Ecuador - Telecommunications Project

CURRENCY AND EQUIVALENT UNITS Currency Unit = Sucre USS = 1 = S.250 (at appraisal - Dec. 1987) - S.500 (on January 1988) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES metric system ABBREVIATIONS AND ACRONYMS CDC - Comonealth Development Corporation DEL - Direct exchange (telephone) line ETAPA - Empresa Publica Municipal de Telefonos, Agua Potable y Alcantarillado GDP - Gross Domestic Product ICB - International competitive bidding IDD - International direct dialing IETEL - Instituto Ecuatoriano de Telecomunicaciones ITU - International Telecommunication Union MIS - Management information system OECF - Overseas Economic Cooperation Fund (Japan) O&M - Operations and maintenance PBX - Private branch exchange PCO - Public call office PSML - Public Sector Management Loan STD - Subscriber trunk dialing  ECUADOR XFOR OFFICIAL UUS ONLY INSTITUTO ECUATORIANO DE TELECOMUNICACIONES (IETEL) FIRST TELECOMMUNICATIONS PROJECT Table of Contents Page No. LOAN AND PROJECT SUMMARY .................. . .. -. . .... (l) I. INTRODUCTION ................10.... II. THE TELECOhMWNICATIONS SECTOR..................... 2 A. Backgrounda c k g r o u nd..... .. ............... t 2 Sector Organizationg a n i zn.. ......... 2 Access to Service.. . . .. ....... ..... to ... 2 Usage of Servicee.. .................. 2 Existing Facilities and Quality of Service.............. 3 Demand for Servicer v i ce....................... 3 B. The Entityg.. ........ ... 4 Organization and Management. ......... 4 Staffing and Trainingg.... ... 4 Billing and Collection. ..... . ....................... 5 Accounts ........................................ S Aui ..o ........**... * i .... to... 6 C. Sector Developmentv e l o p m e nt.. . ...... ... . ....... 6 Sector Goals and Objetives ..............e c .... 6 Sector Constraints ..... . ........ . .7 Bank Group's Role and Strategy... . ....... . .. ....... 7 -II. THE PROGRAM AND THE PROJECTR............... . .... 9 9 Project Objectivesj.................................... 9 Project Descriptions cn.. . ....... ..... .. . * 9 Project Cost. .. .............. 12 Contingencies.... ..... ............... 13 Project Financing .............. ................... . 13 Procurement . . . ..... ..... ..... 14 Implementation ........... 17 Disbursements.......... 17 Performance Indicators 8.......... IV. FINANCIAL ANALYSIS ..19 Past Financial Performance ..19 Projected Financial Performance . .21 Financing and Exchange Risk ............................. 22 This report is based on the findings of a Bank mission to Ecuador in December 1987 comprising Ms. C. Ramsay, E. Vidal, E. Sharon and A. Cerezo (consultant). Messrs. D. Mans and P. Lecharney participated in project preparation and Ms. S. Pai in preparation of the appraisal report. This document has a ratricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otewie be discksed without World Bank authortion.  V. ECONOMIC ANALYSIS ........................................... . 24 Benefits .................................................**..*...*....... 24 Tariffs ................................................. . ........ 24 Return on Investment .................... .... 2 Resource Mobilization . .................................. 25 Project Risks .................................... .. . 25 Least Cost Solution ..................... . 26 Environmental and Health Aspects ................... ..... 26 VI. RECOMMENDATIONS............................ .... ......... 27 List of Annexes 1. Basic Sector Statistics 2. Existing Telecommunications Facilities 3. Telephone Demand and Supply 4. Organization Chart 5. Staff Composition 6. The Project 7. Program and Project Costs 8. Institutional Action Plan 9. Terms of Reference for Technical Cooperation 10. Terms of Reference for Management Development Program 11. Terms of Reference for Project Design and Supervision 12. List of Goods and Services to be Procured 13. Bid Packages for Bank-financed Goods 14. Implementation Schedule 15. Schedule of Disbursements 16. Performance Indicators 17. Historical Financial Statements (1982 - 1986) 18. Projected Financial Statements (1987 - 1994) 19. Notes and Assumptions on Financial Statements 20. Summary of Tariffs 21. Return on Investments 22. Documents Available in Project File Mapt IBRD No. 20053  ECUADOR INSTITUTO ECUATORIANO DE TELZCOMUNICACIONES (ISTEL) FIRST TELECOMMUNICATIONS PROJECT Loan and Project Su_ary Borrowert Instituto Ecuatoriano de Telecomunicaciones (IESTEL) Guarantor: The Republic of Ecuador Amounts US$45 million equivalent Terms: Seventeen years including a five-year grace period, at the Bank's standard variable interest rate Pro3ect Descriptions The project, the first Bank telecommunications operation in Ecuador, will help expand and rehabilitate telecommuni- cations facilities and assist IETEL's institutional deve- lopment. Specific components will: (a) expand local telephone service to connect 189,000 additional subscribers; (b) rehabilitate the existing network to improve service to about 50,000 existing subscribers; (c) expand the long distance network; (d) extend service to rural commmnities through installation of 76 exchanges in rural areas; and (e) expand and modernize international telephone, telex and data service. The project would assist