Sri Lanka - Second Telecommunications Project

Document of The World Bank FOR OFFICLAL USE ONLY Report No.: 18746 IMPLEMENTATION COMPLETION REPORT SRI LANKA SECOND TELECOMMUNICATIONS PROJECT (CREDIT NO. 2249-CE) December 23, 1998 Energy Sector Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Rupee (SLR) Appraisal Year 1990 - US$1.00 = SLR 40.25 Intervening Year 1994 - US$1.00 = SLR 50.80 Completion Year 1998 - US$1.00 = SLR 66.03 GOSL Fiscal Year January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADB - Asian Development Bank AT&T - American Telephone and Telegraph Co. CATB - Cabinet Appointed Tender Board ERR - Economic Rate of Return FRR - Financial Rate of Return GOSL - Government of Sri Lanka ICR - Implementation Completion Report IDA - International Development Association IRR - Internal Rate of Return ITU - International Telecommunication Union MOPT - Ministry of Posts and Telecommunications OECF - Overseas Economic Cooperation Fund of Japan PCR - Project Completion Report PPF - Project Preparation Facility RSU - Remote Subscriber Unit SAR - Staff Appraisal Report SASEG - South Asia Region Energy Sector Unit SLT - Sri Lanka Telecom (a state corporation incorporated in 1990) SLTA - Sri Lanka Telecommunications Authority (regulator with departmental status) SLTD - Sri Lanka Telecommunications Department SLTL - Sri Lanka Telecom Ltd. (incorporated in 1996 under the Companies Act) SLTS - Sri Lanka Telecom (Services) Ltd. (incorporated in 1993 under the Companies Act to implement the "150K" project) STD - Subscriber Trunk Dialing TEC - Technical Evaluation Committee TRC - Telecommunications Regulatory Commission (regulator with commission status as from 1996) UNDP - United Nations Development Programme WLL - Wireless Local Loop Vice President Mieko Nishimizu Country Director Roberto Bentjerodt Sector Manager Alastair McKechnie Team Leader Ritin Singh  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT Sri Lanka Second Telecommunications Project (Credit 2249-CE) Table of Contents Page No. PREFACE EVALUATION SUMMARY ......................................................................................................................... Introduction ..................i Project Objectives ................................... i Implemenitation Experience and Results ................................... ii Summary of Findings .................................... I PART I - IMPLEMENTATION ASSESSMENT ....................................I A. Evaluation of Objectives ...................................... B. Achievement of Objectives ....................................I C. Major Factors Affecting the Project ....................................' D. Project Sustainability .....................................3 E. Bank Performance ..................................3 F. Cofinaiciers Performialce ...................................6 G. Borrower Performiaice ...................................6 H. Assessmenit of Outcome ...................................8 1. Fu ture Operation .........................................8 J. Key Lessons Leamned ...................................8 K. Evaluation of Program Objective Categoriess ...................................9 STATISTICAL TABLES Table 1: SuLimiiary of Assessmenits ....................................I I Table 2: Related Bank Loans/Ciredits .............. .. 12 Table 3: Project Timetable ................................... 13 Table 4: Loan/Credit Disbursemenits: CuLImulative Estimated and Actual .14 Table 5: Key Indicators for Project Implementation .1 5 Table 6: Key Indicators for Project Operation1 66 Table 7: Studies Included in Project .17 Table 8A: Project Costs .18 Table 8B: Project Financing .19 Table 9: Economic Costs and Benefits .20 Table 10: Status of Legal Covenanlts .22 Table 11: Compliance with Operational Manual Statemenlts ............................................25 Table 12: Bank Resources: Staff Inputs .25 Table 13: Bank Resources: Missions .26 |This document has a restricted distribution and may be ulsed by recipients only in the| performance of their official duties. Its contents may not. otherwise be disclosed without World Banlc authorization.  APPENDICES A. Mission's Aide-Memoire (with Operation Plan) 27 B. Borrower's Evaluation 51 C. Cofinanciers' Evaluation 60 D. Miscellaneous Appendices: D. I Greater Colombo Telephone Exchanges 61 D.2 Telephone Exchanges in the Regions 62 D.3 Telephone Supply and Demand: 1990-2000 64 D.4 Telephone Service Deniand and Supply by Exchang;,e Areas: 1990-1997 65 D.5 Telephone Exchange Expansion - "150K" Project 66 D.6 Chronology of Sri Lanka Telecomimluniicationis Sector Reforill 67 D.7 SLTL's 1996-97 Financial Statemenits 68  IMPLEMENTATION COMPLETION REPORT Sri Lanka Second Telecommunications Project (Credit 2249-CE) PREFACE This is the Implenmentation Completion Report (ICR) for the Second T'elecommuinicationis Project in Sri Lanka, for which Credit 2249-CE in the amount of SDR 39,7 millioni equivalenit was approved on July 15, 1991 and made effective on December 24, 1991. The Credit was closed on June 30, 1998, after a two-year extension of the original closing date. The final disbursement took place on December 4, 1998 and a balance of US$ 7.3 millionl was canceled. Cofinancing for the project was provided by ADB, OECF, and AT&T. The ICR was prepared by Messrs. Ritin Singh, team leader, Mihkel Sergo. consultant (Fiianicial Analyst), and David Delgado, consultant (Telecommunicationis Enginieer), of the Energy Sector -Unit, Soutil Asia Regional Office, and reviewed by Mr. Alastair McKechiiie, Manager, Energy Sector Unit (SASEG). Comments from the Borrower and Beneficiary have been included in Appendix B. Preparation of this ICR started during the Bank's final supervisioni/completion ImiissioIn in May/June 1998. It is based on material in the project file and informiationi provided by the Borrower and Beneficiary. The Borrower also contributed to this ICR by preparing his own evaluationi of the project's execution and providing statistical information. The draft ICR was sent to the cofinanciers and comillenits were invited but none were received.  IMPLEMENTATION COMPLETION REPORT Sri Lanka Second Telecommunications Project (Credit 2249-CE) EVALUATION SUMMARY Introduction 1. The Bank's involvemenit with Sri Lanka's telecommulnicatioins sector started in 1979 with the preparation of the First Teleconin,unications Project (Credit 1020-CE), whicih was approved by the Board in May 1980 and completed in 1987. The Project Completion Report (PCR), dated JuLie 29, 1988 rated this project as highly successful and listed the following main accomplishiliielits: e improving institutional efficiency by separation of the postal and telecomillullicationis services; 3 reduction of unsatisfied demand by the addition of 38,700 new subscribers, improvemilenit of local and long-distance services, and digitization of the network; 3 imiproving access to telephone services in rural areas; and 3 introduction of commercially oriented accoulits and reports and improvement of the finanices of the Sri Lanka Telecommuniications Departmenit (SLTD); e.g., a deficit in the settlemenit of intemational calls at the start of the project was tulired into an aninual US$10 mlillioni surplus at the end of the project. 2. The first Telecommunicationis Project was also successful in creatling good relationis and knowledge of Sri Lanka's telecommunLicatiotis sector in the Bank. Project Objectives 3. The Second Telecommunicationis Project built oni the acilievemilenit and experience gained unider the First Telecommuniications Project and its maini objectives as set oul in the Staff Appraisal Report (SAR) were: * establish a new corporation, Sri Lanka Telecom (SLT), out of the formliel department and strengthen its capabilities in the areas of corporate planning, financial management, network planning and engineering, and operations and maintenance:, * promote private operator participation in sector developmielit; and * reduce unsatisfied demand by connecting 50,000 new subscribers, reducc network congestioni, and improve service quality. 4. The main project objectives focussed on institutionial and sector Irelform, whichi was reflected by the project conditionality. As a condition of project appraisal, SLTD was in 1990 converted into a state- owned corporation, SLT and, as conditions of effectiveness, a new Telecomiliuiniicationis Act, satisfactory to IDA, was enacted and an operating license for SLT signed in 1991. To ensure satisfactory institutional arrangements, financial performance regarding tariff levels and cash genieration, and improved SLT efficiency, the following covenants were also agreed with the Govermiienlt of Sri Lanka (GOSL) and SLT:  - ii - * GOSL to review the institutional arrangements for the sector by June 1993 and implement changes as agreed with IDA; * SLT to produce a rate of return of 15% on revalued net fixed assets and contribute an average of at least 25% of its capital expenditures from internally generated funids; and * SLT to improve its service quality and staffing ratio in line with agreed pertfomiaice indicators. 5. The project objectives in the institutional areas were not as ambitious as envisaged during the early project preparation. The full corporatization of SLTD under the Companies' Act and development of specific private telecommunications services had to be delayed and a more gradual approach adopted due to labor union and wider political oppositioin to privatization. After some hesitationi, the Bank agreed to this and subsequent events indicate that the Bank's flexibility was justified in this case. Implementation Experience and Results 6. The objective to strengthen SLT's institutional capabilities was largely successful in the areas of corporate planning, network planning and engineering, and operations and mainitenianice, as well as reduction of the staffing ratio and improved financial performance'. This is reflected by the agreed performance indicators given in Table 5. SLT's finanicial management, however, did not improve as much as expected; e.g., accounts receivable were brought below the equivalenit of three monithis of billinl only towards the end of the project in mid-1998 and a performance related profit shar-inig system was not fully implemented. 7. The project's physical objectives were overachieved. The SAR indicated 50.000 new subscribers to be connected under the project. By June 1998, about 1 15,000 liies (includinig exchange rehabilitatioll) had been provided under the project and about 80,000 subscribers coniected. By the end of 1998, over 160,000 lines should have been installed under the project. SLT's service quality also improved ulider- the project (see Table 5). The project results are sustainiable and likely to be improved on by the private operators. 