Document of The World Bank FOR OFFICIAL USE ONLY ~~CONFIDENTIA Report No: 12464 CE Type: SEC 12464 SRI LANKA: STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR March 16, 1994 Energy and Infrastructure Operations Division Country Department 3 South Asia Region This docunent 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. CUR.RENCY- EQ)UIVAI&ENT'I (June 1993) Currency Unit-Sri Lankan Rupee (SLR) US$1-SLR 46 SLR 1 million-US$21,739 FISCAL YEAR January 1 - December 31 Weights and Measures Metric PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADB - Asian Development Bank BLT - Build Lease and Transfer BOT - Build Operate Transfer DANIDA - Danish International Agency DEL - Direct Exchange Line (or Main Line) EPL - Ewbank Preece Limited GHz - Gigahertz GOSL - Government of Sri Lanka IDA - International Development Association ITU - International Telecommunications Union Mb/s - Megabits/Second Mhz - Megahertz MOPT - Ministry of Posts and Telecommunications OECF - Overseas Economic Cooperation Fund of Japan PABX - Private Automatic Branch Exchange PCM - Pulse Code Modulation PCN - Personal Communications Network PCS - Personal Communication Service PLDT - Philippine Long Distance Company PPF - Project Preparation Facility RSA - Revenue Sharing Agreement RSU - Remote Subscribers Unit SLS - Sri Lanka Telecom (Services) Ltd. SLT - Sri Lanka Telecom SLTA - Sri Lanka Telecommunications Authority SOFRECOM - Society for Telecommunications Studies, France UNDP - United Nations Development Program SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Table of Contents Page No. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. SECTORAL BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . Sector Objectives . . . . . . . . . . . . . . . . . . . . . .. . . 3 Demand for Service . . . . . . . . . . . . . . . . . . . . . . . . 4 Existing Facilities . . . . . . . . . . . . . . . . . . . . . . . . 6 II. STRATEGIC FRAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . 7 Legal and Regulatory Framework . . . . . . . . . . . . . . . . . . 7 Service Providing Entities . . . . . . . . . . . . . . . . ... . . 8 Market Structure . . . . . . . . . . . . . . . . . . . . . . . . . 10 Competition and Market Forces . . . . . . . . . . . . . . . . . . 10 III. OVERVIEW OF MAIN ISSUES . . . . . . . . . . . . . . . . . . . . . . 12 Public Sector Institutions . . . . . . . . . . . . . . . . . . . . 12 Network Planning . . . . . . . . . . . . . . . . . . . . . . . . . 13 Operating Efficiency and Quality of Service . . . . . . . . . . . . 16 Pricing Policies . . . . . . . . . . . . . . . . . . . . . . . . . 20 IV. PROPOSED STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . 23 A Vision for Future Development . . . . . . . . . . . . . . . . . . 23 Sector Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 25 Tariffs . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 27 Network Development . . . . . . . . . . . . . . . . . . . . . . . . 28 Role of the Private Sector .. . . . . . . . . . . . . . . . . . . . 29 The Main Operator, SLT . . . . . . . . . . . . . . . . . . . . . . 30 Financing of SLT Investments . . . . . . . . . . . . . . . . . . . 35 Fiscal Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 V. CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . 38 This study of the Sri Lankan Telecommunications Sector is based largely on the findings of a.mission that visited Sri Lanka in May/June 1993. The mission consisted of Messrs./Mmes. M. Sergo (Sr. Financial Analyst), Jane Walker (Private Sector Development Specialist), D. Delgado (Telecommunications Engineer), S. Sathar and S. Achath (Consultants). The study also draws on several reports which have been listed as references in Annex 25 to this document. The report was prepared with assistance from Dr. Bandaranaike (Consultant) and Mr. Gregory Staple (Consultant). The assistance provided by the Ministry of Posts and Telecommunications and Sri Lanka Telecom (SLT), Sri Lanka Telecommunications Authority (SLTA) and other public and private sector entities is gratefully acknowledged. Annexes: 1. Status of Liberalization of Telecommunication Services . . . . . . . 42 2. Main Telephone Lines per 100 Inhabitants . .3. . . . . . . . . . . . 43 3. Ratio of Main Lines to GNP . . . . . . . . . . . . . . . . . . . . . 44 4. Telephone Demand Forecast . . . . . . . . . . . . . . . . . .. . . 45 5. Sri Lanka Telecommunications Act No. 25 of 1991 . . . . . . . . . . 48 6. Private Companies Providing Telecom Services . . . . . . . . . . . . 50 7. Main Telephone Lines Growth Rate . . . . . . . . . . . . . . . . . . 53 B. SLT's Investment Program: 1991-1995 . . . . . . . . . . . . . . . . . 54 9. Performance Indicators . . . . . . . . . . . . . . . . . . . . . . . 5 10. Converqion of SLT from State Corporation to Company . . . . . . . . . 56 11. Local Telephone Service Costs . . . . . . . . . . . . . . . .. . . . 58 12. Approval Process for SLT's Project Planning and Implementation . . . 59 13. Experience of Privatizations in Sri.Lanka . . . . . . . . . . . . . . 60 14. Recent Telecommunications Privatizations . . . . . . . . . . . . . . 61 15. Main Elements of Memorandum of Association . . . . . . . . . . . . . 62 16. Organization Chart of Sri Lanka Telecom Authority and Staffing . . . 63 17. Organization Chart of Sri Lanka Telecom and Staffing . . . . . . . . 65 18. Organization Chart of Celltel . . . . . . . . . . . . . . . . . . . . 67 19. SLT's Financial Statements: 1991-95 . . . . . . . . . . . . . . . . . 68 20. Financial Projections 1994-2005 for SLT . . . . . . . . . . . . . . . 73 21. Principal Telecommunications Tariffs . . . . . . . . . . . . . . . . 76 22. Status of Frequency Allocations and Usage . . . . . . . . . . . . . . 80 23. Advanced Technologies and Limits for Application in Sri Lanka . 81 24. How Long Does It Take to Divest a State-Owned Telecommunications Operator? . . . . . . . . . . . . . . . . . . . 83 25. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Map - IBRD 22723 SRI LANKA STRATEGIC OPTIONS FOR TR TELECOMMfNICATIONS SECTOR EXECUTIVE S=WARY Back4round To take advantage of rapid development of new telecommunications technologies over the last decade and to keep pace with fast growing demand, an increasing number of countries have separated sector regulation from its operation and permitted private companies to compete for the provision of various services. In many countries, e.g., Argentina, Australia, Chile, Japan, Mexico, New Zealand, and the U.K, state owned operators of basic telephone services have been privatized. Most recently, the Government of Singapore has made a public offering of shares in Singapore Telecom. The role of government is thus being redefined from provider of telecommunications services to regulator of the sector, and the operation of the sector is to an increasing extent left to private companies. The development in Sri Lanka has been influenced by these trends: in 1986, the Telecommunications Board of Sri Lanka was established to develop a restructuring program for the sector, including the creation of an independent operating company with eventual private equity. In 1988, the Cabinet proposed a new telecommunications act for this purpose. However, labor union and broader political concerns prior to the 1989 elections prevented the Cabinet from presenting the proposed act to Parliament. The new Government decided to keep basic telephone services as a public monopoly, but the Telecommunications Act was approved by the Parliament in 1991. The 1991 Telecommunications Act opened up the market to the private sector, except for basic local and long-distance telephone services that are provided by a state corporation, Sri Lanka Telecoms (SLT). Under the new Act, a regulatory body, Sri Lanka Telecommunications Authority (SLTA), was created under the Ministry of Posts and Telecommunications (MOPT) . Sri Lanka's telecommunications sector is now one of the more open to private operators in Asia and various private companies have been licensed to provide paging (5 companies), cellular (3), data transmission (3), trunked mobile (1) and other services. There are also hundreds of unlicensed small private agencies offering telephone and fax services to the public, many of which are open 24 hours a day, and a private operator of over 200 public card phones. These private operators have responded quickly and efficiently to Sri Lanka's increasing demand for telecommunications services. Sector Issues There is a noticeable contrast between the dynamic response of the private operators to the requirements of the market and the performance of SLT, the state monopoly for basic telephone services. SLT's limited autonomy in investment planning, procurement, project implementation, personnel management and other matters is not conducive to systematic network development and efficient operation. Its investments are based more on the availability of concessionary funds and political decisions than on market demand. Due to these technical and administrative weaknesses, SLT has failed to respond effectively - ii - to the strong growth in demand. Over the last decade, growth in installed lines has lagged behind - the increase in demand, resulting in only about 142, 000 connected subscribers in June 1993 as compared to an unsatisfied demand estimated at over 200,000 additional potential subscribers. To accelerate the expansion of the telephone network, a new state owned company,. Sri Lanka Telecom (Services) Ltd. (SLS), was created in 1993 mainly to implement a supplier financed, turn-key project for 150,000 lines. While the creation of SLS may accelerate network expansion, it is unlikely to solve the longer.-term problems of the public telecommunications sector, e.g. service quality, demand satisfaction and efficiency of operations. It appears that SLS only is a temporary solution until SLT has been converted into a company and its efficiency of operations improved. By most standards, the quality of service provided by SLT is below adequate levels. Thus, it is not surprising that a World Bank Private Sector Assessment Survey in 1992 of 93 manufacturing enterprises in the Greater Colombo area showed widespread dissatisfaction with the quality of telephone services. While the firms'ranked the 'quality of telephone services as the second most important factor influencing their performance (after adequate and reliable power supply), they singled out telecommunications as the worst performing infrastructure sector. This is hardly surprising as only about 35% of international and domestic calls are successfully completed. Furthermore, many of the lines are too poor for reliable fax and data transmissions. The 1991 Telecommunications Act provided an adequate framework for increased private investments in the sector. The resale of SLT services was not foreseen, however, and this leaves the telephone agencies and the card phone operators without regulatory control. Further, the fact that the regulator, SLTA, and the state-owned main operator, SLT, report to the same ministry (MOPT) may lead to conflicts of interest. The regulator, SLTA, has experienced difficulties in retaining suitably qualified staff and has been unable to implement certain regulatory functions prescribed by the 1991 Act, e.g. consumer protection aspects, monitoring of operator's performance, enforcement of license conditions and public hearings. SLTA has also experienced problems in dealing with the increasing demand on the radio frequency spectrum from the public as well as the private sector. In 1993, the Government of Sri Lanka (GOSL) approved a request from SLTA for new staff positions. A draft amendment to the 1991 Act has also been prepared with the purpose of tonverting SLTA into a more independent Regulatory Commission and which would allow for the regulation of private resettles of SLT services. The increasing variety of the telecommunications services and number of service providers, make adequate regulation a necessity for coordinated expansion and improvement of the network. If the 1991 Act is not amended, there would be serious doubts about the longer-term ability of SLTA to adequately carry out its regulatory functions. SLT's monthly subscription fee (about US$1.70 equivalent) is low by all standards and may cause a deterioration of SLT's profitability over the longer run as well as promote uneconomic demand. SLT's low subscription fee may also be detrimental to the development of privately supplied services. - iii - Recommendations GOSL's main objectives for the sector are to expand access to telecommunications services all over the country, improve service,quality, satisfy all demand for telephone connections and promote efficient operation. While these objectives are commendable, they are unlikely 1to be reached as long as the basic telephone service remains a public monopoly. Adequate access to good quality telecommunications is a necessity if Sri Lanka is to continue its export led growth and establish itself as a viable alternative to Hong Kong, Singapore. Taiwan and Malaysia. To rapidly improve access to and quality of basic telephone services, this market should, therefore, be opened to the private sector by allowing private companies to establish wireless services in competition with SLT as well as wired services in areas not served by SLT. The development of wireless cellular technologies in recent years, coupled with falling prices for cellular equipment, not only make competition feasible but also provides a cost-efficient way to rapidly expand the telephone system. Further, to enable SLT to compete on an even basis and improve its efficiency, service quality, market orientation and commercial operation, it should be privatized with a qualified telephone operating company holding a substantial share of its equity. At the same time, the sector regulator-- SLTA--should be strengthened and become more independent. Thus, the proposed strategy for Sri Lanka's telecommunications sector provides for a redefinition of GOSL's role from service provider to regulator and can be summarized into the following three core elements: * improve market access and increase competition; * strengthen sector regulation; and * privatize SLT. The key steps of the above strategy are given below: Improve Market Access and Competition: * allow qualified private companies to provide wireless basic telephone services in competition with SLT as well as wired services in areas not served by SLT; * transfer SLT's mobile cellular and data transmission services to independently operated subsidiaries to ensure,that they are not subsidized by SLT's monopoly services; consider their future divestiture; and, * study the feasibility of the establishment of local telephone companies and cooperatives and how they could be funded and provided with the necessary technical assistance. Strengthen Sector Requlation: * presentation to the Parliament of the amendment to the 1991 Telecommunications Act to change the status of SLTA into a more independent Commission and provide it with regulatory authority over the resale of SLT services; * finance SLTA's activities through license and other operator fees (rather than through GOSL's budget), to provide it. with suitable financial autonomy; - iv - - * design and implement a plan to increase SLT's low monthly subscription fee to avoid uneconomic demand and a longer term decline in SLT's profitability; * encourage the expansion of cellular, data transmission, paging, card pay phones, telephone agencies and other services currently provided by the private sector; * undertake a study of radio frequency needs to ensure future availability of frequencies for companies that want to enter the market and new technologies and services under development; * encourage the companies providing mobile cellular (and in the future stationary cellular) and other radio operated services to use modern, digital technologies, when commercially available, to ensure efficient use of radio frequencies; and, * study the feasibility of auctioning off the radio frequencies and other scarce facilities to the highest bidder to ensure fair and transparent allocation. Privatize SLT: * convert SLT into a company under the Companies Act; * reincorporate SLS's project implementing functions into SLT; define other functions for SLS (e.g. to operate SLT's cellular services) or cease its operation; * continue SLT's consultancy supported efforts to improve its corporate planning, efficiency of operations and service quality; * define conditions that GOSL would require in the license for a private operator of SLT as well as debt/equity and tariff and taxation policies; * bring SLT's audited statements up to date and monitor its financial performance on a commercial basis to facilitate estimates of its value; * establish the rules and bidding/negotiations procedures for the divestiture of SLT; * to encourage private interest in the purchase of SLT and obtain a fair price for GOSL, consider the option of selling a minority stake of SLT's equity to a strategic investor with an option to acquire a majority stake later; the management of SLT could be transferred to a minority investor by issuing shares with different voting power; some shares could be sold to SLT staff and/or floated in the local market; * discuss and inform SLT staff and other concerned parties about SLT's privatization and identify adequate staff transition arrangements to minimize union and other resistance; and * contact suitably qualified and financially strong telephone companies to ascertain their interest in investing in SLT; negotiate price and other conditions. SRI IAN1RA STRATEGIC OPTIONS FORTER TELECOMMXNICATIONS SECTOR I. SRCTORAL BACKGROUND Introduction 1.1 The main purpose of this paper is to review recent developments in Sri Lanka's telecommunications sector, make comparisons with relevant experiences in other countries and formulate a suitable development strategy for the sector. The main focus is on the regulation of the sector and the Government-owned main operator, but the existing private sector service providers have also been studied to provide an adequate picture of the sector as a whole. The possibilities to further increase the role of the private sector in the provision of telecommunications services.and-the encouragement of competition and market forces have been given special attention. 1.2 During the past decades, rapid technological development (e.g., in the fields of digital switching, satellite communications and optic fibre cables) has revolutionized the telecommunications sector. New services have been created (e.g., mobile cellular, telefax, and high speed data transmission), and demand for telecommunications services has increased dramatically. In parallel with those developments, the production and distribution of goods to consumers took place in ever shorter time intervals and the ability to produce and sell in close relation to changing consumers preferences became a necessity for efficient competition. These changes have far-reaching implications for developing countries like Sri Lanka that have adopted an outward-oriented, export-led development strategy. In todAy's apparel trade, successful retail chains place orders repeatedly during the season for models that sell well and delivery is expected within weeks. Similar developments are taking place in other industries and adequate telecommunications services (phone, fax, and data transmission) have become a necessity for effective competition, especially for the tourism and export industries. 1.3 To enable the telecommunications sector to keep pace with technological changes and innovations, a number of governments restructured the sector. During the secoqd half of the 1980s, in line with European Economic Community (EEC) recommendations, the telecommunications sector was liberalized and the private sector was permitted to provide some services, e.g. terminal equipment and value-added services in France, the Netherlands, Belgium, and also Switzerland. In the US, the private sector American Telephone and Telegraph (ATT) monopoly was divested in 1994, and the entrance into the market (except for local telephone service) of new companies and competition was facilitated. The creation of new services' and the breaking up of old telecommunications monopolies made it necessary to distinguish clearly between the regulatory and the commercial aspects of the sector and amend the regulatory framework. New telecommunications laws were enacted in a'number of countries, e.g. in the U.K. (1984), Japan (1985), France (1986), Switzerland (1987) and Germany (1990) and state owned telephone companies were privatized, e.g. in Argentina, Chile, Mexico, U.K., Australia and New Zealand. The most recent example was the divestiture of Singapore Telecom. Governments in an increasing number of countries thus see their main role as the regulator of the sector, leaving its operations to private companies. The restructuring of Sri Lanka's telecommunications sector has followed the same trends noted above. The postal and telecommunications services were separated in 1980, in 1991 a new Telecommunications Act replaced the old Telecommunications -2- Ordinance, separating commercial operations from sector regulation, and a new government corporation was licensed for the operations of basic telecommunications services". Various private companies were licensed to provide mobile cellular, paging, data transmission, and other services. Hundreds of unlicensed agencies all over Sri Lanka offer telephone and fax services to the public and a private company has installed over 200 public card phones. On the whole, the Sri Lanka telecommunications sector is now one of the most liberalized in the Asia-Pacific region, second only to the upper income countries, Australia, New Zealand, and Japan (see Annex 1). A chronology of major sector reforms and operating licenses is given below: Chronology of Sri Lanka Sector Reforms 1980 Sepaiation of Postal and Tetecamaunications servIces; 1981 -The first paging service ticense was granted; 1985 Customer Premfses. Equipnent (tetephones,, teteprinters, fax machines end PBXs) opened to competition; 1988 The first nobi L cettular service icense granted; 1989 Second, third and fourth paging Licenses granted; 1990'. A GOS. corporation, Sri Lanka TeLecom (SLT) Legatty estabLished; 1991 The new TeLeenuuications Act of 1991 adopted, creating the regulatory authority (SLTA) within the Ministry of Posts and Telecommunications (MOPT); *.SLT's operating License signed; * Two icenses granted for store and forward fax services; * Two licenses granted for data transmission iervices; 1992 A second cellular ticense granted; - A fifth paging ticense granted; 1993 A third celluter ticense granted; A third data services license granted; A first trunked:mobile service ticense granted; * SLT sublicenses card pay phones services; * A new GOSL owned company, Sri Lanka Telecom (Services) Ltd. (SLS), created to impLement a planned turnkey, suppLier financed project for 100,000 new tines. 199 * SLT Suth icenses a second card phone operator * A fourth cetular-license granted 1.4 Despite expansion of public and private telecommunications services in recent years, there is still a huge unmet demand for basic services (paras 1.6 to 1.10) and the service quality provided by the public corporation is poor, with a call completion rate of only 35%, which is lower than other South Asian countries. At the end of 1992, Sri Lanka had a telephone density of 0.76 telephone lines in service for 100 of population as compared to 0.68 in India and I/ GOSL moved towards the privatization of the telecommunications department in 1986 to 1989, but reversed itself due to labor union and wider political concerns before the 1989 parliamentary elections. 