72.0 - Major districts 40.0 - 57.0 51.0 52.0 - Mincr districts 45.0 - 45.0 45.0 41.0 - Circles - - 34.0 33.0 31.0 - All India - - 57.3 51.4 47.1 49.4 - Average Lost Time (Hours) per 100 yste-S per Month ror "road-band coaxial cable 3.00 1.16 1.00 20.70 1.57 1.07 1.20 1.42 Broad-band ticrowave radio 2.20 1.75 1.00 0.66 0.C8 0.7s 0.50 0.26 I Effective Telex Calls metropolitan districts 75.0 67.0 57.0 58.0 50.0 - Major districts 70.0 63.0 64.0 64.0 67.0 - inor districts 70.0 72.0 73.0 75.0 80.0 - Circles 65.C 81.0 79.0 76.0 78.0 - A As in Appraisal Report for Credit 1112-IN. -80- geMMe E!S#mt 7B206.8TCATlmB '90.r fLbaN 1.55521 Mse Coi 1112-INi Em.l13*d ad Aetual P..ie Camen (me il 1; a n) Seent Preiet (Len 1492-Dn Local toleoho~* *ervice 52.2 2,571.8 3,153.9 73.4 2,378.4 3.111.5 126.0 92.5 98.7 Long distance avithin 117.9 3"1.3 594.2 18.5 44.0 62.8 15.7 11.3 10.5 Long dintance trangaifaion 150.5 1,229.9 1,380.4 18.1 1,158.t 1,344.2 123.7 94.2 97.4 Open vire and tolegroDhe 33.1 "1,4 W07.2 52.9 861.6 934.7 147.8 114.3 115.8 MUher land end b.ildinga - 599.0 599.0 - 55.0 5".0 - 92.8 92.8 Reeerch, training. temting etc. 59,7 135.0 191.7 36.3 66.2 104.5 60.8 50.5 54.5 PAT Total 4 Q 5.6927 6.6387. L.Z2 L.OV, 2 L,014 i,d L 4 na IT 88.8 114.2 203.0 78.4 115.3 193.7 53.3 101.0 95.4 r,CL 89.0 75.0 164.0 72.2 76.4 148.6 Jl i 101.9 90.6 rTL 19.2 15.2 34.4 20.9 15., 36.4 108.9 102.0 105.8 Crand Total 1.143.0 5.8971 7.040.1 1.1987 5.7 L2L7 6492.4 I24 2L2 Eiahth P,eoict (Credit 1112-INI L.ocal tolegkone ".r,ce 1,257.6 5,155.4 '1.413.3 1,931.4 4,871.9 6,03.3 153.6 94,5 106.1 Lnq die,ance e.tching 1S0.0 60.9 m0.9 - - -- L~ng diatonce traneneison 400.0 2,163 9 2,563.9 264.7 2,045.0 '.329.7 71.2 94.5 90.9 Open wire and telegraph 103.9 1,049.9 1,153.8 32.7 900.0 932.7 31.5 85.7 A0.8 Othe, lande and bu.;,dinge - a25.5 25.5 - 700.0 700.0 - 84.8 548 Research treoiing, testing etc. 99.8 620.4 720.2 112.9 935.0 1,047.9 113.1 150.6 145.5 E-Ita1. 2.041.3 10.496.0 12.537.3 2.37LZ 9.451.9 11.813.6 ULLI 22-2 ri 211.0 15s.0 364.0 1W.7 8.0 26.7 1 1 1.9 5.2 7.3 HCL 309.1 246.0 555.1 368.7 268.4 63.1 118.6 109.1 114.4 ST 77.2 65.9 143.1 57.6 58.6 113.4 74.9 84.4 79.2 Crand Total 2.638. 10.960.9 13.599.5 2.804.9 9.7A39 12.5111j11 ..11 10 L /. Excludes Poighat factmry coet of Ra 337.2 m (total). stIx1ty AND fhk.Tn TIELC~11N1CAITIONS taoCt (L0O0A ti"-(8 AM CatelT 3332-i} _Pti1cT C~Æe.tTlt» ficpik PaT/0Y lare, st&t ,&to J. leot e i 04ch 3 8919 1990 £91f 94 39 303 39.4 39.1 ..9.JUIg ..T.. Les. Art..ei ltr. A<t..3 3.8. Art..3 Eal. actua.l lEt. Akt.o to, Arto.3 tet. 4,teet Es1, aktes tet. artes eTø* tot*~e7.se stt .8. e.. s... a.a. a.o. o.o. a,a a.. o.e. 2.19 o.a. 3.012 a.a. 3.323 0... 1.110 s.a. 1380 Iaret (3n.r..dS.4 570> 0...s. a.. .0. 0.8. 0.0. 0.0. e.. 0.0. 0.8. 3,101 *.s. 3.810 a.8. 4.143 m.. 6.446 0.0. 6.626 Treek 0.a. a.. 0.8. *.0. 