IETEL's institutional development by helping to finances (a) an agreement for technical cooperation or *twinning* between ISTEL and a more developed telecomunuications administration; (b) a management development program for IETEL staff; and (c) technical assistance to help strengthen IETEL's project implementation capacity. Proiect Benefits and Risks: Business and rural subscribers will be primary beneficia- ries of expansion of the network. However, all sub- scribers will benefit from overall improved quality of service--particularly in Guayaquil where deterioration of the cable network and congestion are most severe. Busi- ness and Government subscribers will be the major benefi- ciaries of the expansion of long distance telephone, telex and data facilities and mobile telephone services. Project risks relate tot (a) IETEL's ability to implement the project, given past low levels of investment and institutional weaknesses; and (b) maintaining management stability and political support for institutional improvements and policy changes. The first will be minimized bys (a) using private foreign and local contractors for cable installation; and (b) having turnkey  - ii . contracts for exchange and transmission equipment. Also, in the Guayaquil region, consulting engineers will assist IZTZL with project implementation. The second risk will be minimized through agreements on a long-term action plan committing the company to specific performance targets and actions during project implementations and through close supervIsion during 1988 and 1989. Loan conditionalities with respect to project implementation will also help reduce this risk. Estimated Costs: la Item Local /b Foreign Total - (US$ million equivalent) - Exchanges 17.8 108.9 126.7 Cable network 28.1 34.1 62.2 Rehabilitation (Guayaquil) 4.5 7.5 12.0 Transmission 1.2 7.2 8.4 Telex and data 0.7 6.8 7.5 International 2.9 17.6 20.5 Rural 6.9 20.0 26.9 Buildings, civil works 7.2 0.0 7.2 Traffic and test equipment 0.3 1.5 1.8 Training and management development 0.1 0.9 1.0 Consultancy 0.8 2.9 3.7 Miscellaneous (mobile tel., vehicles, freq. spectr. monitoring equip) 14.2 13.3 27.5 Total Base Cost 84.7 220.7 305.4 Physical Contingencies 2.6 11.0 13.6 Price Contingencies 1.3 9.7 11.0 Total Proiect Cost 88.6 241.4 330.0 La Exchange rate used Sucres 250 - US$1.00. /b Local costs include Sucres 14,620 million (US$58.5 million) in customs duties and local taxes.  _ iii - Financing Plan: Local Foreign Total - (USS million equivalent)- World Bank - 45.0 45.0 CDC - 27.0 27.0 Italy - 5.7 5.7 France - 47.2 47.2 Japan - 45.0 45.0 Spain 6.7 6.7 Brazil 7.7 7.7 Mexico 8.1 8.1 Other - 17.5 17.5 IETEL 88.6 31.5 120.1 Total 88.6 241.4 330.0 Estimated Disbursements: IBRD FY: FY89 FY90 FY91 FY92 FY93 FY94 FY95 Annual 3.8 - 7.0 10.4 8.1 8.1 7.6 Cumulative 3.8 3.8 10.8 21.2 29.3 37.4 45.0 Economic Rate of Return: 31X Map: IBRD No. 20053.  - 1 - ECUADOR FIRST TELECOMMUNICATIONS PROJECT 1. INTRODUCTION 1.1 Telecomunnications services in Ecuador are inadequate. There is large unmet demand for service, and quality of service is poor in both rural and urban areas. Principal constraints to efficient sector performance and development have been (a) the poor institutional environment of the primary service provider, Instituto Ecuatoriano de Telecomunicaciones (IETEL) which has limited its ability to implement projects and operate and maintain the network; (b) poor pricing policies which have limited resource generation and increased network congestion; and (c) severe underinvestment in the sector due to lack of resources, low sector priority and poor procurement practices. 1.2 The Bank reviewed the organization, finances and investment program of the telecommunications sector in 1986 during preparation of the Country Economic Memorandum (April 87). Bank's assistance to the sector was requested by the Government of Ecuador and IETEL and is being provided through two initiatives. The ongoing Public Sector Management Loan (Ln. 2156-EC) will help strengthen financial and administrative systems. The proposed project will focus on alleviating physical and resource constraints affecting sector performance and furthar institutional development.  - 2 - II. THE TBLZCOMMUNICATIONS SECTOR A. Background Sector Orsanization 2.1 The Ministry of Public Works and Communications is responsible for overall supervision and control of th telecommunications sector in Ecuador. IRToL provides International and domestic long distance telephone and telex services and local telephone services to over 952 of the subscribers. Addi- tionally, INTEL has been delegated responsibility for allocation and control of the radio frequency spectrum. Empresa Publica Municipal de Telefonos, Agua Potable y Alcantarillado (ETAPA), a corporation owned by the municipality of Azuay, provides local telephone services in the city of Cuenca. In addition to the public switched network, there are several dedicated private networks to meet the specialized requirements of private companies, public sector entities in the petroleum and energy sectors, and the Armed Forces. Ecuador hae no telecommunications manufacturing industry as such although some ancil- lary equipment, such as small diameter subscriber cables, are produced locally. 