0.97 in Pakistan, 9.91 in Malaysia,. and 2.73 in .Thailand (Annex 2). Colombo, with only 4% of Sri.Lanka's population, had 67t of the telephones resulting in a telephone density of 13.7 lines per 100 population as compared to 6.7 in Calcutta, 11.0 in Earachi, 12.1 in Kuala Lumpur and 14.7 in Bangkok. Sri Lanka's telephone density is in line with what generally could be expected in a country with Sri. Lanka's GNP per capita (Annex 3). However, to enable Sri Lanka to compete with other Asian countries and satisfy telecommunications demand from tourism, export-oriented industry and the relatively large number of Sri Lankans living abroad, further expansion and improvement of services are justified. Sector Objectives 1.5 With the East Asian NICs as a role model, the Government of Sri Lanka (GOSL) has successfully pursued an export led growth strategy, which has resulted in Sri Lanka becoming the largest exporter of manufactured goods, in per capita terms, of all low income countries. Adequate access to good telecommunication services is essential to continue this export drive. Further, if Sri Lanka aspires at becoming a viable alternative to Hong Kong, Singapore, Taiwan and Malaysia to foreign firms looking for a suitable export base, Sri Lanka's telecommunications infrastructure would have to be expanded and improved. MANUFACTURED EXPORTS PER CAPITA Low Income Countries Sri Lanka Indonesia ZImbabwe China Pakistan Egypt C.AR India Sierra Leone Mauritlana Bangladesh 0 20 40 60 80 100 120 MaAf. Exports per capita (US$) Goureeo World DevlopMent Report, 1998 1.6 Against this background, GOSL's main sector objectives are to expand access to telecommunications service all over the country, improve service quality, satisfy demand for telecommunications connections and promote operating efficiency. The Bank supported those objectives under the ongoing Second Telecommunications Project, which provided for expansion of the network, imnrovement of the service quality and strengthening of SLT's institutional -4 - capabilities in corporate planning, implementation of development plans as well as efficiency of operations of the expanded networkY. However, considering the currently large unsatisfied demand and projected growth of demand, the need for careful network planning and SLT's project implementation capabilities, the public sector on its own is not likely to satisfy the demand for basic telecommunications service until well into the next century. Another sector objective is the strengthening-of the sector regulation, which is being supported by the Bank under a technical assistance component of the ongoing Third Industrial Development Project. Demand for Service 1.7 Several demand estimates and projections have been made in recent years by JICA (Japan), Carl Bro. & Co. (Denmark/DANIDA), Ewbank Preece Ltd. (EPL, UK, funded by ADB) and ITU (funded by IDA PPF) . The EPL study of 1988s the most comprehensive one and was updated in early-1993 by consultants, SOFRECOM of France funded by IDA under the Second Telecommunications Project. The updated EPL forecasts (Annex 4) indicate a total demand for 460,000 lines in 1995, 636,000 lines in 2000, and 920,000 lines in 2005, or an increase of 7 to 8% p.a. However, these forecasts should be considered only as indicative because of the uncertainty of some data: (a) the last population census was done in 1981; (b) the future GDP growth may differ from the assumed 5% p.a; (c) the basis for forecasting demand in the troubled areas in the north and east is weak; and (d) tariff changes, e.g., a substantial increase in the monthly subscription fee, may have an impact on demand. A summary of supply and demand projections for basic services is given below: SMMIXv MWd DleMonf Proletl2as fo PI asir, geryices Dir. Exchange ST'I Lines Connected Waiting tnregist. Total Year Ae . (DEL . ean Da 1992 Colombo Area 91,000 58,300 61,000 0 Outside Colombo 44,50D 40,900 43,800 129,1200 Total Si aka 135, 500 99,200 104,800 339500 1995 T Sri Lanka 2,000* 70 7,000 450,000 L t.L anka N.A. N.A. * A..*ing a 15% p.a. increase from 1993 to 9 The Second Telecommunications Project (Cr. 2249-CE) in 1991 also provided for a mid-1993 review of the adequacy of the institutional arrangements for the sector; this review has been combined with and incorporated into this sector study. - 5 - 1.8 In July 1993, there were, nearly i09.000 applicants for service on SLT's waiting list as compared to 144,000 subscribers. The waiting lists are 'likely to include mostly serious applicants, as the former Telecommunications Department introduced an application fee of SLRs. 250 (US$5.75) in 1989, which reduced the number of applicants by 20,000. However, the waiting lists may not include all demand, as waiting lists are maintained only in places which currently have service, and potential subscribers may not . bother to register without a realistic expectation of being connected within a reasonable time. Such suppressed demand has been estimated to equal current waiting lists, which would indicate a total demand (the sum of connected subscribers, waiting list and suppressed demand) of over 340,000 lines in early 1993. Demand is expected to grow at the rate of 7 to S p.a. for the foreseeable future. On the other hand, SLT's monthly subscription fee of only US$1.70 equivalent may promote uneconomic demand, especially from residential subscribers, many of whom may not want a telephone of their own if rates were set at about cost recovery levels of US$7 to US$10 equivalent (see para 3.24). The connection fee was recently increased to about US$260 and covers the cost of the basic subscriber apparatus and its installation. This fee is relatively high, but does not adequately compensate for the low monthly subscription fee or discourage uneconomic demand from new subscribers. The low subscription fee may be one of the main reasons for increasing demand for residential connections (see chart below): Registered Demand Per Subscriber Category Subscriber Category Con.Subs. (144,000 af 7/93) SLIs Walt List (110,000 as of 7/93) Newr Apple. April to July '93 (13.800) Source: SLT/Sofrecom 1993 1.9 High traffic per connected subscriber line also indicates a substantial unsatisfied demand. The existing network was not designed to handle the high traffic load and the result has been severe congestion and low completion rates for local as well as long distance calls. Despite a four-time increase during the past two years in the traffic handling capacity of the international facilities, some congestion during busy hour still exists due to the increased traffic caused by the resurgence of tourism and other economic act$vities, as well as increased number of calls with Sri Lankans living abroad. 1.10 The three private mobile cellular service providers currently have about 5,000 subscribers and are connecting over 200 new subscribers monthly. The potential demand for this service was'estimated at about 3% of the demand for -6- basic telephone service, or about 15,000 lines by 1995. This estimate looks low, now that competition has pushed down prices and increased the cellular market. The willingness to pay a substantial connection fee for a cellular telephone, a -monthly subscription fee over US$20 equivalent and call charges more than double SLT rates also indicates a strong demand for telephone service. 1.11 There are five paging companies in Sri Lanka with a total of about 4,000 subscribers. Based on the experience in other Asian countries, the market for paging services in Sri Lanka could be about 10-12,000 subscribers by 1995. There is one private company operating about 200 card pay phones. Based on its demand estimates, this company plans to have 600 card phones in service by early 1994. Therp is also a growing number of unlicensed agencies (also called "bureaus") reselling SLT services by providing telefax and telephone facilities to the public. Exact numbers are not available, but estimates indicate that there are several hundreds. The demand for various telecommunications services has grown rapidly during the past couple of years and the private as well as the public service providers have expanded their services, the private sector at double digit rates, without catching up with demand. Existina Facilities 1.12 In addition to the private facilities mentioned above, the state owned corporation SLT has a nationwide network providing domestic local and long distance and international facilities for voice, telex, telegraph and facsimile services. For the local telephone services, the telephone switching capacity is provided in some 250 telephone exchanges, remote subscriber units (RSUs) and manual switch boards with about 180,000 exchange lines as of December 31, 1992. With about 136, 000 main lines in service, exchange capacity utilization (exchange fill) averaged only 75%. SLT needs to address this uneconomic exchange fill and remove its causes, such as network imbalances and connection procedures, as a priority issue. For the past decade, Sri Lanka's growth in main telephone lines was 6.7% p.a. In 1993, SLT expects to increase this rate to over 15%. However, even at this higher connection rate, the low exchange fill will remain beyond 1995. A reasonable exchange fill for the Sri Lankan network should be over 85%. 1.13 SLT's greater Colombo area has six exchanges and 19 RSUs, with a total capacity of about 120,600 lines (67 t of total lines in the country) . At present, 71% of switching capacity in the country is digital, and this percentage is increasing. The proliferation of various switching systems is a problem, especially for a network of Sri Lanka's small size. The oldest analog exchanges (strowger from 1950 and crossbar from 1960-70) will be replaced by the year 2000. In urban areas, the cable network is buried; self-supported aerial cables are extensively used in rural areas. The cable network in the Colombo area has recently undergone extensive replacement with improved reliability. The new cable system has performed well even under the adverse weather conditions experienced during the recent monsoon seasons. 1.14 SLT provides telex service to about 1,500 subscribers (90%in Greater Colombo area) connected to the Colombo telex exchange. There are more than 6,000 facsimile machines, mostly provided by private sector, which due to their simpler operation and relatively low costs are now preferred to the telex service. SLT also provides a telegraph service operating over 133 lines from the .telex exchange at Colombo, connecting several post and SLT offices with Gentex teleprinter. The telegrams are read over telephone to the nearest "phonogram" office of SLT, transmitted through the Gentex network and sent by messengers to their final destination. L.15 SLT's domestic long distance ,network consists mainly of digital ficrowave highways -(2*34 Mb/s 4GHZ) and analog coaxial cable links. Spur routes xse small and medium capacity analog radio system and some areas are served by solar powered 4 and 8 channels multi-access radio equipments. SLT has carried >ut an extensive program of digitalization of the transmission network using ?ulse Code Modulation (PCM) systems through cable and digital links between the secondary and switching centers and the primary exchanges. For national switching, the tertiary centers in Kandy and Anuradhapura are linked to an older existing analog exchange in Colombo and to a new national digital exchange with Larger capacity. A map is attached indicating the status of the long distance aetwork as projected under the Second Telecommunications Project. 1.16 International communications are provided via a submarine cable (SEA- 4E-WE), stretching from France through the Mediterranean Sea, the Suez Canal and the Red Sea, to Colombo, Singapore and Indonesia and a standard A satellite station at Padukka 35 km east of Colombo. - ADB is funding a new satellite station at Padukka, a back-haul microwave link with Colombo and expansion of the international exchange. Due to the pressure of increased traffic and the time needed to procuie and install the ADB funded facilities, SLT has recently installed a Standard B transportable station on their telecommunications compound in Colombo to provide additional channels on the 630 Intelsat Indian Ocean satellite. To facilitate the smooth handling of international traffic, the international exchange was recently expanded from 200 to 800 trunks. 1.17 Three companies have been issued operating licenses for data transmission services: (a) Datapak, a joint venture between SLT and Indian Saga, which operates data services between India and Sri Lanka; (b) Data Net, which recently started operations serving international companies in Sri Lanka; and (c) Electroteks, which is the leader in this market. Electroteks has facilities in about 200 locations, mainly in Colombo, about 200 radio channels of its own and some leased' long-distance circuits from SLT; it has its own international satellite link working over the British Telecom (Tyme) net. II. STRATGIC FRANNWORK Legal and Requlatory Framework 2.1 In May 1991, the Parliament passed a new Telecommunications Act, which replaced the former Telecommunications Ordinance with effect from July 1991. Under the 1991 Act, the telecommunications market was opened to the private sector, except for basic local and long-distance telephone service, and the regulatory authority was vested with the Sri Lanka Telecommunications Authority (SLTA), under a Director General Telecommunications (DGT) within the Ministry* of Posts and Telecommunications. SLTA's main regulatory functions according to the 1991 Act include: control of tariffs and interconnection charges, approval of transmission and signalling plans, type approval of equipment, radio frequency allocation and monitoring, consumer protection, licensing of operators, examination of radio operators and monitoring and enforcement of relevant laws and license conditions. A more detailed description of the 1991 Act and SLTA,s regulatory functions is in Annex 5; SLTA's organogram and staffing is in Annex 16. On the whole, the 1991 Act and the sector regulation have been successful in facilitating increased private participation in the development of Sri Lanka's telecommunications sector outside SLT's monopoly on basic telephone services. -8- Service Providing Entities 2.2 SLT was legally established in February 1990 under the State Corporation Act of 1957 and became operational in September 1991 when its operating license was signed and it took over relevant assets and liabilities from the former Telecommunications Department. SLT (organogram and staffing in Annex 17) was given the monopoly to provide basic local and long-distance telephone service, but may delegate monopoly rights to private service providers. This has been done, e.g. to a private card phone operator and to a data transmission operator, who has his own long-distance circuits and international satellite link. 2.3 As a state corporation, SLT's investment plans have to be approved by GOSL and procurement by the Ministerial and/or Cabinet tender boards (see Annex 12); investment decisions are often guided by the availability of concessionary funding and political pressures rather than market demand and suitability of equipment, and staff salaries are limited by GOSL guidelines for state corporations. This limited autonomy makes it difficult for SLT to make meaningful longer term corporate plans, improve service quality and connect subscribers to already existing capacity rather than expand capacity. 2.4 SLT's need to strengthen corporate planning, network planning and engineering, operations and maintenance and administrative systems were noted during the preparation of the IDA supported Second Telecommunications Project. Ongoing technical assistance and consultancies for SLT in those areas are summarized below: * Corporate Plarning, Network Planning and Traffic Engineering and Operations and Maintenance; awarded to SOFRECON of France; wark started in Septeuber 1992; IDA * HIS, billing end collection, coserciAl accounting and coeputer hardware and software; awarded to PA Consulting Sept.19;A foreign aid 'ocal training of SLTs top anid middle manageent ini custener services, nwpo.er planning Vnd stors senagement; .trai~.ning started to March 19:.UNDP/ITU *Cable network pl;rpming, prepratio of~. techetea specifiestltin and assitance il 2 .5 In May 1993, SLT completed its opening balance sheet as of September 1, 1991, but no audited financial statements are yet available. Preliminary statements indicate, however, that SLT' s financial performance is sound with a rate of return on revalued net fixed assets in operation exceeding 20%. A summary of SLT' s recent financial performance and projections up to 1995 (as prepared by SLT) are given in Annex 19; financial projections in US$ up to 2005 (prepared by the Bank) are in Annex 20. Accounts receivable for services are now equivalent to about five months of billing, which is on the high side but should be reduced once the ADB funded technical,-assistance and billing equipment have been implemented. 2.6 To accelerate the development of basic telecommunications services, a new GOSL owned company, Sri Lanka Telecom (Services) Ltd. (SLS), was incorporated in June 1993 under the Companies Act. As a company, SLS will be able to pay wages fully competitive with the private sector and should be able to attract qualified Sri Lankan staff from the private sector and from abroad. Further, it would not be subject to the time consuming approval procedures for projects and procurement that public corporation like SLT must follow (Annex 12) and should, therefore, be able to implement projects more efficiently. Through the use of private subcontractors, and simplified procedures, SLS should also be able to connect new subscribers quicker than SLT. SLS's memorandum and articles of association (Annex 15) provide for a wide range of activities in the telecommunications sector, but its immediate task will be efficient implementation of the planned 150,000 lines project and the connection of corresponding new subscribers. At the moment, it is unclear whether SLS will have any future operational functions in addition to its project implementation activities. 2.7 The number of private companies providing telecommunications services in Sri Lanka has grown dramatically, especially since the 1991 Act became effective. The main private operators are listed below: PRIVAT PROVIDERS .0 TELECOM SERVICES (As of May 1993) Type of Service -.A Licerse Year of Subscribers Gieg -.,Operatio CeLutaC t.tenke Ce tet 3-50 1988 1989 Z.Lank Cet tular Sves. 700 1992 1993 : 3.Noblte( 500 1993 1993 Pajing 1. Equipmenit Traders 900 1981 1982 2. Fentons 1000 1989 1990 3. Protec services 750 1989 1990 4. Bell Coamunics. Lanka 425 1989 1990 5. Infocam Lanka 700 1992 1993 Store and 1. Lanka Communication N.A. 1991 1993 Forward Fax Services 2. Electroteks I.A. 1991 1993 Trunked Mobile 1. Dynacom Engineering 200 1993 1993 Radio Data Trans- 1. Etectrotax Ltd. 20 1987 1991 mission. . 2. DataNet 6 1991 1993 3. Datapack I.A. 1993 1993 Public Card 1. Lanka Payphones 200 phones 1992 1992 Phones Note: . A fourth cellular operator licensed in early 1994 is a joint venture between Malaysia Telecom and Sunpower System (PSE) Ltd. and had not started operations when this report was finalized. A second public card phone operator was also licensed in early 1994. - 10 - SLT to an increasing extent also uses private subcontractors for the laying of local cable networks and.other civil works as well as for the connection. of new subscribers. A number of subcontractors have been trained under FINNIDA and OECF funded projects and SLT plans to open up its training facilities to the private sector to increase the number of suitably qualified private subcontractors. The compilation, printing and distribution of SLT's telephone directory including the "yellow" classified business section, is also done by a private company. A more detailed description of the ownership structure, major clients, plans for the future etc. for the private service providers is given in Annex 6. Market Structure 2.8 According to the 1991 Telecommunications Act, the state-owned SLT has the exclusive right to provide basic local, long distance and international telecommunications services. The private sector can provide mobile cellular, data transmission, paging, value-added and other services. This simple division of the market is getting blurred, however, as SLT has delegated some of its monopoly rights to the private sector, e.g. to the card phone operator (Lanka Payphones) and data transmission service companies (Electroteks). Hundreds of unlicensed agencies all over Sri Lanka are reselling SLT services by providing telephone and fax facilities to the public. Further, in some areas SLT competes with the private sector through joint ventures, e.g. in mobile cellular services (with OTC, Australia) and data transmission (with India). SLT also provides card phone facilities. In the same way as private companies have been permitted by GOSL/SLT to supply some of SLT's monopoly services (data transmission and card phone facilities), private competition could also be allowed in the provision of basic telephone services. Once the 1991 Telecommunications Act has been amended, the regulatory authority (including licensing) for the resale of SLT's current monopoly services would be transferred to the regulator, SLTA. 2.9 SLT provides a standard telephone set with the connection of a new line and the cost of-the telephone instrument with its installation is included in SLT's US$280 connection fee (Annex 21). No discount of the connection fee is offered to subscribers that procure their own telephone sets outside SLT. There are various private suppliers who sell, install and maintain private branch exchanges (PABXs), facsimile machines, telephone sets and other subscriber equipments, generally for business subscribers. Competition and Market Forces 2.10 Outside SLT's monopoly for basic telephone service, the number of independent private companies in the different segments of the market is generally adequate for efficient competition, e.g. mobile cellular (3 companies), paging (5), data transmission (3), card pay phones (1) and store and forward fax (2). As qualified new companies can obtain operating licenses and start competing with existing companies, tariffs are at reasonable levels and opportunities for long-term over-pricing and substandard service quality are limited. This situation has resulted in falling tariffs in real terms, especially for mobile cellular services which now are among the cheapest in Asia. If this trend continues, cellular services will provide a viable alternative to SLT's basic service and increase the competition in the sector. 2.11 The presence of three competing mobile cellular companies (a fourth license was granted in early 1994) in a small market like Sri Lanka has given the consumers a wider choice and lower prices. However, as all three companies operate in the same geographical areas (no regional division), they all need separate allocations of suitable radio frequencies for their analogue equipment. The relevant frequency spectrum has, therefore, become quite crowded (see Annex - 11 - 22) and SLT has experienced problems in obtaining, suitable frequencies for its wireless local loop (WILL) systems in Kandy and Colombo. New technologies and services are under development (Annex 23) that also will make use of the radio spectrum, e.g., personal communications services (PCS) and "radio in the loop" systems. Increasing use of digital equipment that operates outside the currently crowded frequency bands would be necessary, otherwise the shortage of suitable frequencies would make it difficult to introduce new radio based services in Sri Lanka. The existing companies, which already obtained their frequency allocations, will have an advantage over newcomers. The recent take-over by ATT of MaCaw Cellular of USA is a good example of the high prices paid, mainly for frequency allocations and operating licenses as shown below: AT&T s USSM7.5 b Tion Taieoer of MaCa Celt ar Since the.1984 break-up of AT&T celtphone services have attrected 12 1licn subscribers in USA and revenues have soared from nothing:to USST.8 bitlion in 1992. -Over the next .few years, a range of personaL caimnieations services CPCSs3 are expected to be provided over the cellular networks, e.g., telephone, fax, :iotepad, campOter and message center.. To obtain a piece of the growing cellular market, AT&T: offered USS12.6 bilLion for Macw and will also take over U$S4.9 billion of debt, Vilch iokes a totaL-price of USSI7.5 bil Iion. NeCew has only 2 milLion coltular subscriberi, which means that AT&T is paying over- MM58000 per subscriber, and Maces has never made a profit. .It is cear that AT&T "is gambi.ing on the future development of cellular cimunleations and Is paying. mainly for the frequency allocations and operating licenses rather than for the equipment and custoer base. 2.12 In line with the standard license conditions in Sri Lanka, tariff. changes by the public and private companies should be approved by SLTA. However, some licenses were granted by the Telecommunications Department under the former Telecommunications Ordinance before SLTA was created under the 1991 Act. Those older licenses (four paging companies and the main mobile operator, Celltel), do not need SLTA's approval to change their tariffs. In practice, this advantage has been used to quickly reduce prices as necessary to defend their market share against newcomers. This competitive advantage for companies licensed before 1991 is offset by the fact that they had to pay duties on imported equipment; new companies have generally been granted duty free import. On the whole, the differences in conditions between licenses granted before and after the 1991 Act do not appear to significantly distort the market. 