0.0. 0.0. 0.8. 0.8. 0.8. 2.023 *.0. 1*,13 0.8. £,831 0.0. 5,49 0.8. 1.830 Teløsrph 603 414 101 149 1, 60 1 1G 188 6? 110 sit 564 6mi 9ål J.l. 9b" .s. 4.116 Toteke "0 4011 129 1i 440 S4l sol 109 6ha 4 30 161 414 934 0.s. 1.1W9 ".. e gl Løsed *orvtce i? ti? l 31111, 10 91 110 i94 10 119 30 1 »M 941 kW 414 å .* 69 oIr*tlememer 4 <Is2> 10 <101) 30 3123 300 (301o i. 14Ut) 00 (10y1 300 (402) . . 4 .11 a. (510 lotok Ikeøkeooo .9 1 6.1 .931 31,,G 4931 6.1 spe i-tlt l 9.1 lyt,4 10.419 to» 1 12.639 11.434 1101 JQ4 aa. L %KS PUt'.991 3.004 2.M19 2,321 2.il 23.10 2.914 .218 3.10 4,021 1,"4 4.630 6,12 ' .Oi. -.2 i.h. 4.93' fiher f*retn e 0 m4ø sal s2s $1) 426 8.006 92 1,4 s.031 1ai m. 8,133 1.e. 1.31 ekeeø~coeu 614 113 94 U9 408 "l1 944, ru 3.1799li9 &,1"I &. 1.11.A . 8.681 6.. l.0 rototen fo bd døbe@ 0 1 0 33 la 0 (til 0 17 0 0 6 0 O.a. 0 O.a. 0 WNI t! ototi tøet~.o l"33 I. MM49 .1 4.049 4.3 !inM ).80 u,33 ivi .04 3 m .3 " .8 lAn l.41 h L m.4 letøre~I receipto (+) 239 303 193 326 206 266 M 12 11 42 I 113 M 699 *.i. lit 1.O. 221 ogea Bfore fatereat 6 Ime0,~ poent~ <-2 270 210 2i i19 3g 416 44 40 636 ?0 l 9 9al 1.231 o.a. 1.?4 8 .4. 2.326 ne, 1cme 19 1 l3 0 pitet reere food 0.*. 3.691 e.e. 3101 B... 141 a.. 130 o.*. 3171 o.. 3.424 0... 3.391 8.0. 2.049 m.. 232 Mr,,~se resor,, fund o.. #e o.. 200 I .o. 42 l.e. 3.221 n.. 3.241 0.0. 3.133 0.e. l9d9 t.. 44 1.%. 111 om resacoo . .a. woof. 0 .. al i a.. 4M m.. 313 0.0. 122 4.o. 441 ... (66) 8.0. 3.349 ~@t øf geoerg )/ 3ieeete 23.3 2».0 24.0 23.3 19.1 28.1 20.@ 21.3 20.0 49.2 19.0 1.9 19.1 tr.0 . ii.9 0... 6.4 aoln .a. o.a. 0.. er.[ 34.9 1.4 14.11 84.4 34.3 13.0 34.0 li.? tå.* 33.6 a 1.4 m 00 ~relma Matt. (I) srO-O<M-e 3l 1 33 19 51 61 6 2 I 4 .6 43 14 a l. 12 .. 43 Ikela*d 0 0 0 43 62 41 62 6 1 42 70 d8 49 19 12 . 19 m-. a0 NtMt 2.6IG 2.413 2.1?8 2.06 2.67 2.132 2.97 2.114,1 3.099 3.11 3.2 1 1.26 4 3.410 3..0. 0... 1.560 . . .a. ca.t (kl 199 price) k.. ?.41i ..a. 2,411 0.. 2.3115 a.. 2.041 0.. 3.201 0.0. 7.009 .6. I.920 o.. 8.814 " ... .. 3esett~g **p**6es/DEL 3.494 1.709 I.7m9 3.199 ,044 .916 1,034 2.3 2.333 2,231 2,310 2.61 2.140 2.91 . . 1.336 n.. a. CAI aoret t%g tsø6n86/11EL Ca*erent 8110 3.430 3.603 3.641 3.676 3.411 3.191 3.811 1.643 7.143 I,611 2.269 1.401 .4% 0.0. 2.192 0.0. 2... c~.c. 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Dec ~ 099 allt~ ff@ 69~ Cm ~ ch ov.J-t ror DIGD-MI we aha 9~ VTG>ct offifts~ fo~f- de MM. 0 INDIA SEVENTH AND EIGHTH TELECOMMUNICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) PROJECT COMPLETION REPORT Organization Charts of DOT and MTNL (January 1986) Depart.ent of Telecommunications o-- ---------------------.4•••• .... .. -/1\-......-. ca.... L .... ......... 43k-~~ ta-fi- In~ - .