8. The overachievement of institutional objectives was mainly due to GOSL's reform policies, the 1991 Telecommunications Act and the willihginess of GOSL and the sector regulator to license new private operators. The private sector's interest In startilng up new telecomm11ullicationis operationis in Sri Lanka was also an important factor and indicates that the private operators had confidenice in the legal and regulatory framework of the sector. Physical objectives were overachieved due to substanitially lower unlit prices than projected, especially for exchange equipmenit and local networ-ks, and the Bank's willinginess to reallocate Credit funds and allow increased quantities under the exchanige supply contracts. Even so, demand for telecommunications services could not be fully satisfied. The telegr-aph equipment component was canceled, as telegramils increasingly were replaced by f:axes. 9. The objective of promoting private investmilenlts and operations in Sri Lanka's telecommunications sector was overachieved. Wheni the project started, ther-e was only one private mobile cellular operator in Sri Lanka and paginig services. By mid-1998, there were about 30 private operators providing mobile cellular, wireless local loop (WLL), paginig, data transmission, public card phone, and other services to over 200,000 subscribers and the public in genieral. Continiuous dialog with GOSL on reform issues and the 1991 Telecomimluniicationis Act and its subsequenit amenidimient in 1996 to strengthen the regulator were major reasons for this development. In 1996, SLT was converted into a company, SLTL, and 35% of its equity sold to a shareholder investor in 1997. This investor was given a management contract for SLTL, so all telecommunicationis services in Sri Lanka are now provided by ' In this report, "financial performance" refers to cash generationi and rate of return. "Financial management" refers to billing/collection and timely financial reporting.  - iii - private operators. A chronology of telecommunications sector refonis in Sri Lanka is given in the Box below. 1980 Separation of postal and telecommunications services. 1981 The first paging service license granted. 1985 Customer premises equipment (telephones, fax machines, and PBXs) opened to competitioni. 1988 The first mobile cellular service license granted. 1989 Second, third, and fourth paging licenses granted. 1990 A GOSL corporation, Sri Lanka Telecom (SLT) legally established. 1991 0 The new Telecommunicationls Act of 1991 adopted, creatiing the reggulatory authority (SLTA) within the Ministry of Posts and Telecommtlunlicationls (MOPT). * SLT's operating license signed. * Two licenses granted for store-and-forward fax services. * Two licenses granted for data transmission servkces. 1992 0 A second cellular license granted * A fifth paging license granted. __ 1993 * A third cellular license granted. * A third data-services license granted * A first trunked-mobile service license is granted. * SLT sublicenses card pay phoines services. * A New GOSL-owned compainy, Sri Lanka Telecoii tServices) Ltd. (SLTS). created to impiciliimet a planned turnkey supplier-financed project for 250,000 lines. 1996 * Two licenses for wireless local ioop services (WLL) are granted. * Amenidmelt of the 1991 Telecommun1illications Aci. Conversion of SLT into a compaly (SLTL) ulider the Companics Act. 1997 * Conversioni of SLTA into a more indepeindenit Tc!commllun.ications Rcgulatory Comimillissioi (TRC). * Privatization of SLTL throughi the sale of 35'%0 of its equity to a strategic investor and a maniagemiielit contract for this investor. 10. A summary of project costs, fundinlg, and implemeiltationl is given in the table below and detailed costs and funding information is included in Tables 8A and 8B. I 1. The performance of the Bank and the Borrower was satisfaetory. The Bank was flexible during project preparation (see para. 5 above) and GOSL fIllly supported the reform of the sector, especially after the 1993 mid-term review and sector report (see Appendix D.6). The only major project problem was the procurement of local networks, whicih was delayed by nearly three years. The Cabinet, based on SLT's evaluation, made an award recommendation that the Bank could not accept and it took over two years to solve this problem in a mutually satisfactory way. 12. On the whole, despite a delay of nearly three years in the completioni of the physical components of the project, the final outcome is highly satisfactory.  - iv - Project Implementation ;t>'X't ..'t, ">''- Project Total Cost (Is$ Million) Funding Completion Components SAR Actual Source Date Telephone Exchanges (Local + Tandem) 59.9 33.1 IDA SLT Dec-98 Cable Plant (Regions) 17.5 29.3 JDA,SLT Dec-98 Cable Plant (G. Colombo) 44.1 49.4 OECFSLT Aug-95 Technical Assistance, MIS and Accountiig 7.9 5.4 IDA. ADB. Dec-97 and Billing Systems UNDPITU. SLT International Facilities 18.7 18.7 ADB'SLT May-96 Trunk Transmission Network 28.4 30.4 ADBI'SLT Jani-98 National Switching Center 5.6 12.2 AT&T/SLT Jani-93 Spur Transmission Systems 10.6 5.4 Sl T Dec-98 Telegraph Equipment 3.1 --- ll)ASLT Subscriber Terminals 5.5 15.0 (*) SLT SLubscrtibers Buildings and Stores 2.8 1.6 SLT Dec-97 TOTAL 204.1 202.5 Dec-98 (*) Estimated at USS 100/subscriber: not included by SLTL in Appenidix D. Summary of Findings 13. Due to slow disbursement, this project was for some time classified as a problem project despite institutional, sector reform, and physical objectives being mostly overachieved. The reasons for the slow disbursement, in addition to the delayed project implemlienitationl and procurement of local networks (para. II above), were the cancellation of the telegraph componienit (US$2.0 million) and lower prices than projected, especially for exchange equipment, whichi resulted in the cancellationl of about US$7.3 millioni of the Credit after its closing date. In retrospect, more weight should have been given to the progr-ess towards the achievement of project development objectives thani to the disbursement numbers. 14. All telecommunications services in Sri Lanka are now provided by private operators and the Bank does not contemplate any further freestandinig project to support telecommunications operationis. However, under the ongoing Private Sector Infrastructure Development Project, there is at least one private telecommunications operator applying for funds. FuLther, under the ongoinig Telecommuniications Regulation and Public Enterprise Reform Techniical Assistance Project (Credit 2837-CE), the Bank is supporting further strengtheninig of the sector regulationi to ensuLe contilnued satisfactory sector development and fair competitioni. 15. Some lessons to be learned fiom this project are: * radical sector reform takes time and contilnued involvemiienit in a sector provides the Bank with the opportunity to support reform step by step ulider various Governments. The Bank can play a useful role in initiating and supportinig politically unpopular reforimis; * patience and flexibility oni behalf of the Bank regaidilig project objectives and conditionality may be justified to overcome labor and other opposition to changes, provided Government is committed in the longer term to sector reformi; * labor unions should be involved at an early stage of reform and their concerns addressed to reduce resistance to change;  - v - * the successful private operation of value-added and other marginal telecommunications services may reduce staff fears of privatization of the main operators. It may also provide comfort to potential investors, as it provides a track record of commercial operations and shows that the legal and regulatory framework is working satisfactorily, * a government corporation can operate more efficientiy thani a departmenit, e.g.. regarding demanld satisfaction and service improvemiienits. Its efficiency will still be hamilpered, howvever, by government salary scales, investimienit approvals, and procuremiient procedul-es. Only fuill corporatization under the Companies Act, preferably with private maniagement and suitable regulation, provides the necessary autonomiiy to quickly expand service to meet demanid and incentives to become more consuLimer orienited and competitive, * competitioni leads to lower prices and reduces the need fSor price regulationi. With four competing providers of mobile cellular- services, Sri Lanka has some of the lowest mobile tariffs in the world; * the project team was the samie fi-om identification to completioni and one Bank staff was also involved in the first TelecomilIlilmicationis Project in Sri Lanka. This contilnuity of project staff contributed to makin- the Bank's support of sector reforii effective; and * suL-plus credit funds due to cost savings and elhiminationl of project componienits should be identified and canceled early to redLice commitment charges for the Borrower and to ensure adequate iniformationi for the Bank to adequately evaluate disbursemilenlt performialice.  IMPLEMENTATION COMPLETION REPORT Sri Lanka Second Telecommunications Project (Credit 2249-CE) PART I - IMPLEMENTATION ASSESSMENT A. Evaluation of Objectives I. Consistenlt with GOSL's sector strategy, IDA's priticipal objectives under- the project were to SuppOIt sectoral reforimi throughll the enactilienit of new telecomillullicationis legislation, the establishmenit of a new comillercially orienlted, auton1omLIous operating entity (SLT) and a separate regulatory authority (SLTA), improve sector efficiency, promliote private investments and operations, and help finance SLT's initial investmenit programil to expand and improve telecomimiunicationis services. SLT was established in 1990 as a condition of appraisal and the 1991 Telecommulnications Act, includinig the legal basis for a regulatory authority, was a conditioni of credit effectiveness. Major sector objectives were, thus, achieved at an early stage. 2. Specific project objectives as listed in the SAR were to: (a) strengthen SLT's capabilities in the areas of corporate planning, financial management, network planning and engineering, and operationis and mainitenianice; (b) facilitate private sector participationi; and (c) provide 50,000 new lines to meet about 80% of demand in project areas by 1995, reduce network congestion, increase call completion rates, and reduce the rate of faults. 3. The project objectives were relevanlt, clear, and realistic and were not modified during project implemiienitationi. The achievemilenlt of those objectives, however, was quite demanding for GOSL and the imiplemientinlg agency, SLT, in particular. This was noted during project preparation and the SAR identified the risk of possible delays in project implemenitation due to the time needed to make SLT and the sector reg,ulationi operationially effective as well as SLT's limited project implementation capabilities. B. Achievement of Objectives 4. The sector policy objectives were overachieved. At the end of the project, SLT had been converted into a company (SLTL) under private management', various private service providers licensed, and a functioning sector regulation established (see Appendix D.6). Competition between mobile cellular- operators has led to quick expansion of service and some of the lowest tariffs in the world. In recent years, SLT has accelerated its network development and in the first six months of 1998 nearly 63,000 new subscribers were connected, which is more than in any previous full years. Unsatisfied demand for telephone service has been reduced and subscribers and the economy in general now benefit from more varied telecommunicationis services at competitive prices. l 65% of SLTL's equity is still owned by Government. The private investor/operator, owning 35% of SLTL, is operating ALTL under a management contract.  -2 - 5. The financial project objectives have been fully met. SLT produced a higher rate of return and contributed out of its own cash generation more funds to its capital investments than projected in the SAR. GOSL has also benefited fiscally from the sector: US$ 14.0 million was collected in 1996 from two new WLL licenses; US$225 million was paid in 1997 for a 35% equity share in SLT and its management and growing income taxes are received from SLTL and other private operators as their subscriber base and revenues grow. 6. The institutional development objectives for sector regulation were fully met. In the case of SLT, the objectives were achieved in the areas of staffing ratios, network enginieerinig and planning, operations and maintenance, and service quality improvements. As seen from Table 5, staff per 1,000 subscribers was brouglht down from 85 in 1990 to 23 in 1998, mainly due to stable staff numiibers and expansion of the network, and subscriber service complaints per 100 lines in Colombo from 25 per months to 7. SLT's financial maniagemlienit, however, remained weak durinig the project period and only towards the end of the project in mid-1998 were outstanding bills brouglht down to agreed levels and audit reports submitted within agreed time frame. SLT did not fully imlplemenit a performllanice related profit shar-inig system. 7. Physical project objectives were overacllieved, althouglh late. The original objective of 50,000 new subscribers by 1995 was achieved in 1997 and by mid-1998 aboLit 80,000 subscribers had been connlected under the project. By the end of 1998, this nIlimber is expected to have increased to about 120,000-more thani double the original objective. The reason was higher demand growth than projected and that prices for switchilng equipmiienit had become much lower thani at the time of appraisal, which allowed SLT to exercise the option to increase supply contracts, rehabilitate more exchanges, and include 30,000 subscriber lines in the IDA-funded tandemii exchanige. The tandem exchange was installed about two years behind schedule, but still oni time to provide the necessary interconnection facilities to the private operators outside SLT, especially the WLL operators licensed in 1996. S. The basic assumption for the IRR calculationis in the SAR was that SLT's international and long- distance traffic could not be increased without the project investments. This assumption was, oni the whole, soulld. The re-estimated economic rate of return (ERR) for the project is 64%, which compares flavorably with the SAR estimate of 37%. However, this ERR may unlderstate the real ERR, as: no consUmner suLplus was taken into accounlt despite unlsatisfied demand at current tariff levels; no increase in consumller- surplus was considered despite imiprovemiient in service quality and expansion of the network, which makes the telephone service more useful for all subscribers; and no incremental benefit beyond 2000 has been included, althouglh the ilfrastructure provided under the project allows connection of more subscribers at low marginial cost. 9. The re-estimated financial rate of return (FRR) for the project is 41%, which is substantially higlher than the SAR estimate of 27%. This FRR should be on the conservative side, as it is based on SLT's average revenues and operating costs per subscriber. Most subscriber lines provided under the project were for the Greater Colombo Area with its concentration of business subscribers and economies of scale, and incremenital project revenues may, therefore, be higher and operating costs lower than SLT's average. A summiiary of assumptionis for the ERR and FRR calculations is given in Table 9. C. Major Factors Affecting the Project 10. During the project period, technology development and competition brought down unit prices for telecommunications equipment, especially switching equipment, which made it possible to increase the project scope and at the same time reduce its cost. This factor, outside GOSL's control, had a substantial positive impact on the achievement of the physical objectives of the project. 11. SLT's autonomy and authority during the Project period was quite limited. GOSL had agreed to increase SLT's authority and approval limits to procure goods and services as necessary to ensure  - 3 - efficient project implementation. The approval thresholds established for SLT proved to be inadequate, however, and the local procurement procedures were not conducive to efficient implementation. Only after SLT's conversion in 1996 into a company, SLTL, and its subsequenit privatization in 1997, were procurement procedures radically changed. 12. The main reason for the nearly three year delay in implemenitation of the project's physical components was the late procurement of regional networks. The Cabinet Appointed Tender Board (CATB) made an award recommendation that was not acceptable to the Bank under its procurement guidelines. It took over two years, a change of government, and a new CATB to revise the award recommendation in a manner satisfactory to the Bank. The Technical Evaluation Committee (TEC) of the implementing agenicy, SLT, could have avoided the above delay in procuUremllent ot regional networks by following the Bank's procuremiient guidelinles more closely in its evaluation and subsequent recommenidationi to CATB. 13. Project implemiienitationi delays may also have been caused by major additions in 1992-97 to SLT's investment programii outside the project. Those additions used a substanitial portion of SLT's limited planninig and project implemiienitationl capacity. The major additions were a 50,000 Inzes emergency project for Colombo and a "150K" project, whiclh finally added about 250,000 lines to SLT's network (see Appendix D.5). AlthouL1gh the "I 50K" project was implemented by a state-owned company, Sri Lanka Telecom1 Services Ltd. (SLTS)'. created specifically for this purpose, substantial SLT input was still required. D. Project Sustainability 14. The project achievements in the sector reform areas appear irreversible, especially after the 1996 amenidnieiit of the Telecomnmuniicationis Act, the conversion of the regulator into a more independent comimiilissioIn, SLT's privatization, and various other private operators well established. SLTL's new private maniagemiienit established a businiess plan for SLTL's future development and this plan includes the efficient operationi of equipmenit provided under the project. The plan also provides for further imipr-ovements of SLTL's finanicial managellenlt, operating efficiency, and service quality. The achievemlienits so far in these areas are, therefore, likely to improve during the project operation period. On the whole, project achievemenlts will most likely be sustainable. E. Bank Perfokrmance 15. The project was first identified in combination with a 1986 the supervision of the First TelecommunLications Project. Initially, it was to be included as a component of a larger project for reform of public enterprises, but this larger project got delayed and in 1989 it was decided to go ahead with a freestanding telecommunications project. This appears to have been the right decision, as GOSL's as well as the Bank's attention could be fully focussed on tihe proposed telecommunications sector reform under the project, which was the first IDA project that aimed at an overall reform of the sector, including GOSL realized that SLT as a state corporation had difficulties in rapidly implementation and Sri Lanka Telecom Services, Ltd. (SLTS) was established in 1993 under the Companies Act to implement the "150 K" project. As a conmpany, SLTS could pay higher salaries than SLT and, thus, attract qualified Sri Lankans from abroad. Further, SLTS was not subject to SLT's time-consuming approval and procurement procedures. After the "150 K" lines transfer to SLT and SLT's conversion into a company in 1996, the rationale for SLTS ceased. It is now a shell that GOSL may use for other purposes.  - 4 - its legal framework and institutions. It was consistent with GOSL's priorities and the Bank's country strategy. The Bank's performance was satisfactory. 16. In early 1986, before the Bank had decided on a freestanding telecommunications project, GOSL established a Telecommunications Board (TBSL) to develop a sector-restructurinig p;ogram, including the transformation of SLTD into a company under the Companies Act for possible privatization, and the establishment of an independent regulatory body. IDA supported TBSL's activities through two PPFs, in 1986 and 1988. However, labor resistance and political oppositioni to privatization caused GOSL to dissolve TBSL in 1989 and adopt a more gradual approach to sector reform. This resulted in 1990 in SLTD's transforniation into a fully Governmenit-owned corporation (SLT) and the creation of a regulatory authority (SLTA) as a department within the Ministry of Posts and Telecomillunicationis. The project scope was revised to reflect the above chanlges and the Bank showed substantial flexibility in this process. The project was appraised In May 1990 with a post-appraisal mission in December the same year. The Bank project team consisted of a senior financial analyst and a telecommunications engineer, both with substantial sector experience. Given the difficult circumstances at the time, the Bank's project preparation performiaice was highily satisfactory. 17. SLTD's conversioni into a more indepenidenit goveriinient-owined corporation, SLT, was a conditioln of appraisal and was also seen by the Batik as a concrete sign of GOSL's commitment to sector reform. The enactimienit of the 1991 Telecommllullicationls Act, including the creationi of a regulatory authiority, SLTA, was a conditioni of credit effectiveness. By satisfying these conditions, GOSL demonistiated its commilitimienit as well as its ability to reforimi the sector. The limited capabilities of SLT to implement the physical project componienits was noted and to miniiilize the risks of implementation delays, a suitable technical assistance package, extensive use of turinkey contracts, and suitable coonditionialities were provided for in the project. IX. The initial activities to make SLTA operationally effective were funded separately as a TA comiiponienit of the Industrial Developmenit Project 3 (IDP 3) and, therefore, excluded from the Second TelecomimniLlcationis Project. The 1986 PPF for US$750,000 was charged against the IDP3 Credit and the 1988 PPF for USD$550,000 against the credit for this project. The main reason for this separation was that the IDP3 funds were available earlier and GOSL, as well as the Bank, realized the importance of havinig a regulatory and licensing authority prepared by the time the 1991 Telecommunications Act was enacted. 19. The project's sector reforimi componienits, e.g., a new telecommunications act, the establishment of a regulator, and the conversion of SLTD into a corporation, were prepared with Bank PPF assistance and expected to be implenienited by Credit effectiveness in accordance with the proposed project conditionality. The project appraisal, therefore, focused on the project's physical components. These were fairly straight forward, but the size of the project, compared to SLT's limited capabilities, and the iiumber of co-financiers created coordination problems. Those matters were addressed during appraisal and, to ensure efficient project implementation, suitable TA and conditionalities were identified to minimize implementation problems. Except for a nearly three year delay in implementation of IDA- funded regional networks as well as a similar delay of ADB-funded long-distance facilities, the project implementation alTangements identified during appraisal worked reasonably well. 20. The financial package for the project was appropriate and the credit amount adequate, based on the price and other information available at the time of appraisal. In retrospect, given the fall in prices, especially for switching equipment, the original project objectives could have been achieved by a smaller IDA credit. This development was not easy to foresee at the time of appraisal and, given the unexpected high growth in telecommunications demand, the overachievement of physical objectives made possible by the Credit was a good thing. 