Guatemala - First Telecommunications Project

RESTRICTED Report No. P-1001 FILE COPY This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA GUATEMALTECA DE TELECOMUNICACIONES FOR A FIRST TELECOMMUNICATIONS PROJECT WITH THE GUARANTEE OF GUATEMALA December 9, 1971 CURRENCY EQUIVALENTS US$1.00 = 1 Quetzal (Q) INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA GUATEMALTECA DE TELECOMUNICACIONES FOR A FIRST TELECOMMUNICATIONS PROJECT WITH THE GUARANTEE OF GUATEMALA 1. I submit the following report and recommendation on a proposed loan to Empresa Guatemalteca de Telecomunicaciones (GUATEL) with the guarantee of the Republic of Guatemala for the equivalent of $16.0 million to help finance the foreign exchange cost of a project to expand telecommunications facilities in Guatemala during 1971-75. The loan would have a term of 20 years, includ- ing 5 years of grace, with interest at 7-1/4 percent per annum. PART I - INTRODUCTION 2. Guatemala has received five Bank loans for a total of $50.5 million, two for power, amounting to $22 million and one loan each for highways, education and livestock development. After an initial loan for highways, made in 1955, the Bank suspended operations in Guatemala because of the failure of successive Guatemalan Governments to settle a dispute regarding three outstanding sterling bond issues. Following settle- ment of the sterling debt, the Bank resumed lending to Guatemala in 1967. The last loan, for livestock development, was signed in February 1971. In addition to the proposed loan, the lending program for FY1972 includes a loan for power, which has just been appraised. No operations are scheduled at present for FY1973. 3. On October 31, 1971, a total of $15.1 million remained to be dis- bursed on four loans, two for power, one for education and one for livestock development. Execution of the two power loans has on the whole been satis- factory, but disbursements on the education loan have been delayed by a com- bination of factors, including the change of government and unsatisfactory performance of consultants. Improvements, however, have taken place in re- cent months and construction is about to start. Disbursement of the livestock development loan, which was made effective in July 1971, should begin shortly. A summary statement of Bank loans to Guatemala as of October 31, 1971, is at Annex I. 4. An IFC loan of $0.2 million in 1958 for a flour mill has been fully repaid. In 1969, IFC approved an investment of up to $0.9 million to finance construction and operation of a hotel in Guatemala City. This project has however recently been cancelled, since the sponsors no longer -2- considered it justified in view of the disappointing tourism market devel- opment during the past year and uncertain prospects. IFC is discussing with the Government and private sponsors (the International Nickel Corpora- tion) the possibility of participating in the financing of a large nickel project, which has been under consideration for several years. 5. Other external financing is principally provided by USAID, the Interamerican Development Bank (IDB) and the Central American Bank for Economic Integration (CABEI). AID is financing mainly rural development and primary education, but has also during the last year granted loans for rural electrification, housing and health services, and has provided tech- nical assistance in the field of tax administration. IDB is mainly active in agriculture (general credit lines, irrigation and fisheries), housing, transportation (feeder roads and maintenance) and water supply. CABEI is financing regional projects, principally in roads and telecommunications. PART II - THE ECONOMY 6. A "Memorandum on Recent Economic Developments and Prospects" (CA-15), dated November 12, 1971, Is being distributed separately to the Executive Directors. A Country Data Sheet is attached as Annex II. 7. The new Government has made substantial progress in creating sev- eral key institutions through which a more dynamic public investment program can be launched to overcome the serious socio-economic structural imbalances which exist in Guatemala. The fiscal situation has improved. Following an increase in tax rates in 1967-70, Central Government revenue in 1970 record- ed a satisfactory 10 percent rate of growth. Similar revenue growth is ex- pected in 1971-72, which should generate a current surplus sufficient to fi- nance a substantial part of the investment program. However, a financing gap is likely to appear in 1973 and increase in succeeding years unless ad- ditional sources of revenue can be developed in time. The Bank is, therefore, impressing upon the Government the need for further revenue measures. 