2.13 Many private companies, are concerned about possible competition from SLT, which has started to offer mobile cellular (in a joint venture with OTC, Australia, under BOT arrangements), card phone and data transmission services in competition with the private sector. The private companies argue that SLT should concentrate on the improvement and expansion of the basic telephone network and not make investments that could be made by the private sector. Further, by making use of its existing infrastructure, like buildings and antenna towers, SL7 and its partners may have an unfair competitive advantage. SLT claims that it is mainly improving the access to service in areas which currently are not serve6 As from 1991, SLT's license has been used as a model for operating licenses to private companies. - 12 - by the private sector and where the private sector may not be interested to provide service, e.g. in rural areas. Further, due to its long standing relation with the post office (they are under the same Ministry and cooperate in the provision of telegraph services), it is natural for SLT to provide card phone and facsimile services on the post office premises. 2.14 To some extent, SLT's monopoly services compete with the private sector. Potential SLT subscribers who are unable to get connected quickly may opt for a more expensive mobile cellular phone, even if they do not need the mobility. On the other hand, some SLT subscribers currently paying a monthly subscription fee of only US$1.70 equivalent may opt for a paging service at US$4.00-5.00 per month if SLT's subscription rates for telephone service were increased to cost recovery levels at about US$7.00-10.00 equivalent. SLT's competition with the private sector, as long as it is fair, should improve the market by offering the customers a wider choice of services. To ensure that SLT's operations do not discourage private sector initiatives, SLT's tariffs should at least provide for cost recovery. Those aspects are covered by the 1991 Act and SLT's operating license and the regulator, SLTA, is responsible for verification of compliance. However, it is difficult to verify the adequacy of tariffs, especially for SLT's non-regulated services, given the current lack of proper cost accounting. III. OVERVIEW OF MAIN ISSUES Public Sector Institutions 3.1 Many of SLT's problems were inherited from the former telecommunications department, e.g. poor service quality, high unsatisfied demand and lack of adequate commercial accounting and -operational procedures. Improvements have been made with the assistance of consultants since SLT became operational, but SLT still has a long way to go to reach generally acceptable service and efficiency standards. SLT is still very much engineering dominated and it will be difficult to make it more commercially operated and consumer oriented under its current state corporation status. 3.2 As a state corporation, SLT's investment plans must be approved by GOSL and procurement over SLR 5.0 millions (about US$100,000) by the Ministry Tender Board and over SLR 20.0 million (about US$400,000 equivalent) by the Cabinet Tender Board. As SLT officials may be called to the Parliament to explain their acts, decisions are often referred to the Ministry of Posts and Telecommunications (MOPT) and/or the Cabinet even if SLT would have the authority to decide on its own. In practice, this often delays project implementation by over a year and compares poorly with what could be expected by a truly autonomous company. A chart indicating the processing steps from project preparation to award of contract is given in Annex 12. Salaries for SLT staff are limited by GOSL guidelines for state corporations and are well below remunerations paid by the private sector in Sri Lanka and abroad. GOSL, as the owner of SLT, through MOPT appoints SLT's board and top officials and this makes SLT vulnerable to political pressures, e.g. to expand service faster than prudent network planning and SLT's limited implementation resources would permit. 3.3 To facilitate efficient expansion of the telephone network, without the above constraints of a state corporation, a new GOSL-owned company, Sri Lanka Telecom (Services) Ltd. (SLS), was recently incorporated under the Companies Act. - 13 - rhe creation of SLS may accelerate network expansion, especially regards the planned 150,000 lines project. It is unlikely, however, to solve the longer-term problems of the publicly operated part of the sector regarding service quality, lemand satisfaction and efficiency of operations. The rationale can be auestioned for having two government owned entities (SLT and SLS) in Sri Lanka's relatively small telecommunications sector. It appears that SLS is only a temporary solution until SLT has been converted into a company and its efficiency of operations improved. GOSL should clarify its views regards the future roles of SLT and SLS. 3.4 The regulator, SLTA, has experienced problems in retaining suitably qualified staff with its departmental wage scale, which has been lower than that of SLT. SLTA, therefore, "borrowed" SLT staff, which led to an obvious conflict of interest. The fact that the regulator (SLTA) and the main operator (SLT) report to the same Ministry (MOPT) also raises concerns regards conflicts of interest. Further, due to lack of suitably qualified staff and equipment, SLTA was unable to implement certain regulatory functions prescribed by the 1991 Act, e.g. consumer protection aspects, monitoring of the operators' financial performance, enforcement of license conditions and public hearing procedures. The public has not been fully informed of its rights to protection under the 1991 Act, and SLTA would not have been able to handle more than the handful of complaints received from the public so far. 3.5 GOSL has now approved a request from SLTA for 107 new positions (see Annex 16) and hiring has started. This addition of staff will enable SLTA to replace staff "borrowed" from SLT and to undertake the various regulatory functions that have not been implemented fully so far. A draft amendment to the 1991 Act (Annex 5) has been prepared with the purpose to convert SLTA into a more independent Regulatory Commission which could pay more attractive salaries to qualified staff. This amendment would also allow for the regulation of private resellers of SLT services, e.g. the "bureaus" and the card phone company. If this amendment to the 1991 Act is not enacted, there would be serious doubts about the longer term ability of SLTA to fully carry out its regulatory functions. as prescribed by the 1991 Act. A strengthening of SLT's capabilities to manage the radio frequency spectrum is also necessary to ensure the future availability of suitable frequencies for new services and technologies. Network Planning 3.6 The planning of the basic telecommunications network expansion has been based more on available concessionary funding (IDA, ADB, Japan, France, Finland, USA etc.) than on the demands of the market, suitability of technology and careful network planning. A summary of SLT's 1991-95 investment program is given below: - 14 - SLTis Investment Iyoram 1991-95 (USS i i 4ain Prcram Caponents Local ....ta A. SLT/Supher furded 118.7 92.0 210.7 works: Networks and mutti,access radio B. IDA II Project: 147.4 137.0 284.4 Local Networks and Nationet and International. Long Distance Network C FINWIDA,. 6.7 20.3 27.0 *aterd Project D. Proposed OECF III 7.2 45.0 52.2 Cotobo Project E. Planned new works:- 45.8" . 171.9 217.7 150,000 'ines turnkey Project 4 otthers Total 225.8 466.2 692.0 3.7 SLT's investment plans have been substantially expanded since the 1991 IDA-supported Second Telecommunications Project, partly due to political pressures on SLT's management to meet demand by the end of 1995. A BOT scheme for 200,000 lines was initiated by GOSL in 1992. Later this scheme was reduced to 100,000 lines, but GOSL and the suppliers could not agree on revenue sharing and other conditions and the BOT scheme was finally replaced by a tender .for 100,000 lines (later increased to 150,000 lines) on a turnkey basis to be financed by suppliers credit and implemented by SLS; bids were opened in June 1993. This major expansion was initiated without detailed demand studies or network design and implementation problems can be anticipated. Under those circumstances, it is difficult for SLT to implement longer-term network plans or adequate corporate plans in general. 3.8 The lack of long-term planning has resulted in imbalances between cable plants and exchange capacity, low utilization of installed capacity and an excessive mix of different brands of exchange equipment. In addition to complicating the network planning and possible interface problems, the large number of different exchange brands has led to higher operating costs due to duplication of spare stores, training of scarce staff in the operations and maintenance of various types of equipment and difficulties in pinpointing the responsibility for equipment performance to a specific supplier. The proliferation of different systems is likely to continue in 1993-95 by the planned additions under IDA, suppliers and OECF funding (see box below): - 15 - arif_cur A g 6)f ie Io. of Lipes Reekso 1 CIT/AtCatet E 10 132,000 French protocot Crance) and Sp or Credits AT&T ESSS 24,000 Suppli Credit (USA) 3 NEC NEAC 61 21,500 ZDA Iproject (Japan) ICB Sookie s 210 e600 atera Ald < Finland) 5 LME 8000 ECF capetitive (swaden) biddirig 6 A 150: 000 Turnkey project bid opening June 1993 .N.A . 53000 IDA 11 project ICS procuremnt B N.A 38,000 OECF '11, cowetitfve bidding TOTAL 202-000 241,000 Note: 300 ines of itachi IIDX 10 are also in servie. Source: SLT 3.9 To satisfy demand shortly after 1995, GOSL and SLT plan to expand SLT' s network at a very high rate up to 1995 and increase the number of subscribers by over 40% p.a. in 1994 and 1995. Such a high rate of expansion has no precedence in Asia (the highest for the 1982-91 period was Macau with 23.5% p.a., see Annex 7) and is not likely to be achieved in Sri Lanka. Further, at this high rate of expansion, imbalances in the network, shortages of suitably qualified SLT subcontractor staff and necessary paper work are likely to delay the connection of new subscribers. Assuming a 15% p.a. increase in the number of connected subscribers, which would require a substantial improvement on SLT's past performance, supply would not catch upwith demand until year 2007 because of the current high unsatisfied demand for service (see graph below): - 16 - Projected Supply & Demand for SLT Services DEL* (000) 1400 4200 -...--.................................. --.................. -- 0 I l i t a l i l Ie l l AII.. 1990 1995 2000 2006 2010 Year Demand -+-No. of Subearibers -* Unastisfied Demand Source: SLT/Sofrecom Note: Years 1990 to 1992 are actual and 1993 to 2010 projections assume about 7.5% p.a. increase in demand and a 15t p.a. increase in the number of connected subscribers. 3.10 The demand for telecommunications services provided by the private sector is likely to continue to increase at a fast rate (see paras 1.11 and 1.12). The current strong demand for mobile cellular service may weaken once SLT is able to provide reliable basic telephone service to all potential subscribers. However, this is not likely to happen in the near future. The private sector is, therefore, expected to continue expanding as fast as the market and.available funds permit. In the past, expansion was sometimes slowed down by the need for permits, e.g. for buildings and antenna towers, or to arrange for duty free import, e.g. smart cards for the public card phones. On the whole, however, operating licenses and necessary permits have been granted within a reasonable time. Given GOSL's objective to quickly satisfy demand, the increased participation by the private sector would be an important element in accelerating network development. Oterating Efficiency and Quality of Service 3.11 SLT's operating license stipulates that "The operator shall comply with quality of service standards conforming to international standards specified by the Authority" (para 2.1 of the license). However, the quality of service standards were not quantified by the regulator and no time-frame established for their implementation. Therefore, the main criteria for evaluation of SLT's overall efficiency are the performance indicators established under the ongoing IDA supported project: (a) productivity (number of staff to 1,000 telephone lines); (b) exchange fill (number of subscribers lines to installed capacity); (c) outside plant occupancy (number of subscribers lines to local cable pairs); (d) quality of service: (i) faults per 100 lines/month), (ii) time required to - 17 - repair faults, and (iii) operator answering time; and (e) the call completion rates. A comparison between SLT and some 6ther operators is given below: .. . . :. Per ftane I a a of Dec.ttiber 1992 Sri Larka Philippines %Pakstan Indonesia Monthly faultS N.A. per 20O0 lines Falts rep ired 75% 8 8 next worIing day Call Completion rates (a) Local 40. 1.A 74% 92% on distanie 3 NA 8 60. 83% Interhational 28 -39% NA. Employees 56 8 39 59 per 1, 000 lines . (a) A-busy destination-is counted as an incomplete call and the completion rate is, therefore, lowr In syst8 hith a high traffic load per DEL Source: SLT and ]b 3.12 Since SLT became operational in 1991, its service quality has improved e.g., monthly complaints per 100 working lines have been brought down from 50 in the Greater Colombo area in 1990 to about 22 at the end of 1992. Call completion rates have also improved for domestic long distance and international calls from 21-27% to 28-40 at the end of 1992 (see Annex 9). SLT needs, however, to improve its service quality further to reach acceptable standards, e.g., less than 10 monthly complaints per 100 lines and call completion rates exceeding 50%. Overall productivity has increased from about 66 to 56 staff per 1,000 lines in service between 1990 and 1992, mainly due to keeping the same number of staff while increasing the number of telephone lines in service. Further reduction of the staffing ratio is expected as planned expansions are implemented. SLT should also address the problem of under-utilization of the exchange capacity low exchange fill) and the outside plant occupancy. Above all, SLT should introduce a more customer-oriented approach to improve the satisfaction of its subscribers. 3.13 The service quality and reliability . in the Colombo metro area was improved with the completion of the OECF-funded local cable network project. Outside central Colombo, the quality of transmission often is so poor that - 18 - facsimile messages get distorted. Many businesses outside Colombo, therefore, use telephone agencies in central Colombo for their facsimile needs, which is costly as well as time consuming. A Bank survey of manufacturing enterprises conducted in mid 1992 found that good quality communications were considered to be of prime importance and that most users found the quality of the service provided to be rather poorl' (see box): Telecommunicatlon Services in Sri Lanka: User Perceptions The findings below are based on a survey of 95 manufacturing enterprises carried out in May-Jine 1992 in the Greater Colombo area of Sri Lanka. The purpose-of the study was to ascertain the nature and extent of deficiencies in the supply of infrastructure services faced by firms, and the costs borne by the firms as a result of such deficiencies. The survey covered the supply. f power, wateri telecommunications and transport. The sample of firms was fairly representative, and encompassed all the manufacturing sectors and locations in Greater Colombo, including firms in the Export1 cessing Zones (EPZs) of Katunayake and Biyagama. Respondents placed a high priority on reliable telecommunication services for their firm's operations, second only to the supply of reliable power. However, the user satisfaction with current telephone service received the poorest ratings. Given the strong export orientation of Sri Lanka's overall industrial strategy, reliable telecom services are needed to enhance productivity and reduce costs for inventory, production and marketing functions. . Further, frequent exchange of information with suppliers, contractors and customers is necessary for efficient procurement and marketing. k enables a quick response to changing market conditions and enhances the flexibility to manage production and inventories. The availability of reliable telecom links between different units of the firm was cited as a significant requirement for effective communication and control of internal functions. The survey revealed that current use of computers is fairly unsophisticated, but projected use of automated control systems for effective management appears tobe b ery high. Almost all the exporting firns and nearly 83% of other firms expressed plans to expand the use of comj*ters for diverse purposes, such as, production scheduling. inventory control, design formulation, process control and management information systems. Firms also realized the importance of establishing electronic links with suppliers and customers for information exchange, but felt constrained by the poor reliability of telecommunications and the high cost of system hardware. The survey indicates a high level'of unmet demand for firms operating for the domestic market, but close to 100% demand satisfaction for firms located in the EPZs, as they are accorded priority in allocation of telephone lines. The responses uniformly indicate poor ratings, across all firms, for transmission quality and system reliability. Call completion was rated fair for international calls, but poor for domestic long distance calls. Source: S. Vishwanathahlyer, Industrial Infrastructure in Greater Colombo, SA3EL Draft, April 1993. The World Bank Private Sector Assessment (PSA) survey conducted in 1993 confirmed these conclusions. This survey also clearly showed that the service quality outside the Colombo metro area is considered inferior to that inside this area. Further, larger, high growth companies saw deficient telecommunications as more of a constraint than smaller, low growth companies. The same was felt by younger firms compared to older ones. - 19 - Sector Regulation 3.14 On the whole, the 1991 Act provided for an adequate regulatory framework. However, the Act did not foresee the possibility of the resale of SLT services, which now leaves the telephone agencies and the card phone operators without regulatory control. Further, the fact that the regulator, SLTA, and the state-owned main operator, SLT, report to the same Ministry (MOPT) may lead to conflicts of interest. For example, it may not be realistic to expect MOPT to support the promotion of public hearings and the formation of user groups when criticism of the telephone service expressed at such hearings would be reported by the press and could be taken as criticism of MOPT itself. Further, fines or other regulatory sanctions imposed by SLTA on SLT would be seen as Government (MOPT) sanctioning itself. A private operator, afraid of loosing his license, would be more likely to react quickly to regulatory sanctions than a Government owned operator. 3.15 For reasons given in paras 3.4 and 3.5 above, SLTA has been unable to implement certain regulatory functions prescribed by the 1991 Act, e.g. consumer protection, enforcement of license conditions and public hearings. SLTA is also experiencing problems in dealing with the increasing demands on the radio frequency spectrum from the public as well as the private sector (see Annex 22). New telecommunications technologies and services to an increasing extent operate over the radio frequency spectrum (see Annex 23) and SLTA, therefore, needs strong capabilities for planning and monitoring of the use of radio frequencies. 3.16 During recent years, nundreds of agencies (called "bureaus" in Sri Lanka) have surfaced, offering telephone, facsimile, copying, typing, and related services. As the 1991 Act did not provide for the regulation of the resale of SLT services, those agencies and the card phone company operate without licenses. The agencies provide a very useful service to the public and many operate adequately without any regulation. *However, abuse of customers in the form of overcharging, or misinformation about rates has been noted and the customers have nowhere to go with their complaints. Further, a number of agencies have "disappeared" after accumulating millions of SLRs in call charges to SLT. This has been made easier by SLT's slow billing and disconnection procedures which provides the agencies a "float" of up to four months before they are required to pay their SLT bills or be disconnected. 3.17 In addition to converting SLTA into a commission, the draft amendment to the 1991 Act (Annex 5) provides for the regulation of the resale of SLT services, including public card phones and telephone agencies. The amendment would provide SLTA with the necessary powers to license the agencies, register licensed agencies, require them to clearly post their tariffs for the public and make suitable arrangements with SLT to ensure the payment of their bills. It would also provide a mechanism for responding to consumer complaints. The amended Act would not, however, provide for regulation of the tariffs the agencies charge nor impose undue restrictions on entry. 3.18 According to the 1991 Act and SLT's license, SLT's monopoly services can not subsidize services for which it competes with the private sector (paras 16.1 to 16.7 of SLT's license dealing with "Anti-Competitive Practices"). At the 'moment, SLT does not have a suitable, cost/profit center based commercial accounting system to establish the costs for providing a certain service. Neither is the regulator currently equipped with qualified accountants and other staff to verify that SLT and the private companies compete on "a level playing field." Measures have been initiated to improve those weaknesses in SLT as well as SLTA. - 20 - 3.19 The increasing variety or telecommunications services and number of service providers, public and private, make adequate regulation a necessity for coordinated expansion and improvement of the network. The rapid expansion and improvement of telephone services in Chile after their privatization were partly due to a well functioning regulatory system. The experience in neighboring Argentina has not been as positive, partly due to lack of adequate regulation and definition of Government objectives before the privatization of the sector. The risks of monopoly operations without proper regulation are illustrated by the experience in the Philippines: Philippines: An-Experience in Private Telecommunications The teleconunications sector in the Philippines is aLmost entireLy privately-owned. The main operator is Philippine Long Distance Telephone Company (PLOT), which now has over 90% *of the market; there are also various smatter operators. The regulation- of the telecammunications sector (under the National Telecommunications Commission within the Ministry of Comunications) is weak and. the performance of the operators poor. Som indicators are given below- * there are about 650,000 subscribers and registered, unsatisfied demand is about 705,000; * the growth in: main telephone Lines has only averaged about 3.4% over the past decade; the witing time to get a telephone.1s over 10 years; monthly subscription fees are more than double the average of low income countries in Asia; and .-the service quality is sub-standard.- Conclusion: In practice, PLDT- has a monopoly on telephone service and is able to hinder competition. Monopoly operations without proper regulation is not conducive to efficient operations. Source: Telecomunications sector Reform in Asia Towards a New Pragmatism, Worid Sank, 1993. and ITU Statistics, 1991. Pricing Policies 3.20 The private sector needs the approval of SLTA for tariff changes (except for Celltel and the paging companies whose licenses were issued before the 1991 Act) . Such approval is generally given routinely and the prices of private sector services are not governed by specific pricing policies or regulations. SLT's monopoly services are regulated; international tariffs are adjusted for the devaluation of the Sri Lanka Rupee (SLR) and domestic long- distance and local tariffs have a price-cap on increases, inflation minus two percent. Those principles for tariff regulation are satisfactory but have been applied on inadequate monthly rental charges since this regulatory system was instituted. At current tariff levels, SLT's international and domestic long-distance revenues are subsidizing the local service and business subscribers are subsidizing residential subscribers. Ideally, each service and subscriber group should pay fully for themselves to avoid uneconomic demand. SLT's principal tariffs are set out in Annex 21. 