21. IDA's relations during appraisal with other agencies that helped finance the project, i.e., ADB, OECF, and UNDP/ITU, was good. IDA and ADB had common project preparation missions as well as  -5 - appraisal. However, ADB presented its part of the project to the ADB Board as a stand-alone project with weaker conditionality regarding sector reform, e.g., the Telecommunications Act, than the Bank had recommended. Further, the accounting and billing systems components to be funded by ADB were delayed and finally canceled and this made it difficult for SLT to comply with financial reporting and bill collection covenar. .s agreed with the Bank. 22. The project implemenitation plan and performnaice indicators for SLT (Table 5) were adequate. In retrospect, the projected performance of SLT for the early years was optimistic. In later years, however, SLT's performance surpassed expectations. The project was appraised by the same staff that identified and prepared it. The Bank's performance dulinig appraisal was satisfactory. 23. The project implemenltation delays were caused by SLT's limited capabilities, especially in the early stages of the project, as well as its procurement procedures established by GOSL. Those SLT weaknesses were noted in the SAR and suitable TA was provided under the project to strengtheni SLT's capabilities. GOSL also provided SLT/MOPT somewhat more auton1omily in SLT's proculemenet. This was not enouglh, however, to avoid imiplemllentationi and disbuLsemiienlt delays, whiclh were duly reported in the Supervision Form-ls 590. Follow-up letters to SLT and MOPT witlh recomminiendations to accelerate proculemenet were acted oni, but with some delays. For those reasons, the project was temporarily classilied by the Banlk as a problemii project. 24. In addition to a one-year project start-up delay, the contract for regional networks was further delayed due to a procurement issue. To ensure sufficient funds for the various project components, the Banik did not process some credit reallocation requests until after this procurement issue had been solved and the regionial networks supply contract signied. This contributed to delays in project implementation, particularly the expansion of the scope of the exchange rehabilitation component and, to some extent, the procurlemenit of the tandemii exchanige with 30,000 subscriber lines added to it. In retrospect, and given the USS7.25 million in cost saving7s cancelled upOIn Credit closing date, the Bank could have processed SLT's credit reallocationl requests quicker. 25. All institutional and finanicial perform-1anice covenanits were complied with. SLT's financial maniagtemienit, however-, did not improve as expected and covenants on timely financial reporting and audits, billing and collection, and perform-latnce based staff incentives were complied with late or not fully complied with. Durinig negotiations, it was noted that SLT would not be able to comply with these covenanits utitl new accounting and billing systems, to be funded by ADB, were operational. This project componienit was delayed and finally canceled. SLT installed new systems funded out of its own resources, but those systems became operational only in 1998 towards the end of the project. This was duly noted in the Supervisioni Forms 590 and SLT was requested to take suitable corrective actions. Taking into accoullt the circumstances, the Bank showed some flexibility, e.g., by agreeing to delay the due date of SLT's audit reports from four montlhs to eight months after the close of the fiscal year, provided unaudited accounts were received within four months. 26. During negotiations, it was agreed to undertake a mid-term review in June 1993 with focus on the institutionial arrangemiients for the sector. This review was combined with a sector report, Strategic Options for thle Telecommunications Sector (8SRISR057). The main recommendations of this report were to: open up the local and long-distance markets to competition from wireless operators; strengthen the regulator by giving SLTA the status of a more independent commission; convert SLT into a company under the Companies Act for subsequent privatization; and amend the 1991 Telecommunications Act to facilitate the aforementioned. All the recommendations of this sector report were implemented by GOSL in 1994-97 (see Appendix D.6). The project, thus, achieved all the original sector objectives identified during project preparation but not reflected in the project documentation due to labor union and political opposition, at the time, to SLT's privatization. 27. In the SAR, the Bank's project supervision was estimated to require 10 staff-weeks per year and this esLimate proved fairly accurate (see Table 13). The Bank supervision of project implementation  -6 - consisted of about two missions a year by the same staff that prepared and appraised the project and regular contacts through letters, fax, and phone between the Bank, the Borrower, and the implementing agency, SLT. At the early stages of project implementation, reports and other information were also exchanged with cofinanciers to facilitate coordinated implementation of the project as a whole. The Bank based its performance rating of the project largely on implementationi and disbursement data and, in retrospect, more attention could have been paid to the achievement of the larger development objectives. On the whole, the Bank's performance during the supervision stage was higilly satisfactory. F. Cofinanciers Performance 28. The project was cofinaniced by OECF (local networks in Colombo), ADB (interinational, domestic long-distance facilities, and finalicial systems), AT&T (nationial switching center in Colombo), and UNDP/ITU (training center). Originally, the national switchingt center was expected to be funded by Franice. As AT&T finianlced this project component, the Frencih fuLids were used for other equipimienit outside the project. The OECF, AT&T, and UNDP/ITU ftinded project components were implemilenited largely on schedule. The implemenitation of the ADB-funded long-distance network was about two years delayed. As Bank-funded project componienits and other developments in the regions also were delayed, the ADB delay In itself did not have a major nlegative limpact oln the project. 29. As part of project preparation, ADB fuLided a telecommuniications demand study. The Bank was invited to participate In this study and the results were shared between ADB and the Bank. The study's demilanid projectionis were based oni the ITU model, i.e., relating ,rowth in telecommuniications demand to populationi and GDP growth. The resulting forecast demanid substanitially underestimated the growth in real demanid for telecomillullicationis services, however, as "hidden" demand surfaced after telephones started to become more widely available. Appendix D.3 shows the actual service demanid in the period 1 990-97 and indicates that SLTL aims at fully satisfying demand by the year 2000. 30. The computerized accountinig and billing and collection systems to be funded by ADB under the project were not implemented. This made it difficult for SLT to fully comply with the covenants agreed with the Bank regarding timely finanicial reporting, performance related profit sharing, and accounts receivable. On the whole, the performance of the cofinanciers was satisfactory. G. Borrower Performance 3 1. In February 1986, GOSL established a Telecommunications Board of Sri Lanka (TBSL) to: conver-t SLTD into a company under the Companies Act, prepare its Articles of Association, review offers of foreign collaboration, draft the necessary new telecommunications legislation, and establish a regulatory body for the sector. The Bank supported TBSL's activities through two PPFs, one in 1986 and one In 1988. Towards the end of 1988, TBSL, with PPF-funded consultants' assistance, had largely completed the drafting of a new telecommunications act and SLT's articles of association and was ready to start the implementation of planned sector reforms. However, in February 1989, confronted with labor unlioIn and other political opposition to the privatization of SLTD, GOSL dissolved TBSL and transferred its files and functions to the MOPT. 32. MOPT, on GOSL's instructions, planned for a more gradual reform of the sector than TBSL had done, e.g., the conversion of SLTD into a fully GOSL-owned corporation, the establishment of a sector regulator within MOPT under departmental status and a new telecommunications act that supported this development. Most work done by TBSL was amended accordingly by MOPT. The labor unions initially also opposed the conversion of SLTD into a govemment corporation and it took over a year for MOPT  and the unions to agree on staff transition arrangements. By 1991, SLTD had been converted into a government corporation, SLT, the 1991 Telecommunications Act enacted, and a regulatory authority for the sector, SLTA, established with MOPT departmental status. 33. GOSL's dissolution of TBSL and the adoption of a more gradual approach to sector reform kept the reform process alive in face of labor union and wider political opposition to this reform. The labor unions accepted SLTD's conversion from department to government corporationi on the condition that no staff would be laid off. Fulther, SLTD staff were given three basic options: retire with some extra benefits; retain civil servant status and joil SLT or another GOSL entity, o01 become SLT staff with about 30% salary increase. Nearly all SLTD staff opted to joil SLT and the political opposition to refoml subsided. GOSL's perforimianice during project preparationi should, therefore, be considered fully satisfactory. 34. SLT, the implementing a,ency, planined and prepared the project in a professional manner. Despite its conversionl fi-om a GOSL departimienit into a corporation and intensive labor union negotiations, SLT succeeded in coordinatilng the cofinanciers and the various project componenits and design the largest SLT development project so far. SLT recognized its Iimited project implemenitationl capabilities and suitable TA was included in the project, e.g. corporate planning, network planining and engineering, operationis and mainitenianice, and finanicial management, in iCludinig new accountling, billing and collection systems to be finded by ADB. SLT's perforimianice during project preparation was satisfactory. 