*~' L4 u. DOT Directorate m~Dm men=-6 l l F El l- .M l 14>r lwi ----------- m u l :r -86- Maanaqo~*.fnn. N- M ANNEX 5 c Page 3 of 3 C C L .ne.a - a- n, l .ec- , -- - anis an *.ali- C -e.o . Do T C we e n -.7- 口口亂魚 月口鰓 口口開亂口口』目勵口驢口U闔口U 口細亂口口曰口』自他 細閑必神• ••．•魚••．．■．••．■■•••開•■開．■■矓••．•一．■•••■■••■■••■•• 一“，黝劇’“一神待｀馴••矚，•，•“,l一。袖戶•••口•••州論 一•．畸•■■－－■■■••．•．••■■■■•■■■•．■•••．■■•■一•－•．•．•．••．■口••口閑 勵細自口 籵森之．--.，二 亂．個h•．州“,&，網“，巒■曰一自口妒二口口．自狗，一••闕• 一勵口自1．唱口口“•口口自自，目‘.，•．•．•，．開口 細騰勰綢州戶馴馴馴諍臘二 、－一．曾h念二‘一一－一－－一 由目隨．點臨口口口•悶 幼盤站州自鳥月唱‘&,&&,I一、”。‘“•黝‘．啊，開• 鰓鸚總寺．，一。一t..I,,，一。，,t.&I,.,..l,-.&& 開•細間甲．神t••留•勵0．個口“••••闢•細馴開•騙神觔口開 胤露發常X之：:：勰．．一；勰”- 由目細f 10。潤口么已一嗚鳥召，勵l、亂勵， fl•t，•，•．，•用磚《個．•，，•，&,&b‘■••‘．么，，擊•，．•，斗，細•口物k&, &．。觔用神•”‘騙•常一禺0.1&..．•－．勵•”者者．叫”細，&&t二卜I婦已婦 之；勿．乏；I:A:：一，&,.&&,｛認‘’一”’一I誌”&- 搬絨州學．.-.．… C．鳥‘•·讒闢－.I坤＇，。，q闢t.I&:I『讓婦“&.I一“一調口•戲論＇一，& 計一。一：,l．二j,.l。．,：網．勰一1...，一訕t.I..& 計’吵＂.,,.-：一，論方臘．.,，論絮臘．.,&- 計了：、蝨仕腦．t,&,:&&&&’州．.& 。•，妒·ojo,，二‘ j閱憚t•t••．.C，驢啊，&）一••．亂。，，亂t. U-．一奮．&&.,f】．邊陶．•．，••調．.‘二，,，楓． &:’。一“,.&k.o&“鬨‘&I.& 沫！斗、酌雙獸需獸：乏： -I州k．擔鬨擔｀”闐州0. uf妒綢唱·‘,‘口．•，.,“吋，,&. 1•••4t．唱二t•，t：••自．,&1唱r,,‘電． ，細‘甲認亡才必森喜：，必；累•甲引“f,&.&，…以化他 ∥“•‘，一才勰江”：勿3&.,,&”州認訌邊 ！叔工亂，－馱露】：麾：1：一，,‘。·，&‘一計常： 才。二閱C 0 11·鰓＇&．•馳‘,,)&&‘。 、01一l口綢一豐巒叩‘豐•‘,‘二讓＇飼h& 一，,‘闐O•‘&&，一，唱一• k認門江絮二；：州：:.，…．‘一，，。．，二。…，. 〕，豔U邊肥他 戰一澱游數：二’鶯；:,;&’玀侈繼汗 爍～.A忍描發：．。一、。一、，-.&- l一儲I『也口t電闢•，細 &,&&.,．回．.,.&l，。，& 〕山U 繁憑勞二：二牆～&~~,．。，-..－二，.,-‘·禿 網••．•‘．•■，一～.‘•• 弋留：間”－一‘”一，t-&,.t一馴”--- 團～－二I.0～一→一～－一•一【 蹤黠～－一‘:：二。一。一。一。－ 面•面江州一化豐豐豐 一j亡上亡二一一－一－--－一一一－一二二二一一－ 二卹•亂td. 公二，江：：奮·：代認。－一－，一‘&”一”一’&&&&”•一‘&~&&&”一’-t一‘一一一’ 88 - ANNEX 7 Page 1 of 2 INDIA SEVENTH AND EIGNTH TZLICOMMUNICATIONS PROJECTS (LOAN 1592-IN AND CREDIT 1112-IN) PROJECT COMPLETION REPORT Return on Investment Benefit Period 1. The benefits of the program are expected to extend over the period from FY1979 to FY2002 when the plant provided under the program will, on average, have completed its useful life. Capital Expenditures 2. Capital expenditures are in accordance with the proposed program and have been deflated in order to maintain constant 1979 prices. Duties on imports and profits on domestically manufactured equipment and preinvestment for future programs have been excluded. Operations 3. Reven,163 and operating costs have been assigned to the program primarily based on additional rSLs provided under the program. 4. Revenues and operating costs have been deflated at the 1979 prices. ANMEX 7 -89 - Page 2 o2 Net Benefit3 5. A summary of cost and benefit streams followes Capital Operating Net Year expenditures costs Revenues benefits 1979 986 - - (986) 1980 1,004 382 637 (749) 1981 842 530 908 (464) 1982 1,303 705 1,222 (786) 1983 1,418 980 1,689 (709) 1984 1,526 1,184 2,071 (639) 1985 1,591 1,482 2,543 (531) 1986 1,818 2.895 1.077 1987-2002 1,881 3,171 1.289 6. The interndl financial rate of return defined as the discounted rate which equalizes the stream of costs and benefits as shown above is 142.