3.21 SLT's connection fees are relatively high (US$280 equivalent), but the monthly subscription fee has remained at SLRs 80 (about US$1.70) since 1990. This is low by international standards (see Annex 11) and may cause a deterioration of SLT's profitability over the longer run-as well as promote uneconomic demand. Some aspects of the low monthly subscription are given below: (a) According to recent ITU statistics, the monthly subscription as of December 1991 was US$4 for residential and US$7 for business subscribers in lower income countries in Asia. The averages for the Asia-Pacific region as a whole were US$6 and US$10 respectively. The current monthly subscription fee of only US$1.70 for residential as well as business subscribers in Sri Lanka is low by comparison; (b) The portion of residential to total subscribers is currently estimated at. about 40%. The new applicants added to the waiting list from April to July 1993 included 70% residential applications. The portion of residential subscribers is likely to increase even further and, due to their relatively low usage of profitable long distance and international facilities, SLT's average revenue per subscriber and profitability will go down if monthly rental fees are not set at cost recovery levels; (c) The low monthly fee promotes uneconomic demand for telephone connections. Business subscribers request more lines than they really need and some potential residential subscribers may prefer to use public facilities (pay and card phones) or paging services, "bureaus" etc., rather than paying a monthly fee at cost recovery levels for a phone of their own; (d) The investment in connections that will not pay for the cost of providing the service is not the best use of SLT's limited financial, human and other resources, especially considering the high unsatisfied demand that is likely to remain for many years; and (e) The low monthly subscription fee may be detrimental to the development of privately supplied services, e.g. card phones, "bureaus", paging, terminal equipment, BOT and.other schemes. 3.22 Decades ago, when step-by-step switching technologies were prevalent, it was necessary to mix residential with business subscribers to reduce the per line traffic load during the busy hour. As the equipment was dimensioned according to the expected load during the busy hour (mainly business traffic), there were valid reasons for giving residential subscribers preferential rates. With the new digital switching technology and the lower cost of switching equipment as compared with the local cable network, the rationale for preferential rates has become weaker. If the average capital cost (all inclusive) to provide a new subscriber line is assumed to average US$1,500-, its useful life 15 years, the cost of capital 10% and the connection fee (US$280) is deducted from the investment, a monthly subscription fee of over US$10 would be needed just to cover the fixed capital costs for the investment. Operating, maintenance and other variable costs (estimated at about US$370 p.a. for a subscriber line in 1993) would have to be covered by call chargers. The marginal cost of adding new subscriber lines to SLT's network may currently be less than US$1,500/line, as major investments with spare capacity have been or will soon be completed, e.g. the Colombo local network (OECF) and a microwave long-distance network and international facilities (ADB). - 22 - 3.23 A study of 131,500 SLT bills during the last quarter of 1992 was used to classify the bills according to the monthly amount billed and resulted in the following distribution of number of bills and revenues: Distribution of Bills & Revenue 40 =% of total bills M % of total revenue 20 to.1 ..0.. .. .. ..... .. .... 0- 0-.2 .2-.5 .5-1 1-2 2-5 5-10 10-20 20-50 >50 Billed Monthly Amount (SLRs 000) Source: SLT/SOFRECOM 1993 As can be seen from the above chart, -58t of SLT's subscribers (billed less than SLRs 500, about US$10.00, per month) produced only about 6.2% of SLT's revenues which most likely does not cover the cost to provide service 6. On the other hand, 15% of the bills produced 77% of the revenues. Those 15% include the high traffic volume business users, who subsidize the low traffic volume residential users. The portion of residential subscribers-entering SLT's waiting list now exceed 70%. If fixed charges are not increased, the average revenue per subscriber is, therefore, likely to fall as the network expands, resulting in a reduction of SLT's profitability. ,f The profitability for the network as a whole of a specific subscriber should be based on the value of outgoing calls billed to that subscriber as well as incoming calls. The value of incoming calls is often assumed to equal the value of outgoing calls. - 23 - IV. PROPOSED BTRATXGY A Vision for Future Development 4.1 The access to reliable telecommunication services will be of vital importance for the continuation of Sri Lanka's export led growth, to attract foreign investments and for Sri Lanka to become a viable alternative to the Asian NICs as an export base in the region. The development of Sri Lanka's telecommunications sector has to be substantially accelerated to reach the levels of other fast growing Asian countries: indicator' Sri Lanka Hons ona. aays1a. SinaPore Thatoind fines IO 0.8 45 9 99939 2.? population Pub ic pho0es 12 0.78 St 58 0.46 ~1000 pop.4* Line growth 6.7 6. 1.6. 15.2 Staffl1000 54 6 16 16 Revenue £s~ as ,93 601 22 9 i no Based on data from mid 1993 for Sri tanks and 'IT stati stics as of Decauber 1991:, for ether countrlia.. The differences are wattet if onty the dentties of the mah titles are consIdered (1991)i Cotnt 13.7/100, Kuala Lunpur 12.1/100 and Bangkok 14.7100 IncLtues card phones and telephore agencies. .1MHost telephone demand in Hong Kong and Singapore' has been satisfied, which explains the tow tine growth. 4.2 Sri Lanka would have to expand access to telephone service by 15% p.a. or more to keep pace with other fast growing countries and, at the same time, improve the service quality. The reliability and quality of transmission is of special importance for business subscribers given the increased use of data transmission and facsimile as business tools. The public sector on its own would not be able to satisfy the demand for basic telecommunications services until well into the next century. To achieve this GOSL objective within a reasonable time-frame, the private sector should be allowed to provide local and long- distance services in competition with SLT. Increased private investments in card pay phones, telephone agencies, user co-ops, paging and cellular services should also be encouraged. The main sector objectives, namely to improve efficiency and cost-efficient service delivery, are most likely to achieved by redefining the role of the public sector from service provider to regulator, while the private sector provides the services. 4.3 Advanced technologies are now available, and others are being developed, that would facilitate competition in the provision of local and long- distance services. The problems with overlaying or shared local cable plants can - 24 - be avoided by requiring private companies to use only wireless (radio) local loops in areas currently served by SLT. As the radio solution would not requi-re detailed cable network plans and duct laying, it would permit quicker installation, as has been shown by the installation of 50,000 wireless local lines in East Germany as well as SLT's WILL systems-. New digital technologies are making radio in the loop cost efficient and possible to operate outside the crowded frequencies currently used by the analog mobile cellular companies. In areas which SLT will not be able to serve within a reasonable time, the private sector should be allowed to provide wired as well as wireless services. Some advanced technologies that could be used in Sri Lanka to accelerate the expansion and improvement of the telecommunications network are described below: ADVANCED TECHNOLOGIES SUITABLE FOR USE IN SRI LANICA VSAT (Very Smatt Aperture Terminal). A point-to-multi point. satettite-service using terminals with smal dish,.antennas (2 meters or less) that can transmit and receive voice and data and also receive video signals. VSATs are increasingly used. for intra corporate commnications. A smatter version-is also available whichi can be used for .disaster and emergency situations. VSAT provides a typicat 41by-pass, technotogy. and service and could be easily estabt ished in Sri Lanka. Radio in the Loop This is an emerging stationary application of the mobile celLular technology -and -provides for substitutlon of the physical connection between the subscriber and the local exchange. The introductionof wireless, either totally or partially, has the distinct advantage of flexibility..ri planning, rapid Installation and, in same cases, Lower cost than the traditional cable or wire connection. The- technology used is based on the. ceLutar but without the need for complete mobiLity and ihandover" or "rowming" facilities. Analog as well as digitat-versions of this technology'are'being developed, which permits It to work on various frequencies, from the 400 MHz band up to 3.5 Oti, and provide some - flexibility in the use of frequencies.. Even so, ft-contributes*to spectrum congestion and- these radio Links are not suitable-for- broad band applications (e.g. Video). Sri Lanka has already obtained some experience with this technology in Kandy and Colombo. 'ISOK (Integrated Services Dinital Netuork) ISDN is a framework for the future integration of- voice, data and video communications_ -The customer can access circuit-sitched,' packet- switched and semi -permanent (leased) connections. Some countries have started the so calted narrow band ISDN and a few have the wide band ISDN on triae basts. Modern digital exchanges are suitable for integration with ISDN and Sri Lanka, with -Its substantial digitalization of the local and -progressive digitalization -of the nationat network, could consider offering ISDN services. Fiber Optics is a key technology for ISDN. A glass fiber of about 0.1 am can carry information equivalent to several thousand teLephone calls (a system operating at 140 Mbits/s is equivalent to 1920 PCM telephone channels). Sri Lanka-could consider extending the use of this technology in its long distance network as a step towards full digitalization of the network. Today, digital technology is more economical than analog for transporting any type of information. 4.4 The advantages of using radio for local access are: potential for The television density is higher than the telephone density in most developing countries; in Sri Lanka there were 3.4 TV sets in 1991 as compared to 0.7 telephone lines per 100 inhabitants. The reason is the ease by which a TV is connected - only power supply is required. The telephone requires exchange lines and local network, which the consumer cannot install himself. Until wireless telephones are made available, demand satisfaction for telephone connections will always be more difficult to achieve than that for television. - 25 - lower capital costs, investments can be incurred in line with the subscriber build-up, lower maintenance cost and faster installation. The disadvantages include: crowding of the frequency spectrum, problems with high traffic and bandwidth applications (e.g. video) and lack of adequate international standards. However, the cost of cellular technology is coming down at the same pace as the cost of computers (around 25% p. a.) and new digital equipment is being developed that would alleviate the radio frequency requirements. Wireless loop systems have been installed, or are under installation, in: USA, China, Hong Kong, Finland, Hungary and various other East European countries. A massive change from wireline to wireless communications over the next decade is expected by many industry analysts. 4.5 For companies that intend to establish new competing local services, the wireless technology also has the advantage that it does not need right of way or negotiations with an already established operator regards the sharing of existing cable networks. Such competing local radio networks have been initiated in various countries (UK, USA, Finland, India, etc.) and more are likely to follow in the near future. Sector Requlation 4.6 Increased private participation in sector development along the above lines would provide competition and is likely to improve access to and quality of all telecommunications services. However, increased private sector participation and competition would make it necessary to address a number of regulatory issues e.g., pricing, interconnection, sharing of long-distance and international revenues, competition and radio frequency allocation and management. All those areas are under SLTA's regulatory authority, but SLTA's capabilities would have to be strengthened and its autonomy increased to enable it to deal efficiently with those matters. The importance of an adequate regulation for the development of the sector is illustrated below: COUNTRY REGULATORY SYSTEM PRIVATE PERFORMANCE ARGENTINA Repeated changes in regulation Highty profitable, but too soon to tell impact on privatized 1989-92. service quality and national welfare. in 1990 CHILE Highly detailed benchmark regulation Unprecedented high rates of investment and privatized in supervised by regulatory agency with network expansion subsequent to privatization; 1988-90 explicit arbitration process. substantial increase in national welfare. JAMAICA Rate of return specified in license Major investment in domestic network and privatized in agreement. No independent regulator. increased national welfare, high profitability. 1986-89 PHILIPPINES Longstanding regulation by cmnission Alternation between stagnation and periods of private sfnce with vague mandate and modest power. moderate investment. Very high unmet demand. inception. Profitability unknown. UNITED KINGDOM Price-cap regulation and cotplex Take-off of investment In 1983, with large gains privatized in mechanisms of conflict resolutions in national welfare. 1984 specified by license. Source: Regulation, Institutions and Commitment in Telecommunications - A Comparative Analysis of Five Country Studies by B. Levy and P. Spiller, April 1993. 4.7 To implement all regulatory functions prescribed by the 1991 Act and efficiently deal with increased private sector participation, SLTA should be given Commission status and the necessary financial administrative autonomy. For this purpose, and to address some weaknesses in the Act itself (e.g., lack of regulation for the resale of SLT services), the draft amendment to the 1991 Act should be presented to the Parliament for approval as soon as possible. Further, - 26 - SLTA's funding should be removed from GOSL's budget and its activities funded by fees paid by the operators; some examples of such funding are given below: FunMln .4f. telo 4wat an RAut rv itecls ..... .CAAD 01CR charges a cost recovery fee based an the revenues of regulated t4teconnunications carriers and is generatty allotIwed to keep this fee by the MOF and Treasury Board. MALAYSIA Cost-recovery fee of around 0.5% of pre-tax profit is charged on regulated carriers. PAK1STAN Proposed legislation .would provide the regu latory agency with (a) a share of the privatization proceeds, Cb) a.percentaoe of carier gross operating revenues and (c a share of ticense fees. U.K. Fee is broadly reLated to operating rvenues of the regulated carriers. USA FCC charges a variety of operator fees amounting to 20%-30% of FCC costs. 4.8 To ensure fair competition between SLT and private service providers, the regulator should review SLT's accounts and verify that SLT's monopoly services do not subsidize services for which SLT competes with the private sector, e.g. mobile cellular, card phones and data transmission, and that SLT's tariffs cover the cost to provide specific services. A reasonable commercial cost should be charged to each service for the use of the SLT infrastructure (long-distance channels, antenna towers, buildings etc.). Given SLT's lack of commercial, cost center based accounts, a suitable alternative would be for SLT to transfer its competing operations to independently operated subsidiaries. Such SLT subsidiaries could subsequently be divested/privatized to enable SLT to. fully concentrate on its main business, namely to provide good quality basic telephone service to its subscribers and to those private companies interconnected with SLT. Relevant radio frequencies and such SLT infrastructure that may not be needed for its regulated operations should be allocated in a transparent, commercially sound manner to ensure economically efficient use of the facilities. 4.9 There is a serious risk that a shortage of suitable frequencies will restrict expanded use of new technologies and services. Many of those technologies (e.g. analog radio in the loop) operate on the same frequency bands as the cellular systems. In. addition to limiting the scope for introducing new technologies that now are becoming cost effective, the lack of frequencies could make it difficult for new companies to enter the market and compete with existing ones. GOSL and SLTA should, therefore, study the future need for frequencies and establish a suitable frequency allocation and monitoring policy to ensure the longer term availability of radio frequencies and efficient, fair and transparent allocation. The competing demands on the frequency spectrum have made its management complex and SLTA would need to strengthen its capabilities in this area. New Zealand successfully "privatized" the frequency spectrum and is now auctioning off frequencies to the highest bidder. In the USA, the FCC also started an auction plan in addition lotteries and competitive hearings. Auctions are thus increasingly seen as a suitable way to allocate frequencies. Tarif f. 4.10 The main weaxness in SLT'.s tariff structure is the low monthly subscription fee. Supply is unlikely to catch up with the growing demand in the near future and uneconomic demand growth should not be encouraged. One way to manage the demand for SLT's services would be to increase SLT's monthly subscription fee (currently US$1.70) to cost recovery levels (US$7 to 10) 1'. At this level, some telephone subscribers, especially residential subscribers, may prefer cheaper paging, card pay phones or alternative means of communications provided by the private sector. An increase in SLT's subscription fee could reduce the demand for SLT's services and increase the demand for services provided by the .private sector. At the same time, it would make it more attractive to the private sector to increase its supply of services,. and thus facilitate a reduction of total unmet demand. An increase in SLT's connection fee from the current relatively high level of US$280 is also likely to reduce residential demand. 4.11 To avoid a deterioration in SLT's long-term financial performance and discourage uneconomic demand, the following steps should be initiated: (a) make a plan to increase the monthly subscription fee and link it to improvements in SLT's service quality; and (b) require subscribers that rely on SLT to provide and maintain their telephone sets to pay a higher monthly fee (and/or installation charge) than subscribers that buy their own telephone sets. Such differentiation is common outside Sri Lanka (USA, Sweden, etc.). If the increased revenues from higher subscription fees are used to improve service quality and this is made clear to the public, the resistance against the tariff increase may be -reduced. As potential subscribers often are willing to pay higher tariffs to get service, the viability of higher fees for new lines only could also be considered. 4.12 New companies establishing wireless local services in competition with SLT should be allowed to set their own connection fees and monthly rentals in the same manner as existing mobile cellular operators. Revenue sharing agreements for long-distance and international calls would have to be established between SLT and other providers of basic telephone services. The regulator would verify that the revenue sharing is fair and reflects the costs of providing service or facilities to process the call. Most studies of the subject conclude that telephone demand is rather inelastic to price changes. However, those studies have generally been done for developed countries like the USA and UK and deal with price changes in the 5-20% range. When a 60% tax was imposed on long-distance calls in Pakistan, telephone traffic went down by 30% and this reduction remained a year after the tax was introduced. An A.D. Little study in 1992 of the telecommunications sector in Bulgaria concluded that an increase of the monthly rental and or connection fee to cost recovery levels would sharply curtail demand from the residential sector, but not affect business demand. A 200-300% increase of the monthly subscription fee in Sri Lanka could, therefore, have a substantial impact on residential demand. - 28 - Network Development 4.13 Consultants (SOFRECOM) under the IDA-supported Second Telecommunications Project, have studied the need for improved network planning. Their recommendations are now being discussed with GOSL and SLT and include: (a) realistic definition of demand satisfaction over time; (b) choice of main technology(ies) to avoid excessive mix; (cl policy of replacing obsolete and uneconomic equipment; (d) regular updating of demand, traffic studies and overall network plans; and (e) coordination of expansion plans with financial budgets and manpower development plans. 4.14 The network planning for the provision of wireless services would be relatively simple. No detailed local network plans would be required as the exact location of the subscribers in an area would be of less importance than the density and the numbers of subscribers. The time needed from investment decision to connection of subscribers could be substantially reduced. However, the radio technology may not be suitable for very high traffic (business) subscribers. Fiber optic cable is likely to provide a suitable solution. A private supplier of wireless local services would have to make arrangements to lease SLT cables (or be allowed to install his own) to serve such high traffic volume subscribers. The same could apply to long-distance and international facilities. Regulatory coordination of SLT's network plans with those of the private sector service providers would, therefore, be necessary to avoid bottlenecks in the system as a whole. A recent example of parallel networks is provided by developments in South India: India to End Telephone Monopoly India approved a USS100 miLlion deal with US West for the installation and operation of a wireless telecommunications network in the South Indian town of Tirupur. Within the first year of operating, US West also plans to start laying fibre optic tines in the same area. Once the fibre optic network is ready, the wireless equipment would be moved further out, linking new areas to the core. The system would work in parallel with the existing public. network and the call charges would be the same. Privatization and foreign investment are sensitive subjects in India. The importance of expanded and improved telecomunication services for India's growing industrial and comercial sectors is so greet, however, that Goverranent decided to end the public monopoly despite opposition from Labor unions and menters of parliament. Source: Financial Times, September 30. 1993. 4.15 With several providers of local and long-distance services, the regulator would have to assume more responsibility for the overall sector coordination and development to ensure that GOSL's objectives regards access to and quality of service are being achieved. This would include service expansion targets for the operators, service quality standards, technology standards and type approval of equipment, signalling plans to ensure adequate interface between systems, updating of overall demand and traffic forecasts and identification of bottlenecks and measures for their removal. The regulator should also facilitate the rapid expansion of public telephones to improve the access of service for the residential sector, which may be most affected by an increase in the monthly subscription fee. Role of the Private Sector 4.16 The role of the private sector can be increased in various ways: (i) by allowing private companies to provide new services in addition to those provided by state-owned carriers (the "bottom up approach"); (ii) by "divestiture" or "privatization," of the state-owned carrier (the "tp down" approach); and (iii) by the use of Build Operate Transfer (BOT), Build Lease Transfer (BLT), Revenue Sharing Arrangements (RSA) and similar schemes. 4.17 Sri Lanka has been quite successful in promoting the "bottom up" approach and various services are now provided by private companies. In the future, other private companies are likely to be licensed to provide new value added services and existing companies will expand their operations to satisfy growing demand. However, some market segments like mobile cellular, data transmission and paging services, already have several service providers and new entries may be made difficult due to existing competition and lack of suitable radio frequencies. To enable the "bottom up" approach to contribute as much to future sector development as it has in the recent past, the use of radio frequencies should be carefully planned and the local and long-distance markets should be opened to the private sector. 