3 5. GOSL's perforimiance duLilng project implemiletitatiol, in particular after the 1993 mid-term review and Bank sector report, was highly satisfaictory, especially in the sector policy and institutional areas, e.g., amenidimienit of the 1991 Telecominlllicationis Act, conversion of SLT into a company under the Companiies Act and subsequent privatization, conversionl of SLTA into a more independent commission (the Telecommunllicationis Regulator-y Commilissioni-TRC), and the licensilig of various private operators (see Appendix D.6). Some of the maini reasons for GOSL's successful sector reform were that: the labor UlliOlnS were giveni suitable assurances to satisfy their concerils; various private companies were interested in investing and operating telecommllullicationis services in Sri Lanka; the sector regulation was seen by the private operators and other-s to operate In a fair manner-; and, most importantly, GOSL had the will and ability to implemiienit refor-mils. 36. A contributing factor to the successful conversion of SLT into a company, SLTL, and its privatization may have been the establishillenit and rapid growth of other private operators. Many SLT statf had forimler- colleagues doing well working for private operators, which diminished SLT staff fear of privatization. Further, a successful track record of private telecommunications operations had been established in Sri Lanka before SLTL's privatization. This provided potential investors with the comfort that the legal and regulatory system was functioning well. 37. SLT had initial difficulties in implementing the TA and physical components of the project. Most studies (see Table 7) and equipmenit procurement got delayed by about a year, but the project could still have been completed by the original Credit closling date if the procurement of regional networks had not been delayed. SLT's Technilcal Evaluation Committee (TEC) recommended award of the regional cable networks to anothier bidder than the lowest evaluated one. The Cabinet Appointed Tender Board (CATB) accepted TEC's recommendation and sent its award recommendation to the Bank, which objected to the proposed award. This matter was reviewed and discussed between the Bank, MOPT, SLT, and SLT's consultants for nearly two years and the Bank was prepared to declare misprocurement. A new govemment and CATB, however, changed the original award recommendation in a way satisfactory to the Bank and the implementation of the regional networks could start after a nearly three-year delay. 38. The demand for telecommunications services increased faster than projected (Appendix D.3), resulting in long lists of people applying for service. In addition to licensing private service providers, some major public investments in the sector, e.g. a 50,000-line emergency project for Colombo, to be  -8 - implemented by SLT, and a "150K" project (which finally provided a 250,000-line addition, see Appendix D.5), to be implemented by a state-owned company, SLTS, which was created for this purpose. Those projects were implemented in parallel with the IDA supported project and, although well justified from a demand satisfaction point of view, used a substantial part of SLT's limited planning and project implementation resources. This may have contributed to the delays in the implemenitation of the IDA supported project. 39. SLT's performance, taking into account the regional networks procurement and other project implementation delays, was less than satisfactory. Considering, the substantial investments, e.g., the Colombo emergency scheme and the "150K" project. that SLT was obliged by GOSL to uLidertake in parallel with the IDA-supported project, however, SLT's overall implemenitation performiance should be considered satisfactory. H. Assessment of Outcome 40. Given the overachievements of sector, institUtional and physical objectives of the project, its high ERR, and a highi probability that project achievemlienits will be sustainied, the project outcome should be considered highly satisfactory. 1. Future Operation 41. SLT's private management has accelerated the connection of new subscribers and during the first half of 1998 nearly 63,000 new subscribers were conniected. This is more than in any previous full year and will lead to a more efficient use of SLT assets, including the ones installed under the project. The waiting time for SLT phonie connectioni has been reduced to three monithis up to a year, depending on the exchange area, from nearly 10 years at the time of project appraisal. Other private operators provide service within weeks of application and have no waiting lists. SLT's service quality is being further improved by SLT's private managemilenlt and new procedures for efficient handling of customer complailnts have been introduced nationwide. SLT's recent performance indicates that the physical components of the project will be operated in an efficient manner. 42. The future perfonnance of SLT and the project could be monitored by the same indicators as agreed for the project (see Table 5). The main monitorinig will, however, be conducted by the regulator, TRC, as part of its regulatory functions. TRC's monitoring of all the operators in the sector will include: service quality, compliance with license conditions, tariffs, finances, etc. Given TRC's regulatory authority over the private operators, including SLTL, and the competitive nature of the telecommuniicationis market, the Bank could consider wavering the revenue covenants for the project. There is, therefore, very little scope for a separate follow-up or monitoring by the Bank. J. Key Lessons Learned 43. Some lessons to be learned from this project are: * radical sector reform takes time and continued involvement in a sector provides the Bank with the opportunity to support reform step by step under various governments. The Bank can play a useful role in initiating and supporting politically unpopular reforms;  * patience and flexibility on behalf of the Bank regarding project objectives and conditionality may be justified to overcome labor and other opposition to changes, provided Government is committed in the longer term to sector reform; * labor unions should be involved at an early stage of reform and their concernis addressed to reduce resistance to change; * the successful private operation of value-added and other marginial telecommunications services creates new job opportullities and may reduce staff fears of privatization of the main operators. It may also provide comfort to potential investors, as it provides a track record of commercial operations and shows that the legal and regulatory fi-amework is working satisfactorily; * a gover-nmiilenit corporation can operate more efficiently than a departmiienlt, e.g., regarding demand satisfaction and service impr-ovemiienits. Its efficiency will still be hampered, however, by governimlenit salary scales, investmiienit approvals, and procur-emiient proceduL-es. Only full corporatization under the Companlies Act, preferably witlh private management and suitable regulation, provides the necessary autonomny to quickly expand se-vice to meet demanid and incenitives to become more consumiier- oriented and competitive; * comlipetitioni leads to lower prices and reduces the need for price regulationi. With four competinig providers of mobile cellular services, Sri Lanka has some of the lowest tariffs in the world; - the project team was the same fiom identificationi to completion and one Bank staff was also involved in the first Telecommunllicationls Project in Sri Lanka. This continuity of project staff contributed to makilng the Bank's support for sector reform-i effective; and - surplus credit funds due to cost savings and elimination of project components should be identified and canceled early to reduce commitmiienit charges for the Borrower and to ensure adequate informiiationi for the Bank to evaluate disbursement performance. The above lessons are valid particularly for Sri Lanka's telecommunications sector as well as for many other sectors and countries. K. Evaluation of Program Objective Categories 44. The project had nio specific social objectives, but is likely to have some beneficial social impact, e.g. by improving telecommuniicationis in rural and other areas, some previously without telephone service, whichi should facilitate access to medical care, GOSL agencies, etc. The numerous private operators established after 1996 have also created new job opportunities in Sri Lanka. Further, by supporting Sri Lanka's economic development, e.g., in the textile export and tourism industries that are both telecommunicationis and labor intensive, the project would contribute to alleviation of poverty. 45. The project was given a "C" environmental rating and its environmental impact was expected to be miniimal. However, the project should have some beneficial environmental effects, as improved telecommllunications promotes efficiency in all sectors, particularly in the transport sector by allowing more efficient use of vehicles thus reducing the number of trips. 46. The main achievement of the project was to open up Sri Lanka's telecommunications market to private operators through the 1991 Telecommunications Act. Before 1991, there was only one mobile cellular company, licensed by SLT, with only about 2,000 subscribers, and some paging licensees. By the end of the project in 1998, there were some 30 private companies providing mobile cellular, WLL, paging, data transmission, public card phone, Internet, and other services. The total number of  - 10 - subscribers of those services exceeds 200,000 and is growing at a fast pace. With the privatization of SLTL in 1997 and the transfer of its operations under a management contract, all telecommunications services in Sri Lanka are now provided by private operators. The public now enjoys a wider choice of telecommunications services at competitive prices. The project's private sector development objective has, thus, been fully achieved.  Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies E U U U Sector Policies V/ a U Financial Objectives U V/ [ O Ilstittutionial Developmenit V O a C P'hysical Objectives V 0 Poverty Reductiotl E] O V/ Gender Issues E l V/ Other Social Objectives C1 1 E U Environimilenital Objectives EO U O Public Sector Managemilenit Ul E l Private Sector Developmeint V U U Othier (specify) E Ul U 2 B. Project Sustainability Likely Unlikely Uncertain Highly C. Bank Performance satisfactory Satisfactory Deficient Identificationi U V U Preparation Assistance V/ U Appraisal U / U Supervision V U U Highly D. Borrower Performance satisfactory Satisfactory Deficient Preparation U V/ U Implementatioi V/ U U Covenant Compliance Ul VU Operation (if applicable) V U U Highly Highly E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory V U U U  - 12 - Table 2: Related Bank Loans/Credits Year of Loan/credit title Purpose approval Status Preceding operations 1. Telecommunications Assist GOSL and SLTD in overcomning the 1980 Completed Project (1). major constrailits that impeded the (C. 1020-CE) developmenit of the sector: uLideriinvestiienit, (C. 10 02-CE) reliance on obsolete equipmenlt, and institutional deficiencies. Separationi of postal and telecomillullicationis services. 2. Emergency Assist GOSL in its program to assist 1988 Completed Reconstructioni and returnees, revive economilc activities and Rehabilitation Project. restore essential services in several areas, (C. 1883-CE) includilg telecolmlIllullicatiolis. 3. Third Industrial In the telecommuniications area: financing of 1988 Completed Development Project TA to the Sri Lanka Telecommunllications (IDP 111). Authority (SLTA) to establish a regulatory (C. 1948-CE) framework for operation of a commercially (C. 1948-CE) run communicatiolIs utility and private telecommulLicationis companies. Following operations 1. Telecommunications Assist SLTA in the tranisitioni to a more 1996 Ongoing Regulation and Public independenlt Telecommunlications Enterprise Technical Regulatoiy Commission (TRC), strengthen Assistance Project. its regulatory authority and assist in (C. 2837-CE) improving its administrative and technical (C. 2837-CE) capabilities to plan and control the use of radio frequency spectrum, including the establishment of a computerized managemenit and monitoring system. Facilitate the divestiture of govenmment- owned enterprises, including SLT.  - 13- Table 3: Project Timetable Date Steps in Project Cycle Planned Actual/Latest Estimate Identification (Initial EPS)' March 1989 Preparation October 1989 Oct. 1988-Apr. 1990 Appraisal February 1990 May 1990, Dec. 1990 Negotiations January 1991 February 11-15, 1991 Board Presenitatioin March 26, 1991 May 28, 1991 Signinigl JuIly 15, 1991 Effectiveness December 24, 1991 Mid-term review June 1993 June 1993 Project Completion December 31, 1995 December 31, 1998 Loan Closing June 30, 1996 June 30 1998 1. This i-.lS \%as the first tbr a fieestanding telecommiiunlicationis project. The project was initially identified in 1986, however, as a coiliponienit of a larger public enlterprise retform project.  - 14 - Table 4: Credit Disbursements - Cumulative Estimated and Actual (US$ Thlousanids) FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 Appraisal Estimate 9,500 27,800 43,500 55,000 57,000 Actual 161 2,626 5,437 16,680 20,231 27.414 37,614 48,514 Actual as % of Estimate 1.7 9.4 12.5 30.3 35.5 48.1 66.0 S5.1 Date of Final Disbursement December 4, 1998 Cancellation: SDR 5.184 millioni (USS7.254 millioni) Note: Fiscal years relate to the period July I -June 30 (IDA fiscal year).  15- Table 5: Key Indicators for Project Implementation 1990 I 1991 1 1992 1 1993 1 1994 1 1995 t 1996 1 91 111 Indiciators Appniua Actual jA,prainl Actual AprainU Actual Apprailul Actual|AploAinu ActualApplA alal Actual| Actual TELEPHONE NETWORK Exchange Capacity (Linesi 148.742 158,518 155.576 159,667 169.410 179,995 227,644 207,227 267.202 237,586 284.202 271.250 340.643 426.219 493.809 Main Linesm Service 114,295 121,388 124.395 125,834 134.295 135.504 167,295 157.774 202,895 180,724 233.595 205.963 254,523 315,865 378.318 Exchange Fill (% 76.8 76.6 80.0 78.8 79.3 75.3 73.5 76.1 75.9 76.1 82.2 75.9 74.7 74.1 76.6 Outside Plant Occupancy (%1 lal 58 46 60 47 62 48 65 54 67 61 69 59 59 62 66 Public Telephones SLT onlyl 600 600 660 625 725 635 800 673 880 756 900 780 796 1,110 Main Lines in Ser t106 Populattan 0.64 071 0.69 073 073 0.78 0.90 0.89 1.07 1.02 121 115 141 171 2.03 Subscaber with STO I%l 98 98 98 98 98 98 99 99 99 99 99 099 100 100 Subscsibers with ISOD %1 10 10 10 10 10 10 20 20 20 20 25 20 20 20 74 Complamnsl100 lines in Sern.-Month. Colonmbo Metro 50 50 30 30 20 20 12 12 10 10 9 la ta 8 7 -Provices 25 25 25 25 20 25 14 20 12 15 10 15 15 15 17 Operanor Answerng Time < 20 sNI -Long Distance 90 90 90 90 95 95 98 98 98 98 99 98 98 98 98 International 74 74 80 80 85 85 90 90 95 95 99 95 98 98 98 Call Completion Rates le%: local calls 27 27 35 35 45 40 45 40 45 45 50 45 45 45 35 interurban calls ISTOI 26 26 27 27 30 30 30 30 33 33 55 33 33 35 28 international inconang calls 21 21 22 22 22 28 40 40 45 45 50 55 55 65 65 PROOUCTIVITY StaflfI,000 hires n Service 85 66 80 57 70 56 60 47 50 40 40 39 33 28 23 FINANCIAL Telephone ReveriuelLine IUS$) lbh 650 650 650 670 670 867 680 833 700 873 750 893 979 782 Operaling CosUlTeleph. Line IUS$) Ic) 300 300 300 348 305 363 320 566 330 542 320 622 596 565 Sell Iriancing Ratio IYr id) 65 65.0 42.0 234.0 310 116.0 23.0 43.0 34.0 44.0 130.0 47.0 23.0 26 0 Operating Ratioa 1% 41 41.0 40.0 36.4 380 710 42.0 58.0 39.0 70.0 36.0 64.0 61.0 1g9 720101 Current Ratio tiniesl 4.0 4.0 3.5 60 2.7 78 3.5 5.7 4.1 6.5 4.1 1.9 1.7 1g9 2 1911 OebtlEquity Ration %l 34 34 33 35 46 30 48 29 49 39 46 35 40 (91 49 Debt Service Coverage (tniesnl lel 4.5 45 2.8 168 26 4.9 2.6 42 2.9 3.1 3.4 4.9 2.4 2.4 Returi on Assets I%) 22 22 14 41 16 47 15 32 15 18 16 36 28 191 41 1g Accounts Receivables lEquiv. nionthsl 111 5 5.0 4.0 6.6 3.0 7.1 3.0 8.0 3.0 5 5 3.0 5.0 4.0 5 0 Exchange Rate used RslUS51.00 40.06 4137 43.83 48.00 49.00 54.05 56.71 62.15 lal Subscribers divided by pairs connected lo Main Orsntrbulion Frame hb) Teleph. operating revenue during the period divided by average nuriiber of lines ici service durinig that periafl Ic) Teleph. operating costs during the priod divided by ayerage nunhber of lines at service diiing Ihat peiiod Idl Net of debt service. taxes, dividends and wotking capital increase. Percenit oa the aniniual cap,lal expeirdititre. te) Net internal cash generation before interest, divided by interest plus amirortization. (f1 Total account receivables divided by Avg. revenue per day for each category ot subscribers. Igi Oilier tront the ratios calculated in Appendix 0.7, which are based on SLTL's audited fiiianicial slatetretits I1I As of June 1998. Targets tor 1998 were not available. Source: SLTL August 1998  - 16- Table 6: Key Indicators for Project Operation Indicators for the operational phase of the project were not included in the SAR or the President's Memorandum. The same indicators as agreed for the implementation phase (Table 5) and any other parameters included in SLTL's license or agreed with the regulator, TRC. however, could be used to monitor future performance of SLT. Monitoring of these indicators will be condLicted by TRC. SLTL submitted the following infomiation about its current corporate plan: I1. Corporate Mission Provide quality telecommunications services so that customers are satisfied and all people in Sri Lanka have access to telephone service by 2001. Quality means: * the service is available when desired * a high percentage of successful call * a clear, good quality connection * value-added services are available Telecommunications services iniclude: * national and international telephone services * data, telex, and text services * video services * international transit services Satisfied customiiers mnea,i: * meeting customers's needs timely and convenlienitly * the services are reasonably priced * problems are resolved quickly and convenienitly Access for all people in Sri Lanika means: * telephone and other services to all people who desire scrvices are provided readily * other have access to a private or public telephonie service withinl five kilometers 2. Corporate Goals (a) To meet market demand by providing 880,000 telephonle lines by the year 2000 (b) Effective and efficient use of manpower resources (c) To increase productivity throughi a contenlted workforce (d) To provide other services (e) To achieve and maintain interinationial quality standards (f) Generation of funds to meet capital investimicit (g) To maintain an adequate level of profitability (h) To achieve a minimum rate of return of 15% on re-valued fixed assets  - 17- Table 7: Studies Included in Project Study Purpose as defined at Status Impact of appraisaVredefined study I PPF-funded studies Organization and management, draft Completed under Provided a basis for TBSL, 1986-90 Telecommunications Act, sector reform, the PPFs for sector reform. and license for SLT; personnel organization and managemenit; financial planning; financial and accounting systems; telecommunications legislation and license. 2 Corporate planning Institute a corporate planning function, Completed under SLT capabilities develop appropriate methodologies to IDA project improved. formulate initial corporate plans, and monitor the fulfillment of corporate plans and objectives. 3 Network planning Enhance SLT's capabilities in economilic SLT capabilities and traffic location of telephone exchaniges, system Completed under improved. engineering design, preparation of specifications. and IDA project traffic measuremenlt and analysis. 4 Operations and Upgrade SLT's operations and CI d under SLT service quality maintenance maintenance divisions to increase their oIDpAte uer improved. development productivity and efficiency. project 5 Cost center based, Introduce an effective incenltive system Partly completed Incenitives paid to performance related for SLT staff. under IDA project. staff, but not profit sharing performance system for SLT staff _ related. 6 Telecommunication To maintain satisfactory finanicial Completed under Adequate tariffs s tariff structure and performance under new fiscal policies for IDA project. maintained. levels the sector and commercial onlendiig terms for the debt. 7 Accounting system Finalize SLT's opening balance sheet, Completed under Provided the base (PPF) design and assist in the implementationi of IDA PPF for financial a suitable commercial accountitig system, reporting. and train SLT staff in commercial accounting practices. 8 Managemenit Establish a developmenit maniagemiienit Completed uLider SLT management development center and assist in materials various agreements capabilities maniagemenit, customer services, with UNDP/ITU improved. subscriber database, personinel and financial management, informiationi systems, and developmeilt of middle managemenit. 9 Management Review of the requiremnents in these Completed during Recommendations inforniationi systems areas. project preparation not implemented. and data processing by ADB-funded needs consultants. 10 Customer billing Review the customer billing system, Funded by ADB. Recommendations system, conduct maintenance workshops, and not implemented. maintenance, and assist in preparing a quality improvement service quality plan.  - 18 - Table 8A: Project Costs (US$ Millions) l Appraisal Estimate | Actual/Latest Estimate (*) Items Local Foreign Local Foreign | Costs Costs I Total Costs | Costs Total IDA-FINANCED COMPONENTS Local Telephone Exchanges: Colombo and Regions 8.0 31.3 39.3 5.4 17.6 23.0 Tandem Exchanges 1.3 5.1 6.4 1.4 3.5 4.9 Cable Plant (Regions) 7.6 6.1 13.7 9.8 19.5 29.3 Exchange Rehabilitation 1.2 2.7 3.9 1.2 4.0 5.2 Telegraph Equipment 0.8 1.8 2.6 0.0 (.0 0.( Technical Assistance 0.0 2.2 2.2 0.1 3.9 4.0 Base Cost 18.9 49.2 68.11 Physical Contingencies 1.9 2.4 4.3 Price Contingencies 5.2 5.4 10.6 SUIBTOTAL| 26.0 57.0 83.0 17.9 48.5 66.4 ADB-FINANCED COMPONENTS International Facilities 3.5 11.4 14.9 6.3 12.4 18.7 Trunk Transmission Network 4.3 17.6 21.9 10.2 20.2 30.4 Information Systems 0.6 2.1 2.7 0.0 ().0 () Technical Assistance 0.2 0.7 0.9 0.0 0.8 0.8 Base Cost | 8.6 31.8 40.4 Physical Continigencies 0.8 3.1 4.0 Price Contingencies 1.8 5.3 7.1 SUlBTOTALI 11.2 40.2 51.5 16.5 33.4 49.9 COMPONENTS FUNDED BY OTHER SOURCES National Switching Center 1.( 3.9 4.9 (.0 12.2 12.2 Cable Plant and Technical Assistance 5.3 32.3 37.6 24.8 24.5 49.3 Spur Transmission Links 1.5 7.5 9.0 5.4 0.( 5.4 Subscriber Terminals 0.6 4.2 4.8 15.0 (.0 15.0 Building and Stores 1.8 0.4 2.2 1.6 0.0 1.6 TA for Planning and Management 0.