2.2 The Ministry of Public Works and Communications exercises control of INTEL through chairmanship of its Board. While the Act which established IBTEL in 1972 formally gives it the rights associated with a public corpora. tlon, Government procedures constrain IETEL's operational autonomy (para. 2.10). Access to Service 2.3 With 343,000 direct exchange lines (DELs) in service, the average telephone density in Ecuador, at end 1987, was 3.5 direct exchange lines (DELs) per 100 inhabitants. This compares unfavorably with the averages for other Latin American countries (Colombia 9.5, Venezuela 5.8) and to the average for Latin America as a whole (about 7 DELs per 100 inhabitants). About 981 of all telephone lines are concentrated in urban areas. Quito and Guayaquil, with 28S of the country's population, had 772 of the DELs. Rural areas, with about 401 of the population, had only public call offices (PCOs) or no service. Nearly all DELs were served by automatic exchanges, with only 90 lines, In the rural areas, served from small manual exchanges. There were 1,000 coin box telephones and public call offices. Automatic telex service was available to about 3,230 subscribers of whom about 881 were in Quito and Guayaquil. Usage of Service 2.4 Current statistics do not distinguish between residential and busi- ness telephones, nor is there data on the composition of traffic. However, since domestic call charges were unchanged over the last 30 years, the revenue from domestic (local and long distance) calls per DEL is a good indicator of the usage per line. Over the period 1982 to 1986, the domestic call revenues grew on average nearly 271 per annum compared to a 41 growth in DELs. The more than doubling of usage per line over the period indicates the level of  unsatisfied dew=nd for telephone connections, estimated at 422 of total demand at end 1987. Existing Facilities and Quality of Service 2.5 At end 1987, total telephone switching capacity was 459,000 lines and telex exchange capacity 7,550 lines. (This includes the 28,900 lines of tele- phone switching capacity provided by ETAPA in Cuenca). Annex 1 gives statis- tics on the development of facilities over the period 1980-87. Details of existing facilities are provided in Annex 2. Despite a large unmet demand (para. 2.7), only about 75Z of telephone exchange capacity is presently used. This is largely due to underutilization of capacity of recently commissioned exchanges which have been placed in service ahead of expansion of the outside plant necessary to connect it to subscribers. 2.6 The quality of service is poor, with many outages and long delays in restoration. Only 50Z of faults are cleared within three days. Call comple- tion rate is low, averaging only 35Z. There is also severe congestion on mny inter-urban routes during business hours when the call completion rate is practically zero. The poor quality of service is primarily due to (a) delayed rehabilitation and replacement of faulty or unserviceable equipment and cables; (b) equipment imbalance resulting from faulty planning and delayed investment; and (c) poor maintenance. About 202 of the exchange equipmeni needs replacement. Most of these old and obsolete exchanges are situated in the business areas and serve heavy traffic-generating subscribers. Equipment regrading is overdue in many of the older electromechanical exchanges. Re- dimensioning of exchanges and inter-exchange routes for efficient handling of traffic is also necessary. The cable network requires replacement in partic- ular sections as well as rejointing where use of inadequate materials and improper splicing procedures has made the waterproofing ineffective. This is a particular problem in Guayaquil, where there is a sharp increase of cable faults during the rainy season. A recent survey of the Guayaquil network indicated that 202 of the primary and 50Z of the secondary cable network needs to be replaced. This has affected service to about 50,000 subscribers. In addition, lack of free cable pairs and poor operational practices have often resulted in bypass of the congested secondary network and direct connection to the subscriber from primary cables. This, coupled with non-maintenance of updated cable records, has created problems in fault clearance. A severe shortage of skilled maintenance engineers has further aggravated the problem. Demand for Service 2.7 The available data on demand is limited as IETEL does not maintain waiting lists in areas where exchanges are saturated and in areas where th*re is currently no service. Even where waiting lists are maintained, there is significant suppressed demand as potential customers are discouraged from registering by the current long lead time in obtaining connections. The historic growth rate in DELs over the period 1982-87 of about 52 per annum is no indication as it reflects a supply constraint due to underinvestment in the sector. On the basis of demographic and economic data, IETEL estimates the total demand (working lines and unmet demand) at end December 1987, to be 589,000. Demand is estimated to grow by 52 per annum over 1987-92. These estimates are reasonable. INTEL aims to meet 802 of demand by 1992 as against  - 4 - 582 at end 1987. A demand and supply curve for telephone lines in Ecuador is given in Annex 3. B. The Entity Organization and Management 2.8 ISTEL, the proposed borrower and implementing agency, is a govern- ment-owned corporation administered by a six-member Board of Directors, whose chairman is the Minister for Public Works and Comunications. The other members are representatives from: the Ministry of Finance, the Armed Forces, the National Development Council (CONADE), the Engineering Association and the General Manager oi IETUL. The Board establishes policy and approves tariff proposals, procurement contracts and other major operational decisions. Tariffs approved by the Board are subsequently coatfirmed by a ministerial accord issued by the Minister of Public Works and Comunuications. 