4.18 GOSL made an attempt to privatize ("top down") the Telecommunications Department from 1986 to 1989. The Telecommunications Board of Sri Lanka was established in 1986 to develop a sectoral restructuring program, including the transformation of the Department into an independent company, eventually with private equity participation. In 1988, the Cabinet proposed a draft new telecommunications act for this purpose; however, its presentation to the Parliament was postponed due to labor union and wider political concerns before the 1989 Parliamentary elections. Shortly after the election, the Telecommunications Board was dissolved and its assets, records and functions were taken over by MOPT. "The new Government continued the restructuring of the sector, but decided to keep the main carrier operations within a state-owned corporation rather than privatize them. A contributing factor to the GOSL's decision may have been that the private sector's interest had cooled off due to the unsettled conditions at the time. Now that the labor unions and political concerns have calmed down and Sri Lanka's economy has improved, private investors could be interested again. It may therefore be an opportune moment to revive the privatization plans for SLT. 4.19 Some countries have been able to accelerate the development of their telephone networks through the use of BOT, BLT, RSA and similar funding schemes. Some relevant examples from Asia are given below: 4.20 Sri Lanka's telecommunications system is small by international standards with less subscribers than a medium sized town in Europe or the USA. Before licensing a BOT operator of basic telephone services, the benefits of more than one operator (faster growth, competition, increased consumer choice, etc.) should be compared to the costs (interconnection and coordination of operators, reduced economies of scale etc.). The licensing of SOT operators of wired services in SLT's operating areas would Vake SLT less attractive to private - 30 - 1gperience' of Iuild operate Transfer iBGT Uuild Lease transfe .BgW and evenue Sharing rrangementS ($SA for the TelecMmunications Sector in Asia . rnnese had 2000 tiies instaited inder its F1fth Development Pt*n (1989 9 under an eight year RSA. under which the supier receives 100%of instatlLt fees, 55% of monthly subscription fees and0 of calt charges. 'The pubtl- corporation. Telekom, witt operate the equipment and'receive remaining revenues. Thailand decided, in 1990 to install by the end of 1996, 3,000,000 new lines under SOT arrangements for 25 years. -A contract for 2,000,000 lines .for Bangkok was awarded in 1991 and another'for: 1,000,000 Lines outside Bangkok in .1992. The suppliers, Telekom:Asia and Thai Telephone & Telecommunications, negotiated with the public operator'(TOT) for the sheringof revues and.entered into agreements with foreign'operating nd manufacturing companies for the implementation of the projects. A special feature is that the ownership of the equipment witt be transferred to TOT at the start of the concession period instead of at the end, which is usual under-AoT. Pakistan erbarked on a "OLT" scheme in 1991 for 500,000 lines, but the uteasel" eature was dropped due: to Legal and other difficulties. The public operator (PTC) keeps separate accouits for, !BLT1 revenues, but this RSA is mostly theoreticaL, as PTS guarantees the suppLier the same payments as under the original tease scheme. In practice, those arrangements are more like turn-key, supplier financed purchase of equipment. * The experience-so -far of the above arrangements indicates that substantial additionaL,funds were made available for the acceLerated development of the sector. However,, the cost of equipment was higher than what could be expected under ICB procurement without financing and operating obligations for the bidders. (in the case of Andonesia up to 50% higher). Source: IBRD investors and shared or overlapping cable plants are likely to cause problems. It would also make it less attractive to potential private companies to establish competing wireless services. BOT and similar schemes may be more suitable for the funding of new local companies in areas where SLT does not operate and where SLT or other companies are unable to provide service within a reasonable time. The opening of the local market to competition and the privatization of SLT itself, however, are likely to contribute more to a faster improvement and expansion of the network as a whole than BOT and similar schemes. 4.21 One way to expand the network into less profitable (e.g. rural) areas is to promote the formation of local private networks and co-operatives. This has successfully been done in various Latin American countries. The interested parties form a co-operative, negotiate interconnection with the main carrier and put up the necessary funds for the local network development and connection to the national network. Once the investments have been made and the project is completed, such local networks are often handed over to the main carrier for operation and maintenance; the members of the co-operative are interested in getting telephone service, not to own it. Such schemes could be developed in Sri Lanka if local populations were given adequate technical assistance and access to funding. An example of such local networks in Sri Lanka is provided by the tea estates, which had their own private telephone systems connected to the main network. The Main Operator, SLT 4.22 Under its current state corporation status, SLT would not be able to compete with the private sector for scarce qualified telecommunications staff in - 31 - Sri Lanka and abroad or rapidly expand and improve, its services to meet market demands. Private service providers are likely to concentrate their market efforts on the profitable business segment, leaving SLT with residential and other less profitable subscribers. The first step towards providing SLT with the necessary operational flexibility to improve its performance and compete efficiently would be to convert it into a company under the Companies Act. Under existing laws, this could be accomplished through a Cabinet decision. Once SLT has been converted into a company, it should reincorporate SLS's project implementing functions, including relevant staff. SLS would have to assume other functions, e.g. take over SLT's cellular services, or cease to exist. However, as a state owned company, the Treasury would own all of SLT's shares on behalf of GOSL and the presumed increased autonomy as a company may prove fictitious. SLT's Board, in all likelihood, would hesitate to take decisions without first consulting with GOSL and political pressures on SLT may continue. To ensure SLT's autonomy and fully commercial operations, a major part or all of SLT's equity would have to be sold to a strategic investor, the public, and possibly SLT staff. Recent developments in the German telecommunications sector may be relevant for Sri Lanka: The"German Telecom Sector The German telecoumnications sector as quite similar to that of0srf Lanka: a state- owned corporation, Deutsche Sundespost Telekam has the monopoty..on basc voice services, the,. private sector (and Telekom) operate mobile cetular and other services and the'sector regulation is under the Ministry:of Posts ahd Tlokeconmmications. Telekam is-eager. to free itse of o the constraints as a*state corporation-to compete effficently with the.prfvate sector, but cannot be privatied without a change of taw allowing the Governent to self shares to investors. Aalting this tow change, TeLekom's mobile eellular operations were spun off into a subsidiary with itscown management and pay structure. This subsidiary would be able to coipete on. an even besis with the private company Mannesmann, which recently overtook Tetekom as the main supplier of mobite cettular services in Germany. 4.23 Sri Lanka's experience of privatization of state owned corporations and companies is limited to a handful of smaller entities (Annex 13). There is no experience in Sri Lanka regards the privatization of a major public utility like SLT. Some relevant experiences from other countries are provided below: - 32 - Drect sate has a big advantage::over nonownership uthods prvatization, e.g., Ianagerwt contracts), since this transfer property rigs to profit oriented owners who push their COIp*ieO to perform betttr, at toter cost, amS to pay more attentiOn:to:the needs and depands 'f cufsaers. Sates of wutherity:shares can qseavie pasitive effects on efficiency prov*dd that anagerial controe s transferred to cmpetertt core Investors and the goveiernts vtin rights are limited so as to cart ite-da Interference. Some couatet.started out- by setling minority shares. In Chie, shares of arge and "sensitiven.enterprises yere.sold.graduatty to investors until the state retained just over .50 percent. This was fotLowed by an offer of 2 or 3 percent, which Left the govermient ina minority position. 'The remaining shared were then sold quickly. Minority sales are particularly beneficial when canpetitior is introduced,. management is. strengthened, and the minorityshare offering is:a prelude to a majority share offering at a Later stage, thus ensuring autonoy. In Japan Nippon Telegraph and Telephone (NTT) recorded large financial and efficieney gains after 33 percent. of Its shares were sold to 1.6.mi aon small shareholders (with a further goverrment conmitment.to. sel.u to-67 percent of total.shares3. The NTT was at the same time exposed to conpetition, and a.. new chief executive.officer from the private sector was appointed. As a result, prof its, rose ih spite of .rductions In Long-distance tariffs, the staff uas reduced by 20 percent In the five years after the privatization, and,the quality of. service improved. Source: Privatization: The Lessons of Experience; S. Kikeri,.J. NeLlis, f4. Shirley, The World Bank, 1992. 4.24 A privatized SLT is likely to expand and improve its services faster than a public corporation and this would benefit Sri Lanka's economy, especially the export and tourist sectors. . Some specific benefits that could be expected from the privatization of SLT are summarized below: (a) the Treasury would receive the funds paid for SLT, which would constitute an immediate fiscal benefit; (b) GOSL's guarantees and relevant concessional funds for SLT could be used for other purposes; private funding of SLT would lead to increased availability of development funds ("additionality"); (c) the floating of SLT shares on the Colombo stock market would provide a safe and profitable investment vehicle for pension funds, insurance companies as well as private investors; (d) SLTA's regulatory role would be straight forward without conflicts of interest and GOSL could require full compliance with agreed license conditions, e.g. network expansion and service quality. A private operator would be more sensitive to the consequences of noncompliance, e.g. rejection of tariff increases, fines or revocation of operating license (for SLTA to impose a fine on SLT can be seen as GOSL fining itself); (e) without the constraints of GOSL project approval and procurement procedures, interference in network planning, salary guidelines etc., a private operator would be able to expand and improve service quicker than a public operator; (f) a private operator would select its technology(ies) based on suitability and price, and not on available concessionary funding and this should improve operating efficiency; and (g) in its own interest, a private operator would be more market oriented and make sure that available lines are connected quickly and that profitable long-distance lines are not congested; this would also benefit the economy as a whole. 4.25 on an international basis, SLT is still a minor telephone operator and there are several international companies that would be able (if willing) to pay a reasonable price for SLT. This price would depend on the length of time and the -extent of services for which exclusivity is granted, the estimated cost of required service expansion and other restrictive år costly conditions stipulated in the license for a private operator. Details of some recent privatizations in the telecommunications sector is set out in Annex 14; typical license conditions are given below: Tÿpicat License Conditions for e Private Operator The main objectives of the ticense are to: document the rfghts and obligatians of- the operatör and red~ce the need,,for dayto,day political interference. in operations. A icense generaLty includes. Al Öef, ;infition of. the Licensed network and_the:diildingi tie between the (publIc)network, other (privat) .networks and tèMin[..t. p .ent.. The services covered by the icense (e.g LocaL. ong.distance, nternational: celtilar radio" paging, satell.ite, private circits ). The number of years far whch exclusivlty (onopòy Vs granted for specif c ticensed servi es Guantitatiwe and Ouatlitative performance targets(e.gi geogrphic .coverage, access ines nd ratio of public calt-off ices per apita, feult levels andepair times). A requireient to publish tariffs for atservices and.anöbligation to serve customers without undue preference.or discrimination. Social- welfare cbligations(e g free calts.to emergency numbersi access ta directory services service to disabled and earing läpaired) Prohfbition of antt-competittVe practiçes (linked sales undue cross-subsidles, closed tenders). Obligation to cnnect "type apprved" termtnat equipment on 0 non-discriminatory basis. '.Obligation to connect vith :other networks on reasonable terms provi sion for access charges.? e Trff regulation rules ,(.g,price cap> and defintion of services covered. canmercial code of "good practice" for doing business at suppers ond customerso BitIing, metering 'and record keeping requrements. Prohibition of.exclusive dealing for lnternationalservices Nurbering orrangements for terrestria and wireless services. Rights of access to public land and corresponding obligations ta provide access. License and other fees (e.g, on capital budget or gross turnover). Obligation to furnish information for regulatory purposes.. Accounting and audit requiremmnts.` " Condition for revocation, ,modification and assignment of license. Rules an treatment of complaints and r49edes for service. interruptions. " Consequences for noncompliance with License and Legal requirements. Source: Telecomnications Sector Reform in Asta: Towards a New Pragmatism; IBRD Discussion Paper, 1993, by Peter Smith and G. Staple. - 34 - 4.26 A private investor would estimate the revenue earning potential of SLTs' operations taking into account the cost to comply with expected license conditions with the expected cash flow more likely to form the basis for the evaluation rather than the asset values. From the present value of estimated cash flows, a potential investor would deduct the value of all liabilities to be taken over together with the assets. As most of SLT's long term liabilities are IDA, ADB, OECF, FINNIDA and other concessionary funds on-lent to SLT by GOSL, a decision must be made by GOSL as to what liabilities should be taken over by a privatized SLT and on what conditions. 4.27 A major factor in the valuation of SLT will be its tariff structure and the tra4isparency of the tariff regulation. The currently low monthly subscription fee of US$1.70 would certainly be a negative factor, especially with the increasing portion of residential subscribers. GOSL should initiate a plan to increase the subscription fee before negotiating the sale of SLT. Further, SLT's financial statements should be brought up to date and audited to establish a commercial track record. This would provide a better basis for valuation of SLT by a potential investor as well as by GOSL. A private investor would also need to know GOSL's taxation policy for the sector, e.g. regards the turnover tax. This tax has been increased to 20% without corresponding increase of SLT's charges to its customers and SLT has to pay turnover tax to GOSL on bills that are not collected. A private company is unlikely to accept this tax policy. 4.28 If SLT is privatized, GOSL would require the private operator to maintain a certain service quality and expand the network as conditions for the privatized SLT's operating license. Given current conditions, such license conditions may not be meaningful for the north and east of the island and special arrangements for those areas may have to be considered until the current problems have been sorted out. Further, it may be practical to retain the telegraph service ("the poor man's telex") and certain free services to postal staff and Government officials within the public sector. Those services cannot be operated on a commercial basis and a private company would be reluctant to take over the numerous telegraph staff, which in any case is largely administered by the post office. 4.29 Before SLT is privatized, suitable staff transition arrangements should be agreed. Expansion of SLT's operations should make it possible to avoid lay-offs; some staff could be offered early retirement or to remain GOSL employees. The sale of some SLT shares to its staff on financed terms would give them a vote at the shareholders meetings and could reduce concerns about the privatization. The experience from other countries generally shows that staff were better off after privatization as indicated below: - 35 - Boise tábor and Consumeø £onse&uénceo of Sal linu PuJblic Entefoetst Léýt teUfitex New word 8ank rsearch on the.Nelfaecnsequence of.the privati:ation of twelve firms in Chi le, alaysia, 1exico, and the United Kingdom provides systematic and quantifiabte evidence coerning the effects of privatiation The cases cover telecommuncations fthree firas), airlines four firms), electricity <two firms), a Åottery company, a port, and a transport company.. General Wefare Effects In eleven of the twelve cases analyzed, divestiture improved domestic and world welfare; the exception wasMxicanaAirlines. The magnitude of the welfare gains is substantial; the perpetual annuaL benefits to society in relation to predivestiture annuat sates of .the companies average 26 percent**. The improvements are attributable to changes`brought abaut by divistiture, two exaipres include: The-mosttsignificant change was a dramatic increase-in investment. A strikiing , exampLeis Chile, here a local telecomuications copany doubled its capacity in the five years following .dvestiture. Wine of the twelve'firms showed1nproved productivity, thanks to better Iabor- management retations, ,mproved ncentives, a reduced .work force, and internal reorganilzation. Labor Effects Contrary to conventional wisdom, in no case in the sapLe did divestiture make warkers of the divested firms aworse off, even, taking into account all Layoffs and forced retirements. in three cases (Chite's electricity,distributoncopany, ENERSIS, Nexlco's Tetemex, and the United Kingdom's National Freight), or'ters iade subatantial gains., . Consuier Ef fects In all but five cases, consmIers mere either teft unffected - thanks to:copeition- or were considerably better off, as a resutt of effective reguLation. For example, consuners of telecomnunications services in:Chile and the United Kingdim benefited substantially fram divestiture. For a full description of the-methodology, anatysis of the cases, and synthesiså se'e Gatat, Jones, Tandon, and.Vogelsang, The Welfare Consequences of Selling Public Enterprises: Case: Studies from ChiLe,.Nalaysia, Mexico, and the..UK Country Economics Development Divisfoni-Uashington, 0,C * The ann~aL conponentof the perpetulty equivaLent (ACPE) of the gaing is calculated ei the welfere.galn multiptied by the discount factor divided by the annual saLes of the coipany! in the previous year. For exanle, if the weLfare gain is $100, the discount factor 10 percent, and last year's.saLes $200, the ACPE equats 5 percent. Source: Privatization: The Lessons of Experience, S. Kikeri, J. NeLtis, M. ShirLey, in World Bank, 1992. Financing of SLT Inveatments 4.30 The investments of the former Telecommunications Department were mainly funded by credits from de.velopment institutions (IDA, ADB, OECF, FINNIDA, French protocol, etc.) and GOSL guaranteed suppliers credits. SLT took over the ongoing projects, mainly the IDA supported Second Telecommunications Project, and corresponding funding. Since becoming operational in September 1991, SLT has funded all new local capital expenditures out of its internal cash generation. Foreign exchange costs have also been funded out of SLT's own resources, but mainly by suppliers and other bilateral credits with GOSL guarantee; New OECF and ADB credits for telecommunications projecte in Sri Lanka have been planned. Given GOSL's guarantee, SLT has had no problem in obtaining necessary .foreign credits. - 36 - 4.31 Shortly after 1995, SLT would need to invest about US$100 million (in addition to already planned investments) to catch up with projected demand and over US$60.0 million p.a. thereafter to satisfy projected growth in demand. The annual investment would increase as the system grows. Improvement of service quality, and replacement of obsolete equipment would require additional investments. Projections for SLT's cash generation are summarized.below: SLT's Internal Cash Generation 1995-2005 FY endinq Dec. 31f 1995 1997 1999 2001 2003 2005 --(Constant 1993 USS mWilions)--- Met Income 39.8 38.5 47.9 44.4 37.7 26.6 Depreciation 27.6 38.8 41.5 57.9 79.7 108.5 laternal Cash 67.4 77.4. 89.4 102.3 117.4 135.1 Generation Less: Amortization of 22.5 31.5 33.7 47.1 64.8 88.2 LT Debt et Internet Cash 54.9 45.9 55.7 55.2 52.6 46.9 Note: The portion of SLT's internal cash that could be used to pay for capital expenditures wiRt depend oniSLTJs future working capital needs and.the owners dividend requirements. SLT's working capital is not expected to increase signif Icantly. SIT has, so far, not declared any dividends to its current owner (GOSiL). flowever, in the future the owner is likely to require some dividends from this profitable sector. .Based on SLT's.net income, an appropriation of USS 15 to 25 mittion p.e. would appear reasonable. Detailed assulptions for the. above projections are given In Annex 20. Source: IBRD 4.32 If privatized, SLT would not have access to GOSL guarantee and financing would have to be obtained on SLT's own financial strength and, if applicable, that of a strategic investor. Currently, SLT is running a net foreign exchange surplus of about US$40.0 million p.a. on its international traffic; this surplus is likely to increase once the ADB-funded international facilities have been installed. The Colombo emergency scheme was funded by committing SLT's net surplus on traffic with the ATT system, for the ATT equipment, and with France, for the CIT ALCATEL equipment. As this surplus is retained at the source abroad, suppliers should regard it as secure enough without GOSL guarantee. However, a reform of the accounting rate system could reduce international revenues and net surplus on international calls (see box below): - 37 - 'Acoutin Rates for settlements of intentational Ca sn Internationet agreemnts establish accounting rates for interstationet catt.s in~ hard cArency and deftIhomn resulting amouts should be d Ided bete'een the orionntieg nd teceivigrg totephone achinistration an~d Cny evta thrd party involved i the transmissio of the catt. Total amounts for incoming and outgoing calts are generally settled annthly in accordance with those agreements::and any produce a net surplus or deficit. .Accounting rates hre different from collection rates, which is the rote a teLephoneaeinistration collects fromits subscribers for outgoing internationalcits; the coLection rate is not governed by internatiatut agreements. t . .The vitume of Incoming calls from fndustria zed countries has been higher than the v6lts of outgoing catLs from developing countries, resulting in large foreign exchange surpluses for operators In developing countries (ib, the ase of SLT about USS40 mitlion annualay)n. The accounting rate system that athecates revenues frinternational cats Lhas been *criticized for the folloiting reqsons:. projects.a $6.5bItI ton defisi by 1997, 70% of which goes to developing nations, * ATY and other big operators hove no incentive to stimulte international traffic when revenues are sucked up by the settlement rates. political campaigi to reform the syst has been startedi the US, but opions are divided because: many devlop ing countries rely up o on teraton ettlement to y for imported telephone,equipments; a reform Would make the sector ass profitable and less attractive to pr vate investors;__ 'many international conpanies (tike. ATT) export equipment to and/or have an equi ty stake in the telecoanuications sectors of developing countries; many US operators ( s. ATT) are ctive in the 11b-pass" technologies, which may cause up to 40% of the US def1cit for political reasons, it may not be possible to Increase the residentlit tariffsin developing natf6ns to reduce the need for subsidies from the international traffic; and * AIts not clear if a reform of the accounting rates wilt correct the imbalances or if the relative prosperity of the recipient nation is the major factor. 