El Salvador - Second Telecommunications Project

CIRCULATING CPY RESTRICTE D TO BE RETURNED TO REPORTS DESK FIL2" COFT" 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 It may not be published, quoted or cited without Bank Group authorization. Thc Bank Group does not accept responsibility for the accuracy or compicteness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ADMINISTRACION NACIONAL DE TELECOMUNICACIONES WITH THE GUARANTEE OF EL SALVADOR FOR A SECOND TELECOMMUNICATIONS PROJECT March 23, 1972  CURRENCY EQUIVALENTS US$ 1.00 = 2.50 Colones (C) c 1 = $ 0.4O  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ADMINISTRACION NACIONAL DE TELECOMUNICACIONES WITH THE GUARANTEE OF EL SALVADOR FOR A SECOND TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed loan to Administracion Nacional de Telecomunicaciones (ANTEL) with the guarantee of the Republic of El Salvador for the equivalent of $9.5 million for a telecommunications project. The loan would have a term of 20 years, including a grace period of 5 years, with interest at 7-1/4 percent per annum. PART I - INTRODUCTION 2. El Salvador has to date received nine Bank loans and two IDA credits, totalling $71.5 million net of cancellations. Four loans and a credit, totalling $30.2 million, have been made for power; three loans and a credit, totalling $26.9 million, for transportation; one loan, amount- ing to $9.5 million, for telecommunications; and one loan, amounting to $4,.9 million, for education. The last operation, a credit for power, was signed in January 1971. No other operations are scheduled for FY1972. The Bank expects to make a loan of about $2.0 million for highways and a loan of about $15.0 million for power in FY1973. 3. As of February 29, 1972, a total of $10.6 million remained to be disbursed on two loans and a credit. The final stages of construction on a highway project for which a supplementary loan was made in December 1967 (Loan 521-ES) have been delayed by changes in the project, adverse weather conditions and the war with Honduras. The project is now progressing satisfactorily, with about 90 percent of the work completed; the Closing Date has been postponed from June 30, 1971 to December 31, 1972. An education loan made in June 1969 (Loan 609-ES) has been slow in starting because of institutional difficulties within the education sector, in- experience in international bidding procedures, and budgetary pressures in the immediate post-war period. Meanwhile, the Government restructured the country's education system, and this required some changes in the project. The project is now progressing well, and is expected to be conpleted on schedule. A credit for power, made in January 1971 (Credit 227-ES), only became effective in October 1971 due to delr2s in obtairing congressional ratification. The project is progressing on schedule.  4e. IFC has made two investments in El Salvador. The first, a $VLO,000 loan in 1959 to Industrias Textiles, S.A., has been campletely repaid. The second, a $233,000 equity investment and $600,000 loan to Hoteles de Centro Am6rica, S.A., in 1969, is not yet fully disbursed. The hotel project is expected to be completed in September 1972. No other investments are under consideration at present. 5. A summary of Bank loans, IDA credits, and IFC investments is in Annex I. 6. A $250,000 claim of British bondholders in respect to debts owed by the Salvador Railway Company arose when the Company's assets were transferred to the Republic of El Salvador in 1962. About a year ago a mutually acceptable settlement of the claim was agreed upon, under which payments were to be made in public bonds to the British bondholders. Slow administrative procedures and elections in early 1972 have subsequently delayed completion of the transaction, but the last formalities are now expected to be campleted shortly. 7. Presidential elections in February 1972 gave the Government's candidate, Colonel Arturo Arimando Molina, only a plurality of votes. Thus, in accordance with the Salvadoran constitation, the final choice rested with the Parliament, which nominated Mr. Molina. The President-elect is scheduled to take office on July 1, 1972. Mr. Molina was private secretary to President Fidel Sanchez Hernandez during the current presi- dential term, and no significant changes in the Government's policies are expected, following his nomination. Parliamentary elections in M4arch 1972 gave the Government party 38 of the 52 seats (compared with 34 during the present legislature). PART II - THE ECONOMY R. A report entitled "Current Economic Position and Prospects of El Salvador" (CA-12a) was distributed to the Executive Directors on October 20, 1971. The Bank's views on the main economic issues have not changed materially since then. 9. A serious imbalance between a rapidly growing population and scant natural resources makes the solution of development problems in El Salvador both urgent and difficult. At the growth rate of 3-lv percent annually as in the sixties, the 1971 population of about 3.7 million is projected to double by 1990 and to reach almost 10 million by the end of this century. 