Colombia - Telecommunications Project

R RN TO ~~~~~~~RESTRICTED REPORT DE Report No TO-529b This report was prepared for use within the Bank and its affiliated organizations They do not accept responsibility for its accuracy or completeness The report may not be published nor may it be quoted as representing their views INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE TELECOMMUNICATIONS EXPANSION PROGRAM EMPRESA NACIONAL DE TELECOMUNICACIONES COLOMBIA May 17, 1967 Projects Department  CURRENCY EQUIVALENTS Before March 22, 1967 the exchange rate was 13 50 pesos to the US dollar A new system was introduced on March 22 providing a fixed rate of 16 30 pesos for capital transactions and a floating rate for imports and exports, starting at 13 50 pesos 13 50 Rate 16 30 Rate US$1 00 = 13 50 Pesos = 16 30 Pesos Pesos 1 = US$0 074074 = US$O 061349 Pesos 1, 000, 000 = US$74,074 = US$61,349 WEIGHTS AND MEASURES 1 Kilometer (Km ) = 0 6Z2 statute miles FINANCIAL YEAR The financial year corresponds to the calendar year  COLOMBIA APPRAISAL OF THE TELECOMk'IUIICATION EXPANSION PROGRAM hMPRESA NACIONAL DE TELECOk4U1ICACIONES Table of Contents Page No. SUHARY 1 - 11 1 INITRODUCTION 1 2. TELECONI11UNICATIONS IN COLOMBIA 2 3. THE BORROIVER 2 Organization - Administration 2 Organization - Operations 3 4 EXISTING FACILITIES 4 National h International 5 5. DEMIAND FOR SERVICE 5 Local Telephone Service 5 Long-Distance Telephone Service - National 6 Long-Distance Telephone Service - International 6 Telegraph Service 7 Telex Service 7 6 THE PROJECT 7 General 7 Principal Long-Distance Telephone Systems 7 Secondary Long-Distance Routes 8 New Urban Facilities Interconnection Facilities International Service 8 Other Works 8 Engineering, Construction and Initial Ooeration 9 Procurement and Disbursement 9 Schedule of Construction 9 Cost Estimates 10 Future Construction 10 This report is based on the findings of missions to Colombia of which the latest was in F-bruary 1967, and was composed of iiessrs. S. S Scales and R N. Walsh of the Bank.  Table of Contents (Cont'd) Page No 7. FINANCIAL ASPECTS 11 Accountang and Auditing 11 Insurance of Facilities 11 Tariffs 11 Domestic Long-Distance Telephone 12 Domestic Telex and Telegraph 12 Intemnational T3lephone, Telex and Telegraph Service 12 Finiancial Position 14 Past Operation 16 Financing Plan 16 Forecast Future Financial Position 18 8 COmCLUSIONS 18  COLOMBIA EITRESA i;ACIO!44L DE TELECOWNUICACIONES List of Annexes 1. Organization Chart 2. Resume of the Main Toll Switching Equipment 3. International Radio Circuits from Bogota 4. Growith of Traffic 5 In-Service Dates of Newi Facilities 6. National Long-Distance Telephone Tariffs 7. Estimated Cost of Ezpansion Program 8 Balance Sheets (Actual 1963-1965) Modified Actual 1965, and Forecast 1966-1971 9. Statement of Long Term Debt at December 31, 1966 10. Statement of Actual Income 1963-1965 and Forecast Income 1966-1971 11. Sources and Applications of Funds I~iAPS - Proposed Ilicrowave and VHF Radio Systems VHF Radio Network after Redistribution of Equipment  COLOMBIA APPRAISAL OF THE TELECOWMMNICATIONS EXPANSION PROGRAM ENPRESA NACIONAL DE TELECOMNNICACIONES SUMARY i. The Government of Colombia has asked the Bank for a Us$16 million loan, includming interest during construction, to finance most of the foreign exchange costs of the 1967-1970 program to expand and improve the telephone, telex and telegraph facilities of the Empresa Nacional de Telecomunm caciones (TELECOM). The estimated total cost of the program is US$27.6 mllion equivalent. II, The proposed Borrower is the Empresa Nacional de Telecomunicaciones (TELECOM). This Government agency has been operating since 1947 and provides almost the entire long-distance public telecommunication services of Colombia and all the international telecommunication service. TELECOM also furnishes local telephone service in 350 small localities. The telephone networks of the large cities are owned by the corresponding municipalities but are connected to TELECOM's long-distance system, iii. TELECOMts technical staff, with the assistance of consultimng services and the training program established, is able to carry out the expansion program satisfactorily0 Its organization and management are reasonably experienced and competent to operate successfully the new facilities, Iv. The proposed program is technically sound and comprises the installation of facilitles urgently needed to meet the primcipal domestic long-dlstance and international telecommunication requirements of Colombia, and should materially improve the quality of service rendered. v, The equipment to be financed under the proposed Bank loan would be purchased through internatlonal competitive bidding and in accordance with plans and specifications prepared with the assistance