4.33 Given an.adequate, tariff policy, SLT should be able to fund all future local costs out of its own resources as it has done in the past. Given its stable and profitable operations, SLT should also be able to issue utility bonds in the local market. Its foreign exchange surplus on international traffic after already committed payments, however, will not cover all the necessary foreign exchange costs for an investment program that would provide for a IS% annual increase in the number of subscribers. If SLT is to fully finance its foreign exchange needs without GOSL guarantees, a suitable option would be to attract a strategic investor with established access to credit, or ability and willingness to contribute new equity, preferably a well established telephone operating company. - 38 - Fincal Impact 4.34 Currently, GOSL collects a turnover tax (20% of SLT's telephone and telex revenues) and an income tax (40% of SLT's taxable income), which for 1993 were estimated at a total of about SLRs 2.7 billion (about US$59.2 million). Further, all surplus SLT funds are currently deposited with state banks (at the end of 1993 estimated at US$39.0 million equivalent), something a private company hardly would agree to. As the sole owner of SLT, GOSL could also collect dividends, which, so far, have not been declared. 4.35 If SILT is privatized, the Treasury may collect less funds from this profitable qector than under state ownership. However, if SLT's investments are accelerated in line with GOSL' s objective to catch up with unsatisfied demand and to bring the service quality up to acceptable standards, all SLT generated funds over the coming decade would be needed for capital expenditures (para. 4.31). The turnover and income taxes would be collected by GOSL from SLT disregarding its ownership. If private management improves SLT's efficiency of operation and accelerates its network expansion, however, those taxes may provide higher revenues for GOSL under private rather than public ownership of SLT. The November 1991 privatization of the state-owned telephone company in Venezuela (CANTV) provides a good example. The Government received a substantial amount for the sale of CANTV and the new private operator turned a 1991 net loss into a taxable net income in 1992. 4.36 The net fiscal impact of SLT's privatization will depend on GOSL's investment, tariff, dividend and other policies for SLT. It would appear that in the near term (or as long as all SLT's internally generated funds are needed for expansion and improvement of its service), the fiscal impact of SLT's privatization would be positive at whatever reasonable price GOSL could extract for SLT. In the longer run, GOSL may collect less funds from SLT's operations under. private ownership than under public. However, improved telecommunications services under private operations could bring benefits to the economy as a whole with the potential of increasing fiscal revenues from the export, tourist and other sectors. V. CONCLUSIONS AND RECOMMENDATIONS 5.1 Access to good quality telecommunications services is critical to sustain Sri Lanka's export oriented development strategy. For this reason, GOSL liberalized the sector well ahead of most developing countries. In 1986-89, GOSL also considered the privatization of its telephone operations, but settled for the transformation of the former Telecommunications Department into a state corporation (SLT). 5.2 The liberalization of Sri Lanka's telecommunications sector has been successful in attracting private companies to provide mobile cellular, data transmission, paging, card pay phones, public telephone/fax agencies and other services. The scope for the establishment of new private companies to provide more of those services may be limited by the small size of the market and by existing competition. 5.3 Since its creation in 1990, SLT has gradually increased its operational efficiency and accelerated its expansion program. Even so, SLT's performance is barely on par with the telecommunications operators in India and - 39 - Pakistan and is far behind the performance of the rapidly growing East Asian countries. This situation is unlikely to change significantly unless a drastic restructuring of the telecommunications sector takes place. 5.4 Recent technological developments have made competition for basic telephone services feasible. Prices for digital wireless (i.e., radio) technology have decreased dramatically and are now competitive with those for traditional wired networks. Thus, the market for basic telephone services has become contestable and new, wireless operators have started to enter the market in competition with the established telephone monopolies. If opened to competition,- the local and long distance telecommunications market in Sri Lanka is likely to attract a number of interested investors. Competition would also lead to faster growth of the sector, improved quality of service and better adaption of tariffs to the cost of providing the service. 5.5 With the entrance of new operators providing wireless local and long distance telephone services, the need for prudent regulation of radio frequencies, network interconnections and revenue sharing arrangements will increase. Thus, SLTA should be given the status of a more independent commission and its technical and administrative capacity must be enhanced. 5.6 To enable SLIT to compete on an even basis and improve its efficiency, quality of service and commercial and consumer orientation, it should first be converted into a company under the Companies Act (this could be done through a cabinet decision) and then privatized. SLT's monthly subscription fee should be increased to remove current distortions in the tariff structure. This increase should be -linked to improvements in SLT's service quality and should differentiate between subscribers that buy their own telephone equipment from existing private suppliers and subscribers that use SLT supplied equipment. 5.7 The feasibility of local private networks, cooperatives (including TA and credits to promote such ventures), BOT and similar schemes should be studied,. as a means to develop telecommunications in areas which SLT is unable to serve within a reasonable time. The liberalization of the basic telephone service and the privatization of SLT, however, are likely to be the main options for increased private participation in sector development. 5.8 Before entering into negotiations with potential private investors, GOSL should identify the conditions to be included in SLT's operating license as a private company, e.g., exclusivity period for wired services, expansion of service, subventioned services (telegraph), routing of international traffic, service quality and its monitoring, tariff and taxation policies, etc. Further, SLT's audited financial statements should be made up to date to provide a track record of commercial operations for valuation purposes. GOSL would also have to decide on debt to be taken over by a private company and the conditions for such debt. 5.9 Given the past opposition to the privatization of telecommunications in Sri Lanka, suitable staff transition arrangements should be identified. Further, the privatization process should be well prepared, made as transparent as practicable and. explained to SLT staff and the public to avoid criticism from political, labor unions and other quarters. The experience from countries where In the GATT trade negotiations, Sri Lanka provisionally offered to open the basic telephone services to competition, if other countries do liekwise. - 40 - state-owned telephone companies have been privatized indicates that staff conditions generally improve. 5.10 The major private investor in SLT should preferably be a telephone operating company with adequate experience and financial strength to ensure the efficient development of SLT and its telecommunications services. 5.11 Thus, the proposed strategy for developing the telecommunications sector in Sri Lanka provides for a redefinition of GOSL's role from service provider to regulator and includes the following main components: * improve market access and competition; * strengthen sector regulation; and * privatize SLT The key steps of the above strategy are given below: Improve Market Access and Competition: * allow qualified private companies to provide wireless basic 10 telephone services-' in competition with SLT as well as wired services in areas not served by SLT; * transfer SLT's mobile cellular and data transmission services to independently operated subsidiaries to ensure that they are not subsidized by SLT's monopoly services; consider their future divest iturez-1; and, * study the feasibility of the establishment of local telephone companies and cooperatives and how they could be funded and provided with the necessary technical assistance. Strengthen Sector Reculation: * presentation to the Parliament of the amendment to the 1991 Telecommunications Act to change the status of SLTA into a more independent Commission and provide it with regulatory authority over the resale of SLT services.; * finance SLTA's activities through license and other operator fees (rather than through GOSL' s budget) , to provide it with suitable financial autonomy; * design and implement a plan to increase SLT's low monthly subscription fee to avoid uneconomic demand and a longer term decline in SLT's profitability; The private companies currently providing mobile cellular services should also be allowed to compete in the provision of basic wireless services. They could be required, however, to use digital technology to reduce the crowding of the frequency spectrum. In Germany, the state-owned Telekom spun off its mobile business into a subsidiary with its own management and pay structure to keep up with Mannesman, the main private competitor for mobile services. - 41 - * encourage the expansion of cellular, data transmission, paging, card pay phones, telephone agencies and other services currently provided by the private sector; * undertake a study of radio frequency needs to ensure future availability of frequencies for companies that want to enter the market and new technologies and services under development; * encourage the companies providing mobile cellular (and in the future stationary cellular) and other radio operated services to use modern, digital technologies, when commercially available, to ensure efficient use of radio frequencies; and, * study the feasibility of auctioning off the radio frequencies and other scarce facilities to the highest bidder to ensure fair and transparent allocation. Privatize SLT: * convert SLT into a company under the Companies Act; * reincorporate SLS's project implementing functions into SLT; define other functions for SLS (e.g. to operate SLT's cellular services) or cease its operation; * continue SLT's consultancy supported efforts to improve its corporate planning, efficiency of operations and service quality; * define conditions that GOSL would require in the license for a private operator of SLT as well as debt/equity and tariff and taxation policies; * bring SLT's audited statements up to date and monitor its financial performance on a commercial basis to facilitate estimates of its value; * establish the rules and bidding/negotiations procedures for the divestiture of SLT; * to encourage private interest in the purchase of SLT and obtain a fair price for GOSL, consider the option of selling a minority stake of SLT's equity to a strategic investor with an option to acquire a majority stake later; the management of SLT could be transferred to a minority investor by issuing shares with different voting power; some shares could be sold to SLT staff and/or floated in the local market; * discuss and inform SLT staff and other concerned parties about SLT's privatization and identify adequate staff transition arrangements to minimize union and other resistance; and * contact suitably qualified and financially strong telephone companies to ascertain their interest in investing in SLT; negotiate price and other conditions. 5.12 The demands for SLT's services is expected to continue to expand rapidly. Thus, even through SLT's staffing ratios are high at present, it should be relatively easy to avoid any involuntary retrenchment of labor following divestiture. - 42 - It should also be noted that in all cases where telecommunications companies have been privatized, the employees were better off. Often-the employees made major gain. 5.13 The necessary work to implement some of the recommendations of this report has already been completed, e.g., the draft amendment to the 1991 Telecommunicatfons Act, and other recommendations only need a GOSL decision, e.g., a Cabinet decision to convert SLT into a company under the Companies Act. There is a need, however, for follow-up work, studies and technical assistance to assist GOSL in formulating its detailed policies regards the use of radio frequencies, tariffs, network expansion, service quality standards, etc. Assistance may also be needed in,the identification of and negotiation with suitable strategic investors in SLT as well as in the strengthening of SLTA's capabilities to ensure adequate regulation of a more complex telecommunications sector. 5.14 The commercialization and privatization of a major public utility is a complicated process that involves substantial legal and institutional changes. In the UK, British Telecom was established as a company in 1981, a minority interest sold to individuals and institutions in 1982 and 1983, a majority interest sold in 1984 and remaining shares (22%) are expected to be sold in 1994, except for a "golden share" held by Government. In Germany, Telekom was established as a separately operated Government corporation in 1988 and, after necessary changes of law, is expected to be privatized in 1994. Some other examples are provided in Annex 24. In Sri Lanka, the initial steps have already been taken: separation of telecom from posts (1980), separation of sector regulation from its operation (1991) and corporatization of the operator with change of employee status from public servant (1991). A tentative time- frame, consistent with the experience in other countries, towards the strengthening of the sector regulation, increased competition and the privatization of SLT is given below: Estimated time (years) Description of Action 0-1-2- 3 4 (a) Amendment of 1991 Act and conversion of SLTA into a Commission (b) Strengthening of SLT's regulatory capabilities * (c) Establish adequate policy for use of radio frequencies I (d) Allow private companies to establish wireless basic telephone service in competition with SLT * (e) Convert SLT into a company under Companies Act (f) Transfer SLT mobile cellular and data transmission services to independent subsidiaries; privatize (g) Define GOSL requirements, license conditions and rules for SLT's divestiture (h) Float SLT shares in the local market, sell some to employees (i) Negotiate sale of SLT with strategic investors . Annex..1 STRATEIC PION R TE TELCOMMUNICATIONS SECTOR Status of Liberalization of TelemuMniatio .. Services Customer premises equipment Telephone service Other Country Telephone PBX Telex Fax Modem Na<' Int'l Mobile Data Afghaniscan N N N N N N N Bangladesh P Y N Y Y N N N N Bhutn Y Y N Y N N N - - Cambodia N N D.P.R. Korea N N Fiji Y Y Y Y Y N N P N Indonesia Y Y Y Y Y P P y y tran (I.R.) N N N N N N N N N Kiribati N N N N N N N N N Lao P.D.R. N Y P Y N N N Y y Malaysia Y Y Y Y Y N N Y Y Maldives Y P N P Y N N - - Micronesia N N N N N N N N N Mongolia N N N N N N N - - Myanmar N N Nepal N N Pakistan P P Y Y Y N N Y N Papua New Guinea N P N Y P N N N N Philippines Y Y Y y p p p y Y Solomon Islands N N SriLanka Y Y Y Y Y N N Y Y Thailand Y Y N Y Y N. N P P Tonga N N Vanuatu N N Viet Na N N Western Samoa N P P p P N N N N Lower income China Y Y Y Y Y N N N P India Y Y Y Y Y N N Y All lower income Bnnei Darussalam Y Y Y Y Y N N Y Y French Polynesia Y Y N Y Y N N N N Guam Y Y Y Y Y N Y Y Y Hongkong Y Y Y Y Y N N Y Y Korea (Rep. of) Y Y Y Y Y N P N Y Macau P Y N Y Y N N N N New Caledonia P Y Y Y Y N N N N Singapore Y Y Y Y Y N N N N Upper income Australia Y Y Y Y Y y y Y Y Japan Y Y Y Y Y Y Y Y Y New Zealand Y Y Y Y Y Y Y Y y Y W Fully liberalized P * Partly liberalized Source: ITU 1991 STRATE C Om©Ns TOR Tm TELE lL ?ATNN SECTOR Main Telephone Lines (per 100 inhabitants) Japan 45.4 New Zea"and 44.2 Singapore 39.8 Guam 3.3 Koma 4~Rep. Of 33.7 Maoaau 31. Freach PolYnema I10. New caledona Brunea Darus~a 14.3 Malaymta 9.9 Fijt.2 Tonga - 5.4 Iran - 4.3 D.L Korea - 3.7 MaldIveg - 3.4 Thauan 2.7 Meongessa 2. e Saa 2.5 KLribatå 3.i Vanuatu 1.5 Solomon igland - 1.4 Pakistan - PhilUPPae, - i Papua t4ew Guinea - . Sri Lanka - 0.7 Indonessa -j0.7 ladia - .7 Ne~pe - 0.3 China -40.8 Bhatau -.2 Bagiadesh -~ 0.8 Lao P.D.R. -- 0.2 MyaNmar 0.2 AfghaLtan - 0.2 Viet Nam 0.1 Cambodaa 0.1 0 10 20 30 40 50 60 Sore:ITTelephone uinen 1991 - 44 - STAT!CIC 07TIONS FOR TIE TL!ECOMMUNMCATIONS .SECTR Ratio of main lines to GNP A SMII,: 1989 10 -- - ---.-a. -. --- == =::: = :: FRG= SRI IA"mA 0.5 100 500 100 500M 1000 4000 > A Main fines par 100 inhabi > GNP p- capite (1 Sri Lanka: Density 0.9, GNP per caPita US$470, as of December 1992 Ource: Siemen- Annex 4 Page 1 of 3 SRILAK STRATEGIC OPTIONS FOR THE TELECOMMUNICA=ONS SECTOR Telephone Demand Forecast The Ewbank Preece Ltd. (EPL) Forecast was commissioned by ADB to study the development of the telecommunications network of Sri Lanka. To forecast the telephone demand in the.period 1990-2005, the consultants have compared two separate methods and obtained national and regional figures to be used the dimensioning of the network. The first method, leading to a macroscopic forecast, relates demand density (number of main telephone lines in service per hundred population) to the level of Gross Domestic Product (GDP) per capita. EPL.arrived at the formula; Y = 0.000419 X.2 for a logistic curve linking the demand density Y and the GDP, X, which is relatively close to expressions derived earlier by Carl Bro and JICA, and to a similar formula developed by ITU. The total demand is estimated as the sum of the expressed demand (known number of lines in service plus waiters) and a hidden or suppressed demand. This hidden demand represents the'unknown potential subscribers that would request a telephone if there was a realistic chance of getting one in a reasonable time. EPL believes that a reasonable assessment of hidden demand is about 50% of currently expressed demand. According to this method, total demand in 1995 would be about 329,000 lines. At district level or telephone exchange level the demand could be calculated as a proportional share of total demand, although these desegregated results may have severe deficiencies. The second method assumes the telephone demand to be a function of three regional factors: (i) the level of income; (ii) the level of urbanization, and (iii) the economic structure or sectoral mix in the region. Scores (1-5). given by the consultants to each factor in each administrative district are averaged to assign telephone densities and growth rates to five groups of regions on the basis of other countries experience and the consultants' judgement on the Sri Lankan situation. These densities vary from 0.5 to 7.0 (Colombo) lines/100 population in 1990 and grow to 0.7-9.1 by 1995. Total demand in 1995 estimated by the second method is about 404,000 lines. The two methods provide a broad indication of telephone requirements in Sri Lanka. EPL introduced further adjustments to the regional results to get "planning" estimates of 376,000 lines in 1995. Demand Forecast by Sofrecom. Sofrecom, the consultant commissioned for developing the capabilities of SLT in corporate planning, network planning and Amnex 4 Page 2 of.3 traffic engineering,and operations and .maintenance, has used the same methodology as EPL for the 1988/1989 demand estimates. Sofrecom gathered data from RTE and various governmental organizations and the total demand at the end of 1992 was evaluated at 301,958 lines for Sri Lanka, out of which 194,743 lines were for Colombo. This figure was then compared to the planned forecast of EPL for 1992. The comparison showed that the figures were close. However, EPL had underestimated the demand for Colombo by 8%, while it had over- estimated-other districts by 10t. Sofrecom also updated the macroscopic forecast using new figures for GDP and population and it was found that the demand had increased by 40% during the period 1988-1992. Since the demand could not be extrapolated for the future, international comparisons were carried out using the JIPP1 curve and the ratio 'Total telephone revenue by GDP* and the result showed macroscopic demand of 900,000 lines by the year 2005. The local forecast was updated using the most recent figures available by districts for the level of income, level of urbanization, sector mix, major projects, and adjusted for differences between the growth rates used by EPL and those observed. The result of the local forecast was 941,535 lines in 2005. The macroscopic forecast and the local forecast were combined using the Sofrecom software, resulting in the following planned forecast levels: 460,000 lines for 1995 636,000 lines for 2000 920,000 lines for 2005 The above demand forecast, however, has to be taken with caution, because of the uncertainty in the data used, e.g.: the last population census was done in 1981;, the breakdown of the population of Colombo and the switching areas was not known; the annual GDP increase over the next 12 years may be significantly different from the assumed St, etc. Demand for Non-Voice Services SLT provides telex service to about 1,500 subscribers (90% in Greater Colombo area) connected to the Colombo telex exchange. The telex service is expected to grow only marginally over the next five years. There are more than 1000 facsimile machines, mostly provided by the private sector, which due to their simpler operation and relatively low cost are now preferred to the telex service. The facsimile service is expected to keep growing at an average rate of 15 to 20% during the next five years. SLT also provides a telegraph service operating over 133 lines from the Telex exchange at Colombo, connecting several post and SLT offices with Gentex teleprinters. The telegrams are read over telephone to the nearest "phonograma office of SLT, transmitted through the Gentex network and sent by messengers to their final destination. From 1984 to 1989 the number of telegrams has decreased at a rate of about 11% per year and is unlikely to increase in the future. 1/JIPP curve relates to the ratio of main lines to GNP which is reflected in the annex 3 Annex 4 Page 3 of 3 SLT's Waiting List as of April 1993 Total Reqd. Total Reqd. Colombo Applicants Outside Applicants Metro (Waiters) Colombo (Waiters) .Colombo Central 11141 Batticola 2749 Jaffna Ja-hia 4595 Trincomalee 313 Vavuniya 309 Maradana 23976 Badulla 672 Havelock Town Bandarawela 815 Hatton 862 Mt. Lavinia 9364 Awissawella 756 Nugegoda 9250 Kegalle 1532 Ratnapura 1686 Kandy 6699 Matale 1230 Gampaha 3423 Kalutara 4490 Negambo 4955 Anuradhapura Chilaw 1560 Kurunegala 3258 Galle 2664 Hambantota 658 Matara 2241 Total 58326 Total 40872 Total Sri Lanka 99198 Source: SLT, April 1993 Page 1 of 2 SRI- LAMK STEAEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Sri "anka Telecommunigations Act No. 25 of 1991 1. The 1991 Act was gasezted in July 5, 1991 and provides fort (i) the appointment of a Director General of Tele'comm-nications (the OAuthorityx) for the regulation of the sectorl (ii) the transfer of assets and liabilities of the Department of Telecommunications to a new state corporation, Sri Lanka Telecom (SLT) for the operations of the telecummications systems (±j4) the repeal of the Telecomanications Ordinancet and (iv) other related matters. 2. The Act provides for the objectives, powers and duties of the Authority; some main features of the Act are listed belows (a) the Authority has the power to make rules for tariff regulation, interconnection charges, signalling and numoring plans etc. (Sections 5(k), 5(1), 5(n), 68); (b) trPe approval of equipment (5(9); (c) licensing, management and control of radio frequencies (Sectiong 5(r), 10, 22) (d) inquiries into complaints against an operator (Section 9); (a) issue and regulation of vendors' licenses (Section 2L); (M) examination and certification of radio telegraphy/telephone operators (professionals and mteurs)l (g) insPection of operators (Section 7); (b) reviev of annual reports of operators (Section 8); (i) enforcement of license conditions and public hearings (Sections 11 and L2); (J) granting of operating licensee and modification of licensee (Section 18)1 (k) verify compliance with ITU requirement (Section 5(g)); and (1) consult the public opinion (Section 17(3)). 3. All rules and regulations issued by the Authority shall be gazetted and do not become effective without the approval of the Minister, HOPT. Anane..5 Page 2 of 2 Proposed Amendment to the 1991 Act. 4. During the two years the 1991 Act has been effective, it has beomne evident that the duties placed on the Director General are so varied that a broader based regulatory structure would be desirable. Further, the departmental statua of the Authority limits its financial and administrative (including salary structure) autonomy and is a major constraint on its ability to discharge its duties under the 1991 Act. An amendment to the Act was, therefore, drafted with the objective to convert the "Authority" into a "Coission", which would be constituted of five "Commissionero" skilled In engineering, accountancy, law, economics, public administration, business and comercial management. 