( 0.9 (.9 0.0 0.7 0.7 Base Cost 10.2 49.2 59.41 Physical Contingencies 1.0 2.5 3.5 Price Contingencies 2.4 4.4 6.8 SUBTOTALI 13.6 56.1 69.7 46.8 37.4 84.2 TOTAL BASE COST| 37.7 130.2 167.9 Total Physical Contingencies 3.7 8.1 11.8 Total Price Contingencies 9.4 15.1 24.5 TOTAL PROJECT COST 50.8 153.4 204.2 81.2 119.3 200.5 Note: At appraisal, total costs included US$28 million in taxes and dutics. Estimated total local costs include USS50 million in taxes and duties. Source: SLTL, November 1998  - 19- Table 8B: Project Financing (US$ Millions) Appraisal Estimate Actual/Latest Estimate Financial Sources Local Foreign Local Foreign Costs Costs I Total Costs Costs Total IDA 0.0 57.0 57.0 0.0 48.5 48.5 ADB 0.0 40.0 40.0 0.0 33.4 33.4 OECF 7.2 36.9 44.1 0.0 24.5 24.5 France/AT&T (l) 0.0 4.4 4.4 0.0 12.2 12.2 UNDP/ITU 0.0 1.0 1.0 0.1 0.6 0.7 SLT 40.9 0.0 40.9 66.1 0.1 66.2 Subscribers 2.7 4.8 7.5 15.0 0.0 15.0 (2) GOSL 0.0 9.2 9.2 --- --- --- TOTAL 50.81 153.31 204.11 81.21 119.31 2-00-.5 (I) The national switching center was funded by AT&T. not France as expectcd at appraisal. (2) Estimated, as no records are available. Note: French funding has been excluded and subscriber funding of terminal equipment included, which explains differences between the above table and SLTL's table in Appendix E. Source: SLTL - November 1998  - 20 - Table 9: Economic and Financial Rate of Return (ERR & FRR) Re-estimates At the time of appraisal, SLT's international traffic was so congested that no meaningful increase In international traffic and revenues could be expected without investments in new facilities. The congestion is SLT's long-distance network was nearly as bad. The SAR's ERR and FRR estimates were, therefore, based on the assumption that all increases in internationial revenues were incremiiental to the project, even if originated from subscribers connected outside the project. Simiilarly, it was assumed that 60% of domestic long-distance revenue would not have been possible without the new facilities provided under the ADB-financed component of the project. The experienice durinlg the project period supports the SAR assumptions and these have, therefore, also been used for the re- estimates of ERR and FRR. The ERR and FRR calculations are also based on informationi from SLTL's FY97 and earlier accounts, financial projections for FY98, project costs as provided by SLTL, and the followilg simplified assumptions: (a) incremental proiect revenues equal SLT's average local revenlue per subscriber times the number of subscribers connected under the project, plus 100% of increillemetal international revenues and 60% of other incremental long-distance revelnues. The per- subscriber average from SLT's FY98 projections has also been used for subsequent years. Connection fees have been taken as incomiie wheni collected. Appendix A, aide- memoire dated May 1, 1998, Attachment 3, describes SLTL's tariff changes as from 1998; (b) incremental proiect operating expenditures equal SLT's average cost per subscriber for subscribers connected under the project plus 60% of other SLT operatingb cost increases. The average for FY98 has also been used for subsequent years; (c) a useful project life of 20 years has been assumed and no residual value has been considered; (d) incremental proiect cost and revenue have been estimated in constanit 1998 US$ using the average unweighted SLR/US$ exchange rate for each year and the US GDP deflator. Cost and benefit streamiis are assumed to remaini constant in real terms as from year 2000; (e) for ERR calculations, custom duties have been excluded from and subscriber costs for terminal equipment added to capital expenditures. The duty on telecommunications revenues (25% GST up to 1998 and 12.5% thereafter) has been added to revenues; (f) no shadow pricing for labor has been applied for ERR calculations as the project implementation and subsequent operation mostly require technically qualified staff, for which there is no surplus in Sri Lanka; and (g) for FRR calculation, SLTL's projected income tax has been taken as a cost, the duty on revenue (para. (e) above) deducted from income, and other taxes and Based on the above assumptions, the following cost and benefit streams (in constant 1998 USS) were constructed:  Table 9 Page 2 - 21 - Incr. Oper. Income Capitail Cost Expend. Incr. Revenues Tax i__ Net Benefits FY ERR FRR ERR/FRR ERR FFRR RR L ERR FRR 1992 5.9 8.1 (5.9) (8.1) 1993 8.5 11.7 (8.5) (11.7) 1994 42.8 55.5 4.6 16.0 12.8 0.8 (31.4) (48.1) 1995 40.8 52.5 11.3 37.9 31.1 1.6 (14.2) (34.3) 1996 36.5 43.4 21.2 70.5 56.4 3.3 12.8 (11.5) 1997 14.5 11.7 37.3 121.3 97.0 5.8 69.5 42.2 1998 21.8 13.5 64.4 192.2 170.8 10.3 106.0 82.6 1999 7.5 80.5 232.9 207.0 11.8 144.9 114.7 2000-151 92.4 266.0 236.4 14.7 173.6 129.3 Rate of Return' 64.2%/o 41.4%/4.  Table 10: Status of Legal Covenants Original Revised Covenant Present fulfillment fulfillment Description of Agreement Section type status date date covenant Comments DCA 2.02(b) I C 12/31/91 The Borrower to open and maintain in A special dollar account was opened in the dollars a special account in a bank under Central Bank and authorized signatures conditions satisfactory to IDA. forwarded to IDA in December 1991. DCA 3.04 5 C 06/30/93 05-06/93 The Borrower shall (a) by June 30, 1993, The institutional arrangements were review with IDA the institutional reviewed in May/June 1993 as part of a arrangements for SLT and SLTA and their sector, Strategic Options for the relation to MOPT, and (b) thereafter, as a Telecommunications Sector. SLT was result of said review, implement the agreed converted into a government-owned improvements. company in September 1996, the 1991 Telecommunications Act amended and SLTA converted into a more autonomous commission (TRC) in 1997. DCA 3.06 2 CP The Borrower shall cause all its agencies to All subscribers, whetlher Government or pay in full, within three months of receipt, private, are required to pay the bills within i their telecommunications bills. 14 days after receipt. Timiely payments by Government agencies is being pursued by the Treasury. DCA 3.07(a) 5 C 12/30/91 The Borrower to establish, by December 31, A Cabinet Appointed Tender Board was 1991, and to maintaini thereafter, a tender established. board with membership and powers satisfactory to IDA, to facilitate efficient and economical procurement of goods, works, and services for SLT. DCA 4.01 1 C April 30Of August31 of I. The Borrower to lave the records and SLT has provided IDA with unaudited each year each year accounts for all expenditures with reports within four montlhs of the end of the respect to which withdrawals from the FY. C'redit Account were made on the basis of SOEs and those for the Special Account for each FY audited by independent auditors acceptable to IDA.  Original Revised Covenant Present fulfUilment fulfillment Description of Agreement Section type status date date covenant Comments 2. The Borrower to furnish to IDA within Audit reports have been submitted up to four months after the end of FY the FY97. IDA agreed to receiving audit audit report, including a separate reports within eight months, provided opinion of the auditors about the unaudited accounts were received within reliability of the financial statements, four months of the close of SLT's FY. procedures, and internal controls. DCA Sched. 3, Sec. 11 10 C The Borrower to employ or cause SLT to Consultants have been retained. employ consultants satisfactory to IDA, in order to assist in carrying out the Project. PA 3.03 13 C SLT to take out and maintain with SLT's Board decided to insure only main responsible insurers, or make other exchanges and set aside reserves (self- provision satisfactory to IDA, for insurance insurance) for other SLT equipment. This is against such risks and in such amounts as acceptable and consistent with industry shall be consistent with appropriate practice. practices. PA 4.01(b)(i) I C SLT to have its records, accounts, and SLT appointed the Auditor General, who financial statements for each fiscal year was acceptable to IDA. SLT's 1995 t'J audited by independent auditors acceptable accounts were audited by a private audit S to IDA. firm'. PA 4.01(b)(ii) 9 C August31 of SLT to furnish to IDA, not later than eight See 4.01 above. each year months after the end of the year: (a) certified copies of its financial statements for such year as so audited, and (b) the repoit of such audit. PA 4.02(a) 2 C SLT shall producc an annual return of not less than 15% of the average net fixed assets in operation. Before March 31 of each year, SLT to inform IDA whether this requirement would be met in respect of such year and the following FY. PA 4.03 2 C SLT shall generate from intemal sources not less than 25% of its annual capital expenditures. SLT to inform IDA, before March 31 in each of its FYs, whether it would meet this requiremenit and take all necessary measures to meet requirement. I. SLT's 1995 accounts were audited by the Auditor General as w%ell as by a private auditor in preparation for its conversion into a company. As from SLT's conversion into a company, SLTL, in 1996, SLTL's accounlts are audited only by a private auditor. Table 10- Page 2  PA 4.04 2 C SLT to maintain at all times adequate funds to meet its requirements for operating costs, debt service, working capital, and capital investment. PA Sched., para. 1 5 C SLT shall establish and maintain a staffing ratio satisfactory to IDA. PA Sched., para 2(a) 13 NC SLT shall undertake a study under terms of SLT has no cost-center based accounting. reference satisfactory to IDA, of a cost- ADB was going to finance a new accounting center based, performance related profit system, but this never materialized. sharing staff remuneration system. PA Sched., para. 2(b) 13 CP 12/31/91 By December 31, 1991, SLT to furnish the See Sched. 2(a) above. result of the study agreed in Sched. (2)(a) to the Borrower and IDA for review. PA Sched., para. 2(c) 13 CP 06/30/92 By June 30, 1992, SLT to begin See Sched. 2(a) above. implementation of the recommendations in the above study (Sched. 2(a)), as agreed with the Borrower and IDA. PA Sched.. para. 6 C 06/30/92 SLT shall, as of June 30. 1992, niaintain its During the project period, receivables accounts receivables below the equivalent of equaled about 5 months of billing, mainly t three months of billing. due to the cancellation of a billing system to be funded by ADB. Only towards the end of the project by mid-1998, after the installation of a SLT-funded billing system, were receivables brought down to 3 months. Co%venant types: Prcscint Statis: I. = Accounts audits 8. - Indigenous peopte C covenant complied wilh 2. = Financial performance rceenue generation from 9. - Monitoring. re\view and reporting C =) complied with after delay beneficiaries 1(0 = Project impicilientation) not covered by categories 1-9 CP complied with partially 3. = Flow and utilization of project f'unds 11. = Sectoral or cross-sectoral budgetary or otlier resource NC =not complied with 4. Counterpart funding allocation S. Management aspects ol' the project or CxCCLtioLg 12. = Sectoral or cross-sectoral policy/ agency regulatory/inIstitUtional action 6. = Enrvironmental covenants 13. Other 7. = Involuntary resettlemienit Table 10- Page 3  - 25 - Table 11: Compliance with Operational Statements Statement number and title Comments on lack of compliance Bank Operational Manual statements (OD and OP/BP) have been complied with Table 12: Bank Resources - Staff Inputs Stage of Planned Revised Actual project cycle Weeks US$ (000) Weeks US$ (000) Weeks US$ (000) Preparation to 82.5 267.8 appraisal Appraisal 31.4 66.8 Negotiations 12.7 28.0 through Board approval Supervision 89.7 254.5 Completion _ 15.5 35.0 TOTAL n.a. n.a. n.a. n.a. 231.8 652.1  Table 13: Bank Resources - Missions Performa nce rating Number Specialized staff Stage of Month/ of Days in skills Implementation Development project cycle year persons field represented (*) status objectives Types of problems Identification Feb/88 2 13 FA, TE NA NA Preparation Oct/88 I 10 FA NA NA Preparation Mar/89 1 5 FA NA NA Preparation Nov/89 2 10 FA, TE NA NA Preappraisal Mar/90 2 12 FA, TE NA NA Appraisal May/90 2 15 FA, TE NA NA Supervision I Aug/91 2 4 FA, TE I I Supervision 2 Feb/92 1 5 FA 2 1 Slow procurement and TA progress Supervision 3 Sep/92 1 6 TE NA NA Supervision 4 Dec/92 1 9 FA 2 1 Slow procurement and studies progress Supervision 5 May/93 2 12 FA, TE 2 1 Slow procurement and studies progress Supervision 6 Jul/93 1 7 TE NA NA Supervision 7 Nov/93 1 8 TE 2 1 Slow procurement and studies progress Supervision 8 Feb/94 2 10 FA, TE 2 1 Slow procurement and studies progress Supervision 9 Jan/95 2 14 FA, TP S HS Supervision 10 May/95 I TE U S Slow procurement and studies progress Supervision 11 Nov/95 3 10 FA, TE, TP U S Slow procurement and billing delays Supervision 12 Feb/96 1 10 FA NA NA Slow procurement progress Supervision 13 May/96 2 5 FA, TP S S Supervision 14 Sep/96 3 16 FA. TE, TP S SH Supervision 15 Mar/97 3 6 FA, TE, TP S HS Supervision 16 Aug/97 2 12 FA, TP S HS Supervision 17 Apr/98 I 14 TE NA NA Supervision 18 Jun/98 2 8 FA, TP S HS (*) FA: Financial Analyst TE: Telecommunications Engineer TP: Telecommunications Policy Specialist  - 27 - Appendix A Mission's Aide-Memoire and Project Operation Plan I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  -28 - Sri L:ink. TELECOMMUNICATIONS REGULATION.9 D.LD PUBLIC ENTERPRISE REFORMnt TECHNICAL ASSISTAINCE PROJECT (Credit 2837-CE) Mid Term Review Mission and SECOND TELECOMMUNNICATIONS PROJECT (Credit 2l49-CE) Supervision Mfission Aide-Memoire I. An IDA mission :onsis-inz of MIessrs. RPr.n S.nyh. Mihkel Serg,o and Sumith Pflaciriva v sired Colombo From Mav :s co June 2. 