India - Third Telecommunications Project

RESTRICTED Report No. P-714 RE ua FILE Co This report was p sewit the Bank an its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RflCONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO INDIA FOR THE THIRD TELECOMMUNICATIONS PROJECT June 5, 1969  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO INDIA FOR THE THIRD TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed operation consisting of a Bank loan in an amount in various currencies equivalent to US$27.5 million and an IDA credit in an amount in various currencies equivalent to US$27.5 million to India. PART I - HISTORICAL 2. The Association helped finance the telecommunications expansion program of India during the Third Five Year Plan (1961-1966) with two credits totalling US$75 million. The first credit in the amount of US$42 million, made in 1962 (Credit No. 28 IN), covered part of the foreign exchange expenditure of the Posts and Telegraphs Department (P&T) for the import of finished equipment; the second credit in the amount of US$33 million in 1964 (Credit No. 58 IN) covered the foreign exchange component of telecommunications equipment manufactured in India by three Government-owned factories and by the P&T in its onz workshops. The Government of India has asked for addi- tional Bank Group assistance to help provide the foreign exchange required for the telecommunications expansion program during the first three years of the Fourth Five Year Plan period (1969-74). 3. The project was appraised in January/February 1969, and negotiations for the proposed loan and credit were completed in Washington on June 2, 1969. The Borrower was represented by Messrs. K.N.R. Pillai (Member - Planning - of the P&T Board), P.C. Kapur (Deputy Director General - Accounts - of P&T) and D.K. Sangal (Deputy Chief Engineer of P&T).  - 2 - 4. The Bank has made 36 loans in India, including 30 which are fully disbursed. The Association has made 22 credits to India, including 17 which are fully disbursed. The status of Bank loans and IDA credits in India as of April 30, 1969 is summarized as follows: Amount (US Amillion) less cancellations Bank IDA Undisbursed Total loans/credits 1,007.2 1,010.1 137.4 of which has been repaid to Bank and others 382.7 Total now outstanding 62h. 5 Amount sold 109,7 of which has been repaid 103.8 5.9 Total now held by Bank and IDA 618.6 1,010.1 Total undisbursed 116.4 21.0 137.4 5. For details of individual undisbursed loans and credits, and for summary statements on (i) delays in Bank/IDA project execution, (ii) IFC investments in India and (iii) forthcoming Bank/IDA operations in India, please refer to paragraphs 8 to 10 of my Report and Recommendation on the Tarai Seeds Project, dated May 29, 1969 (R69-105). PART II - DESCRIPTION OF TIHE PROPOSED LOAN AND CREDIT 6. BORROWER: India, acting by its President. PURPOSE- To help finance the P&T's investmrent program for expansion and modernizatiort of its telecommunications facilities during the Fourth Five Year Plan (1969-1974). AMOUTNTS: Bank Loan: US$ 27.5 million. IDA Credit: US$ 27.5 million. AM-IORTIZATION: Bank Loan: In 30 years including a 10-year period of grace, through semi-annual installments beginning June 15, 1979 and ending December 15, 1998.  -3 - IDA Credit: In 50 years including a 10-year period of grace, through semi- annual installments of 1/2 of 1% from June 15, 1979 through December 15, 1988 and of 1-1/2% from June 15, 1989 throug;n December 15, 2018. INTEREST RATE: On Bank Loan: 6-1/2% per annum. SERVICE CHARGE: On IDA Credit: 3/4 of 1% per annum on the principal amount disbursed and outstanding. CO1I'IT14ENT CHARGE: On Bank Loan: 3/4 of 1% per annum on the undisbursed amount. ESTIMATED ECON01MIC RETURN: 40h. PART III - THE PROJECT 7. An appraisal report on the proposed project, entitled "India - Appraisal of the Telecommunications Expansion Program (1969/70-1973/74) Post- and Telegraphs Department" (PU-15a), dated June 2, 1969, is attached. 