2.9 The organization is divided into a Corporate Headquarters and two Regions with regional headquarters in Quito and Guayaquil. In general, the Regions are autonomous with respect to detailed engineering, operations and maintenance, training and personnel and control their day-to-day operations within approved budget ceilings. Efforts have recently been made to improve intra-regional coordination through changes in organizational structure. The effectiveness of these changes will be assessed and reconuendation. for changes will be made to IETEL's Board (para. 3.3(vi)). IETEL's organization chart is given in Annex 4. 2.10 Although it is an autonomous corporation, IETEL's operations are subject to review and approval by several Government agencies. The Ministry of Finance approves annual budgets for operating and capital expenditures and any subsequent intra-category transfers. Procurement, which is governed by Ecuador's Procurement Law, requires approval of several Government agencies. Government personnel policies and procedures which apply to administrative, financial and higher level technical staff generally do not fit in a business profit-oriented enterprise. During the period of project implementation, and as part of an agreed action plan, IETEL will review existing personnel policies and other factors in its institutional environment affecting opera- tional efficiency and make recommendations for necessary changes (para. 3.3(vi)). Staffing and Training 2.11 As of December 31, 1987, IETEL's staff totalled about 6,027. While IETEL's staff ratio of 18 per 1,000 DEL's is reasonable, being only 2 to 3 times that of telephone companies in developed countries, staff composition is not in line with the requirements of the company. Technical staff (engineers, technicians, operators, and linemen) constitute only 43Z of total staff and is less than administrative staff. Moreover this percentage has declined over the last 10 years while the percentage of administrative and support staff has increased. IETEL's staff composition is given in Annex 5. Current IETEL plans to improve staff productivity to 1511,000 lines by 1991 will require a virtual freeze in hiring administrative staff, and retraining to meet the requirements of the expansion program. Development of a comprehensive man- power and training plan is a necessary first step (para. 3.3(iii)).  -5- 2.12 Training of IETEL staff is provided mainly through the Regional training centers at Quito and Guayaquil. Direccion Nacional de Personal provides limited training in general and administrativo subjects and some specialized telecommunications training has been provided by equipment suppliers. Training in INTEL has been inadequate, and budget allocations for both external and internal training have been underutilized; the training budget was reduced in 1987 because of perceived ineffectiveness. The national training unit at corporate staff headquarters has not played an effective role in coordinating and planning training activities. Regional training centers are poorly managed, available facilities are not well maintained, and there is a severe shortage of qualified instructors. IETEL has taken some measures to overcome the deficiencies in the more critical areas. Phase 1 of a Swedish technical assistance program provided training in maintenance of exchange equipment and some initial assistance with outside plant maintenance. To supplement its own resources IETEL is using local private contractors to assist with network maintenance. Additional funds have also been allocated to IETEL under the PSHL to provide urgently needed assistance in outside plant maintenance (para. 3.3(iv)). A twinning arrangement to be financed by the proposed project (para. 3.3) will provide substantial support to IETEL in staff training and development including assistance in strengthening in-house training facilities. Additional training will also be provided through Phase 2 of the Swedish assistance program (para. 3.3(iv)). Billing and Collection 2.13 IETEL's billing is fully computerized. There are marked differences in performance between the Guayaquil and Quito regions. 'While bills are issued on schedule in Quito, within 20 days of the end of the billing period, there have been major delays in Guayaquil. At the time of loan appraisal, issue of bills in Guayaquil was 5 months behind schedule. Billing was brought up to date with the assistance of an external consulting firm. As agreed during appraisal, IETEL submitted to the Bank, prior to loan negotiations, a status report on billing in Guayaquil and measures taken to help prevent extensive delays in the future. 