8. Over the next few years, the rate of growth of real GDP may decline from the 6 percent experienced in 1968-70 to the 4-5 percent of the 1965-67 period because of poor prospects of the external sector, resulting from lower coffee prices and the crisis in the Central American Common Market. In the longer run, if financing problems surrounding the nickel project can be re- solved and the project gets underway, export and growth prospects would be enhanced considerably. - 3 - PART III - THE PROJECT Sector Background 9. Development of telecommunications has in the past been neglected and as a result existing local and long-distance facilities are inadequate to meet Guatemala's current needs. As of the end of 1970 there were 38,000 lines in operation and 35,500 applications for telephone connections, 77 per- cent of them in Guatemala City. The long-distance domestic service, which is still based on the use of open wire and HF radio, is limited in size and spread, of poor quality and congested. International facilities, based on open wire and HF radio, were unsatisfactory, but have improved considerably with the opening in November 1971 of the Central American Microwave Network. 10. Progress in the past was hampered by unsatisfactory sector organi- zation. Prior to April 1971, the responsibility for providing telecommuni- cations services was divided between two entities, of which one, Direccion General de Telecomunicaciones (DGT), was responsible for national telephone and telegraph operations, and the other, Empresa Guatemalteca de Telecomuni- caciones Internacionales (GUATEL INT), was responsible for international services. DGT was a Government department with its budget and accounts form- ing part of the Government budget and accounts, and its role was largely li- mited to technical supervision and operation, whereas planning, development and contracting activities took place in other committees and departments of the Government. GUATEL INT was an efficient autonomous entity organized on a commercial basis. 11. The 1971-75 Development Plan recommended a five-year expansion pro- gram to improve and expand local and long-distance telecommunications facil- ities and appropriately reorganize the telecommunications sector. Following recommendations of consultants financed by USAID and in close consultation with the Bank, the new Government set about reorganizing the sector and, in April 1971, carried out the merger of the existing entities into one autono- mous entity (GUATEL) to be responsible for all public telecommunications ser- vices in Guatemala, except for existing domestic telegraph service, which was incorporated in the national postal system. Project Entity 12. GUATEL is a public autonomous entity. Overall control of the sec- tor continues to be the responsibility of the Minister of Communications and Public Works, who is also the Chairman of GUATEL's Board. In the Bank's view, the Board and the Management are vested with the necessary powers to operate the entity efficiently. 13. GUATEL has been satisfactorily organized and, by merging the staff from the former entities, should be in a position to build a good team, capa- ble of developing the telecommunications sector to meet the country's needs. -4- At present, GUATEL is assisted by technical experts from the International Telecommunications Union (ITU) and Bundespost, Federal Republic of Germany, and it has agreed to continue employing some of these experts in the work re- lated to local exchange systems. In addition, GUATEL is arranging to obtain experts in management and organization from Canada. With this assistance GUATEL should have the necessary planning, engineering and supervisory capa- bility to execute and operate the Project. Project Description and Financing Plan 14. The proposed Project includes most of GUATEL's expansion program for 1971-1975. The main features of the Project and the Loan are summarized in Annex III. The principal components of the Project are: (i) installation of about 35,000 lines of local exchange equipment; (ii) expansion of cable distribution and subscriber facilities to provide approximately 35,000 additional direct exchange connections; (iii) installation of long-distance facilities including microwave systems between Guatemala City and three major provincial cities. Besides the Project, the expansion program for 1971-75 includes ongoing works, of which the main items are facilities for the regional Central American network and the new telecommunications center building of GUATEL. The Project, which ranks very high in the Government's priorities, would meet part of the projected demand for telephone connections and would alleviate congestion and delays in the national long-distance traffic. The long-distance facilities included in the Project, together with those being financed by the Central American Bank for Economic Integration (CABEI) as part of a regional project, will for the first time provide adequate long- distance and international service. 