of competent consulting engineers. Vi. The financial results in recent years have been unsatisfactory. SubstantLal tariff adjustments were made in 1965 but their effects were largely offset by increases in costs. In October 1966 the international tariffs were increased 50% and the national telephone tariffs were increased approximately 20%. This brought the earnings close to a satisfactory level. Other than an adjustment in international tariffs before the fourth quarter of 1967, reflecting the increase in the exchange rate applicable to transfers in the capital market, no further tariff adjustment is expected to be required in the near future, During loan negotiations, an undertaking was obtained that this adjustment in international tariffs would be made before October 1,  - li - 1967 and that in the future tariffs would be maLntained at a level such as to produce a return of 9% on net fixed assets in service. On this basis TELECOM should be able to maintain a sound financial position. vii. The Project provides a suitable basis for a loan of US$16 million with a 20-year term including a grace period of 4 years.  COLOMBIA APPRAISAL OF THE TELECOMMUNICATIONS EXPANSION PROGRAM ENPRESA NACIONAL DE TELECOMUNICACIONES 1. INTRODUCTION 1.01 The Government of Columbia has asked the Bank for a loan of US$16 million equivalent to finance most of the foreign exchange costs of the 1967-70 program to expand and improve the telecommunication facil- ties of the Empresa Nacional de Telecomunacaciones (TELECOM). This Government-owned organization would be the Borrower. 1.02 The estimated cost of the program forming the basis of the present loan application is US$27.6 million equivalent. An estimated US$19.7 million would be in foreign exchange and Col$128 million would be in local currency. The foreign exchange requirements would be provided mainly out of the pro- posed loan proceeds. The balance of requirements would be provided from funds generated by TELECOM's operations except for US$3.7 million of the foreign exchange requirements which will be provided by suppller credits under contracts already placed or corresponding to equipment additions for which procurement by international competitive bidding is not practicable. 1.03 The main facilities to be provided under the proposed loan are for long-distance telephone service but the program includes expansion and improvement of telegraph and telex services and installation of local tele- phone facilities in some of the smaller cities. The bulk of the expansion of the local telephone systems is being carried out separately by the municipalities and provinces. lO4 The basis for the present program is a long-range plan prepared in 1962 by the London consulting firm, Preece, Cardew & Rider. Commencing with dlscussions with the Bank mn 1963, several appraisals have been carried out and a serles of tariff increases have been applied. The last appraisal was made in February 1967 by Messrs. S. S. Scales and R. N. Walsh. Their findings provide the basis for this report.  - 2 - 2 TELECOM10iUNICATIONS IN COLOIVIBTIA 2.01 The responsibility for providing telecommunication services i Colombia is divided among several organizations. TELECOM' s princLpal operations are long-distance telephone, telegraph and telex services, both national and international, while almost all local telephone service is pro- vided by municipal organizations Thub TELECOM's principal domestic telephone business is handling traffic between municipalities. There also exist a few systems owned and operated by provincial organizations. TELECO1M has over the years, upon the request of a number of small municipalities, assumed responsibility for providing local services. This trend is likely to con- tinue but the more important municipalities, backed by the strong feeling of regional independence, can be expected to maintain their own services. 2 02 The principal telecommunication organizations, 33 in all, have formed a common association (Associacion Nacional de Empresas de Telefonos) which plays an important role in finaing solutions to common problems such as standardization of operating procedures, coordination of expansion plans, system interconnections, tariff adjustments and div-sion of revenues from toll calls. Although a simpler way of coordinating operations would be achieved by consolidating all public telecommunication operation min a single agency, this is not necessary as a reasonable level of coordination between systems is being obtained. 