2.14 Collection of accounts receivables needs to be improved in both regions, although the problem is more acute in Guayaquil. IETEL has been reluctant to enforce disconnection policies in the case of state-owned enter- prises and in the Guayaquil region where there are major problems with bil- ling. Measures agreed under institutional action plan to reduce accounts receivable include seeking revised arrangements for payment of Government bills, carrying out an inventory of outstanding receivables with the assist- ance of PSML consultants (para. 3.3(i)), follow up legal action and more vigorous application of disconnection procedures in respect of overdue accounts. Accounting 2.15 IETEL's accounting systems place heavy emphasis on cash budget and revenues. Cash operating and capital expenditures are approved annually by the Government and are used as a control tool by IETEL's management. Coummer- cial accounts however have been largely ignored and have been unreliable due  to inconsistent policies and lack of documentation and control. The auditors found that several accounting procedures were not in accordance with generally accepted accounting principles, the most important being, presentation of revenues on a cash basis and costs on an accrual basis, inconsistent deprecia- tion of fixed assets and inappropriate recording of some asset and income items resulting on balance in understatement of these accounts. In assessing historical performance (para. 4.2) financial data has been adjusted where possible, including adjusting cash revenues to reflect accruals. Technical assistance provided under the IETEL component of the PSML will support IhTiL efforts to take corrective actions (para. 3.3(i)). Audit 2.16 IETEL has been slow in finalizing accounts and in having them audited. Also, the Controller General's Office, which has responsibility for auditing state enterprises has delayed initiating hiring procedures for exter- nal auditors until IETEL's financial statements were available. This has further delayed availability of audited accounts. Audited financial state- ments for FY86 were available only in February 1988. IETEL has appointed auditors for its 1987 accounts and has agreed that auditors will continue to be appointed in a timely manner. Appointment of auditors for FY87 accounts was a condition of Board presentation (para. 6.3(a)). Improvements in accounting systems and procedures in FY89 will reduce the time required to finalize accounts and to prepare draft financial statements. During negotiations, agreement was reached that audited financial statements for FY88 will be submitted to the Bank within eight months of the close of the fiscal year, and for FY89 onwards unaudited and audited financial statements will be submitted to the Bank within four months and six months respectively, of the close of the fiscal year (para. 6.1(a)). C. Sector Development Sector Goals and Obiectives 2.17 The Government of Ecuador has recognized that well functioning tele- communications services are crucial to economic development and to achieving growth in non-traditional exports and increased efficiencies in productive sectors. At the same time, current economic difficulties make it essential to improve the efficiency of public enterprises and public sector finances. In line with this, the main goals of the telecommunications sector are tot (a), improve quality of, and access to, telecommunications services in business centers and rural areas through network rehabilitation and efficient and cost effective network expansion; (b) increase operational efficiency through improved management and orga- nization; and (c) generate higher revenues to cover operating costs and contribute a significant percentage of investment costs.  -7- Sector Constraints 2.18 The principal constraints to sector development have been the followings (a) Poor Institutional Environment. Government regulations and proce- dures vhich govern procurement, financial management, capital and operating budgets and personnel restrict managerial options and affect operational efficiency. Civil service salaries which apply to managerial, administrative and most higher level technical staff, limit IBTEL's ability to attract qualified staff and to link salaries to performance. IZTEL also suffers from internal deficiencies in its systems and procedures for financial management, accounting, corporate planning and administration. Staff training has been inadequate contributing to a large extent to poor network mainte- nance. IETEL's management places more emphasis on technical rather than financial, personnel and commercial management. The company needs to become more business oriented. Both the Government and IETEL have recognized the urgent need for improvements in IETEL. ISTEL has taken initiatives to improve performance such as a corp- orate reorganization and strengthening operations and maintenance procedures with assistance of foreign consultants. 