15. The estimated cost of the Project is $21.2 million, or almost 90 percent of the cost of the 1971-75 expansion program, which is estimated at $23.9 million. The proposed loan of $16.0 million would cover the for- eign cost, of the Project. GUATEL's financing requirements over the five years, including increased working capital and advance expenditures on in- vestments to be completed after 1975, total $31.2 million. The proposed loan would provide 51 percent of the total funds required, 32 percent would be generated within the enterprise, 9 percent would come from future borrow- ing and 8 percent from the CABEI loans already contracted. - 5- Financial Position of Borrower 16. The merger of DGT and GUATEL INT into the new entity will be com- pleted by December 31, 1971. By that time GUATEL will have taken over all assets and liabilities of the previous entities and the new entity will have full financial autonomy. In the past, DGT's financial performance had been weak, with low rates of return, almost no growth of gross fixed assets and a reliance on funds from the national budget. GUATEL INT, on the other hand, had shown a strong financial performance, with high rates of return and a rapid growth of gross assets. Over the period 1968 to 1970 it had contributed about $1.8 million to the national budget. The disparity in the operating results of the two entities had been largely due to the fact that GUATEL INT operated the most profitable part of the services without sharing its revenues with DGT, whose own revenues were prejudiced by tariff concessions granted to Covernment users. 17. The future financial position of GUATEL is projected to be sound and the financial forecasts show an adequate profit level over the project period. A decision has already been taken, in response to a recommendation by the Bank, to eliminate the concessions to Government subscribers and to restructure tariffs, which will bring substantial additional earnings. GUATEL does not pay taxes but is required instead to distribute to the Gov- ernment 45 percent of annual net profits, estimated to be about $5.8 million over the project period. Even after this distribution, GUATEL will be able to finance a substantial part of the expansion program. To ensure adequate cash generation for future investment, GUATEL has agreed to maintain tariffs, beginning in 1973, at a level which will result in a minimum annual rate of return on average net fixed assets in service of 10 percent, after deducting the statutory distribution to the Government. 18. GUATEL's debt service coverage is projected to be satisfactory. GUATEL has agreed not to undertake any long-term debt without the Bank's prior approval, unless net revenues would cover its debt service at least 1.5 times. GUATEL has also agreed not to undertake any major investment outside the Project during the disbursement period of the proposed loan, unless the financing plan has been agreed upon with the Bank. Procurement 19. All goods financed by the Bank would be procured through inter- national competitive bidding, with the exception of additions of switching equipment to the existing exchanges, for which prices would be negotiated. These additions, which GUATEL would procure from the original supplier for reasons of compatibility, are estimated to cost $1 million. 20. The provisions for international competitive bidding give recognition to existing arrangements in the Central American Common Market by allowing a margin of preference in bid valuation for bids sub- mitted by suppliers in all the Central American countries. These countries have entered into an Agreement on Fiscal Incentives in which they each agree -6- to give preferential treatment (limited to 50 percent of existing import duties) to products of Central American origin in all public procurement, even though the procuring agencies (such as GUATEL) may be entitled to ex- emption from import duties. Provision is made in the Loan Agreement that the preference so allowed shall not exceed 15 percent. It is not expected that any orders will be placed in Guatemala under the proposed arrangement and orders likely to be placed in other Central American Common Market countries are unlikely to exceed 5 percent of the loan amount. Economic Justification 21. The expansion program, including the Project, is technically sound and economically justified. The internal financial rate of return, defined as the discount rate which equates the present worth of Project costs to attributable revenues, is conservatively estimated at 17 percent. The economic return would be higher. