Nepal - Fifth Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 20281 IMPLEMENTATION COMPLETION REPORT NEPAL FIFTH TELECOMMUNICATIONS PROJECT (Credit 2364-NP) May 2,2000 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 = Nepalese Rupee (NRs) Appraisal Year 1992 - US$ 1.00 = NRs 42.3 Intervening Year 1996 - US$ 1.00 = NRs 56.8 Completion Year 1999 - US$ 1.00 = NRs 70.0 WEIGHTS AND MEASURES Metric System FISCAL YEAR OF BORROWER HMG and NTC Fiscal Year 15 July - 14 July ABBREVIATIONS AND ACRONYMS DANIDA Danish International Development Agency FINNIDA Finnish International Development Agency GSM Global System Mobile HMG His Majesty's Government lAS International Accounting Standards ICB International Competitive Bidding IDA International Development Association IDP Institutional Development Program TTU International Telecommunications Union (Geneva) JICA Japan International Cooperation Agency MARTS Multiple Access Radio Transmission MIS Management Information System MoF Ministry of Finance MOIC Ministry of Information and Communications NTA Nepal Telecommunications Authority NTC Nepal Telecommunications Corporation (subsequently called "Company") OAG Office of the Auditor General PIU Project Implementation Unit SAR Staff Appraisal Report SDR Special Drawing Rights WLL Wireless Local Loop Vice President: Mieko Nishimizu Country Director: Hans M. Rothenbuhler Sector Director: Alastair J. McKechnie Task Team Leader: Ritin Singh  FOR OMCAL USE ONLY NEPAL FIFTH TELECOMMUNICATIONS PROJECT (Credit 2364-NP) IMPLEMENTATION COMPLETION REPORT TABLE OF CONTENTS Page No. PREFACE EVALUATION SUMMARY .....................i PART I. PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives .I B. Achievement of Objectives .2 C. Major Factors Affecting the Project .4 D. Project Sustainability .5 E. IDA's Performance .5 F. Cofinancier's Performance .7 G. Borrower Performance .7 H. Assessment of Outcome .9 I. Future Operation .9 J. Key Lessons Learned .9 K. Evaluation of Program Objective Categoies .10 PART II. STATISTICAL TABLES Table 1: Summary of Assessments .12 Table 2: Related Bank Loans/Credits .13 Table 3: Project Timetable ........... 14 Table 4: Credit Disbursement: Cumulative Estimated and Actual .14 Table 5: Key Indicators for Project Implementation .15 Table 6: Key Indicators for Project Operation .16 Table 7: Studies Included in Project .17 Table 8.A. 1 Project Costs .20 Table 8.A.2 Procurement Arrangements .22 Table 8B: Project Financing .22 Table 9: Economic and Financial Rate of Return (ERR and FRR) .23 Table 10; Status of Legal Covenants .25 Table 11: Compliance with Operational Manual Statements .27 Table 12: Bank Resources: Staff Inputs .27 Table 13: Bank Resources: Missions .28 APPENDIX A: Mission's Aide Memoire ...................................... 31 APPENDIX B: Borrower's Contribution to the ICR ...................................... 35 APPENDIX C: Map No. 23473 ....................................... 39 This documet has a restrictcd distribution and may be used by recipiets only in the performance of teir official dutes. Its contents may not otherwise be disclosed without World Bank authrizatio.   NEPAL FIFTH TELECOMMUNICATIONS PROJECT (Credit 2364-NP) IMPLEMENTATION COMPLETION REPORT PREFACE This is the Implementation Completion Report (ICR) for the Fifth Telecommunications Project in the Kingdom of Nepal, for which Credit 2364-NP in the amount of Special Drawing Rights (SDR) 40.1 million was approved on May 12, 1992 and made effective on December 15, 1992. The Credit was closed on June 30, 1999 and approximately SDR 32.7 million was disbursed. Cofinancing for the project was provided by the Danish Development Agency (DANIDA); the Department of International Cooperation, Finnish Ministry of Foreign Affairs (originally called FINNIDA), and the Nordic Development Fund (NDF). The ICR was prepared by Ritin Singh and Alberto Cruzat of the Telecommunications and Informatics Unit of EMTTI, and reviewed by Hans M. Rothenbuhler, Country Director for Nepal, Alastair J. McKechnie, Sector Director, Energy Sector Unit (SASEG), and Emmanuel Forestier, Manager (CITPO). The Borrower provided comments that are included as an appendix to the ICR. The draft ICR was sent to the cofinanciers and comments were invited, but none were received. Preparation of this ICR started during the Bank's final supervision/completion mission in March 1999. It is based on the materials in the project files. The borrower contributed to preparation of the ICR by offering views reflected in the mission's aide-memoire and preparing its own contribution and evaluation of the Project's execution.   NEPAL FIFTH TELECOMMUNICATIONS PROJECT (Credit 2364-NP) IMPLEMENTATION COMPLETION REPORT EVALUATION SUMMARY Introduction 1. The International Development Association's (IDA) support for Nepal's telecommunications sector started in 1967, with the preparation of the First Telecommunications Project (Credit 166-NEP), which was approved by the Board in 1969 and completed in 1973. IDA's involvement continued with the Second (1973), Third (1978) and Fourth (1985) projects. The Fourth Project Completion Report (PCR) dated March 30, 1995 rated that project as highly successful and listed the following main accomplishments: * improving institutional efficiency through a management consultancy, leading to internal company reorganization, and computerization of some areas; e reduction in unsatisfied demand by addition of more than 30,000 new subscribers lines (more than double the capacity), improvement of local and long-distance services, and digitization of the network; * improving access to telephone services in rural areas by a major expansion plan using Multiple Access Radio Transmission (MARTS) technology; and - initiation of the sector reform process through a tariff study and the first sector re-organization seminar. Project Objectives 2. The Fifth Telecommunications Project built on the achievement and experience gained under the previous projects and its main objectives as set out in the Staff Appraisal Report (SAR) were: (a) address network shortages and improve network quality by: (i) increasing telephone penetration in a balanced manner in urban areas; (ii) completing the provision of automatic, long distance telephone service in all 75 districts of Nepal; (iii) expanding the national and international telecommunications infrastructure to cope with increased traffic from enlarged networks; and (iv) replacing and upgrading obsolete equipment; (b) improve Nepal Telecommunications Company's (NTC) performance, especially regarding corporate planning, administration and management; project management; and quality of service and efficiency through a balanced institutional development program; and  - ii - (c) address the major sector issues by establishing an agenda for review and reform of the sector. 3. IDA dialogue and legal covenants stating the need for HlMG/NTC to employ consultants not later than December 15, 1992 to carry out an initial sector reform study, triggered a whole process of sector reform initiatives which reached deeper and further than expected at appraisal. 