'hile some cons- traints need to be addressed in the context of overall public sector management in Ecuador, the current project and the PSHL will support major institutional development efforts (para. 3.3). (b) Poor Pricing Policies. While international tariffs have been pegged to the US dollar, local and long distance domestic tariffs have declined sharply in real terms. The domestic call charge at 0.3 sucre (US$0.0012) per impulse had not been adjusted in more than thirty years and was previous to the recent increase, among the lowest in the world. This resulted in increasing subsidies to local service, reducing revenues for expansion and rehabilitation and increasing network congestion from excessive use. Domestic tariffs were adjusted to 1.5 sucres per impulse. (c) Sector Underinvestment. There has been severe underinvestment in the sector. Investments averaged only 0.5Z of GDP over the past four years, whereas 12 of GDP would be needed for rapid development. This reflects (i) lack of resources, (ii) low sector priority and thus limited access to external financing, and (iii) procurement difficul- ties which limited expansion to small purchases from existing suppliers. ISTEL has financed the development of telecommunications services principally through credits from a few suppliers with whom it has had a long-standing relationship. 2.19 Bank Group's Role and Strategy. The Bank's strategy in Ecuador is to support macroeconomic and sector policy reforms through both policy based lending and project loans. As part of these efforts, emphasis is placed on improving the efficiency of public enterprises, supporting Government efforts to improve public finances and development of economic infrastructure through appropriate rehabilitation and expansion investments. The proposed project in  conjunction with the PSML is designed to extend these efforts to the Telecomunuications sector. Bank involvement will help alleviate key constraints which have limited sector development. Major emphasis will be placed on improving IETEL's institutional performance by (a) strengthening the institution through improved staff training and management development, (b) improving pricing policies, and (c) determining necessary changes in IBTEL's external and internal environment to improve its operational efficiency. Progress in these are4as will be monitored during project implementation through regular jo.nt review of performance vie-a-vist (a) agreed performance indicators and (b) the action plan for institutional improvement (para. 3.3). External financing from Bank and cofinancing sources will help the sector correct past underinvestment. Use of international competitive bidding (ICB) for Bank-financed equipment and the promotion of competAtive procurement for non-Bank-financed items should result in significantly lower equipment costs than in the past. Contracts for outside plant installation will help develop local contractors and encourage transfer of know-how in the case of joint ventures.  -9- III. THE PROGRAM AND THE PROJECT The Program 3.1 IETEL's investment program for the period 1988-1994 comprises ongoing works, the proposed project and preinvestment for post-1991 works. The program is consistent with the sector objectives outlined in pars. 2.17. The total investments under the program are estimated at US$835.9 million with a foreign component of US$536.7 million. Ongoing works, which will add 158,000 lines of switching capacity in 1988, are cofinanced through bilateral funds and suppliers' credits. The investments in ongoing works during 1988-1992 are estimated at US$40.2 million with a foreign component of US$25.8 million. Other works include 80,000 lines for Region 2 at a total cost of US$133.7 million and a foreign cost of US$93.5 million. Initial investments for future works is projected at US$332.0 million with a foreign component of US$176.0 million. The proposed project is detailed in Annex 6 and the investment program is given in Annex 7. Proiect Objectives 3.2 The principal objectives of the project are to help (a) improve the quality of, and access to, telecommunications services in Ecuador through rehabilitation and expansion of the telecomnunica- tions network and replacement of obsolete equipment; (b) strengthen IETEL's management and organization and increase its com- mercial orientation through a comprehensive institutional development program; 5C) improve service to business subscribers by modernizing and expanding international telephone, telex and data services; (d) improve IETEL's procurement practices; and (e) increase private sector participation through development and use of private contractors for construction of outside plant. Proiect Description 3.3 Specifically, the project consist3 of the followingt Part A. Investment Program: (a) expansion of local telephone services by the addition of about 189,350 lines of local exchange equipment with associated cables to make about 189,000 connections; (b) rehabilitation of the cable network in Guayaquil to improve service to about 50,000 existing subscribers;  - 10 - (c) expansion of the long distance network by the addition of five new transit exchanges and associated interexchange routes and reorganiza- tion of the network for efficient traffic handling; (d) extension of telephone service to rural communities in Ecuador by the installation of 76 new exchanges in rural areas, and provision of service to isolated areas (i.e., the Galapagos islands); (e) installation of a new international telephone exchange with capacity