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 22. The draft Loan Agreement between the Bank and GUATEL, the draft Guarantee Agreement between the Republic of Guatemala and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern for loans for telecommunica- tions projects. 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RECOMMENDATION 24. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 9, 1971 Washington, D.C. ANNEX I STATEMENT OF BANK LOANS AND IFC INVESTMENTS IN GUATEMALA AT OCTOBER 31, 1971 Bank Loans: Loan Amount (US$ millions) Number Year Borrower Purpose Total Undisbursed 1NI 1955 Government Roads 18.2 - )J 7 1967 INDE Jurun-Marinala Hydroelectric Power 15.0 0.6 5L5 1968 INDE Escuintla Thermal Power 7.0 4.3 576 1968 Government Education 6.3 6.? 72- 1971 Government Livestock U.0 ).0 Total (less cancellations) 50.5 of which has been repaid 18.14 Total now outstanding 32.1 Amount sold 2.8 of which has been repaid 2.8 - Total now held by Bank 32.1 Total undisbursed 15.1 IFC Investments: Amount (US$ millions) Year C any Loan Equit Total 1958 Industria Harinera Guatemalteca S.A. (Flour Mill) 0.2 - 0.2 Total 0.2 0.2 Less sold or repaid 0.2 0.2 Now held - -  ANNEX II BASIC DATA Page 1 of 1 I. SIZE Area (square kilometers) 108,900 1960 1965 1969 1970 Population (million) 3.82 h.58 5.09 5.26 Annual growth rate (%) 3.3 GNP (current market prices a/ p.cap.(US$) 264 288 329 352 II. ECONOMIC INDICATORS GDP at constant market prices b/(million 1,019.2 1,355.2 1,68h.2 1,773.2 Quetzales) Sector origin (%) 100.0 100.0 100.0 100.0 Agriculture 29.8 28.7 27.1 26.6 Manufacturing 13.1 14.1 16.2 16.6 Construction 2.1 1.8 1.7 1.6 Commerce 26.0 27.8 2E.h 28.6 Other 29.0 27.6 26.6 26.6 Annual Changes ( 1961-68 1969 1970 GDP at current market prices 5.2 10.9 10.7 GDP at constant market prices 5.2 7.0 5.6 Manufacturing value-added (const.prices) 8.0 9.2 8.4 Agriculture value-added (const.prices) 3.9 5.8 3.8 Exports, f.o.b. (current market prices) 9.1 12.1 13.6 Imports, c.i.f. (current market prices) 9.9 1.2 11.3 Total banking system credit 8.6 6.9 1.5 to public sector h.0 5.5 -6.h to private sector 9.7 7.2 2.9 Consumer prices 0.5 3.0 3.5 1960 1965 1969 1970 1971 GDP at current market prices (million 1,04 1,331 1,703 1,886 Quetzales) % of GDP at current market prices: Gross fixed investment 9.8 13.0 14.3 13.9 Public sector 2.6 3.1 2.9 2.6 Private sector 7.2 9.9 11.4 11.3 Inventory investment 0.5 0.5 -0.3 1.h1 Gross domestic savings 8.4 11.2 14.3 16.1 Public sector c/ 2.0 2.0 1.2d/ 1.04/ 1.7d/ Private sector 6.h 9.2 n.a. n.a. Resource gap 1.9 2.3 -0.3 -0.8 a/ GNP at factor cost not available. b/ GDP at current factor cost not available c/ General Government. d/ Central Government only. ANNEX II BASIC DATA (cont'd) Page 2 of 3 1960 e/ 1965 1969 1970 1971 t/ Central Government Finances (million Quetzales) Current revenue 87.3 118.8 19.7 165.2 176.5 (% of GDP at current market prices) 8.3 8.9 8.8 8.8 Current expenditure 74.5 96.8 129.3 147.8 144.2 (% of GDP at current market prices) 7.1 7.2 7.6 7.8 Current surplus 12.8 22.0 20.4 17. 32.3 Investment expenditure 26.1 34.8 30.0 3h.2 40.2 Surplus/Deficit 13.3 -12.8 -9.6 -16.8 -7.9 Net external financing 17.0 4.5 14.2 18.6 10.0 Net domestic financing -3.6 8.3 -4.6 -1.8 -2.1 Balance of Payments (million Quetzales) Exports of goods and non-factor services 132 226 303 351 343 Imports of goods and non-factor services 152 257 299 335 356 Resource gap - 20 -31 4 16 -13 Factor income, net -10 -12 -31 -33 -36 Current account deficit 30 43 27 17 49 Transfers, net 15 8 1 18 20 Private capital, net 19 25 16 13 11 Official capital, net 3 7 7 16 19 Reserve changes, ret -6 3 -10 -29 -1 Concentration of Commodity Exports (% of exports, f.o.b.) Coffee 65 49 32 33 Cotton 5 18 15 9 External Public Debt Medium and long-term outstanding as reported to IBRD (including undisbursed, repayable in local foreign currency, in millions of US$) 51 &/ hJ 71 g/ 208 247 Debt service ratio (4. of foreign exchange earnings) 3.1 h/ 5.1 7.7 8.7 Net foreign exchange reserves of the banking system (US$ millions) 48 48 47 76 Coverage of current payments (no.weeks) - 8.9 7.3 10.6 IBRD loans as of June 30, 1971 of which outstanding: IMF data (as of June 30, 1971) Quota 36.o Fund holdings of