1998 co underzake a ivid-7trtn Review OF dile L--lecommunications Re.uiation and Public Enterprise R-.form Techinical Assisance Project and super vise dlie comple:icn of te Second TeFecommnunic~-.ons Project. hris was a continuation of Mr. David Delrados (,Iec.-mmunicarions Enrgineer) m.isSiotI of April 19 cc.ay2. 1998. The A;ide MVlemoires dared May 1i 1998 'or the eariier mission was distributed secarareiv. . Thle mission met with oficials from the iVinis=1 of Posts. Telecommunications and the Me:dia (MOPTMi). the T-cornmunicacions Regulatory Commission of Sri Lanka (TRC), Sci Lanka Telecom L:d. (SLTL). and the Public Enrer=rises Reform Commission (PERC) and odiers. A list of persons met is in Atachment 1. . This aide-menoire refrects the findinas and recommendations of dhe mnission and is subject to confirmacion bv iDA's mana:ement. Telecommunications Regulatfon and Public Enrerprise reform TA Project Project Objectives ' The mission unde:took che Mid-Term EReview of the project and evaluated the ceve!opment objectives as .e7ec:ed in the projeczt Tecnnical AAnnex (R-eoi! No. T-6730-CE. Mar:h 1996). Tihe objectives o( che projecc are ro: (a) assist TRC in irs transition to a more zndecendenr reculacorv Comm;ission and swrenarhen its re-ularory authoritv: (tb) assis TRC in (i) im-rovin, its administrarive and technical caoabiiicies co olan and controil he usc of radio i.-:uency spec:rum. and (ii) establishing a computere.-d radio fre-uenyv rranautne:nc and monitoring system: and (c) cCiii2at te divesciture or government owned ente:r,rises. including SLT. by strengthening the te_chnical and administra:ive :z,accitv of PERC. inese obje,:ives are s;a.l relevant and onic: the -rojec: is compieted. those ooje;cives vAill have bee:n achieved.. TRC COhvPO.NE.NT As stated in dic Mav. 1. l9q8 aide-memoire re:ent sector policy and regulatorv ceve!opmencs have been ve-v positive. With the appoincme:t of a neGv DGT. it is expected char TRC's intscitutioIal and regulatory development will contcnue in a satisfacrory manner. Further. somee ntajor initiatives have be-n taken by TRC. cn.. tle: i 998 tariff determination. staiing an1d  -29 - 2 retention of consultants for interconnection and `6discue resolutiotn procedures. The sector oerformance remains verY dynamic with fast subsc_riber arowrl from all the senice providers. :.g.. SLTL - 352.000 subscribers; WLL ope.ators - 8.000: and mobilc c:lluiar li.OO as oF April 1998. Frequency Management and Monitoring System 6. The evaluacion report and award recommendarion hias been submitted co IDA For its -no objecrion and IDA's resoonse is expected shortly. *c %was nored thiat the cost escimates in the project Technical Annex (Report No. T-6730-CE. Nlarcih 1996) were on ;he hiuth side -or the r.MMIS (approx. USSS.S million). As a result there couid be cost savings for chis component as che lowest evaluated bid pric: is about USS1.; million. Furthermore. TRC has recuesred a reduction in scope ofche F-hMMS concracr as de:ailed in zhe MOPTIM letter OF :\tv 13. 1998 for security reasons. The mission indicared that this r-educrion in scope should rsui in a proporzional price reduction. i.e.. unit prices are mainairnied and cornmon costs" reduc:d in a .asoniably pro-rated ;asnion. *. .t ie mission ac.eed wich TRC chat it would rmiediarely inform IDA on how it intends co utiize thce savings on this component after concluding netoriation with FUMMS cunnac.:cr. As the procure-nent of the FMMIAS has be:n delayed by abcur six months. it was agree diar TRC wouid expedite contract ne2ociarions and seek a shor.-r FfIMS implementation period (rather chan the currenc I 8 months) to ensure the erricient use oF *he Credit before the December 1999 csos Ing dare. S. TRC informed the missicn that it had com.menced precaratory wort in die Negombo *fxed station sire for instailaion of the FlMS equipmenth. iie FMIUMS contraC: will inciude on- the-job rraininSz for TRC staiff on opemation and maintenance. The mission reomrnended that TR.C also deve;op a formal training program on all rhe rezularory aspects in frrecency policy azid pianning. The MioU with Indusryv Canada (IC) provides an opportunirt For this parailel craining of TRC smaff (para 9). Technical Assistance 9. TRC's technical :ssistance is curentiv being ir-=iernenred under the .'loU -.ich IC. For the n2nar-ment or che activiries under zhe MOU. a Financial and Adminiswrastive A e Was Finalized between TRC and Industry Canada (IC) annd aoroved by IDA. The Finziiciai and Acmmn.isstrarive funcriclls o;;the MioU have bee-n delear e to Commoniwea;lth or Letrning. As a next step. TRC and IC have co prepare a DeralWed Work Plan setting out che re ssarc. tzsss to be joinciv undertaken. the anticicared level of etfort. an .-related expenditure .orec: ss for the re.-: twelve months Tihe mission recommends tlat the wvcrk plan be implemented on an urgent basis to screnuthen TRC-s institutional and regulatory capacity. Furthermore. considerinz the Credir ciosinta in Decemiber 1999. there is no room for ce--Vs. 10. Consuiraltcy services on interconnecrion and Icernatre dispute resolution (ADR) procedures has alreadv bee:i initiated under the ,to(' in Mday. [998. Thiis is an urc-nt area uf technical assiscatce in view of the unresolved reveniue sharinii. issues benween SLiT and the two W LL operators. Some initial ground work has been done. Based on the awre:d proposal. the  -30 - expecred outputs are: (i) The SLTL-WLL agreement. (ii) the SLTL-Mobile Agreemelnt. and (iii) ADR training of TRC staff. Cost Study !1. TRC informed the mission that it intends to undertake a comprehensive cost studv and develop re-ulatory expertise in .dealing with cross-subsidies. The mission supported this initiative as future tariff dtexrmination and rebalancin.- by TRC requires an understandinit of costs. which are currently unavailable to TRC. PERC COMPONENT (PERC info. needed) Credit Closin- I. As smared in the proje- documents. the Credic closing date is December 3i. 1999. The mission pointed our the nec:ssity to complete ail ecuoment procurement. installation and consultancies prior to this date. The eventual savines in.the RMMIS component could possibly be used for other purposes. subjec t-o IDA agreement. after the signin, of rhe FNIMIS contract. Implementation and Disbursement Schedules 13. Tlhe mission discussed project implemenration and disbursenent schedules with TRC and PERC and up dated schedules are attached (Attachment & 3). Special Account i 4.* It was noted that the project Special Accounr has been drawn down to abour USS45.000 -without a replenishment request being made. This forced TRC to make a USS7.000 payment out of its own resourc:s for rechnical assistance under the MoU with IC. This is a situation verv similar to the one mentioned in oaras. ;6 and 37 of the Aide Menmoire daEed April 1. 1997. Given that TRC- will be utilizing the Special Account frequently in the next eichreen months to irmiemnent the MolJ the mission recommended close coordination berween the two irmolementina aaencies. F . The mission repeated its recommendarions as of April 1. 1997 and also recommended Cha T RC closeiy monitor the special account on a monchiv basis.. Furthermore. it was axreed that TRC would retain rhe necessary assistance to keep -he Special Account records up to date to ensure timely repienishment of the account. The Sri Lanka IDA Field Offic: will under tke a sample review of SOE documenration. Accounts and Audits IDA has rece.ved. although late (TRC * Seotc:nber 1997 and PERC - March 1998). T.C s and PERC's audited accounts for 1996. The 1997 audited accounts were sent .or audit in 19arh I998. bur cie Auditor General is not likely to finalize liis audit report by June 30. 1998 as required by thie Credit Agreement. It was agreed thac TRC and PERC request rhe Auditor  -- - --3 1- 4 General to ,ive their audic preferential treatment to provide (DA with audited accounts within the agreed rime limits. SECOND TELECOMMiUICATIONS PRO.IECT (Credit 2249-CE) 1 7. The mission reviewed with SLTL the expecred payments under the on"oin011 U contrcs tunded by IDA. To ensure erriecient use of the Credit funds. given the June 30. 1998 Credir ciosing date. it was a;reed that SLTL take the necessary steps ro amend the contracts to enable payments for all moods and services provided to SLTL before the closing date. The mission was informed tha the rd!evanr amrendments were agreed with thie suppliers and senr to IDA oil June I. 1998. S. To ensure che timeiv preparation of the Implementation Completion Repor; (ICR) for die Project. it was avreed .hat SLTL would provide IDA with a draft Project Evaluationi Repori bv Se_tember I. 1998. Derails For chis recort were provided bv the April/iMayv 1998 IDA missiotI .9. Arter appoining a private ex;ernal auditor. IDA has received SLTL's audited t"inancial sa-reIentrs withini areec rime limits. SLTL expects the audited accounts for 1997 to be sent to IDA before the end of June 1998. 0. SLTh has now caugiht uQ with the delays in billing and current bills are collec:ed within azreed three months. 7he balance of old uncollected bills, however. makes the total oursmandinsz balance exceed the e-uivaienc of five monchs of billing. As a private companv. SLTL is able ro wrice off uncollec.abie bills. If SLTL foilows its exzterital auditors recommendation co write off ,D,. 1.500 million for old bills. SLTL would reduce irs balance of outsrandimn, account receivables to less than che equivalent of tlree mondts of billing. Colombo. Sri Lanka- June:. 1998 R.;.t Sinchti I oN tISASEn World Sank  - 32 - Att7chment I Sri Lanka TELECOMMUNICATTONS REGULATION AND PUBLIC ENTERPRISE REFORM TECHNNICAL ASSISTAINCE PRO.JECT (Credir 2837-CE) Project Supervision (Mav 25-June 2. 1998) Persons Mer k .- !>aive . ~-: F . ::.-1;emitIheS l ;@- F TelepboneL ....K. . <.F.t2) 77 1Ylinisrrv of Post Telecommunicztions and che Media (MOTM): -Mr. K. C. Loz,eswamn Scr:m.-rv MOPTM Telecommunic2rions Reguiatory Commission (TRC): ?:-of. Rohan Samarajiva 0GT and CEO 689-336 689-341 Mr. Radley Dissayanak: Dv. Direcror, Soecial Projects 639-343 639-4.1 Imr. M. S. M Suhair C'IiefAccounrant 689-350 Public Enterprises Refiorm Commission (PERC): M4s. A. De Soysa Dy. DG. PERC Mtr. P. Wijetunge Fir, AnalysrdCorporare Planner 338-756 3i56-tt6 Sri Lanka Telecom Ltd. (SLTL): Mir. P. Karitsuma C-3 335010 42400 Mr. T. Saka-a-mi COOI'CTO 4247I52 424754 IMr. M. A.narasinghe HG'NPL 2 Cons. i50-210 ';;432 Mr. O.S. P-rera Advisor Mlr. C. Gnanaindran r;SCo.SL 350-118 348-049 Mrs. Kumudini De Silva 'SiE. ;50_98 398.096 ERD: Nlr. F. Mir. F. Mobide-n DC. ERD T CIL. india (Local Network Controcror): fIr. P.S. Gove-r Chie! PrO