4. The project objectives were relevant and broad enough, in relation with the sector reform process, and was responsive to the evolving political circumstances. The decision to appoint a Project Supervision Consultant, responsible simultaneously to DANIDA, FIN'NIDA, NDF and IDA facilitated the borrower/implementing agency to cope with the complexity of the Project. The Fifth Telecommunications Project was also successful in establishing a good working relationship and knowledge among cofinanciers: DANIDA, FINNIDA, NDF, JICA and IDA. Implementation Experience and Results 5. The sector policy objectives, as set at appraisal, were met. By the end of the project, a new Telecommunications Act had been enacted, a sector regulator National Telecommunications Authority (NTA) was established, NTC has been converted under the Company Act, and the introduction of competition was initiated through the preparation of tenders to select cellular and wireless local loop (WLL) service providers. Several new private companies have been licensed by NTA to provide access to internet, cable TV services, paging services, and modern telecommunications centers in major urban areas. A chronology of telecommunications sector reforms in Nepal is given in the box below: 1959 Telecommunications Department of Nepal ('TDN) established at the Ministry of Works, Transport and Communications 1963 Mandate of TDN re-stated in Telecommunications Act 2019 October 1969 TDN transformed into the Nepal Teleconimunications Board (NTB) as a condition of First IDA Project (Credit 166-NP) 1972 Issued Communications Corporation Act 2028 and a separate Ministry of Communications is created June 1975 NTB transformed into the Nepal Telecommunications Corporation (NTC) December 1990 Tariffs Study June 1991 First Telecommunications Sector Organization Seminar November 1993 - Telecommunications Sector Structure Seminars on Privatization, Regulation and February 1994 Competition December 1995 Drafting of new Telecommunications Act and NTA's Rules and Regulations  - iii - May -June 96 Ve R~sted* and pbic itres liiaions sumte to Surm Cur stalteidn process to award WLL and Cellular licenses initiated in late 1995 August 1996 NTC's employees union ends strike by signing an agreement with HMG aimed to prepare NTC for the new competitive environment, which would include: NTC's cormmercialization, more autonomy from HMG, and introduction of competition 1997 On January 1, 1997, new Telecommunications Act 2053 is enacted by the King after Parliament approval in December 1996 March 1998 Regulatory agency, the Nepal Telecommunications Authority (NTA) established April 1998 - July 1999 DANIDA funded consultants prepare pre-privatization studies/reports July 1998 - March Major studies conducted on: (1) rural telecommunications; (2) frequency management; 1999 (3) interconnection; (4) sector policy and strategy; (5) tariffs re-balancing; and (6) NTC improvement plan 1999 . NTC transferred into Company Act; and * NTA issued licenses for NTC's basic and cellular services. 1999 Cabinet approves new Telecommunications Policy 1999 NTA prepares draft Tender for selecting Cellular and WLL service providers 6. However, it should be noted that in comparison with other countries, Nepal reached a well advanced stage in establishing a legal/regulatory framework, but has lagged in actual introduction of competition (in basic/cellular services). 7. The financial project objectives have been mostly met. NTC produced a higher rate of return and contributed more funds to its capital investments out of its own cash generation than projected in the Staff Appraisal Report (SAR). 8. The institutional development objectives for sector regulation were fully met with the separation of policy making in the Ministry of Information and Communications (MoIC) and the establishment of the Regulatory Agency, NTA, in March 1998. In the case of NTC, the objectives were achieved in the areas of staffing ratios, network engineering and planning, operations and maintenance, and service quality improvements. However, NTC's accounting/financial management, remained weak during the project implementation period. 9. Physical project objectives were substantially achieved. The original objective of doubling the installed capacity by installing approximately 65,000 new telephone lines, was surpassed by adding around 200,000 new telephone lines, with the total of working lines reaching more than 220,000 by June 1999. 10. Detailed costs and funding information is included in Tables 8A and 8B. At an earlier stage during project implementation, FINNIDA arranged for Nordic Development Fund (NDF) to take 50 percent of its original financing.  - Iv - 11. NTC's autonomy and authority during the Project period was quite limited. Another factor partially affecting the Project was the frequent changes in Government, resulting in the appointment of new Ministers and Secretaries for MoIC, which sometimes also resulted in changes in NTC's senior management. These changes impaired NTC's decision-making process and delayed procurement and investment decisions. NTC's procedures for the appointment of procurement evaluation committees resulted in an unpredictable quality of the evaluation reports. This produced delays in procurement processing. 12. There was a great improvement in Project implementation, in comparison with the Fourth Telecommunications Project. This improvement was as a result of the appointment of a project supervision consultant who represented DANIDA, FINNIDA, NDF and IDA (funded by DANIDA). This intervention served to assist NTC in coordinating different project units. Project implementation was not affected by major delays, and internal coordination was greatly improved in comparison with the Fourth Project. 13. NTC's financial management did not improve as. expected, and covenants on timely financial reporting and audits were complied with late or not fully complied with. In the period 1992 - 1995, one of the reasons for the delay in submitting audit reports was the delayed appointment of the auditors by the Office of the Auditor General (OAG). This aspect was never fully corrected and in most cases, appointment took place after finalization of the period to be audited. In 1995, the OAG engaged consultants for an "Institutional Development Project" aimed at improving accounting and financial practices in the main utilities. As part of this plan, NTC was to subsequently, reduce the time to submit its Audited Statements from twelve months in 1994/95 to nine and six months in 1995/96 and 1996/97 respectively. These targets were never achieved. It can be concluded that the main reasons for the lack of real improvement in the accounting/financial areas were: (a) delays by NTC in preparing the financial statements; (b) insufficient incentives from Government of NTC for good corporate governance and sound financial management; (c) inadequate emphasis by NTC management on financial management issues, together with lack of monitoring and supervision of these issues by both NTC management and by IDA (in earlier projects as well as during initial years of this project); and (d) the lack of commitment to privatize by NTC's management during the last years of project implementation. As a consequence of this anti-reform attitude, NTC's management delayed the adoption of International Accounting Standards (IAS) as an additional factor to delay the privatization of NTC. 14. The performance of the Bank and the Borrower was satisfactory. The Bank was flexible during project preparation (see para. 5) and HMG fully supported the reform of the sector. 