3. THE BORROlWER 3 01 TELECOM is an autonomous Government entity organized in 1947 when the assets of the privately-owned Compania Telefonica Central were acquired by purchase. In 1950 TELECOM took over the assets, liabilities and personnel of the Government-owned Empresa Nacional de Radlotelecomunicaciones and in 1965 it took over the telegraph facilities and personnel of the Ministry of Communications Organizat3on - Administration 3.02 TELECO1H is governed by a Board of Directors, comprising four regular members and two alternates. The Minister of Communications and the Director of the Ministry of Communications are by reason of their offices, respectively, the Chairman and one of the regular members of the Board. All members are appointed by the President of the country The Minister of Communications and the two regular members of the Board have been associated with TELECOH's operations for an extended period and are excperienced business executives. At the time of the recent appraisal no appointment had been made to the post of Director of the MYnistry of Communications. The twjo alternate directors are active in professional circles and serve on a number of other boards of directors of other enterprises  - 3 - 3e03 The Director-General is the chief executive of TELECOM and iS responsible for the day-to-day operations. He is appointed by the President of the country. The present Director-General has been associated with TELECOM's operations for about eight years having served previously as a member of the Board and at one time as Financial Director. Together with the Secretary-General, the Director-General attends Board meetings but has no vote. During loan negotiations an undertaking was obtained from TELECOM that the Bank would be informed promptly of any changes in management and that the Bank would be furnished with miformation concernLng the experLence and competence of new management. Organization - Operations 3.o4 There are four functional divisions, Financial, Industrial Relations, Technimcal and Operations. Each is headed by a Director of Division who reports to the Director-General. Also reporting diroctly to the Director-General are the Secretary-General, the Legal Counsel, the Chief of the Organization and Methods Department and permanently- retained consultants. The organizational chart is showin iAnnex 1. 3.o5 For operating purposes the country is divided into seven zones. Each zone is headed up by a manager who nominally reports to the Director- General in Bogota but for operating, technical, personnel and financial functions, the link is directly with the corresponding operating dlivision, 3,06 TELECOM is overstaffed. The excess results mainly from the transfer mi 1965 of 4,000 employees from the Ministry of Communications together with the telegraph facilities formerly operated by that Ministry. This situation of excessive employment is recognized by management and a retraining program has been commenced to absorb as many as possible of the excess staff in the new positions created through the expansion of the system. This program, together with normal attrition, should make it possible to bring about a gradual improvement in operating efficiency, At loan nego- tiations it was agreed that, during the period of the construction program, TELECOM would submit to the Bank for comment a budget of personnel require- ments for the coming year and would limit annual increases to a maximum of 5% of the number of employees at the beginnimng of the year. Since overall annual growth in traffic is expected to exceed 10%, a gradual improvement in personnel utilization should result. The increase during 1966 was limited to about 1% of the number of employees and a simlar very limited increase is expected in 1967. 3.07 The men in charge of the principal divisions of TELECOM are experienced and capable of managing an enlarged operation. The con- sultants, Preece, Cardew & Rider, assisted in the broad planning and continue to provide technical assistance under a general advisory contract. In additlon, arrangements have recently been completed under which engineers from the German Bundespost will provide assistance for mLerowave engineering and operations. A telecommunications training center has been established with assistance of the UNDP. These measures should be adequate to enable TELECOM to carry out the expansion program satisfactorily.  - 4 - 4. EXISTING FACILITIES Nat-ional 4.01 TELECOIM's network is comprised of the following facilities VHF radio systems, Pole lines with open-wire and carrier circuits, Automatic long-distance dialing equlpment, Telegraph and telex equipment, Local telephone netwjorks. 4 02 A VHF radio netwiork, interconnecting 27 cities, prov,des the principal long-distance telecommunications facilities with about 140,OCO kilometers of telephone circuits in operation. The original design of Colombia's backbone VHF system was aimed at providing service with the minimum of investment As a result of subsequent growth, its capacity today is far exceeded by demand and the quality and reliability of service are not as good as needed. Extending from the basic VHF network are VHF spurs of five- to nine-circuit capacity and a few single channel VHF links. The radio and associated carrier equipmnnts are in good condition and well maintained. IJhen replaced by equipment of greater capacity they can be used effectively on routes with less traffic. 