8. India's telecommunications facilities were greatly expanded during the last decade, partly with assistance from two previous IDA credits. Since 1961 the number of connected subscriber lines has been increased from 330,000 to more than 800,000, a high capacity coaxial cable trunk network linking Delhi with Calcutta and Bombay-Madras-Coimbatore has been constructed, long distance subscriber dialling has been introduced on 16 inter-city routes, and a telex network installed. Despite the sub- stantial increases in capacity carried out, telephone, telex and telegraph services are quite inadequate to meet present commercial, industrial and administrative demand. For example, some '00,000 applicants are noaw waiting for a connection with an average waiting time of about 5 years; and long-distance calls often are subject to long delays. The major con- straint to a more rapid expansion has been the shortage of investment resources, in particular foreign exchange. Even though investment allo- cations proposed for the Fourth Plan period (US %621h million equivalent, including a foreign exchange component of US i4156 million) are more than twice as high as the actual investment during the Third Plan period, the gap between actual and requested new telephone connections is expected to widen further. Demand for connections is likely to continue to grow at least at the rate of 13 percent experienced over the last nine years, while the number of new connections is programmed to grow at only 11 per- cent. However, long distance facilities will be greatly improved by extending the coaxial cable network to more routes with heavy traffic, by adding high capacity microwave links and by expanding subscriber long- distance dialling facilities so as to link 55 principal towns accounting  -4 - for two-thirds of P&T's subscribers. Telex facilities will also be greatly extended. 9. The Telecommunications Branch of the P&T has a competent technical staff and should have no problem carrying out the program satis-- factorily. Some operational difficulties result from the fact that the P&T, a Government department, lacks administrative and financial autonomy. However, the Administrative Reforms Commission of India is presently studying the organization and administrative structure of the P&T. In the meantime the P&T is carrying out a financial reorganization of the Tele- communications Branch which it proposed in 1962 and actually initiated in 1965. The financial reorganization, which the Bank Group supported strongly, got off to a rather slow start, but it is now well underway in accordance with the consultants' recommendations. Its main features are the transfer of the accounting function of the Telecommunications Branch from the Comptroller and Auditor General of India to the F&T's owvn staff, and the reorganization of the accounting system along commercial lines. 10. The project which the proposed loan and credit would help finance is a three year (1969/70-1971/72) portion of the telecommunications investment program. The total capital expenditure target for the three- year period is US$361 million, of which about US$103 million (less than 30 percent) would be required in foreign exchange. About half of this would be used to import microwave equipment, coaxial cable equipment and telephone cable, and the balance to import materials and components for local manufacture of switching and transmission equipment, telephones, teleprinters and cable. 11. The Government of India and the Canadian International Develop- ment Agency (CIDA) have agreed, in close consultation with the Bank Group, to allocate a 50-year no-interest credit of about US$33 million equivalent to the purchase in Canada of the microwave equipment and some of the cable required for the project.!/ Several Canadian manufacturers will be in com- petition for these orders, and it is likely that P&T will obtain these goods at prices comparable to those that would be offered in international com- petition. 12. Of the balance of US$70 million foreign exchange required during the three year project period, the Bank/IDA financing of US$55 million wou?d cover the remainder of the imported equipment and cable, and a little over two years' requirements of imported materials and components for the local factories. Imports of finished goods are financed for the full three-year period in order to allow a smooth tendering, ordering and delivery process. The lead time for ordering imports needed by the factories is shorter. 1/ An additional amount of about US$4 million equivalent, on the same terms, would be available for purchases in the fourth year of the five year program.  - 5 - 13. The local costs of the project in the amount of US$258 million equivalent (about 72 percent of total project cost) will be met out of funds generated internally by the Telecommunications Branch and by additional contributions of capital-at-charge by the Government of India. 