15. Given the substantial achievements in the sector, institutional and physical objectives of the project, its high economic rate of return (ERR), and a high probability that project achievements will be sustained, the project outcome should be considered satisfactory. Summary of Findings 16. Some lessons to be learned from this project are: * radical sector reform takes time and continued involvement in a sector provides IDA with the opportunity to support reform step by step under various governments. In addition, labor unions should be involved at an early stage of reform and their concerns addressed to reduce resistance to change; * at an early stage during project implementation, IDA accepted NTC's expanded investment plan when HMG had not yet agreed to pursue a privatization strategy. The successful implementation of this larger investment plan was later used by NTC's new management as a main argument to delay actual implementation of the reforms and introduction of  - v - competition, and this resulted in new stalling actions to maintain its monopoly. In retrospect, IDA lending should have been made contingent to demonstrated firm commitment from main stakeholders. Processing of the Credit should have been contingent upon actions by HMG/NTC demonstrating real ownership of the reform process; * the efficiency of a government corporation, as measured by its ability to satisfy demand and introduce service improvements, can be hampered by government salary scales, investment approvals, and procurement procedures. Only the establishment of a privately owned commercial company, under the Company Act, operating under suitable regulation, provides the necessary autonomy to quickly expand service to meet demand and incentives to employees to become more consumer oriented and competitive; * Nepal telecommunications sector, while having successfully advanced in creating the legal and regulatory framework, has been far too slow in introducing competition, which, as experience confirms, leads to lower prices and consumer orientation. Earlier IDA emphasis on the need to implement legal/regulatory reforms leading to a competitive privately led sector structure could possibly have overcome this problem; * the successful private operation of value-added and other marginal telecommunications services creates new job opportunities, 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 demonstrates that the legal and regulatory framework is working satisfactorily; * the procurement process would benefit from an early agreement with the borrower establishing the need to have core specialized staff as key members in each evaluation committee, and from a more strict procurement planning and implementation, resulting in a more transparent procurement process. In addition, packaging procurement of equipment in larger lots, avoiding too many small packages, would eliminate delays resulting from unexpected procurement difficulties; * land acquisition and building construction should be started well in advance, in order to be ready before equipment installation; * NTC's computerization strategy of developing indigenous software, as proposed by FINNIDA funded consultants, should have been more strongly opposed by IDA; and * undertaking the Financial Management Assessment of the borrower during appraisal, and providing early attention to these issues, would benefit timely improvement of the financial management capacity of the borrower. Additionally, serious follow-up of auditor's qualifications would have avoided the accumulation of issues related to financial management which occurred towards the end of this Project.   NEPAL FIFTH TELECOMMUNICATIONS PROJECT (Credit 2364-NP) IMPLEMENTATION COMPLETION REPORT PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives 1. Consistent with HMG's sector strategy, IDA's principal objectives under the project were to address network shortages and improve service quality, improve NTC's performance, and to support sector reform by establishing an agenda for reform of the telecommunications sector. Considering HMG's firm commitment and the actions already taken to promote Sector Reform, IDA Board approved in September 1995, an Amendment to the Credit Agreement authorizing procurement of additional switching equipment and further use of funds in sector reform issues. During project implementation, and using project funds, major Telecom Sector Reform Workshops were organized (1993/1994) which resulted in an agreed reform agenda, namely, changing to an increasingly competitive sector structure under enabling legal, policy and regulatory framework. The enactment of the new Telecommunications Act 2053 (January 1, 1997), the establishment of the Telecommunications Sector Regulator (Nepal Telecommunications Authority - NTA) in May 1997; the issuance of licenses for NTC for basic and mobile services (1999), and the preparation of tender documents for new cellular and Wireless Local Loop (WLL) service providers, were some of the key reform initiatives undertaken by HMG. During the first half of 1999, HMG completed the transfer of NTC under the Company Act; and in September 1999, the Cabinet approved the new Telecommunications Policy. Major sector objectives were, thus, achieved further than anticipated at appraisal. 2. Specific project objectives as listed in the SAR were to: * address network shortages and improve network quality by: (i) increasing telephone penetration in a balanced manner in urban areas; (ii) completing the provision of automatic, long distance telephone service in all Nepal's 75 districts; (iii) expanding the national and international telecommunications infrastructure to cope with increased traffic from enlarged networks; and (iv) replacing and upgrading obsolete equipment; * improve NTC's performance, especially regarding corporate planning, administration and management; project management; and quality of service and efficiency, through a balanced institutional development program; and * address the major sector issues by establishing an agenda for review and reform of the sector. 3. The project objectives were relevant and broad enough, in relation with the sector reform process, and were responsive to the evolving political circumstances. The decision to appoint a Project supervision consultant, responsible simultaneously to DANIDA, FINNIDA, NDF and IDA made possible for the borrower/implementing agency to cope with the complexity of the project.  - 2 - B. Achievement of Objectives 4. The sector policy objectives, as set in the appraisal, were met. By the end of the project, a new Telecommunications Act has been enacted, a sector regulator (NTA) has been established, NTC has been converted under the Company Act, and the introduction of competition initiated through the preparation of tenders to select cellular and WLL service providers. Several new private companies have been licensed by NTA to provide access to internet, cable TV services, paging services, and modem telecommunications centers in major urban areas. In recent years, NTC has accelerated its network development and as of June 1999, had more than 210,000 working telephone lines, compared with an SAR target of less than 120,000 working lines. Unsatisfied demand for telephone service has been reduced, and subscribers and the economy in general now benefit from more varied telecommunications services at closer to cost-based prices. 