4.03 In addition to the VHF radio network there is a very extensive system of pole lines carrying approximately 65,000 kilometers of open- wire circuits with long-distance telephone connections to nearly 600 cities and towns. The open-wire system is made up of two networks. One is in good condition and almost entirely comprised of copper wire with superimposed carrier circuits The other is the telegraph network recently transferred to TELECCI4 from the Mimnstry of Communications. The latter system is composed of copper and iron circuits extending not only betwqeen the major cities and towns but also to a large number of villages. It is in general poorly maintained. Some portions of this telegraph open-wire netw7ork whlch parallel existing telephone lines will be scrapped during the expansion program to reduce maintenance and operating costs. 4 04 Since 1956, TELECOM has carried out a progressive automatization of its principal long-distance telephone connections. As a result, 8c of traffic is fully automatic and 77i is semi-automatic while 15% is still handled zrnually. Details of the amount and type of automatic long-distance swiltching equipment in service are given in Annex 2. 4 05 TELECOM has more than 1,300 telegraph offices including installations in small villages where very little traffic is handled. Three-fourths of the telegraph circuits are operated on a hand-keyed basis. In an effort to eliminate the expense of maintaining a telegraph operator in the small unremunerative offices, TELECOIvi has a program of creating "Mixed Offices" where the Postnaster or a postal clerk handles the telegraph messages via telephone connection to the nearest important town from which point the message is handled under normal telegraph procedures  - 5 - 4.06 The telex network of TELECOM is modern and one of the most extensive of any Latin American nation. Connections are established by dialing, both for local and long-distance connections. Subscribers to the national network also have access to the international circuits. There are 27 switching centers and approximately 2,000 teleprinters in operation. 4.07 Local telephone service forms a very small part of TELECOM's business, having less than 10,000 telephones compared with more than 400,000 telephones operated by municipal and provincial organizationso With the exception of equipment for 1,300 subscribers in Buenaventura and 500 in San Andres, all its exchange telephone service is manual. There are approximately 350 of these small exchanges. International 4.08 International telephone and telegraph service is provided mainly by means of high-frequency radlo equipment located near Bogota and operating with Europe, U.S.A., Central America and South America. The radio-telephone service is subject to the noise, interruptions and other inadequacies inherent to this type of equipment, Details are shown in Annex 3. 4.09 In addition there are land line telephone circuits connecting with the systems of Venezuela and Ecuador. 5. DEMAND FOR SERVICE Local Telephone Service 5.01 Like other countries of Latin America, Colombia has a low telephone density of 2.4 telephones per 100 inhabitants. In neighboring countries, Panama has a telephone density of 3.6, Venezuela 3.2 and Ecuador 0.8. These may be compared with 5.9 for the entire world and 30 to 48 for the most highly developed countries. 5.02 Of the 623 towns in the country, the largest 72 have automatic telephone service. These 72, with approximately 400,000 telephone lines in service, have a backlog of unsatisfied demand of more than 100,000. In the smaller towns, whlich generally have only manual service, there is a demand for automatic service as well as for expansion of facilities. 5.03 During the period 1953 to 1960 growth of telephones averaged over 12% per year. Since 1960, because of financial limitations, a lower growth averaging only 8% has been attained.  - 6 - 5.o4 Current programs under way or proposed by the municipal telephone systems provide for adding about 300,000 telephones over a six-year period, representing an average annual increase of approximately 11%. The bulk of this expansion will have to be carried out by the munmicipal organiza- tion of the principal cities but financial limitations will probably result in a reduction of this program. TELECOM, in accordance with recommendations of its consultants has, for the purposes of developing its construction program, estimated that the future imcrease in telephones will equal the annual average actually experienced since 1960, or about 8%. This estimate appears realistic. Long-Distance Telephone Service - National 5 05 The existing long-distance circuits are not sufficient to meet the demand for service. As a result long delays are experienced in com- pletmng calls and requests for telephone connection are often cancelled by subscribers when waiting periods are excessive. To reduce these can- cellations to a reasonable level, it is estimated that a doubling of the existing number of circuits is required. Once subscriber-to-subscriber dialing is generally established throughout the netiork, the improved service ijill further increase demand. For example, when subscriber dialing was established from Cali to Palmira, from Tunja to Bogota and bettieen Barranquilla and other cities, the traffic increased to five times that existing under manual operation. 5.o6 The growth of telecoumunication traffic in recent years is shown in Annex 4 Long-distance telephone service has increased at an average rate of 15% since 1960 but in 1965 and 1966, years in which tariff increases were applied, a lesser growth resulted. It is reason- able to expect that annual growth of at least 10% will be maintained during the program period. 5 07 An analysis of calls showis that nearly 50% of the usage of long-distance telephone service is for purposes of commerce and industry. It can reasonably be expected that after a satisfactory standard of service has been achieved a further increase of industrial and coimmercial traffic may be expected, so reflecting the importance of good telecommunication services to efficient operation of private and government organizations. Long-Distance Telephone Servlce - International 5 08 Traffic has increased approximately 12% per year but has been limited by insufficiency of facilities. As high frequency radio equipment sufficient to provide 20 addlitional telephone circuits is scheduled  - 7 - to go into service at the end of 1963, it is estimated that the annual rate of growth will be 20% ln 1969 and 15%o thereafter. Telegraph Service 5.09 Since the transfer of the telegraph facilities in 1965 from the Ilinistry of Communications to TELECOA, little overall growth of domestic telegraph traffic has been observed. Therefore it has been estimated that there will be no growth in domestic telegraph traffic during the con- struction program. However, international telegraph traffic has increased at an annual rate of 10%. In view of the improvement Ln the quality of service expected to result from the new facilities to be provided for international service under the program, a rate of growth of at least this amount should be obtained in the future. Telex Service 5 11 TELECOM's relatively newr telex service has been well received by the business community, traffic having quadrupled in the last five years. Growth of national telex service is forecast at 25O in 1967 tapering to 10' in 1970 while growth of international telex service is estimated at the annual rate of 15%. 6 THE PROJECT General 6 01 The project covers the initial portion of an eight-year telecommunications development plan prepared by consultants but adjusted to give effect to developments since that tine. It is to be carried out in the period 1967-70 and consists of the purchase of land, construction of buildings and purchase of equipment, materials and services for the necessary engineering and installation as described in the following paragraphs. Principal Long-Distance Telephone Systems 6 02 The principal facilities included i1 the project are the following. (a) lAicrowave systems interconnecting Bogota, Bucaramanga, Neiva, Girardot, Pereira, Call and Medellin, also one between Barranquilla and Santa Marta (b) Short coaxial and voice frequency cable systems. (c) Recovery of the existing VHF radio equipment and its reinstallation on routes of intermediate capacity requirements  - 8 - (d) Carrier equipment for the above systems. (e) Toll switching equipment (extensions and new switching centers) in 83 cities and towns. Details are shown on maps at the end of this report. Secondary Long-Distance Routes 6.03 The project includes increases in the long-distance circuits between the large capacity microwave system and the communities not along the routes of this microwave network by means of open wire, cables, carrier on open wire and VHF radio. In addition, a limited amount of open-wire route reconstruction would be carried out. New Urban Facilities 6e04 In some of the small munLcipalities where TELECOM is responsible for the local telephone service, the old manual exchanges would be converted to automatic operation under the project and the corresponding outside net- works would be enlarged to provide for growth. Interconnection Facilities 6e