Nepal - Telecommunications Project

RESTRICTED F LE CW Y Report No. p-7 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A TELECOMMUNICATIONS PROJECT October 23, 1969  REPORT AND RECO ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF NEPAL FOR A TMIEiCOI'iJNTICATIONS PROJECT 1. I submit the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to US$1.7 million to the Kingdom of Nepal for a telecommunications project. PART I - HISTORICAL 2. The initial request to the Association for a credit to finance telecommunications development was made in May 1966, following the recommendations of an International Telecommunications Union mission for major expansion of the network. After several preparatory missions, the project was appraised in January/February 1969, and negotiations for the proposed credit took place in Washington between June 16 and June 23, 1969. The BorrowTer was represented by Mr. B.B. Pradhan, Secretary, 1Ministry of Works, Transport and Communications; Mr. K.B. Manandhar, Additional Secretary, Ministry of Finance; and Mr. B. Pradhan, First Secretary of the Emibassy of Nepal in Washington. 3. The proposed credit would be the first lending operation of the Bank Group in Nepal although the Bank granted the equivalent of $100,000 to finance a transport survey in 1964 and 1965. This relative inactivity has been due to the Government's limited capacity to identify and prepare projects, and to the fact that financing from bilateral sources was secured for most of the projects that did come forward so far. Now, however, several projects are under consideration by IDA. A bridge replacement and road maintenance project is scheduled for appraisal in the next few months, and the FAO/IBRD Cooperative Program has identified an irrigation project which may be suitable for financing. PART II - DESCRIPTION OF THE PROPOSED CREDIT 4. Borrower: Kingdom of Nepal Benefici'.rY: Nepal Telecommunications Board (NTB) Anount: Various currencies equivalent to US$1.7 million. Purpose: To cover part of the foreign exchange cost of the expansion and modernization of the telecommunication system in the period 1968 to 1973.  -2- Amortization: In 50 years, including a 10-year period of grace, through semi-annual installments of 1- of 1% from September 15, 1979 through March 15, 1989, and of lAa from September 15, 1989 through March 15, 2019. Service Charge: 3/4 of 1% per annum. Relending Terms: The Borrower would make the proceeds of the credit available to NTB at 6gS per annum for 12 years including a 2 year grace period. PART III - THE PROJECT 5. A detailed description of the project is given in the attached appraisal report entitled "Nepal - Appraisal of the Telecommunications Expansion Program" (PU-16a) dated October 7, 1969. 6. Telecommunications services in Nepal are still in the early stages of development. Telephone density is about .025 per 100 people -- the lowest for any country with a telephone network. Only three telephone exchanges exist, two in the Kathmandu area and the other at Biratnagar in the eastern part of the country. The long-distance internal communication network consists of a single-wire telegraph land line, the use of which has been largely abandoned, and point-to-point radio links largely used for telegraph purposes. Limited international telegraph and telephone connections are available via high-frequency radio systems operating to India and Pakistan. 7. The system is at present operated by the Nepal Telecormunications Department which forms part of the Ministry of Works, Transport and Communications. However, efficient operation and expansion of the services in the future will require the existence of a separate organiza- tion with a sufficient degree of administrative and financial autonomy. Accordingly, the Government has agreed to set up a new entity, the Nepal Telecommunications Board (NTB), whose purpose will be the ownership and operation of the domestic and international telephone and telegraph s-stems and facilities in Nepal. Legislation creating NTB has been promulgated. The reorganization process, including the actual transfer of assets and functions required for NTB's operations, will be carried out wqith the assistance of consultants provided for under the proposed credit and is expected to be completed by July 16, 1970, the beginning of Nepal's next fiscal year. NTB will be provided with sufficient authority and financial autonomy to enable it to carry out the project and operate Nepal's telecommunications efficiently. A commercial accounting system is expected to be introduced by July 16, 1970, with assistance of the  - 3 - above mentioned consultants. In addit-on, NTB will retain two foreigni experts to fill the positions of business manager and financial controller during the next few years. The Government has already approached the United Kingdom to obtain these services under the Colombo Plan. Appointment of these consultants and experts has been made a condition of effectiveness of the proposed credit. The Government has also applied to UNDP for assistance in providing training to existing technical staff and new employees. 8. The project for which the proposed credit would be made covers all the works included in the Borrower's program up to July 1973 for the expansion of local telephone exchanges and of international and long distance communication facilities, the installation of telex facilities and the employment of consultants to assist in the reorganization of NTB. The project is technically sound and well-balanced and NTB will be capable of carrying it out and operating the new facilities efficiently. 