5. Some main features of the proposed amendment to the 1991 Act are listed below: (a) the words "Director General" and "Authoritym vill be replaced by the words"the Commission" (Section 4 of the draft aenameut bill)i (b) establishment of a "Commission" and appointment of its chairman and Vice Chairman (Section 2)1 (c) amendment of the anomalies in the 1991 Act, e.g. to avoid Odouble licensing" of equipment and the operation of that equipment (Sections 18, 19, 20); (d) a new section 22A proposed to the Act for the licensing and regulation of "Telecounuications Bureaus"t and (e) a new Section 223 for the licensing of cable work in subscriber premises. 6. The above draft amendment was forwarded to the Cabinet by HOPT in June 1992 and the Cabinet referred it to a Cabinet sub-committee, which in September 1992 decided against presenting the bill to Parliament. The bill is now being revived and would have to go through the following procedures: (a) MOPT to request the Cabinet to send the bill to the Legal Draftsman for the preparation of the necessary legislation (b) Preparation by the Legal Draftsmans (c) copy of the legislation to the Attorney General and other Ministries for comment; (d) translation of the bill into Sinhala and Tamil; and (e) Cabinet approval of the bill and presentation to the parliament. 7. Each of the above steps takes some time and a month or two is normally spent between each stage of processing. If no foreseen problems arise, it can be eastimated that it will take at least one year for this bill to be presented in Parliament from the time it is referred to the Legal Draftsman. Annex 6 Page 1 of 3 SRILAK STRATEGIC QPTIONS FOR THE TELECOMbUNICATIONS SECTOR Private Companies Providing Telecom Services Mobile Cellular Services 1. There are three firms providing cellular services: Cel1tel, Call Link and Mobitel, which is the most recent entry into the market (early 1993). Mobitel is a joint venture between O.T.C. Australia (pvt) Ltd. ahd Sri Lanka Telecom (SLT). O.T.C. Australia is wholly owned by Australian and Overseas Telecommunications Corporation Holdings Ltd. (AOTC), the national telephone carrier of Australia. The joint venture agreement between AOTC and STC-allows the use of SLT facilities and a share of the profits is given to SLT. Mobitel currently has about 500 subscribers. 2. Celltel has 92% foreign equity held by three companies - Millicom International (USA) and its subsidiary Comvic (Sweden) holds the majority, another equity holder is an American pension fund. The 8% local equity is held by individuals. The company was the first cellular system to obtain a license in 1988 and has been operating since 1989. Celltel currently has about 3500 subscribers and almost 100% are businesses. They extended their network in early 1993 to include Kandy and Galle. At present they are adding about 200 customers a month. They believe the market is quite strong and that they can double the number of customers in a year. Celltel subscribers estimates their break-even point at about 2,500 subscribers. 3. Celltel is concerned over the Mobitel joint venture and considers that Mobitel has a distinct advantage because of lower capital costs due to sharing of SLT services and facilities. Celltel did not believe any other private sector venture was able to share services directly with SLT. Cel1tel does not see itself as a competitor with SLT's basic services. Customers purchasing Celtel services are purchasing them for mobility. 4. Lanka Cellular Services (LCS) (Private) Ltd, or Call Link, is 75% owned by Singapore Telecom International, 12.5% by the IFC and 12.5% by CDIC, which is a government supported venture capital firm. Call Link only recently began operations (March 1993) and have about 400 subscribers. Its growth projections and market development of cellular services assumes a market of about 3% of telephone wire services. Cellular demand, therefore, should be about 9,000 to 10,000 subscribers by 1995. Call Link is also concerned ever the entry of Mobitel because of its assumed cost advantage due to the joint venture with SLT. Not only can Mobitel use SLT facilities, it also has an easier time in getting land for facilities. The time to obtain land for transmitters etc. is a considerable cost to LCS which Mobitel does not have tc bear. According to LCS, the market does not need a third cellular service, given that LCS and Cel1tel provide the complete range of services. Prices havt dropped significantly due to this competition. - 5n - Page 2 of 3 Paaing Services 5. There are S paging companies operating in Sri Lanka with about 4000 subscribers. Protec Services (Pvt) Ltd. or Intercity Paging, has about 1000 subscribers and it is 100% Sri Lanka owned. It began operating in 1990. The majority of subscribers are businesses; there is not a particular sector niche. Services include voice mail and switchboard services. Intercity is part of a group of four paging companies that are all Sri Lankan owned and have formed a trade association, the Page Operators Association. The other members of this trade association are Equipment Trades Ltd., Fentons, Ltd., and Bell Communications Lanka Ltd. 6. Intercity has had some problems with getting clearances for BOX duty free export status for its equipment. Duty free status has only been available since mid-1992 for pagers as well as transmission equipment. Never paging companies may have benefitted from this development while existing pagers had to pay duty for the majority of their equipment. 7. Infocom Lanka Ltd. or Pagenet, is a recent entry into the market and has only been operating since early 1993. It currently has about 500 subscribers. In addition to paging and communications, Pagenet provides information services through the pager. These services include news, stock market info, sports, etc. 49% of the equity is owned by Streamers Telecoms, which is a member of the Singapore based Keppel Group; 20% is owned by CDIC, 20% by Equity Investments, a local venture capital group, and 11% by local individual investors. 8. Pagenet expects the market to grow in Sri Lanka. In looking at other Asian countries, Sri Lanka is at the low end in terms of pagers per business population. There probably should be double or triple the number of pagers as compared to subscriber of cellular services. Clients were seen in three categories:- corporate, with multiple pagers; single or family owned businesses; and professionals. Pagers are seen as a complement to telephone services, not a substitute. The better the telephone service, the better the paging service. A main complaint by Pagnet is the lack of available lines from SLT. It asked for 10 lines in Galle and Kandy and could only get five. It is likely that the lack of lines could hinder its growth. Pagenet did not experience any difficulties with 301 procedures and was able to get duty free clearance of equipment within weeks. Data Transmission Services 9. Three companies have been licensed for data transmission services; Electroteks Ltd., DataNet (Lanka Cellular Services (Pvt.) Ltd), and Datapak, a joint venture between Sri Lanka Telecoms and Saga an Indian multinational; this company is very new and has only established a link for data services between India and Sri Lanka. 10. Electroteks is the market leader and started operations in .1992 after obtaining its license in 1991. The company is 100% Sri Lanka owned and has about 20 clients which are mainly banks: Bank of Ceylon, Peoples Bank, Grindlys, Standard and Charters, and Seylon Bank. Electroteks has facilities at 200 locations throughout Sri Lanka but mainly in Colombo. The market is growing very fast as is the need for interconnection with other data networks. 11. Electroteks uses its own radio communications (about 200 lines) and only about 5% of its channels are leased from SLT. It is establishing its own satellite link and is working with British Telecom (Tyme Net). SLT is short of circuits so the private sector has to provide its own. Electroteks had no problem with the BO in terms of duty free status for imports of equipment. Annex 6 Page 3 of 3 Their main problem is the cost of financing new equipment, currently 26% for 10 year money through the DFCC. 12. Datanet (Lanka Communication Services (Pvt) Ltd., has had a license since 1991 for data transmission services but just started operations. It is owned by the same consortium that owns Call Link and markets its services aggressively. Its main target customers are international companies in Sri Lanka and it has about six major clients. Card Telenhones Services 13. Since 1992, Lanka Pay Phones Ltd., provides a new service that has proved very popular with the public. It is currently not regulated under the 1991 Telecoms Act; as it is reselling a SLT monopoly service (as defined by the 1991 Act) under authorization by SLT. If the 1991 Act is amended, this type of service will also be regulated. Lanka Pay Phones Ltd. is 60% owned by a Malaysian Group (Antah Holdings), with remaining equity held by CDIC, Equity nvestors Group and several Sri Lankan individual investors. It shares offices with Pagenet (Infocom Lanka). 14. Lanka Pay Phones currently has about 200 public card phones. Users have access to local and international lines. They purchase cards in small businesses near-by the phone kiosks. The phones had to achieve Rs. 1000 per unit per day to break even and they are achieving double and in some cases triple that amount. It is hoped to have 600 units installed by April 1994. The equipment is British and it is imported under the BOI duty free system. There has been some problem with importing replacement cards duty free. The main problem with the phones has been to get lines. Some of the SLT exchanges are full. There is also a need for power supply near-by for lighting (the equipment uses battery power). 15. Just before Lanka Pay Phones started operations, SLT announced a similar service of its own. Twenty card phones were given to SLT by Japan and the phones have been installed in post offices. It is unclear if the Japanese phones will become widespread or will be limited to this initial 20. Lanka Pay Phones sees this as unfair competition by SLT, as the phones were provided free. Anne 7 STRATEcIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Main Telephone Lines Growth Rate 1982-91. masa 23.5 Nepal 11.4 Chan 15.3 E.res (Rep, et> 15.2 Pak~saa Ma~ayia 13.4 S.emm bload 13.1 i Nam 12 Eiriba 11. "m 11.7 Freah Polyaa 11.3 eru~M Dauma 11.2 b~di 10 I64am 1.. Ma r 7.7 t V&Zm.u .2 B-m~en 8.7 FMIt 6.6 S1agap~r 6.2 D.P.. ES 5.4 Magea 5.3 Aura |.4 WTea es 3.7 Philippi 3.4 Afgha"åaa 3.31 Papua New Geaimm 3.3; Japa 3.2: N26Zala"d 2.5 L&D P.D.R. 2.1 Cambodia0.2 0 5 10 r5 20 25 50 ** Average annual. growth rate ini main lines 4 Annet.8 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR SLT's Investment Program 1991-1995 Total 1991-1995 Main Program Components LOCAL Forefian Tal (USS KiLlion) A. SLT/Supplier funded Colombo Crash Program 5ESS 0.20 11.56 11.76 0/S Colombo Crash Program 1.99 15.51 17.50 SEA ME WE/2 0.05 18.02 18.07 Multiaccess Radio Systems 2.08 5.02 7.10 Other Works 14.39 U1.92 Sub Total 18.71 92.03 110.74 B. IDA II Project B1. Works Funded by ADB International Switching Center 5.44 11.56 17.00 Trunk Transmission Network La 17.47 P) Others 2.61 9.19 11.80 Sub Total 14.28 38.22 52.50 92. Works Funded by IDA Local Exchanges, 53,000 tines 17.29 38.19 55.48 Outside Plant 60.60 40 66-66 Others 9.63 12.66 22.29 Sub Total 87.52 56.91 144.43 83. OECF Greater Colombo area Development 31.29 24.91 56.20 Gaupaha & Katunayake 14.28 19 Sub Total 45.57 41.81 87.38 C. Works Funded by Finland Matara Project 6.69 20.34 27.03 D. Proposed OECF III 0(3 Colombo Project 7.20 45.00 52.20 E. Planned New Works 100,000 Lines Turnkey Project 40.00 150.00 190.00 Other items 5.B2 21.86 27.68 Sub Total 45.82 171.86 217.68 Grand Total 225.79 466.17 691.96 Source: SLT, June 1993 SRI LANKA Annex 9 STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Performance Indicators - Actual- SLT's Targets- Indicators 1990 1991 1992 1993 1994 1995 Telephone Network Exchange Capacity (Lines) 158518 159667 179995 228673 265147 402700 Main Lines in Service 121388 125834 135504 160550 219730 340000 Exchange Fill (%) 76.58 78.8 75.28 70 83 84 Outside Plant Occupancy (%) (a) 46 47 48 50 48 55 Public Call Offices 600 625 635 800 880 1000 Main Lines in Serv./100 population 0.71 0.73 0.78 0.91 1.23 1.87 Subscribers with STD (%) 98 98 98 99 99 100 Subscribers with ISD(%) 10 10 10 20 20 25 Complaints /100 Working Lines-Month -Greater Colombo 50 30 20 12 10 9 -Provinces 25 25 25 20 15 10 Operator Answering Time < 20s (%) -Long Distance 90 90 95 98 98 99 -International 74 so 85 90 95 99 Call Completion Rates (%) -local calls 27 35 40 40 45 55 -interurban calls (STD) 26 27 30 30 33 50 -international incoming calls 21 22 28 40 45 50 Productivity Staff/1,000 Working Telephone Lines 66.2 56.7 55.8 54 47 40 Financial Telephone Revenue/Line (US$) (b) 650 655 823 865 803 709 Operating Cost/Teleph.Line (US$) (c) 300 372 352 470 419 419 Self-financing Ratio (%) (d) 65 234 60 61 40 47 Operating Ratio (%) 41 51 37 48 47 54 Current Ratio (times) 4 4.2 6.2 4.2 2.77 3.1 Debt/Equity Ratio (%) 34 33 32 38 51 54 Debt Service Coverage (times) (e) 4.5 16.8 4.3 9.7 5.5 7.3 Return on Assets (%) (f) 22 18 28 25 27 15 Accounts Receivable (months) (g) 5 6.6 4.6 4.4 3.7 3.2 (a) Subscribers/Pairs connected to Main Distribution Frame (b) Teleph. operating revenue during the period/average no. of lines in service in that period (c) Teleph. operating costs during the period/ave. no. of lines in service during that period (d) Net of debt service, taxes, dividends and change in working capital (e) Net internal cash generation before interest, divided by interest plus amortization (f) On revalued basis (g) Total accounts receivables divided by average revenue per month Source: SLT - July 1993 Annex.10 Page 1 of 2 SRX AK STRATGIC OPTIONS FOR THE TEJACOMMUNICATIONS SECTOR Conversion of SLT from State Corpration to company 1. The necessary steps for the conversion of the Corporation "Sri Lanka Telecom" -(S.T) into a company registered under the Companies Act No. 17 of 1982 are enumerated in the Act titled "Conversion of Public Corporations of Government Owned Business Undertakings into Public Companies Act, No. 23 of 1987". The steps are as follows: (a) the Cabinet should consider it necessary that a company be incorporated for the purpose of taking over the functions of SLT; (b) the Minister, MOPT, may in consultation with the Minister, MOF, draft the Memorandum and Articles for the new company and forward them to the Registrar of Companies for registration under the Companies Act, No. 17 of 1982, (c) the Registrar of Companies shall issue a Certificate of Incorporation under Section 15 (1) of the Companies Act and publish an Order in the Gazette declaring that a public company is incorporated to take over the functions of the public corporation specified in the Order; (d) upon the publication of this Order, the Registrar of Companies shall allot all the shares of the company to the Secretary to the Treasury on behalf of the state; (e) stamp duty is not payable under the Stamp Duty Act, No. 43 of 1982 on the allotment of shares to the Secretary to the Treasury; (f) from the date of publication of the Order in the Gazette, the Corporation "Sri Lanka Telecom" shall be vested in the.Company referred to in the Order. 2. Without prejudice to matters specified above (a) all property owned by the Corporation shall with effect from the date of publication of the Order in the Gazette be vested in the Company; Cb) all liabilities of the Corporation shall be deemed to be the liabilities of the Company; (c) all officers of the Corporation who are not offered employment with the company shall be entitled to the payment of compensation as may be determined by the Cabinet of Minsters; (d) all Contracts and Agreements of the Corporation shall be deemed to be Contracts and Agreements entered into by the Company; - 57 - Annex 10 Page 2 of 2 (e) all -actions and proceedings instituted by or against the Corporation and pending shall be deemed to be actions and proceedings instituted against the Company; 3. Section 23 of the Employees' Provident Fund Act, No. 15 of 1958 has been amended by the Employees' Provident Fund (Amendment) Act, No. 14 of 1992 for the purpose of.payment cf compensation to employees who cease to be employed in a Public Corporation upon incorporation of the public company. As a result of this amendment, a member of the Fund established under the Employees' Provident Fund Act, No. 15 of 1958 is entitled to be paid the total amount lying to the credit of such member in the Fund. He/she would otherwise only be entitled if a male, at the age of fifty five years and if a female, at the age of fifty years to the amount lying to his or he credit in the Fund. 4. Some examples of state corporations which have been transformed into Public Companies are given below: (a) National Insurance Corporation National Insurance Corporation Ltd. (b) National Paper Corporation National Paper Company Ltd. (c) Ceylon Shipping Corporation Ceylon Shipping Corporation Ltd. (d) Sri Lanka State Trading Corporation Lanka General Trading Company Ltd. 5. A salient feature in the transfer of personnel from a public corporation to a company is that the company has the discretion to select its own officers and staff from amongst the employees of the Corporation. The Act provides for compensation for those not offered employment. In addition, the amendment to the Employees' Provident Fund Act looks after members of the Fund who cease to be employed in a public corporation upon incorporation of a company. 6. The Companies Act, No. 17 of 1982, which has kept abreast of the English Law on the subject, provides for all situations as regards different classes of shares with different voting powers. These powers are usually spelt out-in the Articles of Association of the Company. Even though shares in public companies after conversion from public corporations are initially fully owned by the state, they can subsequently be sold to the public. - 58 - S== =TCC OP==5N ?O0-TE TELEC= =~UHCA==I?I SECTmt Local Telephone Service Costs 1991 - USs Residew~aB MonavF Massid ta IUnV Conneenaon suascrwnon Connumnon suoSanwfon caig mgiadesh 281 4.1 1101 4.1 0.06 212 4.8 212 4.8 0.0 ambodas... .P.R.Korea ..... iji 49 3.0 3.8 0.07 idnnssa 169 4.1 154 4.1 0.05 ran &LR.L 2478 0.5 iuibn 6.2 I 10.9 0.21 .ao P.D.L 98 5.6 173 11.3 0.2 vai~ysa 18 7.3 18 12.7 0.0. Waldives T46 2.4 146 2.4 00 iicmesa 24 8.0 24 8.0 - Mou 2 1.5 13 6.3 - Myam~n 38 7.2 ... -A .S 54 4.0 54 4.0 - Pakan 105 1.1 105 1.1 00 PapuaNewGuinea 1 4.2 ... ... 0.1g Phippmh s 1 8.6 13 23.6 - So~om oislan~s 53 8.3 ... ... 0.11. Så Lanka Iii 1.9 fet 0,02 7han 145 3.9 145 3.9 0.12 To= 23 3.2 23 3.2 008 vannam Viet N.am ... Westrn Samoa 21 4.2 ... .. 0.05 Lower mome 199 4 151 7 0.07 China . ... India 57 1.6 ... .. . An lowe tcmn 192 4 151 7 0.07 Bnme Darussaam 14 6.9 ... ... Frh Polvnesa 146 7.0 146 '.0 0.31 G:am 25 12.0 35 32.0 - Hmn"*"" 77 7.2 77 .10.0 - KoeatRep.ofi i1 3.7 I1 - 3.7 0.04 Mama 68 7.5 68 3.4 - New Caledoma 195 1.9 195 1.9 0.31 Singorg 46 4.8 58 7.2 0.23 Uppernome 94 6 107 12 0.10 AIusUraa 135 S.8 135 17.5 0.19 Jaan 541 11.5 541 17.5 0.07 New Zeaan 32 16.9 32 34.9 . OECD cousnm 236 12 236 23 0.09 ASIA-PACIFIC 170 6 148 10 O.M Soucot ITU - 59 Annex 12 SRI LANKA Page 1 of 1 STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR PROJECT PLANNING AND IMPLEMENTATION Field Survey Approval by Observation and Project > Committee of > from Ministry Report by SLT Development of Finance Secretaries Approval by Approval of Preparation of Approval by Cabinet Appointed <- Tender Documents <- Tender Documents -- Cabinet Tender Board >20m by Ministry by SLT (CATB) Tender Board Invitation for Bid Evaluation Bids by SLT By SLT Approval by >20m Approval Ministry - > by Tender Board CATB Observation from Ministry of Finance Cabinet Approval Award of Contract by SLT - 60 - Anx13 SRIA STRATEGIC OPTIONS FOR TE TELECOMMUNICATIONS SECTOR Exnerience of Privatizations in Sri Lanka The experiences described below were mainly taken from a study by )r. Saman Kalegama, "Privatization: The Sri Lanka Experience," published by ,he Institute of Policy Studies, Public Enterprises Series No. 1, July 1992. The Paoda Textiles Company invested SLRs 140 million to organize, w:pand and diversify after being privatized. This amount about equals the Lnvestments during the previous ten years under public ownership. Revenues iave increased from SLRs 863 million in 1990/91 to SLRs 925 million in L991/92. 3. The United Motors doubled its turnover after being privatized from SLRs 220 million in 1989/90 to SLRs 443 million in 1990/91 and pretax profit increased by 15%. A staff training program improved productivity and customer relations. 4. Ceyo Oxygen also performed better after privatization; profits grew by 6V, new products were introduced and computerization and other prbductivity promoting investments were instituted. S. The Leather Corporation increased its production by 50% after privatization; staff salaries also increased by 50t. Some of the retrenched workers from the state corporation now work as subcontractors for this company as well as other leather companies like Bata. 6. The Milk Industries of Lanka Company Ltd. (Milco) was 51% privatized in February 1993. This deal was made outside the stock market and is reported to have caused much discontent amongst rival bidders. The Independent Worker's Union has made various demands and workers are intimidating Milco's management. The purchase price of about SLRs 100 million has not yet been settled. According to the chairman of the National Development Bank, neither the state nor the private sector had been adequately prepared. 7. Given the limited experience with privatization in Sri Lanka, conclusions are very tentative. Overall, privatization appears to have accelerated modernization and growth of the companies. GOSL experienced short-term fiscal problems before privatization, as it had to settle accumulated liabilities, restructure debt, compensate displaced workers etc. before the companies could be privatized. Sometimes the total cost of those liabilities exceeded the price received by GOSL at the sale of-the company. The Milco experience indicates the need for careful preparation of a privatization as well as selection of main investor. STRATEGIC OPTIONS FOTH"TgECOMMI1lCATIONS SgCECOR Recent Telecommunicatioms Privatizations Cow"ty M Mild of St Omayr I Covsideration inplic JA Comments US$ Million Valuation er lin ARGENTINA Nov.'90 T&:indvr LNTO North 60 214 cash Commitment to JP hfoiganISTET invest 5600m in 2 years ENTel South 5,300 debt 2062 687 Employees and local investors Citab;ank/Techia equity @15%( (4270) (1423) to hold remaining 40% BARBADOS Feb.'87 Private Treaty C&W 65 52 80 882 Cimsidoration inclides $32m assumed debt Ij L.II1V March '88 TCndir IT 25 8 32 Jib8 Exclusive license fol 15 years CllE (CTC) Duc. '87 Tendr Und Infernall. 