Quetzales 36.0 Stand-by arrangement 1h.0 Allocation of SDR's, 1970 h.2 1971 3.9 e/ Fiscal Year 1960/61 f/ Estimated g/ Only repayable in foreign currency h/1961 ANNEX IT BASIC DATA (cont'd) Page 3 of 3 III. SOCIAL AND RELATED INDICATORS 1960 1965 1969 Birth rate (per 1000.population) 7.7 46.1 Death rate (per 1000 population) 17.5 17.2 Infant mortality rate (per 1000 live births) 91.8 92.6 Life expectancy (years) 49 Median age of population (years) 17.8 Dependent population (X of total population)1/ 8.8 Population in settlements of more than 10,000 inhabitants (4 of total population) 19 Literacy rate (E of adult population) 38 Primary school enrollment (Y of school age pop.): bO 41 46 Urban 76 7L 7B Rural 22 25 30 Secondary school enrollment (' of school age pop.) 6 9 11 Primary school retention ratio 2/ 17 19 Secondary school retention ratio2 28 28 Population per hospital bed h6 h1h )122 Doctors per 10,000 population 2.h Access to potable water (y of population): Urban 70 Rural 8 Access to electricity (' of population): Urban 56 Rural 4 Average daily caloric intake (calories) 2,000 Daily distribution of newspapers (per 100 pop.) 2.3 Radio receivers (per 100 population) 5 Economically active population (% total pop.): 31.2 Urban 32.2 Rural 30.7 Employment of economically active population (% of total): Agriculture 65.h Manufacturing 11.3 Construction 2.6 Services 12.0 Other 8.7 Distribution of farm land: % owned by top tenth 81.4 Expenditures on social services: % of Central Government budget 22.6 34.3 39.2 % of GDP at current market prices 2.1 3.6 3.6 Expenditure on defense: i of Central Government budget 9.3 15.6 15.3 % of GDP at current market prices 0.9 1.5 1.4 1/ Population under 15 and over 64, expressed as a percentage of total population. 2/ The reference year is the year of graduation of the cohort. 3/ Lowest 12 percent only.  ANNEX III GUATEMALA LOAN AND PROJECT StIARY Borrower: Empresa Guatemalteca de Telecomunicaciones (GUATEL) Guarantor: Republic of Guatemala Amount: US$16 million equivalent. The proposed loan would cover the foreign exchange cost of the project. Terms and Conditions: Payable in 20 years with 5 years grace at 7 1/4 interest per annum Project: The project comprises the following components of Guatemala's 1971-1975 telecommunication program: (1) Increase in the capacity of existing and new local telephone exchanges by about 35,000 lines; including 6,000 lines in mobile exchanges; additions to existing exchanges to conform to the new numbering plan and to handle anticipated extra traffic. (2) Expansion of cable distribution and subscriber facilities to provide approxiuately 35,000 additional direct exchange connections. (3) Installation of microwave systems on the Puerto Barrios- Guatemala City and Guatemala City-Quetzaltenango- Retalhuleu routes; installation of coaxial and VF cables and UHF/VHF systems for spur routes; an addition of multiplex equipment for about 560 channels and of open wire carrier systems for secondary routes. (h) Installation of automatic trunk switching equipment in about 20 cities. ANNEX III Page 2 Cost of Pojt: oUS$ Million Local Forein Total Local Teleohone SDrvice Local switching equipment 0.89 5.78 6.67 Local networks 1.88 5.74 7.62 Subscribers' plant 0.25 0.42 0.67 Long Distance Service Microw'ave ld nK-- 0.56 1.58 2. 1 Trunk switching'equipment 0.02 0.16 0.18 Cables and transmission equipment 0.83 1.52 2.35 Buildin and Lnd 0.28 - 0.28 Conencies Physical 0.24 0.80 1.0-4 Price 0.2 - 0.2h Total 5.19 16.00 21.19 Financing of Project: IBRD - 16.0 16.0 GUATEL - net internal cash generation 5.2 - 5.2 Total 5.2 16.o 21.2 Procurement Arrangements: International competitive bidding except for part of the switching equipment (about US$1 million) to extend the existing exchanges; this would be procured from Siemens, Federal Republic of Germany, for reason of compatibility. Suppliers in member countries of the Central American Common Market would receive a margin of preference in bid evaluation of 50 percent of the applicable external tariff or 15 percent, whichever is the lower. Estimated (US$millions) Disbursements: 1972 1973 197L 1975 1976 Total 1972-76 0.6 2.0 3.0 6.0 4.0 16.0 ANNEX III Par- 3 Consultants: With the present expatriate experts, GUATEL has the necessary planning, engineering and supervisory capability and will not need additional technical consultants. Rate of Rrturn: Internal financial rate of return on the investment is estimated at 17 percent, which is a minimum estimate of the economic rate of return. A raisal Report: Report No. PU-76a. Public Utilities Projects Department.  -4.! 4 i i ! 3n - r o -t 0 a - I - ii