14. Procurement procedures will be the same as used for the first two IDA credits. Purchases of imported equipment and cable will be made after full international competition (as in Credit No. 28 IN). Mlaterials and components needed by the factories and the P&T workshops will also be acquired after international competition with minor exceptions such as necessary proprietary items (as in Credit No. 58 IN). The Govern- ment-owned factories started operations under collaboration agreements with foreign manufacturers who had been selected after international competition. Although they are legally and financially separate entities, for all practical purposes they are an extension of the P&T: the bulk of their production is sold to P&T, their management consists of P&T engineers on secondment, and their prices to P&T are fixed at levels which cover cost and allow a moderate return on the capital invested. On the whole prices to P&T are at least as low as could be obtained internationally on a CIF basis, and the quality of the locally manufactured products is on the same level as goods manufactured in developed countries. Because of the practical difficulties of identifying a wide range of materials throughout the manufacturing process, it is proposed to follow the same procedure as under Credit No. 58 IN, and to finance the import content of products delivered to P&T by disbursing a percentage of their sales price. 15. Purchases from the three local factories are made by P&T on a continuing basis. It is proposed to make disbursements against e.xpenditures after April 1, 1969, the starting date of the investment program which was the basis of our appraisal. This would mean retroactive payments of approximately US$1.7 million (or 3 percent of the aggregate loan and credit amount). With regard to imported equipment and cable, no tenders will be issued or contracts placed before the signing of the respective loan and credit agreements. 16. The overall financial position of P&T's Telecommunications Branch is satisfactory. With a recent tariff increase, the rate of return on average net plant in service is expected to be better than 11 percent. The economic return on the total five year program investment is estimated to be about 40 percent, with the return on the long distance investment about 75 percent, and on the local service investment, about 25 percent.  - 6 - PART IV - LEGAL INSTRUMENTS AND AUTHORITY 17. The draft Loan Agreement and draft Development Credit Agreement between India and the Bank and the Association respectively, the Reports of the Committees provided for in Article III, Section h(iii) of the Bank's Articles of Agreement and Article V, Section l(d) of the Association's Articles of Agreement and the texts of Resolutions approving the proposed Loan and Credit are being distributed to the Executive Directors separately. 18. The draft Loan Agreement and draft Development Credit Agreement conform generally to the pattern of the two earlier telecommunications credits to India. The following provisions are of special interest: (a) In recent years the Postal Branch of the P&T suffered losses which were covered out of the operating revenues of the Telecommunica- tions Branch. To avoid that such transfers jeopardize the carrying out of the Project, the Borrower undertakes that funds generated by the Telecomm- unications Branch will be applied to the operations of the Postal Branch only if all funds required for the carrying out of the Project are available to the Telecommunications Branch (Section 5.10 of the Loan Agreement, Section 4.10 of the Development Credit Agreement). (b) Schedule 4 of both Agreements sets out a timetable for the accomplishment of certain significant stages in the financial reorgani- zation of the Telecommunications Branch. (c) Schedule 5 in both Agreements contains the method of computing the annual rate of return for the Telecommunications Branch required by Section 5.11 of the Loan Agreement and Section 4.11 of the Development Credit Agreement. PART V - THE ECONOMY 19. A report on the economic situation and prospects of India was distributed to the Executive Directors on April 28, 1969 (R69-75). 20. India's debt servicing position remains difficult, and it is expected that a net inflow of new funds on concessionary terms will be necessary for some years. However, given the current rate of repayment of existing Bank loans and the expected phasing of disbursements, the proposed loan would not increase beyond prudent limits the level of the Bank's net investment in India. The amount of loans to India held by the Bank on April 30, 1969, net of repayments, was US $619 million, of which about US $116 million was still to be disbursed. In addition the Bank held on that date a special deposit of US $15 millicn, which is expected to be liquidated by Nlarch 1970.  - 7 - PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 21. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Association, respec- tively. PART VII - RECOMMENDATION 22, I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President Attachments June 5, 1969