30 125 517 951 JAMAICA Feb.'87 Private Treaty C&W 20 36 ISO 1957 as MALAYSIA Oct.'90 Flolation/Placement investors 24 900 3750 3125 12% private placement MEXICO Dec.'90 Tender Franue Telecom 20 1760 8800 1872 51% voting rights. SW Bell Commitments to invest Gnipo Carso $10 billion in 5 years. NEW ZEALAND June '90 Tender Bell Atlantic 100 2400 3200 2286 Comnitment to reduce holdinS Amuritech to 49% by private placement (10%) and offer for sale (40%). Government retains Golden Share PUERTO RICO P1991 Tender/Placement 100 P2000 P3000 P3750 SINGAPORE P1991/2 Violation/Placement 10) V5600) P5it) P6222 TRINIDAD & Dec.'89 Tender C&V 49 85 273 7500 20 year exclusive license TOBAGo MImum 15n.rate Of ratemx US VIRGIN ISLS Sept.'86 Private Sale Aliaric, Teleael 100 85 86 2048 Flamd ot of super divi4add c..or wnrlf Rank Renort on Venezuela Privatization, 1993 - 62 - Annex 15 SRI LAA TELECOM (SRVICES) LTD. Main.Elements of Memorandum of Association Name of Company: Sri Lanka Telecom (Services) Ltd. Primary Objectives:, * "To carry on the business of providers, facilitators of all manner of telecommunication services in Sri Lanka and elsewhere"; * "To carry on business as agents, sub-agents, representatives, contractors for Sri Lanka Telecom; * "To carry on business as consultants, project advisors, researcherstrainers, agents, suppliers and contractors in the field of telecommunications and allied activities in Sri Lanka and elsewhere". Ancillary Powers: * "To negotiate loans, to lend money on any terms and in any name and on any security"; * "To subscribe for issue of capital; and * "To enter into any agreement or arrangements with any Government Department or other authority and to obtain from any such authority any rights. decrees privileges, concessions, that may seem conducive to the company-s objective or any of them". Limitations: "The liability of members is limited". Subscribers: 1. Mr. Vernon Watson. Chairman. Sri Lanka Telecom 2. Mr. K. Wickramarachi, Managing Director, Sri Lanka Telecom 3. Mr. T.P. Gunavardena, Director. Sri LanKa Ta"ecom 4. Mr. P.L.D. Premaratne, Additional Solicitor General 5. Mr. R. Paskaralingam. Secretary to the Treasury 6. Mr. Asoka Gunasekara, Secretary, Posts & Telecommunications 7. Mr. K. Shanmugalingam, Deputy Secretary to the orrannsury SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Organization Chart of the Sri Lanka Telecom Authority (SLTA) DIRECTOR GENERAL of TELECOMMUNICATIONS DIRECTOR DIRECTOR DIRECTOR TECHNICAL STANDARDS LEGAL. PUBLIC AFFAIRS ECONOMIC LCENCING & & & REGULATIONS PERSONNEL FINANCIAL AFFAIRS CUSTOMER AFFAIRS SENIORIO CE CE CESENIOR STAmnARD SERICE LFIEA ACCOUNT- LICENCING CUSTOMER SPECTRUM SYSTEAS EANT AFFAIS GEC'TANALST AENGINLV tNGINtLi4 OLLAL EDMIN TRANSLA- ACCOUNT. ENGINEERS ENGINEER ENGINEERS S PR GR M- ENUNE~I ENIN:LaS orrICER FECRET R~ TOPS ANT STOSTO STO CE :Ciis Eingmee.ir 570 $<nn Tchnid OfiIe - 64 - Annex..16 Page 2 of 2 SLTA: STAFFING Category Number Director General 1 Directors 4 Chief Engineers 5 Senior Legal Officer 1 Senior Accountant 1 Accountant 1 Engineers 12 Administrative Secretary 1 Data Entry Operators 5 Stenographers 3 Typist 7, Other Support Staff 67 Total 105 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR SLT ORNZATON CHAT nya~ma nya~m m~ u¥ m=e~ a MinnenEtin om m~ 0mm~ vo~a 09 miug~ita 0mu Mapr~ mimrAms'aTae veuemmfunume GSAA@ nMaNA 9mEAm sIMOpaO - 66 - Page 2 of 2 SLT STAFFING 1990-95 Major Categories 1990 1993 1995 Administration 774 1165 1161 Officers 24 40 40 Staff 750 1125 1121 Engineering 5624 4646 4601 Engineers 175 195 193 Technical Officers 1092 834 926 Engineering Workmen 4357 3627 3482 Finance and Accounts 264 48 56 Accountants 13 20 20 Support Staff 251 28 36 Traffic 2097 1085 1055 Officers 43 174 172 Support Staff 2054 .911 883 Transport 262 225 229 Officers 7 2 2 Support 255 223 227 General 191 164 162. Total 9212 7 333 7264 Productivity Telephone lines in service 101,000 136,000 180,000 Staff/1000 telephone lines 91 54 40 in service Note: With the creation of the SLT in 1991, some staff opted for early retirement, others remained as civil servants and about 1000 telegraph and traffic staff were transferred to the post office. SLT's overall productivity was increased by reducing the staff while the number of telephone lines in service has been increasing. SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Organization Chart of CELLTEL .... I - 68 - Annex 19 Page 1 of 5 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR SLT's Financial Statements and Prolections for 1991-1995 (As preoared by SLT) INCOME STATEMENT Actual Projections FY Ending 12131 1991 1992 1993 1994 995 - (SLRs Millions)- REVENUES Telephone: Rentals 104 125 142 195 281 Domestic Calls 1928 1282 1629 2021 2681 Internatl.Calls 2472 3284 4379 5771 7431 Total Telephone Revenues 4504 4691 6150 7987 10393 Telex 307 300 333 400 460 Telegram 27 100 125 120 123 Miscellaneous 142 298 343 380 437 TOTAL REVENUES 4980 5389 6951 8887 11413 OPERATING COSTS Staff Remuneration 371 545 650 845 930 Maintenance 94 333 373 410 451 Operation & Admn. 194 160 176 202 233 Depreciation 1090 683 845 1037 2341 Turnover Tax 6 286 1296 1677 2170 TOTAL OPERATING COSTS 1813 2007 3340 4171 6125 Operating Income 3167 3382 3611 4716 5288 Less: Interest 203 553 38 464 441 Income Tax 0 1132 1429 1701 1939 NET INCOME 2964 1697 2144 2551 2908 Appropriations 2124 0 0 0 0 Retained Earnings 840 2537 4681 7232 10141 Operating Ratio (%) 36 37 48 47 54 Rate of Return (%) 46 33 26 30 12 - 69 - Annex 19 BALANCE SHEET Page 2 of 5 Actual Prolections FY Ending 12131 1991 1992 1994 1995 --- (SLRs Millions)- ASSETS Assets in Operation 7178 7807 10279 12770 33799 Less: Acc. Depreciation 254 918 1763 2800 5141 Net Fixed Assets in Operation 6924 6889 8516 9970 28658 Investments 902 903 1299 1837 2767 Work in Progress 116 1400 5512 14905 2553 Total Fixed Assets 7942 9192 15327 26712 33978 Cash and Banks 182 3012 1791 970 1500 Accounts Receivable 4224 4128 4557 4800 5250 Stores 195 318 547 697 958 Total Current Assets 4601 7458 6895 6467 7708 TOTAL ASSETS 12543 16650 22222 33179 41686 LIABILITIES GOSL Equity 7443 8000 8000 8000 8000 Retained Earnings 840 2537 4681 7232 10141 Total Equity 8283 10537 12681 15232- 18141 Long-term Debt 3376 4904 7888 15611 21155 Current Liabilities 884 1025 1453 2118 2180 Subscriber Deposits 0 184 200 218 210 TOTAL LIABILITIES 12543 16650 22222 33179 41686 Debt/Capitalization (%) 41 32 38 51 54 Current Ratio (%) 5.2 7.3 4.7 3.1 3.5 Accounts Receivable (months) 5.0 4.5 4.3 3.7 3.3 - 70 - Annex 19 FUNDS FLOW STATEMENT Pace 3 of 5 Actual Projections FY Endin 12131 1991 1992 1993 1994 1995 _ _- (SLRs Millions)- Operating income 3167 3382 3611 4716 5288 Depreciation 235 683 845 1037 2341 Total Internal Sources 3402 4065 4456 5753 7629 Incr. in LT Debt M 1030 3405 8261 6124 TOTAL SOURCES 4248 5095 7861 14014 13753 Capital Expenditure 1215 1622 6584 11884 8677 Incr. (Decr.) Working Capital 352 1402 -1006 -1111 1186 Appropriation to GOSL 2124 0 0 0 0 Income Tax 0 1132 1429 1701 1939 Interest 203 553 38 464 441 Amortization 0 386 420 538 580 Investments 354 Q 36 538 930 TOTAL APPLICATIONS 4248 5095 7861 14014 13753 Debt Service Ratio (Times) 16.8 7.4 117.3 12.4 17.3 Self-Financing Ratio (%) 234 60 61 40 47 - 71 - Page 4 of S SRI-LNK STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Notes and Assumptions to Financial Statements 1. SLT took over SLTD's assets and liabilities on September 1, 1991 at replacement values as agreed with GOSL. SLT's 1991 and 1992 financial statements have not yet been audited and may be subject to change. SLT's main assumptions for its 1993-95 financial projections are: 2. Income Statement (a) Revenue - Revenues have been estimated based on planned expansion of SLT's network and recent tariff revision. (b) Operating Expenses - Salaries are expected to increase by 30% in 1994 and 10% in 1995, maintenance expenditure by 12% in 1993 and 10% thereafter, operation and administration by 10% in 1993 and 15% thereafter, depreciation has been calculated at the rate of 7 to 8% and turnover tax at 20% on telephone and telex revenues. (c) Interest - Interest has been computed at 13% p.a. on loans onlent to SLT from GOSL and on other loans at 8.1%. (d) Corporate Income Tax is 40% of taxable income. (e) Appropriations - No dividends to GOSL have been assumed. 3. Balance Sheet (a) Fixed Assets - Fixed Assets (taken over by SLT from SLTD), valued as of 1st September 1991. Subsequent years fixed asset values are based on SLT's investment program. (b) Work in Progress - Based on SLT's investment program; completed projects transferred to fixed assets in operation. (c) GOSL Eauity - The difference between the assets and liabilities transferred from SLTD to SLT on September 1, 1991. Cd) Long Term Debts - includes all long term SLTD loans transferred to SLT i.e., loans onlent from GOSL (IDA, ADB, OECF, France, FINNIDA) and direct loans from Midland U.K, Midland USA, Bank Indo Suez, AT&T and CIT ALCATEL. (e) Deposits - collected from subscribers for direct dialling facilities and the application fee (later deducted from the connection fee) are included in this figure. - 72 - Annex 19 Pace 5 of 5 (f) Current Liabilities - include snorc-rerm Ljaw..ities, current portion of long-term debt etc. 5. Ratios Operating Ratio - Operating expenses as a percentage of operating revenue. Rate of Return - Operating income, less income 'tax, as a percentage of average net fixed assets in operations at book value. Debt/Equity Ratio - Long term debt as a percentage of total capitalization Current Ratio - Current assets divided by current liabilities Accounts Receivable - months outstanding. Outstanding customer bills, divided by the annual operating revenue, times twelve. Debt Service Ratio - Internal cash generation divided by debt service. Self-Financing Ratio - Internal cash generation, less change in working capital, dividends, tax and debt service, as a percentage of capital expenditures. SRI LANKA: STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Financial Projections 1994 - 2005 for SLT INCOME STATEMENT Actual B ------- ------ Projections--------------------------------- FY Ending 12131 1992 1993 M 1995 1997 1999 2001 2003 2005 Telephone: (US$ million) Rentals 2.7 3.1 3.5 4.0 5.4 7.1 9.4 12.4 16.4 Domestic Calls 27.9 35.4 38.2 41.3 48.5 57.2 67.9 81.0 97.3 Internatl.Calls 71.4 95.2 113.0 120.9 138.4 158.5. 181.5 207.7 237.8 Total Telephone Revenues 102.0 133.7 154.8 166.3 192.3 222.8 258.7 301.1 351.5 Telex 6.5 7.2 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Telegram 2.2 2.7 2.5 2.5 2.5 2.5 2.5 2.5 2.5 Miscellaneous 6.5 7.5 8.1 8.7 .LO 14.2 .18.4 24.0 31.4 TOTAL REVENUES 117.2 151.1 172.3 184.5 212.7 246.4 286.6 334.6 392.4 StaffRemuneration 11.8 14.1 18.4 19.3 21.3 23.5 25.9 28.5 31.5 Maintenance 7.2 8.1 9.0 9.3 10.9 14.4 19.1 25.2 33.3 Operation & Admn. 3.5 3.8 4.3 4.8 6.0 7.6 9.5 11.9 15.0 Depreciation 14.8 18.4 22.2 27.6 38.8 41.5 57.9 79.7 108.5 Turnover Tax 6.2 28.2 3.4 34.7 39.9 46.0 53.1 61.6 71.7 TOTAL OPERATING COSTS 43.6 72.6 86.3 95.7 116.9 132.9 165.5 207.0 260.0 OPERATING INCOME 73.5 78.5 86.1 88.8 95.8 113.5 121.0 127.6 132.5 Less: Interest 12.0 13.0 18.1 22.5 31.5 33.7 47.1 64.8 88.1 Income Tax 24.6 31.1 27.2 26.5 25.7 31.9 29.6 25.1 17.7 NET INCOME 36.9 34.4 40.8 39.8 38.6 47.9 44.4 37.7 26.6 RATIOS Average no. of DELs (1000) 132.0 145.7 167.5 192.6 254.8 336.9 445.6 589.3 779.3 Telephone Revenue/DEL (US$) 772.6 917.8 923.9 863.2 754.7 661.2 580.5 511.0. 451.0 Operating Cost/DEL (US$) 330.5 498.5 514.9 496.8 458.9 394.5 371.5 351.3 333.6 2 Operating Income/DEL (US$) 442.0 419.4 409.0 366.4 295.9 266.7 209.0 159.7 117.4 X Rate of Return (%) 29:0 28.3 29.2 26.2 20.7 29.5 26.5 22.2 18.8 9, N - 74 - PawEL 2 of 3 SRILAA STRATEGIC OPTIONS FOR THE TELECOMNCATX0MS SECTOR Assumntions for 1994-2005 Prolections 1. The projections have been done in 1993 constant US dollars and SLT's 1993 income statement has been converted into US$ at SLRs 46/$. Eventual future exchange fluctuations.have been ignored. 2. The projections are based on the following assumptions: (a) telephone rentals remain at US$21/DEL p.a.; (b) domestic call charges increase by 6% for existing subscribers. New subscribers (over 70% residential) will produce US$60/DEL in call charges during their first year of being connected, increasing by 6% p.a. thereafter. The 6% is based on expected economic growth (5% p.a.) plus increased traffic due to ithproved access (3% p.a.) less 2% p.a. due to decreasing domestic tariffs in real terms (the price cap formula); 'C) international calls increase by at p.a. as from 1995. The traffic increase.due to improved access and quality of service and new equipment should be reflected in the large increases projected by SLT for 1993 and 1994 totalling 58%; (d) telex and telegram revenues are expected to remain flat, as those services are being replaced by fax facilities; (e) miscellaneous revenues include connection charges, interconnections, leased circuits etc. and is expected to grow by B% p.a; (f) staff remunerations are expected to increase by 5% p.a. based on unchanged number of staff but an increasing portion of qualified staff to handle modern sophisticated equipment; (g) maintenance costs are currently well over $50/DEL p.a. and are expected to decrease to $40/DEL by 1997 as new equipment is installed. This is still on the high side but may be reasonable considering SLT's small size and excessive mix of technologies; (h) operation and administration is expected to increase by 12% p.a. slightly less than the DEL increase of 15%; (i) depreciation is calculated at St of fixed assets in operation, which is about what SLT expects for 1993. This assumes an expected economic life of just over 12 years, which is shorter than the physical life of the assets, but with the expected rapid technological change, assets are likely to be retired before they complete their physical life due to obsolescence; - 75 - Annex 90 Page 3 of 3 (j) turnover tax has been calculated at 20% of telephone and telex revenues; (k) interest has been estimated at 10% on 65% of gross fixed assets, which is in line with recent SLT statements; the amount of debt will depend on GOSL's future dividend requirements, which will have an impact on SLT's self-financing ability; (1) income tax has been estimated at 40% of SLT's net taxable income. 3. From 1994 to 1996, SLT plans to add about 175,000 lines to its exchange capacity. As the increase in the number of subscribers is unlikely to exceed 15% p.a. (or about 81,000 DELs in 1994-96), excess exchange capacity is expected to remain until 1998. This will result in a lower rate of return on net fixed assets in 1996-98. - 76 - Anex 21 Page 1 of 4 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Principal Telecommunications Tariffs (March 1993) A TELEPHONE Rates in Rs. 1. Local Service a. Application for telephone connection 250 (offset against connection charges at the time of provision of service) b. Connection fee 13000 to 50000, depending -Subscriber Trunk Dialling (STD) exchanges on the radial distance -Non-STD exchanges First 200 Units Additional Units c. Unit Call Charge (2 minutes incl. turnover tax) Per Unit Per Unit From subscriber telephone 1.20 1.80 From Call Office 2.00 2.00 d. Annual Rental Charge - Business and commercial Govt. deparments 960/-Per annum -Other Govt. departments 9601-Per annum Private subscribers 960/-Per annum -Religious institutions 300/-Per annum -Coin box telephones *with incoming facility 1000/-Per annum *Hotels, clubs, etc. with incoming facility 1000/-Per annum *without incoming facility 400/- Per annum e. Deposit for the facility of originating trunk 150/- calls and telegrams read by telephone (phonograms) f. Deposit for the facility of originating 1000/- international calls g. Deposit for International Subscriber Dialling (ISD) Residental subscribers SLRS 5000-25000/ Business subscribers SLRs 25000 and up depending on usage. (for very high usage, a bank guarantee is required.) - 77 - Annex 21 Page 2 of 4 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Principal Telecommunications Tariffs (March 1993) Rates in Rs. 2. DOMESTIC LONG DISTANCE a. Operator assisted calls (incl. turnover tax) Standard Rate 1/ Economy Rate 2/ 1st 3 min. Addl. 3 min Ist 3 min. Addl. 3 min or fraction or fraction or fraction or fraction Distance Less than 20 miles 5.24 3.60 5.24 3.60 20-50 miles 8.84 7.20 5.24 3.60 b. Automatic Traffic (incl. turnover tax) Pulse Meterine, time for one unit Distance Standard Economy Rate 1/ Rate 2/ (sec) (sec) Less than 20 miles 120 240 20-50 miles 50 100 I/ Standard Rate: From 8 a.m. to 6 p.m., Monday through Friday excluding public holidays 21 Economy Rate: From 6 p.m. to 8 a.m. Monday through Friday, and during the full 24 hour period on Saturdays, Sundays, and public holidays - 78 - Annex 21 SRI LANKA Page 3 of 4 STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Principal Telecommunications Tariffs (March 1, 1993) 3. INTERNATIONAL CALLS 1st 3 min or Fraction Each Addl. Minute Destination Collection Accounting Rate Rate India P-P Std. 325 Eco 265 65 SDR 0.84 S-S Std. 195 Eco 159 53 Japan P-P Std. 495 Eco 405 99 SDR 2.00 S-S Std. 297 Eco 243 81 Kuwait P-P Std. 630 Eco 510 126 SDR 1.63 S-S Std. 378 Eco 306 102 United Kingdom P-P Std. 630 Eco 510 126 SDR 1.40 S-S Std. 378 Eco 306 102 United States P-P Std. 630 Eco 510 126 US$ 2.20 S-S Std. 378 Eco 306 102 P-P: Person-to-Person calls S-S: Station-to-Station calls The Report Charge (when the called person is not available or doe not accept the call) is equivalent to one-minute rate. "Economy Rate" ISD service is available from midnight to 6:00 a.m. for the Pakistan, Maldive Islands. - 79 - Annex 21 Page 4 of 4 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Principal Telecommunications Tariffs (March 1, 1993) B. TELEX Rates in Rs. a. Connection Fees Same as telephone b. Annual Rental Charges 24000/- -Loop rental 960/-Colombo Central area 2160/-other areas c. International Call Charges (Examples for operator assisted calls) Destination Collection Rate Accounting Rate per minute per minute (SLR) India 60/- 0.50 SDRs Japan 86/- 1.80 SDRs United Kingdom 100/- 1.34 SDRs United States 100/- 2.00 US$s C. TELEGRAPH Zone 1 Zone 2 Zone 3 Asia, Oceania, Europe Central, S. America Indian Subcontinent N. America. and Africa and Carribean Islands Rs. Rs. Rs. Ordinary Rate: Per 10 words or less 55.00 87.00 102.50 each additional word 5.50 8.70 10.25 Urfent Rate 11.00 17.40 20.50 Phonograms 1.25 per telegram - 80 - Annex 22 SRI LANKA STRATEGIC OPTIONS FOR TELECOMMUNICATIONS SECTOR STATUS OF FREQUENCY ALLOCATIONS AND USAGE WITH CELLULAR MOBILE TECHNOLOGY Frequency G.S,M. AMPS TACS WILL MPS Band in Reserved Allocated CELLTEL & Allocated Proposed Proposed Megahertz for future to MOBITEL CALL LINK to SLTA for for (Mhz) allocation License Future Digital 2200 System About 120Mhz 1900 proposed 960 10 950 Mhz 33 Mhz 917 915 905 10 894- Mhz* 25 886 24 M 8861 Mh 5 880 Mhz 870 866 851 15 849 24Mhz Mhz * 841 836 5Mh:z 825 821 15 806 Mhz AMPS A Band CELLTEL SLT using System for with 11 Mhz uses TACS this allocation PCS will out of 24 B' Band shared with be digital allocated with 13Mhz Cellular for and CALL its Fixed WILL LINK uses System TACS with the rest G.S.M - (Group Special Mobile), AMPS - (Advanced Mobile Phone Service) MTR - Mobile Trunk Radio Services PCS - (Personal Communication System) TACS - (Total Access Communication System); WILL - (Wireless in the Local Loop); Chart not on scale - 81 - Annex 2 3 Page 1 of 2 SRI LqC STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR ADVANCED TECHNOLOGIES AND LIMITS FOR APPLICATION IN SRI LANKA VSAT (Very Small Aperture Terminal) A point to multi point satellite service using very small Aperture Terminal with small dish antennas (size about 2 meters or less). This can transmit and receive voice and data and also receive video signals. They are increasingly being used for intra corporate communications. A smaller version is also available which can be used for disaster and emergency situations. VSAT provides a typical method of using "by-pass" technology and service. Radio in the Loop This is an emerging application for stationary communications of the mobile cellular technology and provides for substitution of the physical connection between the subscriber and the local exchange. The introduction of wireless, either totally or partially, has the distinct advantage of flexibility in planning, rapid installation and is, in some cases, cheaper than the traditional cable or wire connection. The technology used is based on the cellular but without the need for complete mobility and "handover" or "roaming" facilities. Some radio technology being considered for fixed access are modifications of : CT2 (digital); DECT (digital); Ionica (digital); modified cellular (analogue and digital); and Trunked Mobile (analogue). Those technologies work on various frequencies, from the 400 MHz band up to 3.5 GHz, which provides some flexibility to countries where some bands are crowded. In the former East Germany, 50,000 lines were connected with radio technology and Sri Lanka has already obtained some experience with an experimental system in Kandy and has plans to deploy these in some other appropriate areas. PCS (Personal Communication Services) This is also an emerging technology evoking large interest in several countries. The concept is.to make the terminal, in this case the telephone set, mobile and provide the subscriber with a single number wherever he is, at home, office or in transit. The technology used is again based on cellular. but with very small cells (pico cells), in some cases serving an are not larger than an office by means of very small base stations. The individual telephone will be of pocket size and can be carried. Experimental licenses have been granted both in UK and USA. The service has to depend on "intelligent network" interface to provide it with the complete flexibility in routing, control and billing, etc. ISDN (Integrated Services Digital Network) ISDN service permits integration of voice, data and video communications. To start with, some countries have started the so called - 82 - Annex 23 Page 2 of 2 narrow band ISDN and a few have the wide band ISDN on trial basis. Sri Lanka with its substantial digitalization of the local and progressive digitalization of the national network should consider providing ISDN services if there is sufficient demand for such facilities. Limits of Wireless Communicationp Wireless communications are limited by the allocation and availability of the radio spectrum which is a limited resource. No doubt, technological advance will permit multiple digital use of individual frequencies, particularly in cellular communications. However, the frequency spectrum in the 400 and 900 MHz and in the 2 GHz bands, which have a number of shared services competing for channel space, impose a limit to the expansion of these services. SLTA, which is responsible for the management of the radio frequency spectrum, should keep this in view and provide an equitable allocation at the national level, taking into account the current demand and use as well as the future needs, especially for the main national carrier, SLT. - 83 - Annex 24 Page 1 of 1 SRI LAKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR How Long Does It Take To Divest A State-Owned Telecommunications Operator? Argentina DA P2 >? Mexico DA- Pl-P2----P2 Japan C - P - P2 P2 ? Malaysia DA- C Pl-> Pakistan C DA P1 (est.) New Zealand DA- C P1 P2 (est.) Singapore DA C- P1 1985-'86--' 87--' 88--' 89--' 90-' 91--' 92--' 93--' 94--' 95 Key: DA - Government Agrees to Divestiture C - Corporation P1 - Privatization (first share sale) P2 - Privatization (further share sale or reoffering by initial buyers) Source: Asia Region Study, Telecommunications Reforms: Towards a New Pragmatism, World Bank, April 1993. ANNEX 2 5 - 84 - Page 1 of 1 SRI LANKA STRATEGIC OPTIONS FOR THE TELECOMMUNICATIONS SECTOR Reference Sources 1. Asia Pacific Telecommunications Indicators ITU, May 1993 2. Telecommunications Sector Reform in Asia - World Bank, May 1993 - Toward a New Pragmatism. Draft Discussion Paper, World Bank 3. Several reports of SOFRECOM Consulting Services SOFRECOM, 1993 4. Sri Lanka Telecommunications Act No. 25 of 1991 GOSL, 1991 5. Memorandum of Association of Sri Lanka Telecom March 1993 (Services) Ltd. 6. The Changing Role of Government in an Era of ITU, February 1993 Telecom Deregulation 7. Telecommunications: World Bank Experience and World Bank, December 1992 Strategy, Discussion Paper 192 S. Privatizing Telecommunications Systems, IFC IFC, November 1990 Discussion Paper 10 9. Asia Telecom Forum: Economic and Regulatory ITU, May 1993 Symposium 10. Regulation, Institutions and Commitment in Levy and Spiller Telecommunications: A Comparative Analysis April 1993 of Five Country Studies 11. Implications of Regulatory Reform for Burmeister Telecommunications in Developing Countries January 1993 12. Telecommunications Development Study EWbank & Preece 1989-90 13. Developing the Private Sector IBRD, 1991. 14. Privatization, The Lessons of Experience Kikeri, Nellis, Shirley, IBRD, 1992 15. Telecommunications Reform: Which Sectors to W.H. Melody Privatize? ITU Journal, June 1992 16. Telecom Privatization - A Panacea for Developing S.K. Bhattacharyya Economies? Bell Canada, 1993 17. Restructuring of the Telecommunications System Report of the Government Commission for Telecommunications, Heidelberg, 1988 19. The Bank's Experience in the Telecommunications World Bank 1993 Sector, An OED Review SRI LANKA JAFFNA u SECOND TELECOMMUNICATIONS PROJECT - TELECOMMUNICATIONS NETWORK COVERED BY IDA PROJECT: EXISTING: \ TERTIARY SWITCHING CENTERS A A SECONDARY SWITCHING CENTERS BENGAL * PRIMARY SWITCHING CENTERS o RADIO SITES SATELLITE EARTH STATIONS UNDER PROJECT: - DIGITAL RADIO SYSTEM EXISTING: DIGITAL RADIO SYSTEMS ANALOG RADIO SYSTEMS TRINCOMALEE COAXIAL CABLE SYSTEMS MULIPAIR TRUNK CABLES (N-hd,wo.ýd. ANURADHAPULRA - DISTRICT BOUNDARIES S 10 20 3 40P Galgamuw kO KILOMETERS POLONNARUWA oEro BATTICALOA GULF CHILAW Woriypola OF MANNAR KURUNEGALA M T .GALLE NDY Mahnyngan. NEGOMB SWITCING ISTRITr. andakt EGAMPAHA NAWALAP,TI n,pdka NUIWARA EU-YA BDUL1 MAVISSAWELLA HArrr NaTukl GREATER COLOMBO SWITCHING DISTRICT Pcr.. .JA.ELA faauRATNAPURA GAM AHtA KALUVTARA T-rwoo INDIAN OCEANRAGAMA Surykand- VELIVERNYA- Ene eKADAWATA COLA OirUTkndTiama MATTAKKUUYA Amblangoda -KELANIYA MALWARA WEL PIT HAMBANTOTA EAST KADUWELA1E KOLLUPMTYA ~ RDNAI GALL CO-SOUTH A 4GOTT HOARA JHAVELOCKI MAHARAGAMA PADUKKA S OMAGAMA MT. LAVINIA 0 POAI IUYfANDALA å E 10 Main Exchang. I N D IAN OC EA N MORAUWA. E 10 Satellites 11 Analog Exchnges 0 Colombo NatioNaoln - Switching Center (NSC) -Nxhon-eAra
World Bank Group · Pre-2003 Economic or Sector Report
Sri Lanka - Strategic Options for the Telecommunications Sector
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