9. The estimated total cost of the project is US$h.15 million equivalent, of whAich Us$2.96 million represents the foreign exchange component. The proposed credit would cover US$1.70 million of the foreign exchange costs. The Government of ITepal will provide us$0.06 million to cover certain existing commitments. The remaining foreign exchange portion of US$1.20 million, as well as $0.58 million equivalent towards the local costs, will be provided by the Government of India as a grant. The conclusion of arrangements in this resoect have been made a condition of effectiveness of the proposed credit. The balance of the local costs of the project will be met from funds internally generated by NTB. According to the financial projections contained in the Appraisal Report, NITB will be able to reimburse the proceeds of the credit to the Government over a twelve year period. Procurement of items to be financed from the credit will be on the basis of international competitive bidding. 10. On the basis of existing tariffs and of those to be established for new facilities, the return on IMTB's net fixed assets in operation is expected to be above 10% on completion of the project, compared with a minimum of 8% required by the Credit Agreement. The incremental rate of return on the project itself is estimated at 15%. The economic benefits, although difficult to quantify, are likely to be considerably higher, as shown in Chapter VI and Annex 17 of the Appraisal Report. PART IV - IEGAL IIJTSTRUMMENTS AND AUTHORITY 11. The draft Development Credit Agreement between the Kingdom of Nepal and the Association, the Recomniendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association, and the text of a Resolution approving the proposed developmen-t credit, are being distributed to the Executive Directors separately.  - 4 - 12. The draft Development Credit Agreement conforms generally to the pattern of agreements for telecommunications projects. The following provisions of the draft Development Credit Agreement are of special interest: (a) Section 4.05 (a) provides that the organization and functions of NTB will be implemented and its operations and activities carried out in accordance with the criteria set out in Schedule 4 and under rules satisfactory to the Borrower and the Association. (b) Section t.o6 (a) requires NTB to adopt and put in operation a commercial accounting system by not later than July 16, 1970. (c) Section 4.12 sets forth certain requirements as to NTB's tariffs and fixes a minimum annual rate of return of 8% for NTB beginning with its fiscal year commencing in July 1973. PART V - THE ECONONkiY 13. An economic report entitled "Current Economic Position and Prospects of Nepal"' (SA-7a) was distributed to the Executive Directors on June 26, 1969. 14. Less than twenty years ago Nepal was an isolated feudal kingdom. Since then some progress has been made, particularly in infrastructure (roads, irrigation and power), education, and, to a lesser extent, agriculture. Nevertheless, the country is in a very early stage of development. Per capita income is of the order of $US45-65, one of the lowest in the world. The population of about 11 million appears to be growing at about 2 percent per year, and gross national product has proba.bly not increased any faster. 15. Economic progress is difficult. Three-quarters of the land is hilly or mountainous and two-thirds of the people live there. All forms of communication are very limited. A system of main roads is being built and penetration roads are planned, but most people live in isolated conmunities and economic growth has been very localized. Nepal has fewz natural resources and economic growth in the first instance must be based on agriculture, including water, and possibly forestry. 16. Very low per capita incomes severely limits the Government's ability to raise revenue, which is only about 4 percent of GNP. Government revenue barely covers current expenditures and Nepal is therefore largely dependent upon external sources to finance development. In obtaining aid Nepal has been quite successful, and most of it has been  in the form of grants. Little use has been made of loans. Gold and conveTtel- ible currency reserves are about $56 million,(more than five years of imports payable in convertible currency). Most of Nepal's trade, however, is with India and rice is the principal export. With improved terms of trade, exports have increased substantially, which made it possible to increase imports and consequently receipts from customs duties, but this windfall is not likely to continue for long. 17. The literacy rate in Nepal is probably no more than 10 percent and the education system is badly out of balance. Substantial efforts are being made to increase school enrolment, but the structure of the educational system needs adjustment, particularly by increasing training for middle-level technicians. 18. The most immediate tasks for Nepal over the next several years are to concentrate on obtaining higher returns from the roads and other new investments, increasing research in agriculture and diversifying the economy by developing the forests and tourism. PART VI- COMPLIANCE IWITH ARTICLES OF AGREE1MENT 19. I am satisfied that the proposed credit wfould comply with the Articles of Agreement of the Association. PART VII - RECO1ThETDATION 20. I recommend that the Executive Directors approve the proposed credit. Attachment Robert S. McNamara President.