'The present low per capita availability of cultivable land for the rural population (about 0.3 hectare) will decrease further, even assuming sub- stantial migration fran rural to urban areas. Known-mineral resources are scant, and fishing on the Pacific is limited by the narrow continental shelf. The principal assets for El Salvador's development are its dynamic  -3- entrepreneurial class and a labor force with demonstr ted ability to acquire skills rapidly. 10. The economy expanded rapidly in the sixties until 1966-67, at about 6.5 percent annually, as a result of a surge in production of manufactures for the Central American Common Market and of cotton. En- trepreneurial drive, labor force adaptability, and infrastructure in transport and electric power gave El Salvadorts industry a head-start within the Central American Common Market (CACM). The contribution of manufacturing to the gross domestic product increased from 15 percent to almost 20 percent during the sixties. 11. Nevertheless, the economy continued to depend heavily on coffee and cotton as the major sources of domestic production and export earnings. When in 1967 cotton production fell to half its 1965 peak level, as a result of disease and expansion into marginal lands, economic growth slowed down markedly, to about i percent. The cotton crisis and weakness of the inter- national coffee market held back the growth of export earnings to only about 1-2 percent annually from 1966 to 1969. The conflict with Honduras in 1969 represented another setback for the economy. Exports to the Common Market declined as the border with Honduras was shut off and expensive arrange- ments had to be undertaken for shipmentsto 'Nicaragua and Costa Rica. Export earnings recovered sharply in 1970, as a result of higher coffee prices and cotton recovery, but remained stationary in 1971, as declining coffee prices and stagnating regional exports offset the effects of accelerated cotton exports. 12. The end of the export booa of the early sixties and the Common l.4arket's problems led to a sharp decline of domestic savings and private investment in 1967-70. The rate of growth of GDP fell sharply to 3.6 per- cent in 1968, with some recovery to about !4.5 percent per year in 1969-71. The return in 1969-70 of about 70,000 Salvadoran migrants from Honduras contributed further to the pressure of population upon slowly expanding domestic income, so that per capita income actually fell in 1968 and 1969, and increased by only about one percent over the period 1970-71. 13. Over the next few years earnings from traditional exports are unlikely to expand rapidly, in view of the limited growth of the world demand for coffee and the limited land available for increasing cotton production. Full resumption of Common Market trade, which would permit the renewed growth of manufactured exports to the region and spur private investment, is not yet in sight, although some progress has been achieved in recent negotiations. Ili. In the longer term there is scope for considerable strengthening of the economy by developing industry and non-traditional agriculture aimed at the world markets. This will require land reclamation, irrigation, and improvement of manpower skill. The long-term viability of the economy, however, will also depend on well designed population policies and on a more equitable distribution of the benefits of economic growth. Income distribution has been hlghly concentrated in the past, leaving health, nu- tritional and living standards of most of the population at a low level.  15. The Governmentts cautious policies through the sixties were geared principally to maintaining price stability and avo-iding foreign exchange difficulties, without sufficient emphasis on the objective of economic diversification. Fiscal and financial stability permitted the private sector to exploit the opportunities offered by the creation of the Common Market and the cotton boom. But a low level of tax revenues, at about 10 percent of GDP, and weakc project preparation limited severely the use of long-term foreign financing, and public investment remained low. Yearly disbursements of foreign development loans fell sharply, from about $28 million in 1965-66 to an average of about .$12 million in 1963-70. The share of public investment financed with domestic resources rose from about two-thirds to more than four-fifths in the same period, but public direct investment fell as a proportion of GDP from 3.6 percent in 1965-66 to 2.5 percent in 1967-70. While progress was made in power and transport, the postponement of development expenditures in other sectors,particularly irrigation, rural development, public health and telecommunications, resulted in growing social strains and serious bottle- necks for economic growth. 