5. At the time of appraisal (1991), the Nepal telecom sector had a typical monopolistic structure: one operator (NTC); no regulatory agency; an outdated telecom law, designed for changing the name and status of the incumbent operator; the Ministry was the owner, operator and regulator; and there were no value-added services offered to the public, except for Public Call Offices operated by private entrepreneurs. During Project implementation, the basic legal and regulatory framework was firmly established, and the market began to evolve towards a more competitive structure. In comparison with other countries, Nepal reached a well-advanced stage in legal/regulatory framework, but lagged in actual introduction of competition in basic and mobile services. In spite of early establishment of the legal/regulatory framework, there has been a long delay in introducing competitive services. Recent developments, in particular the issuance of a Telecommunications Policy, provides for international and long distance services to be liberalized by 2001, and the provision of rural services by NTC and private operators. This indicates a pattern where the political will is to move ahead with reforms, yet not make any dramatic changes. 6. Although the objectives, as set out in the Appraisal were surpassed in terms of establishing the basic legal/regulatory framework, by the end of the Fifth Project, major steps are still pending: (a) actual introduction of competition would happen only after successful completion of the transaction to award licenses for the new cellular and WLL service providers; (b) competition in urban areas should be parallel with the introduction of private sector participation in the provision of rural services based on a competitive tendering process; and (c) the stalled process of NTC privatization should be given new impetus. 7. The financial project objectives have been mostly met. NTC 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. HMG has also benefited fiscally from the sector: growing income taxes are received from NTC and other private telecommunications services operators, as their subscriber base and revenues grow.1 Additionally, HMG soon may collect the license fees from the new cellular and WLL service providers, plus the royalty fees of 4 percent of revenue from all telecommunications operators. In summary, financial objectives were partially achieved. 8. The basic assumptions for the internal rate of return (LRR) calculations in the SAR were kept unchanged in the re-estimated calculations. In particular the transformation from financial benefits to economic benefits was done following the SAR methodology. The re-estimated economic rate of return (ERR) for the project is 47 percent, which compares favorably with the SAR estimate of 21.7 percent. I In 1998, NTC paid to HMG NRs 671 million as income tax; NRs 69 million as telephone ownership tax and NRs 255 million as VAT. NTC collected, on behalf of HMG, NRs 310 million as service charge,, and paid NRs 666 million as dividends for a total of NRs 1,371.6 million; compared with NRs 229 million income tax, NRs 35.8 million sales tax and NRs 9.5 million as dividends in 1992 for a total of NRs 274.3 million.  - 3 - However, this ERR may understate the real ERR, as no consumer surplus was taken into account despite unsatisfied demand at current tariff levels; no increase in consumer surplus was considered despite improvement 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, although the infrastructure provided under the project allows connection of more subscribers at low marginal cost. 9. The re-estimated financial rate of return (FRR) for the project is 29.3 percent, which is higher than the SAR estimate of 19 percent. A summary of assumptions for the ERR and FRR calculations is given in Table 9. 10. The institutional development objectives for sector regulation were fully met with the separation of policy making in MoIC, and the establishment of NTA in March 1998. In the case of NTC, the objectives were achieved in the areas of staffing ratios, network engineering and planning, operations and maintenance, and service quality improvements. As seen from Table 5, staff per 1,000 subscribers was brought down from 65 in 1991 to 26 in 1998, mainly due to stable staff numbers and expansion of the network. NTC's accounting/financial management, however, remained weak during the project period. The major pending issue is to complete the conversion of NTC accounts to international accounting standards, and to modernize its financial system to resolve the observations raised by the external auditors. An indication of HMG/NTC's re-taking ownership of the now stalled reform process would be the development of an action plan to improve NTC's financial management system, and the conversion to IAS. Therefore, achievement of institutional objectives can be rated partial. 11. Physical project objectives were substantially achieved. The original objective of doubling the installed capacity by installing approximately 65,000 new telephone lines, was surpassed by adding around 200,000 new telephone lines, with the total of working lines reaching more than 220,000 by June 1999. The reason for this performance was higher demand growth than projected, and prices for switching equipment were much lower than at the time of appraisal. This second factor allowed NTC to exercise the option to increase supply contracts, rehabilitate more exchanges, and include an additional 41,000 subscriber lines to the 61,000 lines originally included in the SAR. This number of lines, plus more than 60,000 lines procured by NTC using its own resources and supplier credits, resulted in a total of 174,500 lines added during the Fifth Telecommunications Project.2 The contracting of the switching equipment was done between 1993 and 1996, when the process of NTC privatization had not been initiated. To complete the expansion plan, additional cable network and transmission equipment was procured afterwards. In retrospect, this rapid expansion plan can be seen as a first NTC action aimed at restricting possible future competition by saturating the market as much as possible. The need to manage a much larger network had some impact on NTC institutional capacity, but the managerial problems were mainly the result of following a wrong computerization strategy (see para. 28). 12. The provision of rural access was mainly satisfied by additional Multiple Access Radio Transmission equipment (MARTS) financed under this project. As of the end of the project, MARTS systems financed under the Fourth and Fifth projects provided more than 4,200 subscribers lines covering around 800 of the 4,000 Village Development Committees (VDCs) in the country. 2 NTC procured 11,400 lines of re-cycled equipment S-12 ALIC from TeleDanmark; 4,500 lines E-1OB from Alcatel CIT, as extension of existing contract; 49,000 lines S-12 J-Rack from Alcatel Bell, as extension of existing contract, 105,000 lines EWSD from Siemens under this Credit; and 4,600 lines in small switches from C-DOT, India.  - 4 - C. Major Factors Affecting the Project 13. It can be noted that during the project period, technology development and competition brought down unit prices for telecommunications equipment, especially switching equipment. This was neither under government nor the implementing agency control, but made it possible to increase the project scope and at the same time reduce its cost. This factor had a substantial positive impact on the achievement of the physical objectives of the project. 14. A factor generally subject to government control was that NTC"s autonomy and authority during the project period was quite limited. After a long labor strike in July 1996, HMG signed an agreement with NTC's largest staff union promising to provide full autonomy not later than December 1998. This agreement included a list of issues ranging from formulation of investment plans, managing human resources, and mobilization of financing sources to representation of unions on the Board, and privatization of at least 50 percent of the shares. Most of these targets are yet to be achieved. Another factor partially affecting the Project was the frequent changes in Government, resulting in the appointment of new ministers and secretaries for MoIC, which sometimes also resulted in changes in NTC's senior management. These changes impaired NTC's decision-making process due to the need to obtain frequent approvals from the Minister, and because the Secretary MoIC remains until now as the Chairman of NTC Board. In particular, this situation has delayed procurement and investment decisions. It is anticipated that with the transfer under the Company Act, and when the privatization effort is renewed, these restrictions on NTC will be eliminated. 15. There were also factors under the implementing agency control (NTC) which had a partial negative effect on project implementation. NTC's procedures for the appointment of procurement evaluation committees resulted in an unpredictable quality of the evaluation reports. Instead of creating and maintaining a core of specialized staff familiar with World Bank procurement rules, NTC sometimes made ad hoc decisions in each case, which resulted in varied quality of reports. This situation produced delays in procurement processing, and raised concerns about the transparency of the process. 16. Among factors normally under NTC control, it can be noted the great improvement in project implementation, in relation to the Fourth Project, resulting from the appointment of a project supervision consultant who represented DANIDA, FINNIDA, NDF and IDA (funded by DANIDA). This intervention served to assist NTC in coordinating different project units such as transmission, switching, outside plant, and civil works. This consultant also issued early warnings to the donors about possible bottlenecks in project implementation. 17. NTC's financial management did not improve as expected and covenants on timely financial reporting and audits were complied with late or not fully complied with. It is the practice of OAG to rotate the private auditors every two to three years. In some cases, the newly appointed auditors had recommendations for some specific problems which were different fiom the recommendation, already implemented, received from the previous auditor. In the period 1992-95, one of the reasons for the delay in submitting audit reports was the delayed appointment of the auditors by the OAG. This aspect was never fully corrected and in most cases, appointment took place after finalization of the period to be audited. In 1995, OAG engaged consultants for an "Institutional I)evelopment Project" aimed at improving accounting and financial practices in the main utilities. As part of this plan, NTC was to subsequently, reduce the time to submit its Audited Statements from twelve months in 1994/95 to nine and twelve months in 1995/96 respectively. These targets were never achieved. It can be concluded that the main reason for the lack of real improvement in the accounting/financial areas were: (a) delays by NTC in preparing the financial statements; (b) insufficient incentives from Government of NTC for good corporate governance and sound financial management; (c) inadequate emphasis by NTC management on financial management issues, together with lack of monitoring and supervision on financial management  - 5 - issues by both NTC management and by IDA (in earlier projects as well as during initial years of this Project), and (d) the lack of commitment with the privatization process by NTC's management during the last years of project implementation. As a consequence of this anti-reform attitude, NTC's management delayed the adoption of IAS as an additional factor to delay the privatization of NTC. 18. Starting in 1995, supervision missions began reporting on specific measures agreed with NTC/OAG aimed at improving the timeliness and quality of NTC's financial statements; however, no real improvement can be demonstrated as of today. This situation, which was not critical at the time of project preparation/appraisal, became critical towards the end of project implementation, when IDA established a policy of more strict review of Audit reports and follow-up of actions recommended by the auditors. NTC had difficulty in adjusting to this new environment. In addition, starting with the audit report submitted in 1997, the auditors issued a long list of observations/recommendations with only a minor percentage being addressed/corrected before the next audit cycle. On balance, covenant compliance is rated as deficient. D. Project Sustainability 19. The project achievements in the sector reform areas appear irreversible, especially after the enactment of the new Telecommunications Act 2053 (1997), the establishment of the sector regulator (NTA) in 1998, NTC conversion into a company, and Cabinet approval of the Telecom Policy (1999). The implementing agency (NTC) changed it internal organization and procedures and now is capable of successfully implementing much larger projects than before. The downside is that NTC has become more prone to exercise political pressure to keep its monopoly position in the provision of basic services, using the argument of being able to successfully implement much larger projects which could lead to demand satisfaction. This argument has gained some political support recently, making it more difficult to demonstrate the advantages of early sector liberalization. The issuance of the Telecommunications Policy where the previously agreed structure for the provision of rural services was amended to reflect NTC' s monopolistic attitude, is also a result of this political pressure. However, the achievements so far, in the sector and in NTC, are likely to prove sustainable, and the only doubt is about the delay in establishing a competitive market. In conclusion, project achievements will most likely be sustainable; however, achievement of full sector reform can be delayed while NTC' s resistance is in place. E. IDA's Performance 20. The project was first identified in combination with a 1989 supervision of the Fourth Telecommunications Project (1588-NP); however, active preparation of the new project only began in late 1990. As part of project preparation, NTC engaged consultants to conduct a tariffs study (December 1990). Part of the delay in starting project preparation was due to the need