of 1,500 terminations and a new satellite earth station at Guayaquil; (f) extension of telex and data services; and (g) installation of a mobile telephone service. Part B. Institutional Improvement: (a) twinning IETEL with a more developed telecommunications administra- tion to improve the performance of key technical and managerial staff, increase the company's commercial orientation, strengthen IETEL's in-house training program and sensitize IETEL to internal and external factors affecting its operational efficiency. (b) carrying out a tailor-made management development program for IETEL managers with assistance of local management consultants; and (c) strengthening IETEL's project implementation capacity through techni- cal assistance in the preparation of detailed network plans, compu- terization of cable records and supervision of the rehabilitation and expansion of the network. These measures, which will be financed by the proposed Bank/CDC loan, form part of a comprehensive timebound institutional action plan (Annex 8) agreed with IETL which will be carried out during the period of project implementa- tion. The plan includes actions to be carried out with IETEL resources as well as measures to improve institutional performance with technical assist- ance from Sweden, Japan under the proposed OECP loan, and the Bank under both the proposed project and the PSML. Key areas to be strengthened and sources of assistance are as follows: (i) Financial Systems and Procedures. The IETEL component of the PSML will help improve IETEL's financial and accounting systems and proce- dures to overcome the deficiencies identified (para. 2.15). During the period of project implementation, consultants financed under the PSML will help IETEL design and implement an integrated commercial accounting system (including cost accounting), carry out a physical inventory of fixed assets and inventories, revalue fixed assets and verify accounts receivables. Design and implementation of new systems and training of staff are expected to be completed by July 1991. During negotiations, agreement was reached that (a) verification of accounts receivable will be completed by September 30, 1989; (b) verification and revaluation of fixed assets by December 31, 1989; and (c) fixed assets will be revalued periodically (every year) during project implementation, in accordance with procedures satisfactory to the Bank (para. 6.1 (b)).  - 11 - (ii) Pro1ect Implementation. Technical assistance under the proposed Bank and OECF loans will provide support to IETEL staff in implementinS the proposed investment program. Consulting engineers, financed through the proposed Bank loan vill assist ISTEL staff in the Guayaquil region to prepare detailed cable network plans, computerize cable assignment records and supervise the rehabilitation and expan- sion of the cable network. Consultants financed under the OECF loan will help INTEL prepare and evaluate bid documents, negotiate contracts, supervise installation and carry out acceptance tests. The project will be coordinated and supervised by a project manager to be appointed at corporate level, head of the Project Administration Unit. (iii) Manpower Planning and Training. An important project objective is to increase the availability of competent staff during project implemen- tation. It was agreed during loan appraisal that by August 1988, IETEL would carry out a detailed assessment of its current staff and develop a manpower and training plan on the basis of productivity targets and the staffing requirements of its current investment program. This will provide a base for the two initiatives to be supported by the proposed Bank loan. First, the twinning arrangement between IETEL and a more developed telecommunications organization which will provide for exchange of staff between the two companies, on-the-job training of IETEL staff and technical assistance to improve IETEL's in-house training capability. Visits have been arranged to potential partners. in addition to staff training, interaction through the twinning arrangement with a commercially oriented telecommunications organization will sensitize IETEL staff to factors constraining institutional efficiency. The proposed Bank loan will finance the fees of the twinnitg institution and foreign currency expenditure of IETEL staff participating in the program. Additionally, the Bank loan will help finance tailor-made management development program for IETEL managers which will be carried out with the assistance of local management consultants. The program will make extensive use of case studies relevant to IETEL's business environment. About 300 hours of training will be provided over a two year period for the estimated 40 managerial staff expected to partic- ipate in the program. (iv) Operations and Maintenance. A key objective of the action plan is to improve the operations and maintenance of the cable network in particular that in Guayaquil. To provide urgently needed assistance in Guayaquil US$100,000 has been allocated from the PSML to finance the expenses of three cable supervisors who will assist and help train IETEL staff in the maintenance of the outside plant network. The consultants were in the field from August to November 1988. Phase 1I of the Swedish technical assistance program will provide an additional 51 manmonths of consultancy over a two-year period to help improve operations and maintenance systems and procedures for the cable network. The consultancy contract has been submitted for approval to relevant Government agencies. The progress of this critically needed assistance program will be monitored closely during implementation of the proposed project.  - 12 - (v) Traffic Management. Lack of expertise and equipment to monitor and effectively manage traffic is a key factor affecting network perfor- mance. IETEL has agreed to carry out a traffic study, in accordance with terms of reference satisfactory to the Bank, which is expected to be completed by negotiations. The proposed Bank loan will finance necessary traffic measuring equipment. IETEL will establish a traffic management unit by end 1989. (vi) Institutional Environment. During the period of project implementa- tion, IETEL, assisted by the twinning institution, will review existing personnel policies, assess the strengths and weaknesses of its new organizational structure and identify changes in internal and external regulations and policies to improve the efficiency of IETEL's commercial operations. Recommendations for changes in these areas will be submitted by IETEL to its Board by December 1989. The Bank will be given the opportunity to comment on proposed changes. Management stability is an important element in successful implementation of the proposed institutional development program. The Bank received assurances that the guarantor will strive to maintain continuity in management during the project period and will advise the Bank of pending changes in senior management. Progress towards achieving the objectives of the action plan will be monitored (a) through agreed performance indicators (para. 3.11); and (b) by reviewing actual progress vis-a-vis specified completion dates for ongoing and proposed institutional initiatives. Terms of reference for the technical cooperation under the twinning arrangement are given in Annex 9 and for the consultants' services to be financed under the Bank loan in Annexes 10 and 11. Map IBRD 20053 shows planned telecommunications development in Ecuador under the proposed project.. Project Cost 3.4 The total cost of the project is estimated at Sucres 124.2 billion (US$330.0 million equivalent), with a foreign exchange component of Sucres 90.9 billion (US$241.4 million equivalent). These project costs reflect: (a) the contract price for equipment for which contracts have already been signed; (b) the median price of the bids received for equipment for which bids have already been received; and (c) estimated end 1987 prices based on IETEL's experience with contracts relating to ongoing works and on experience in other countries for other components, with inflation adjustments to bring them to mid-1988 level. The local cost component includes Sucres 14.6 billion ($58.5 million equivalent) in custom duties and taxes. IETEL is liable for custom duties at an average rate of 262 for telecommunications equipment. Details of project costs are given in Annex 7 and reproduced in Table 3.1.  - 13 - Table 3.1s ESTIMATED PROJECT COST la Foreign - Sucres, million Lb - ---- USS million ---- as 2 of Foreign Local Total Foreign Local Total total Exchanges 27,226 4,440 31,666 108.9 17.8 126.7 86 Cable network 8,512 7,031 15,543 34.1 28.1 62.2 55 Rehabilitation (Guayaquil) 1,875 1,125 3,000 7.5 4.5 12.0 63 Transmission 1,804 301 2,105 7.2 1.2 8.4 86 Telex and data 1,700 181 1,881 6.8 0.7 7.5 91 International 4,405 715 5,120 17.6 2.9 20.5 86 Rural 5,000 1,715 6,715 20.0 6.9 26.9 74 Buildings, civil works 0 1,795 1,795 0.0 7.2 7.2 0 Traffic and test equipment 375 86 461 1.5 0.3 1.8 83 Training and management development 225 25 250 0.9 0.1 1.0 90 Consultancy 730 205 935 2.9 0.8 3.7 78 Miscellaneous 3,318 3,557 6,875 13.3 14.2 27.5 48 Total Base Cost 55,170 21,176 76,346 220.7 84.7 305.4 72 Physical Contingencies 2,758 656 3,414 11.0 2.6 13.6 81 Price Contingencies 32,950 11,535 44,485 9.7 1.3 11.0 88 Total Proiect Cost 90,878 33,367 124,245 241.4 88.6 330.0 73 La Notes Exchange Rates Sucres 250PUS$1.00. lb Local costs include S::cres 14,620 million (US$58.5 million) in customs duties and local taxes, which are not eligible for Bank financing. Contingencies 3.5 Physical contingencies are 52 on local and foreign costs for equip- ment, 102 on local and foreign costs for services and 10 on civil works. Price contingencies for foreign costs are based on increases of 3.02 p.a. in 1989 and 1990, and 4.02 p.a. in 1991 and thereafter. Price contingencies for local costs are assumed equal to global price increases, and the cost table is calculated in equivalent US dollars. Total project costs in local currency shown in the table reflect total project costs in dollars converted to sucres at the projected exchange rates given in Annex 7. Price contingency in sucres is the total Project cost less base cost plus physical contingencies. Pro1ect Financing 3.6 The sources of project financing are indicated in Table 3.2. The project's foreign costs (US$241.4 million) will be financed by several  - 14 - cofinanciers and IDTEL. The Commcnwealth Development Corporation (CDC) is expected to provide a loan of