16. During the last two years the Government has been increasingly aware of the gravity of development problems, and. has introduced a number of reforms, including an increase in the tax on commercial transactions (the first step in a long-studied plan of tax reforms), incentives for exports outside Central America, an irrigation law, a banking law and a new commercial code. In addition, the Government established in the Central Bank a guarantee fund for credit to small industrial entrepreneurs, and liberalized the regulations for remittances abroad of profits from foreign capital. A pilot irrigation project was satisfactorily completed. Remarkable progress was made in setting up a technical and vocational education system, and an intelligent use of televised education provided a quick and effective way of improving teaching in high schools. The Government also encouraged family planning and provided advisory services in its clinics. Progress was achieved in the preparation of projects which could form the basis for public investment expansion with long-term foreign financing. The fiscal outlook improved and direct public invest- ment in 1971 was about one-third higher than in 1970, reaching just under 3.5 percent of GDP. 17. The Government has now prepared a short-term public investment program for 1972-73 and is formulating a medium-term development plan for the succeeding five years. On the basis of information available from public agencies, the Bank prepared a tentative public invest- ment program for 1972-76 as a contribution to the Governmentts planning effort. This tentative program implies ap increase in the share of public investment expenditures in GDP from 2.5 percent in 1967-70 to about 4.5 percent in the late seventies, a target con- sistent with a GDP growth of about 5 percent yearly. The public savings  -5- effort required to finance such an undertaking is a substantial one as compared with the past performance, but would be well within the capacity of the economy. To avoid financing problems, Central Govermient current revenues would have to increase to a level of 12 percent of GDP, compared to about 10 percent in recent years. A variety of new fiscal measures have already been studied and offer a wide choice of means to achieve the necessary increase. 1)3. The proposed investment program would facilitate progress towards expanding and diversifying the economy and, at the same time, providing a more even distribution of the benefits of economic growth. Irrigation schemes, credit programs, and better extension services aimed at small and medium farmers would improve El Salvador's prospects to export high-value fruits and vegetables and substitute economically some of its food imports. Industrial credit and education are also emphasized, along with low cost public housing and water and sewerage facilities. Transport, power and telecommunications would absorb about one-third of the investment program. 19. Net international reserves increased by $15 million to $52 million in 1970, and remained at $52 million in 1971, equivalent to nine weeks current payments. The Government is likely to avoid balance of payments difficulties by following, as in the past, cautious monetary and fiscal policies. A stand-by arrangement with the IMF for $14 million expired at the end of 1971, and the Government plans to request a new stand-by arrangement in July 1972, after the new Administration takes office. El Salvador has a low public external debt. As of the end of 1971 the external debt in foreign currency totalled $134 million including undisbursed amounts. Most of the debt is due to international organizations and to USAID at long terms. The resulting level of debt service -- about 5 percent of export earnings in the next six or seven years -- is low. If better project preparation is achieved, El Salvador could draw on multilateral aid much more than in recent years and thus ease, to some extent, the problems of balance of payments adjustment which will result from the expected low rate of export growth. 20. Apart from the Bank, external financing is principally provided by USAID, the Interamerican Development Bank (IDB) and the Central American Bank for Economic Integration (CABEI). The IDB has made loans for housing, water and sewerage, ports, highways, agricultural credit, industry, higher education and municipal markets. USAID has financed health centers, primary education, housing, and industry. CABEI has financed industry and also highway and telecommunications projects of importance for the Central American network. The past lending of these agencies is summarized below. Though these agencies are likely to continua supporting projects in the same sectors, their programs are still tentative. The IDB is interested in financing tourism, irrigation, road maintenance and project preparation, but none of these operations is at an advanced stage. We are endeavoring to coordinate our possible financing in these sectors with the IDB.  -6- (US$ million) IBRD IDA AID IDB / CA3EI 1/ Lending 1950-1965 37.7 8.0 ?7.1 26.9 7.? Lending 1966-1971 Transport 2.8 - - 1h.8 18.3 Power and Telecaomunications - 5.6 - - 2.7 Education )1.9 - 10.1 2.0 - Health - - 2.7 - - Housing - - 3.0 6.3 1.6 Agriculture - - - 3.5 - Industry - - )J.8 3.1 13.7 Others -2.0 1.0 1.0 Total 45Jh 13.6 4.9.7 56.9 L5.2 1/ Includes some local currency loans. 