to reach agreement with HMG/NTC on the extent of sector reforms to be included. This was greatly advanced through a Workshop held in Kathmandu in June 1991, where, for the first time, issues such as liberalization, sector regulation, and private sector participation were openly discussed. At that time, these concepts were strange and widely opposed; however, HMG agreed to include in the project processing a tariffs study and during project implementation, the organization of further sector reform seminars. The implementation of the recommendations of the tariffs study was established as a condition for Negotiations, which took place in March 1992, after HMG approved new telecom tariffs with validity from November 17, 1991. Major steps in sector reform took place in the following five - six years; however, there was strong political opposition to new tariff increases in local rates. This reality justified the approach taken by IDA in the Identification - Preparation stages, of having the local tariffs increase  - 6 - as a condition of Negotiations. Therefore, the Identification - Preparation stages should be rated as satisfactory. 21. The project was appraised in July 1991, with Negotiations taking place in Washington during March 1992. At that time, the major issues were: (a) to secure, by June 30, 1993, cofinancing from DANIDA and FINNIDA, which was finalized successfully but with a delay of one year. Due to the economic recession that Finland suffered at that time, FINNIDA arranged for the Nordic Development Fund (NDF) to take 50 percent of its originally agreed share of NTC financing, and it was agreed that the same project supervision consultant be funded by DANIDA, selected and monitored by IDA, would also represent NDF in project implementation issues; (b) to reduce the arrears from HMG, which was achieved through a down payment in 1992 of NRs 12 million, paid by MoF, and three installments due in 1993, 1994 and 1995. Final resolution on this issue was reached in 1994 through an agreement by which HMG's arrears to NTC were settled against payments due from NTC to MoF for debt service; and (c) IDA established as a condition for Negotiations to demonstrate sufficient progress in the procurement of the switching equipment. Considering that this was the largest single tender and the technical complexity associated with it, it can be seen in retrospective as the right decision taken by the Bank. 22. The financial package for the project was appropriate and the credit amount adequate, based on prices and other information available at the time of appraisal. In retrospect, given the fall in prices especially for switching equipment, the project objectives could have been achieved by a US$ 5.0 million smaller IDA credit. This development was not easy to foresee at the time of appraisal. 23. IDA's relations during appraisal with other donor agencies that helped finance the project, i.e., DANIDA, FINNIDA, NDF, and JICA, were excellent. IDA, DANIDA and FINNIDA had common project preparation missions. as well as appraisal and major project supervisions. During project execution, DANIDA shifted gradually its focus from the network expansion targets to sector reform issues, while FINNIDA, after finalizing its cofinancing of transmission equipment and computer software development, officially withdrew from supporting the telecommunications sector in Nepal. Since the beginning of its participation, NDF made clear its policy of no direct monitoring/supervision of project implementation, and delegated the role to the World Bank. 24. The project implementation plan and performance indicators for NTC (Table 5) were adequate. In retrospect, the projected performance of NTC for the early years was optimistic. In later years, however, NTC's performance greatly surpassed expectations. The project was appraised by the same staff that identified and prepared it. IDA's performance during appraisal was satisfactory. 25. Project implementation was not affected by major delays, and internal coordination was greatly improved in comparison with the Fourth Telecornmunications Project as a result of the appointment of the supervision consultant funded by DANIDA, who was resident in Nepal from late 1992 until mid- 1994, and who afterwards visited NTC every three months for periods of around four - five weeks, until the end of 1998. 26. The sector reform component was one of the more successful aspects of this project. The Sector Workshop of June 1991 was followed by the workshops of the Telecom Sector Reform Consultancy (November 1993 - February/March 1994) and by Donors Coordination Meetings and Country Assistance Strategy Meetings, which all served to promote actions in pushing the sector reform agenda. Additionally, the availability of the Japanese Grant Fund TF029212, which was approved on July 10, 1995, provided a main driving force in implementing sector reform actions. The main outcomes were: (a) enactment of the new Telecom Act 2053, on January 1, 1997; (b) preparation of Rules and Regulations for the Regulator; (c) issuance in 1995 of licenses to internet (ISP) and cable TV service providers; (d) establishment of the Nepal Telecommunications Authority (NTA), the new telecom sector regulator; (e) transfer of NTC to the Company Act in 1999; (f) preparation studies for rural telecom  - 7 - development; and (g) starting of the process of NTC privatization and preparation of tenders to award licenses to new service providers in cellular and WLL technologies. 27. IDA's supervision of project implementation was estimated at appraisal as requiring three missions per year for the first three years, followed by two missions annually after that. This estimate proved fairly accurate (see Table-12). Supervision was conducted by staff which included some that prepared and appraised the project, plus regular contacts through e-mail, phone, letters, and fax, between the Bank, the Borrower, the implementing agency (NTC), and the Regulator (NTA). Most of these reports and other information were also exchanged with cofinanciers to facilitate coordinated implementation of the project as a whole. In addition, cofinanciers participated in many missions, in particular at the time of main events such as Sector Workshops, Donor Coordination Meetings, etc. However, IDA's supervision missions could have raised issues related to procurement and improvement of the accounting/financial management (see para. 27 and 28) more strongly at an earlier stage of project implementation. On the whole, IDA's performance during the supervision stage was satisfactory. F. Cofinanciers Performance 28. The project was cofinanced by DANIDA, FINNIDA, NDF and JICA. DANIDA participation was originally focused on outside plant cables, ducts and training of the Outside Plant Department staff of NTC. In this specialization, DANIDA was able to introduce new technologies such as a Geographical Information System (GIS), which has a special use in telecommunications companies for outside plant planning, and which DANIDA was also separately funding for other branches of HMG. During project implementation, DANIDA's focus was changed; becoming more interested in sector reform issues. This new focus resulted in: (a) a direct Danish Government Trust Fund given to HMG/MoIC in 1995, to finance consultants who prepared