21. The terms of loans from other development agencies are usually softer than those of Bank loans. AID loans have a term of )oif years with interest of 2 to 3 percent, and most IDB loans are extended from the Fund for Special Operations, carrying 3-1! percent interest rates and terms ranging from 15 to 30 years. The terms of CABEI loans -- which often provide 100 percent financing of local expenditures -- vary in accordance with CABEI's sources of financing, but generally contain a substantial concessionary element. USAID and the Bank Group, which each held roughly one-third of the debt repayable in foreign currency at the end of 1971, are El Salvador's largest external creditors. 22. In the past, Bank Group lending has been directed mainly towards the strengthening of economic infrastructure such as power, roads, and telecommunications, and to a lesser extent toward education. The Bank joined the IDB and CABEI in assisting the development of El Salvador's arterial highway system. The Bank also developed a close relationship with El Salvador's public power agency (CEL) and helped it to develop into one of the most efficient power companies in Central America. 23. The Bank plans to continue lending for power, transportation and telecommunications, given the growing needs in these sectors. In the recent past, however, inadequate project preparation and the delays of Congress in approving foreign loans have been major obstacles to expand and diversify the Bank's and other agencies' operations. During recent dis- cussions with the Government, the Bank reiterated the importance of devising a practical development strategy, including a substantially expanded public  -7- investment program. The Bank is closely following the preparation of the development plan, but no firm understanding on policies is likely until the new Administration is installed in July 1972. Should, however, the incoming administration adopt the approach to development planning dis- cussed in paragraphsl6-18 above, the range of Bank lending in the future should be extended to agriculture and family planning, with further support to education. 2),. With respect to agriculture the Bank has for some time con- sidered the possibility of loans for irrigation and livestock. The Bank *appraised an irrigation project in 1968 and an FAO mission identified in 1970 a livestock project, but the Government has not yet defined its policies and priorities with respect to these sectors. With respect to industry,.the Bank is actively exploring the possibilities for channelling its lending to El Salvador and the other Central American countries through the Central American Bank for Economic Integration. The Govern- ment has shown interest in Bank assistance in the field of population policies and in further loans for education; a UiESCO mission has recently visited El Salvador to identify a project for Bank financing. For the immediate future, the Bank is proposing to make a small loan in FY1973 for improvements of the secondary and farm roads network in the northern region, and a loan to the power agency (CEL) for a hydroelectric powier project. PART III - THE FROJECT Sector Background ;'5. Development of telecommunications in El Salvador has lagged behind the rapidly growing needs of industry and commerce, sectors which played an important role in the country's economic growth and are expected to become even more important in the future. At present, insufficient capacity and spread of the local telephone exchanges and the long-distance network have become a serious bottleneck, and have prompted the Government to rank telecommunications high among immediate development priorities. '6. The telephone density in El Salvador, 1.1 telephones per 100 persons, is considerably lower than that of Panama (4.2), Costa Rica (3.0) and Nicaragua (1.3). El Salvador has 35 local automatic exchanges with a total capacity of about bo,000 lines and 28,000 working connections. An additional 1,00n connections operate off small capacity manual exchanges in rural areas. The growth of telephone lines since 1967 (8 percent per year) has been considerably slower than in Central America as a whole (13 percent per year).  - 8 - 27. About 74 percent of all connections are in the metropolitan area of San Salvador, the capital of the country. Even though the number of'connected subscribers in the city has trebled, the central and most important automatic exchange in this city has not been expanded since 1958, and no new connections have been made to this exchange since 1966, when saturation was reached. This has resulted in a large un- satisfied demand in the business area, and congestion and poor service in the whole city. Furthermore, insufficient investment in the dis- tribution network has brought about a high fault incidence. In areas outside the capital, demand for local telephone service is largely being met, but the long-distance service, which was established essentially within the past five years', is also congested. 28. The five Central American countries are now linked by a high quality microwave system which was recently completed at a cost of about $11.8 million, of which El Salvador provided $2.'7 million. Though not yet fully automatic, a large part of the network was in operation in January 1972. International telephone service is routed through high frequency radio telephone circuits to the United States. International telex service, which was introduced in El Salvador in 1968, has grown rapidly and is operating satisfactorily. 29. In 1963 the Government, on the advice of the Bank and with the support of a $9.5 million Bank loan (Loan 358-ES), reorganized the tele- communications sector and placed it under a new autonomous agency, the Administraci6n Nacional de Telecomunicaciones (ANTEL). The project financed by the Bank was satisfactorily completed by ANTEL in 1968. Sub- sequent expansion of telecommunications, however, was hamliered by adminis-, trative, financial and 6iigineering problems in ANTEL. Largely as a result of Bank missions'and advice, most of the difficulties of ANTEL have now been solved, and a medium-term investment program has been prepared to narrow substantially the gap between demand and supply (see below, paragraph 36). In addition to the present project, the Bank expects to consider financing a third project within the next five years, since commercial and residential demand for telephone services continues to grow fast. Project Enti& 30. ANTEL is an autonomous Government-owned public corporation. It has the right to plan, acquire, construct and operate telecommunication facilities. It also has the authority to fix tariffs and other charges for its services, subject to approval of the Ministry of Economy. It is administered by a five-member Board of Directors, each with a term of four years. The President of the Board is appointed by the President of the Republic. The remaini'ng four directors are appointed respectively by the Minister of Econcmy, the Minister of the Interior, the banking sector, and the agricultural, industrial and coinmerciial associations. ANTEL's day-to-day business is administered by the President of the Board and by a General Manager. Of ANTEL's total telecommunications staff of  -9- 2,300, about 1,300 are telephone employees. During negotiations for the proposed loan, ANTEL assured the Bank that it would limit the strength of its non-technical staff during the period of construction of the Project to about the present level,to encourage labor productivity. Project Description and Financing Plan 31. A report entitled "Appraisal of the Second Telecommunications Project of the Administraci6n Nacional de Telecomunicaciones (ANTEL), El Salvador" (PU-78a, dated March 9, 1972) is being distributed separately. The main features of the project are summarized in Annex III. 32. A Bank mission appraised ANTEL's expansion program for 1971-73 in llovember 1970 and prepared an appraisal report in March 1971. At that time, however, ANTEL entered into a turnkey conitract for an exchange which had been part of the proposed Bank project. This required the preparation of a revised project for construction in 1972-75 excluding the part of ANTEff's program which was carried out without international competitive bidding. This revised project was appraised in August/ September 1971. 33. Negotiations for the proposed loan were held in Washington in November 1971. ANTEL was represented by Messrs. Vicente Sanchez Hernandez, President of the Board of Directors- Roberto Morales, Financial Manager- Juan Antonio Carillo, Chief Engineer; and Oscar Edgardo Lara, General Counsel. The Government of El Salvador was represented by Messrs. Joaquin Morazan Bonilla, Sub-secretary of Economy; and Jos6 Guillermo Pantoja Espinal, of the National Economic Planning Council (C6NAPLAN). 34. The project consists of: (a) installation of 18,000 additional lines of local automatic telephone exchange equipment; (b) expansion of local cable network and subscriber facilities to provide about 14,500 additional telephone exchange con- nections; (c) installation of long-distance equipment on various routes to provide about 750 additional circuits; and (d) services of technical consultants to assist ANTEL's staff in procurement and in forecasting, planning and project preparation for ANTEL's 1976-80 program. The project would be carried out during 1972-75 with the purpose of: (i) increasing local automatic telephone exchange line capacity by about 37 percent, thus removing the congestion in the local networks; (ii) pro- viding a 150 percent increase in long-distance circuits to improve service  - 10 - and meet the growth of the demand; (iii) satisfying the backlog of applications for telephone service in metropolitan San Salvador and meeting part of the new demand for telephones. As a result of the project, telephone density in El Salvador would increase from the present 1.1 telephones per 100 persons to 1.3. 