a tender document for awarding licenses to new cellular and WLL service providers; and (b) a direct grant agreement with HMG, signed in 1997, by which DANIDA funded a privatization consulting firm to begin the NTC privatization process. FINNIDA (replaced by "Ministry of Foreign Affairs, International Development Department"), together with NDF, funded transmission equipment, both fiber optical cables and microwave, and a consultancy aimed at developing NTC's Corporate Data Base (CDB). The company's computerization approach (CDB) promoted by these consultants was through training NTC's engineers to become high level computer systems development experts. This approach was discussed many times with IDA, which was in favor of a more direct procurement of off-the shelf products, requiring only custom tailoring for specific NTC needs, but with the potential for much shorter implementation time. As mentioned in para. 11, this was not the optimal strategy and it was the source of problems in billing, accounting and financial systems, which are yet to make use of modern software tools. Towards the end of the project and after finalization of the Finnish consultancy, NTC decided to procure semi-finalized products. In part, this decision was triggered by the loss of time and of many of the highly trained engineers. JICA continued with its approach of delivering turn-key contracts to Japanese contractors, with final systems turn-over to NTC for operation at commissioning. On the whole, the performance of the cofinanciers was satisfactory. G. Borrower Performance 29. In the period of time from Project Identification to Board presentation, I1MG and NTC strongly supported project preparation by: (a) being willing to discuss in a public forum and supporting reform issues such as liberalization, competition, and privatization, during the First Telecom Sector Organization Seminar, held in Kathmandu in June 1991; (b) contributing to the Tariffs Study of December 1990, and approving it was a condition for Negotiations - the first step of tariff adjustment (new tariffs valid since November 17, 1991); (c) agreeing on a plan to pay for HMG arrears to NTC, including an installment  - 8 - plan; and (d) agreeing on the terms for a sector reform consultancy to be included in the project. HMG/NTC's performances during project preparation should, therefore, be considered highly satisfactory. 30. After processing the initial tender for switching equipment, NTC followed with preparation of some 45 other tenders. It has been NTC's policy to procure equipment in separate lots according to technology, and use its engineering capabilities to integrate the systems,, instead of procuring full systems under "turn-key" contracts. This decision resulted in lower costs due to savings in salaries of foreign experts who would be otherwise engaged in system design and installation, as shown in the case of JICA- funded system which was given to NTC fully installed. However, this policy has the downside of forcing NTC to manage a large number of tenders/contracts of different technologies. NTC had special problems with two of the 45 tenders processed under this project.3 31. All institutional and financial performance covenants were complied with. NTC's financial management, however, did not improve as expected and covenants on timely financial reporting and audits were complied with late or not fully complied with (see para. 17 and 18). 32. HMG's support for the sector reform continued during project implementation throughout the various steps mentioned in a previous paragraph: Workshops of the Telecom Sector Reform Consultancy (November 1993 - February/March 1994), preparation of new Telecom Act 2053 on January 1, 1997, and Rules and Regulations for the Regulator; issuance in 1995 of licenses to internet (ISP) and cable TV service providers; establishment of the Nepal Telecommunications Authority (NTA), the new telecom sector regulator in March 1998; transfer of NTC to the Company Act in 1999; preparation of studies for rural telecom development; starting of the process of NTC privatization; and tendering of cellular and WNLL licenses for new service providers. However, some specific measures were more difficult to implement, such as approving the second step of local tariff adjustment, which had been agreed at Negotiations, or providing actual autonomy to NTC, as agreed with NTC's unions after the strikes of 1996. The latter may be implemented now after the transferring of NTC to the Company Act in early 1999. 33. Some of the events which had a major negative impact on sector reform implementation were not under the control of HMG or NTC. Vested and public interest litigations were filed in Kathmandu in May/July 1996 which resulted in a delay of more than two years in the issuance of licenses to new service providers. One litigation was related with the issuance by [HMG of a letter of intent for the provision of cellular services in 1994, a process conducted without the knowledge of IDA. The other two litigations argued against the tendering process or specific provisions in the tender, which had been prepared by Danish consultants hired directly by HMG in 1995. On April 24, 1998, the Courts instructed NTA to initiate the re-bidding for these licenses. 3 (a) due to climatic conditions in Nepal, the lightning protection of the switching equipment should be critically coordinated with the protection at the Main Distribution Frame (MDF). Switching equipment previously procured by NTC from Belgium had a major problem in this respect, resulting in many subscriber line-cards burned every month, with a peak during the monsoon season. Procurement of new MDF protection, after the switching manufacturing company recognized its inability to correct the problem, proved to be a difficult process, which was successfully completed only after re-bidding, when NTC obtained a new product, using a new technology, from a new supplier to NTC; (b) poles had originally been included in the DANIDA financing, however, due to changes in internal DANIDA rules requiring a higher percentage of Danish component, NTC asked the Bank to finance this item and a tender was floated in May 1994. After receiving from suppliers several complaints to the bid evaluation report, and after NTC Board appointed a new Evaluati.on Conunittee, the final recommendation, accepted by the Bank, was for NTC to re-bid and finance with its own resources. This was one of a number of cases in this project, when NTC submitted to the Bank two evaluation reports with different recommendations. These cases always resulted in unnecessary delays in the procurement process, made even more difficult by complaints from suppliers who were aware of these contradictory views.  - 9 - 34. HMG/NTC support in implementing reforms in the sector was stronger than in accepting changes internally in NTC to improve its procurement process, and in particular the financial and accounting systems, as described above. Additionally, towards the end of Project implementation, some issues were not perceived by NTC at the same level of importance as by IDA, and therefore were left unresolved. Overall, HMG/NTC' s implementation performance should be considered marginally satisfactory. H. Assessment of Outcome 35. Given the achievements of sector, institutional and physical objectives of the project, its high ERR, and a high probability that project achievements will be sustained, the project outcome should be considered satisfactory. I. Future Operation 36. NTC has accelerated the connection of new subscribers, having reached more than 40,000 new lines connected in 1997. This is more than in any previous full year and will lead to a more efficient use of NTC assets, including the ones installed under the project. The waiting time for SLT phone connection has been greatly reduced in most areas (in areas with new installed exchanges a subscriber an obtain almost instant connection using the own your telephone (OYT) scheme, from periods of around 10 years at the time of project appraisal. NTC's service quality is being further improved, and new procedures for efficient handling of customer complaints have been introduced nationwide. NTC's recent performance indicates that the physical components of the project will be operated in an efficient manner. Therefore, NTC operations can be assessed as satisfactory. 37. The future performance of NTC and the project, could be monitored by the same indicators as agreed for the project (see Table 5). The main monitoring will, however, be conducted by the regulator, NTA, as part of its regulatory functions. NTA's monitoring of all the operators in the sector will include: service quality, compliance with license conditions, tariffs, finances, etc. There is, therefore, very little scope for a separate follow-up or monitoring by IDA on NTC' s operations. 38. For sector reform, IDA has confirmed to HMG/NTA and NTC its readiness to continue providing assistance on a whole range of policy, regulatory and financing issues that Nepal is facing in the process of moving towards an increasingly private-led and competitive telecommunications sector structure. After the recent approval of the telecom sector policy, IDA's continued participation is contingent to HMG's firm commitment to further sector reform as demonstrated by issuing licenses to the cellular and WLL service providers, utilizing market mechanisms for the provision of rural service areas by new private entities, and renewed focus on NTC privatization process. J. Key Lessons Learned 39. Some lessons to be learned from this project are: * radical sector reform takes time and continued involvement in a sector provides IDA with the opportunity to support reform step by step under various governments. In addition, labor unions should be involved at an early stage of reform and their concerns addressed to reduce resistance to change; * early during project implementation, IDA accepted NTC's expanded investment plan when HMG had not yet agreed to pursue a privatization strategy. The successful implementation of this larger investment plan was later used by NTC's new management as a main argument  - 10- to delay actual implementation of the reforms and introduction of competition, and resulted in new stalling actions to maintain its monopoly. In retrospect, IDA lending should have been made contingent to demonstrated firm commitment from main stakeholders. Processing of the Credit should have been contingent upon actions by HIG/NTC demonstrating real ownership of the reform process; * the efficiency of a government corporation, as measured by its ability to satisfy demand and introduce service improvements, can be hampered by government salary scales, investment approvals, and procurement procedures. Only the establishment of a privately owned commercial company, under the Company Act, operating under suitable regulation, provides the necessary autonomy to quickly expand service to rmeet demand and incentives to employees to become more consumer oriented and competitive; * Nepal telecommunications sector, while having successfully advanced in creating the legal and regulatory framework, has been far too slowr in introducing competition, which, as experience confirms, leads to lower prices and consumer orientation. Earlier IDA emphasis on the need to implement legalUregulatory reforms leading to a competitive privately led sector structure, could possibly have overcome this problem; * the successful private operation of value-added and other marginal telecommunications services creates new job opportunities 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 demonstrates that the legal and regulatory framework is working satisfactorily; * the procurement process would benefit from an early agreement with the borrower establishing the need to have a core of specialized staff, as key members in each evaluation committee, and from a more strict procurement planning and implementation; resulting in a more transparent procurement process. In addition, packaging procurement of equipment in larger lots, avoiding too many small pack-ages, would eliminate delays resulting from unexpected procurement difficulties; * land acquisition and building construction should be started. well in advance, in order to be ready before equipment installation; * NTC's computerization strategy of developing indigenous software, as proposed by FRNNIDA funded consultants, should have been more strongly opposed by IDA; and * undertaking the Financial Management Assessment of the borrower during appraisal, and providing early attention to these issues, would benefit timely improvement of the financial management capacity of the borrower. Additionally, serious follow-up of auditor's qualifications would have avoided the accumulation of issues related to financial management which occurred towards the end of this Project. K. Evaluation of Program Objective Categories 40. The project had no specific social objectives; however, it included a major component dealing with rural telecommunications development, which is likely to have -beneficial social impact, e.g. by improving telecomrnunications in rural and other areas, some previously without telephone service, which should facilitate access to medical care, HIMG's agencies, etc. The numerous private operators established in the telecom sector, have also created new job opportunities in Nepal. Further, by  - 11 - supporting Nepal's economic development, e.g. in the textile export and tourism industries that are both telecommunications and labor intensive, the project would contribute to alleviation of poverty. 41. The project was given a "C" environmental rating and its environmental impact was expected to be minimal. However, the project should have some beneficial environmental effects, as improved telecommunications promotes efficiency in all sectors, particularly in the transport sector by allowing more efficient use of vehicles thus reducing the number of trips. 42. The main achievement of the project has been the gradual opening of Nepal's telecommunications market to private operators through the Telecommunications Act 2053 (1997). Before 1997, there were only private entrepreneurs operating telecom service centers. By the end of the project in 1999, there were a number of private companies providing telecom service centers, cable TV, paging, data transmission, internet access, and other services. The project's private sector development objective has, thus, been greatly advanced.  -12- Part II: Statistical Tables Table 1: Summary of Assessments Macro Policies 0 0 VI5 Sector Policies /