35. The project is estimated to cost $12.7 million equivalent. The proposed loan of $9.5 million would cover the foreign exchange cost of the project, and possibly a small amount of local costs which would be part of the total costs of procurement, if any, in San Salvador (see paragraph ho). The project forms the main part of ANTEL's t$21.5 million (1971-75) investment programi, for which a satisfactory financing plan has been prepared. About 40 percent of the funds required for this program are expected to be generated within AITEL, about i15 percent from the proposed Bank loan, 12 percent from a CABEI loan, and the remaining 3 per- cent from a Government loan. 36. ANTEL's 1971-75 expansion program includes, in addition to the project proposed for Bank financing: (i) completion of the El Salvador section of the Central American microwave network commissioned in November 1971; (ii) ongoing works for the extension of local distribution cables in San Salvador; (iii) installation of an additional 8,000-line automatib exchange in central San Salvador together with associated subscriber and inter-office cables, (iv) extension of the long-distance automatic exchanges by 960 lines and (v) construction of ANTEL's head- quarters building. Execution of this program will go some way toward eliminating service deficiencies, by removing congestion in the local and long-distance network. Nevertheless, the current backlog of unsatisfied demand and the projected demand growth of 10 to 13 percent per year in different areas of the capital city indicate that ANTEL will be unable to satisfy fully the demand for telephone services by 1975. The gap is expected to be closed only in the next expansion phase, as the present program is the largest which ANTEL can reasonably be expected to implement at this time, in view of its present technical and administrative capability. Financial Aspects 37. ANTEL's financial position, which has improved substantially since 1967 when steps were taken to strengthen financial management and to remove liquidity problems, is now sound and expected to remain so. During the period 1967-1970 ANTEL's net operating income increased by 115 percent and the rate of return on its net fixed assets in operation averaged about 12 percent. During the project period 1972-75 A4TEL is expected to earn an annual rate of return of about 13 percent. ANTEL has agreed to maintain a rate of return of no less than 10 percent during the term of the loan. In addition, ANTEL has agreed to revise its tariff structure, in consultation with the Bank, taking into account. recom- mendations of an expert retained by ANTEL for a tariff study in 1969.  38. ANTEL's debt/equity ratio would be 50/50 at the end of 1976, thus leaving a fair margin for further borrowing. The current position throughout the project period would be satisfactory. The debt service coverage by internal cash generation is expected to be satisfactory, ranging from 1.5 in 1971 to 2.8 in 1976. ANTEL has agreed not to incur any medium- or long-term debt without the Bank's prior approval, unless its net revenues would cover debt service at least 1.5 times. 30. Under a special agreement, ANTEL has been offsetting the charges to the Government for use of telecammunication services against payments due from ANTEL to the Government for the value of assets transferred when AFR'EL was formed in 1963. The Government has not yet entered these re- payments in its books but has agreed to issue an executive order to record properly these transactions and to assure Government payment for telecommunication services after the cost of the transferred assets is fully payed in 1972. Procurement 110. Goods financed by the Bank would be procured through international competitive bidding, except for certain additions (about $0.6 million) to existing equipment where compatibility is essential and for which prices would be negotiated with the supplier of the existing equipment, which was procured after international competitive bidding under Loan ES-358. In the light of the arrangements contained in the Central American Agree- ment on Fiscal Incentives for Industrial Development, which have been called to the attention of the Executive Directors on previous occasions, suppliers within the Central American Common Market would receive a preference of 15 percent of the c.i.f. price or 50 percent of existing custom duties, whichever is the lower. The value of orders placed in Central America under the proposed arrangement is expected to be less than $1.7 million, including possible procurement in El Salvador of about $l.n million, of which about $0.3 million would represent local costs. Disbursement i,L. Disbursements of the loan would be for the foreign exchange cost of imported equipment and consulting services, and 95 percent of the ex- factory cost of any item procured within El Salvador, representing the estimated cost net of taxes. Economic Justification l2. The project is technically sound and economically justified. The internal financial rate of return is estimated at 18.6 percent. This rate understates the economic rate of return, because benefits accruing from reduced congestion and improved telecommunications services for economic activity, functioning of government and social services are not fully reflected in the net revenues accruing from the project.  - 12 - PART IV - LEGAL INSrUIMENTS AND AUTHORITY L3. The draft Loan Agreement between the Bank and AIXTEL, the draft Guarantee Agreement between the Republic of El Salvador and the Bank, the Report of the Committee p,rovided for in Article III, Section ht (iii) of the Articles of Agreement and the text of the Resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern of loans for tele- communications projects. Of special interest are the provisions concerning technical assistance and expansion planning (Section 3.02, Loan Agreement), and procurement of extensions to existing equipment (Sched4'tii)i, paragraph 2, Loan Agreement). - 4ht. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RECOMMENDATION h5. I recommend that the Executive Directors approve the proposed loan. Robert S. MIcNamara President Attachments. Washington, D.C. March 23, 1972  ANNEX I Page 1 of 2 STATEMENT OF BANK LOANS AND IDA CREDITS TO EL SALVADOR AT FEBRUARY 29, 1972 Loan or Credit Amount (US$millions) Number Year Borrower Purpose Bank IDA Undisbursed 22 19h19 Comision del Rio Lempa Power 12.5 - 104 195b Government Roads 11.1 - 216 1959 Government Roads 5.0 - 221 1959 Comisi6n del Rio Lempa Power 2.7 - 263 1960 Comisi6n del Rio Lempa Power 3.5 - 31 1962 Government Roads - 8.o 31,2 1963 Comisi6n del Rio Lempa Power 5.9 - 358 1963 Administracion Nacional de Telecomunicaciones (ANTEL) Communications 9.5 - 521 1967 Government Roads 2.8 - 0.6 609 1969 Government Education 4.9 - 4.6 227 1971 Government Power - 5.6 5-4 Total (less cancellations) 57.9 13.6 10.6 of which has been repaid 29.3 - Total now outstanding 28.6 13.6 Amount sold 3.9 of which has been repaid 3.9 Total now held by Bank and IDA 28.6 13.6 Total undisbursed 5.2 5.4 10.6  ANN4EX I Page ,' of 2 STATEMENT OF IFC INVESTMENTS IN EL SALVADOR AT FEBRUARYL 29-. 1972 Amount (US$ millions) Year Company Loans Equity Total 1959 Industrias Textiles, S.A. 0.L4 - 0.14 i969 Hoteles de Centro Amie6ica, S.A. o.60 0.23 0.83 Total 0.7h 0.23 0.97 less sold or repaid 0.14 - 0.lh Now held o.60 0.23 0.83  EL SALVADOR ANNEX II COUNTRY DATA Page 1 of L I. SIZE Area (square kilometers) 20,900 1960 1965 1969 1970 1971 / population (million) 2.50 2.93 3.421/ 3.561! 3 69 Annual growth rate (o/o) 2.8 3.7 4.7 1/ 4.1 I 3.7 s.XP (factor cost) per capita (US$) 226 271 276 283 235 II. ECONOIEEC INDICATORS GDP at current factor cost (millions of Colones) 1,303 1,823 2,217 2,337 2,lb30 Sector origin (o/o) 100 100 100 100 100 Agriculture 3Y7 29.1 297 2 UX 27.1 Manufacturing 3.4.6 17.7 19.6 1.9.5 19.5 .Construction 3.3 3.1 2.6 2.7 2.9 Commerce 22.4 24.2 22.9 21.9 2i.3 Other 28.2 25.9 28.8 29.3 29.2 Anuual Changes (o/o) 1961-68 1969 1970 1971 GDP.at current market prices 6.1 3.9 6.6 L.5 GDP at constant market prices 6.3 4.2 4.8 Manufacturing value-a'dded (constant prices) 9.7. Agriculture value-added (constant prices) 3.4 Exports, f.o.b. 9.3 -4.7 13.4 -0.2 Imports, c.i.f. 9.7 -3.3 2.0 16.1 Total barking system credit assets, of which: 4.8 15.1 0.5 credit to public sector (2.5) (13.9) (-17.h) credit to private sector (6.7) (13.6) (6.3) Consumer prices 0.4 -0.2 2.8 1960 1965 1969 1970 1971 GDP at current market prices (millions of Colones) 1,420 1,992 2,382 2,538 2,652 o/o of GDP at current market prices: Gross fixed investment 14.4 14.9 11.5 11.4 11.-7 Public sector (2.9) (4.1) (2.7) (2.7) (3.)) Private sector (11.5) (10.8) (8.8) (8.7) (8.7) Inventory investment 1.1 0.5 1.0 o.6 Gross domestic savings 11.0 13.0 9.9 11.7 Public sector (3.0) (3.5) (2.1) (2.4) Private sector (8.0) (9.5) (7.8) (9.3) Resource gap (surplus -) 4.5 2.4 2.6 0.3 / Including about 70,000 refugees from Honduras in late 1969 and in 1970. / Based upon GDP price doflator whinh is currcntly under review. P Preliminary est1mates  AN1NEX II COUNTRY DAT14 (conttd) Page 2 of L 1960 1965 1969 1970 1971 Public Sector Finances (in millions of Colones) Current revenue 395 359 393 (o/o of GDP at current factor cost) (21.7) (16.2) (16.8) Current expenditure 224 310 332 (o/o of GDP at current -factor cost) (12.3) (14.0) (14.2) Current surplus 71 49 61 Investment expenditure 91 90 88 Surplus/Deficit -20 -1 -27 Net external financing 36 32 7 Net domestic financing -16 9 20 Balance of Payments (in millions of uS$) Exports of goods and non-factor services 116 212 222 254 Imports of goods and non-factor services 142 231 247 257 Resource gap 26 19 25 3 Factor income, net 3 7 8 8 Current account deficit 29 26 33 11 Transfers, net 3 13 14 12 Private capital, net 4 9 1 11 Official capital, net - 14 13 3 Reserve changes, net 22 -10 5 -15 Concentration of Communodity Exports (o/o of exports, f.o.b.) Coffee 66 51 L3 50 39 Cotton 13 20 11 10 12 External Public Debt 14ediuwn and long-term outstanding as reported to IBRD (inclucLing undisbursed, repayable in foreign currency, in millions of US$) 80 117 120 13)4 Debt service ratio (% of foreign exchange earnings) 3.5 2.8 3.6 L.7 Net foreign exchange reserves of the banking system (V-S$ milTmon) 15 51 37 52 52 Coverage of current payments (numaber of weeks) 6.0 11.0 7.5 10.2 9.1 IBRD loans as of February 29, 1972 US$57.9 million Of wlhich, outstandcing: US$28.6 million IDA credits as of February 29, 1972 US$13.6 million Of which, outstanding: US$13.6 million ITF clata a/ (as of Mqarch 7, 1972) Quota SDR35.0 million Funid holdings of Colones 129 percent of quota Allocation of SDUts, 1970 SDR )1.2 million 1971 SDR 3.7 million 1972 SDR 3.7 million a! SDR. US$1 at the parity of US$35 for one ounce of gold.  AiiX II Page 3 of COUNTRY DATA (cont'd) 1960 1965 1969 1970 III. SOCIAL AND RELATED INDICATORS Birth rate (per 1,000 population) 49.5 46.9 42.0 40.0 Death rate (per 1,000 population) 11.7 10.6 9.9 9.9 Infant mortality rate (per 1,000 live births) 76.3 70.6 63.7 66.8 Life expectancy (years) 59.4 62.6 Dependent popuLlation (% of total population) 34.1 49.9 50.3 50.4 Urban population (% of total population) 38.5 Employment Economically active population (% of total. population) 32.4 31.9 31.5 31.4 Employment of economicallyactive population (% of total): Agriculture and Fishing 57.5 52.2 48.1 46.7 Manufacturing 12.2 16.1 18.2 17.9 Others 25.2 29.0 28.1 26.7 Unemployment (% of econ. active population) 5.) 2.7 5.6 8.7 Total Public Expenditures on Social Sectors a/ 7 of GDP at current market prices 5.2 5.3 5.7 % of Public sector expenditures 32.7 31.5 31.6 % of Central Government expenditures 43.2 42.0 43.7 Income Distribution % of National Income: Lowest 20%o of population 3.5 Highest 20% of population 60.0 Education Literacy rate (% of adult population) 50.8 58.o Primary school enrollment (% of school age pop.) 57.3 73.8 Secondary school enrollment (% of school age pop.) 9.7 19.7 Primary school retention ratio 15.C 24.3 28.0 Secondary school retention ratio 20.0 a/ Refers to Capital and Current Expenditures. Social sectors include: Education, Public Health, Poor People Welfare, Housing and Water and Sewerage.  AANEX II Page II of L COUNiTRY DATA (cont'd) 1960 1965 1969 1970 Health Doctors per 10,000 population 1.9 2.2 2.6 Population per hospital bed 450 487 h90 Access to potable water (% of population) Urban 48.o 64.0 68.7 70.0 Rural 3.0 32.8 25.0 27.0 Access to sewerage services (% of urban population) 29.2 57.0 73.7 Average daily caloric intake per person 2,030 1,840 Other Access to electricity (% of population) 23.0 30.0 Number of telephones (per 1,000 pop.) 6.4 7.0 10.7 11.1  ANNEX III Page 1 of 2 EL SALVADOR LOAN AND PROJECT SUMMARY BORROWER: Administraci6n Nacional de Telecomunicaciones (ANTEL). GUARANTOR: Republic of El Salvador. AMOUNT: US$9.5 million equivalent. The proposed loan would cover the foreign exchange cost of the project, and possibly also a small amount of local costs. TERMS AND CONDITIONS: Payable in 20 years with 5 years of grace at 7-1/4 percent interest per annum. PROJECT: Second Telecommunications Project 1) Installation of 18,000 additional lines of automatic telephone exchange equipment. 2) Expansion of local cable network and subscriber facilities to provide about 1I4,500 additional telephone exchange connections. 3) Installation of long-distance equipment on various routes to provide about 750 additional circuits. 4) Servicesof technical consultants to assist AliTEL's staff in procurenent and in forecasting, planning and project preparation for ANTEL's 1976-80 program. COST OF PROJECT: (US$million) Local Foreign Total Local automatic exchange equipment 0.2 2.7 2.9 Subscribers' equipment 0.2 0.3 0.5 Local exchange cable 1.7 4.0 5.7 Long distance equipment 0.2 1.9 2.1 Buildings o.6 - 0.6 Consultants - 0.2 0.2 Contingencies: Physical 0.2 0.4 o.6 Price 0.1 - 0.1 Total Project Cost 3.2 9.5 12.7  ANNEX III Page 2 of 2 FINANCING OF (US$million) PROJECT: Local Foreign Total IBRD _ 9.5 9.5 ANTEL i 3. 32 Total 3.2 9-5 12.7 PROCUREMENT ARRANGEMENT Bank-financed items by international competitive bidding, except for about $0.6 million for extensionsto existing equip- ment where compatibility is essential and-for which prices would be negotiated with the supplier, of existting equipment. Suppliers in Central American Cammon Market c,ountries would receive a preference in bid evaluation of 50 percent of the applicable external tariff or 15 percent of the c.i.f. price, whichever is lower. ESTIMATED DISBURSEMENTS: (US$nillion) Total 1972 1973 1974 1975 1976 1972-76 - 1.9 3.8 3.4 0.4 9.5 CONSULTANTS: Suitably qualified and experienced technical consultants to assist 'in procurement, planning and proj,ect preparation for ANTEL's 1976-80 program. RATE OF RETURN: Internal financial rate of return is estimate.d at 18.6 percent. APPRAISAL REPORT! Report No. PU-78a. Public Utilities Department.  E L SALVADOR - 1 LOCAL, TRUNK AND INTERNATIONAL CENTER EXCHANGES AND LONG DISTANCE NETWORK 0 LOCALANDTRUNK EXCHANGE - 0 LOCAL AND GROUP EXCHANGE 0