Colombia - Telecommunications sector

Report No. 663-CO FILE COPY Telecommunications Sector Colombia May 16, 1975 Regional Projects Department Latin America and the Caribbean Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY EQUIVALENTS US$1 = Col$28.12 (as of December 1974) Col$1 = US$0.0356 Col$1,ooo,ooo = US$35,562 FISCAL YEAR January 1 to December 31 LIST OF ABBREVIATIONS AND TITLES USED IN THE REPORT TELECOM _ Empresa Nacional de Telecomunicaciones - an entity solely responsible for operating national telegraph, telex and long distance services and international telecommunications services; and with 53 other entities responsible for local telephone services. TELEX - telegraph exchange service for subscribers. VHF/HF - very high freauency radio 30 - 300 mHz/high frequency radio up to 30 mHz. GLOSSARY OF TECHNICAL TERMS USED IN THE REPORT CARRIER - a system of providing a number of circuits over one radio link, coaxial cable or a pair of wires. FILL - percentage of installed capacity of a telephone exchange actually in service. MICROWAVE - a system of commiunications using frequencies over 300 mHz and working on a line of sight propagation basis.  TELElCO1MUNICATIONS SECTOR COLO`BIA Table of Contents Page No. SUMMARY AND CONCLUSIONS ............................. i-iii 1. INTRODUCTION ........................................ 1 2. THE SECTOR - INSTITUTIONAL ASPECTS .... .............. 2 Background ..................................... 2 Organization ................................... 2 Sector Problems ................................ 4 Planning ....................................... 5 Training ........ . ........ 5 Finance ........... ............................. 6 Procurement ........ ............................ 5 Sector Reorganization ...... .................... 7 Advantages of Full Integration .... ............. 8 Interim Measures ....... ........................ 11 3. THE SECTOR - DEVELOPMENTAL ASPECTS .... .............. 15 Existing Facilities ............................ 15 Local Telephone Service ...................... 15 Long Distance Service ........................ 15 Provincial and Rural Long Distance Service ... 15 Telex and Telegraph Service ....... ........... 16 International Service ........... ............. 16 Quality of Service ........................... 16 Past Performance in Expansion of Facilities .. 16 Market Demand .................................. 17 Local Facilities . ............................. 17 Long Distance Facilities ..................... 17 Provincial and Rural Long Distance Facilities . 18 Telex and Telegraph Facilities ..... .......... 18 International Facilities ........ ............. 18 Investment Program ............................. 19 Development Priorities ...................... 19 Investment Priorities ...................... 21  Table of Contents (Continued) Page No. Tariffs ......... ..................... 22 Investment Deposit ............................ 22 Guarantee Deposit ............................ 23 Installation Fee ............................. 23 M4onthly Rental Charge ........................ 23 Call Charge ............................... 23 Long Distance Charges ........................ 23 Revenue Sharing .............................. 24 Recommendations .............................. 24 Financing ...................................... 25 Financing Arrangements ...... ................. 27 Operating Results ........ .................... 28 Manufacture . ................................... 23 Cables ........................................ 28 Equipment . ................................... 29 Equipment Requirements ...... ................. 29 4. RECOMMENDATIONS MID FlTU1RE ACTION ..... .............. 31 Decemmondlaat1nn 5............... I V 7'uture kre-ion .......... ................. 3?  LIST OF ANNETES 1. Telephone Entities Operating in Colombia as of December 31, 1973. 2. Installed Capacity and Connected Lines (1968-73) 3. Investment (1976-80) i, Summary of Tariffs in Seven Large Entities 5. Long Distance Tariffs 6. Income Statements for Six largest Operating Companies - Telecommunications Branch 7. Statement of Financial Position for Six Largest Companies - Telecommunica- tions Pranch 8. Statemrnt or Estimated Sources and F1cquirements for- Funds   TELECOMMUNICATIONS SECTOR COLOMBIA SUMMARY AND CONCLUSIONS i. This report considers the problems and outlines the conclusions reached as a result of a study of the telecommunications sector in Colombia. ii. The telecommunications sector comprises 54 entities of which 53 are responsible for local telephone operations in different places; and one, Empresa Nacional de Telecommunicaciones (TELECOM) is responsible for opera- tion of national long distance telephone, telegraph and telex services; in- ternational telecommunications services; and some local telephone services. The 53 local telephone entities are operated by municipalities and state governments, while TELECOM is an autonomous entity operated under the over- all supervision of the Colombian Government. iii. The telecommunications sector is poorly coordinated and inefficient due to its structure: The fragmentation of the operations between 54 enti- ties would create problems in any case but many of the entities do not have the capacity or organization to adequately manage their operations or to plan and implement an effective expansion program. Further, most of these entities are in continuous financial difficulty due to poor financial dis- cipline and organization, use of excessive short-term financing and inade- quate tariffs. Procurement practices are unsatisfactory partly due to poor planning and coordination. Moreover, in the absence of unification, Govern- ment has undertaken many of the normal functions of the operating entities which are performed or require approval by the Ministry of Communications, Ministry of Finance, and the National Planning Department. These additional approvals needed for planning and implementing expansion programs make the process extremely protracted and lead to considerable inefficiency and de- lay. iv. The present fragmentation of the sector lowers efficiency of opera- tion and service standards and increases costs. Full integration of the sector by consolidation into a single telecommunications entity should be proceeded with as the desirable long-term objective. There would seem to be two alternative means which might be adopted to integrate the sector. The first of these is compulsory acquisition. This entails changes in legislation basic to the constitution, raises problems of local interests, could raise political problems and take indefinite time. The second method is to supplement the present continuous process of purchase by channeling investment for development in the entities via TELECOM on the basis of equity participation so that TELECOM would acquire an interest in and progressively ownership of the entities.  - ii - v. W4hile no systematic projection of future subscriber connection demand for the whole country has been made, three of the entities have made demand studies. Based on these studies, an annual demand growth rate of 9.5 percent has been forecast. At this growth rate the size of the local telephone network should expand from 670,000 subscriber lines at the end of 1973 to 1,266,000 lines at the end of 1980. Further, additional long dis- tance lines, and terminal equipment to cater for the traffic generated by the new subscribers, and the increase in traffic of the existing subscribers, as community of interest is extended, have also to be installed. vi. The total investment in the sector during 1976-80 would be about Col$11,834 million (IJS$326.4 million), including a foreign exchange component of about US$201 million. This investment includes about Col$1,645 million (US$42 million), including a foreign exchange component of US$36 million, for the extension of long distance, rural and teleprinter networks. vii. The local tariffs are generally low compared with other developing countries. Increases are necessary to meet the cost of improved maintenance, provide an adequate return on investment and generate internal cash to cover a reasonable portion of the capital requirements. viii. Development of telecommunications facilities has been generally financed through suppliers' credits with the disadvantages of short-term financing and higher equipmene costs. The planning of facilities also loses flexibility since the choices of equipment are not based on technical and least cost considerations, but are limited to items available from suppliers prepared to offer financing arrangements. Future development plans are not based on needs but on the quantum and timing of suppliers' credits. As a result of difficulty in obtaining satisfactory financing, telecommunications development in all but the largest entities has practically ceased; and plant conditions have become unsatisfactory due to lack of standardization. ix. While the accounting and finance staff of the larger entities are reasonably competent, the smaller entities have mainly unqualified (and in some cases no) accounting/financial personnel - largely because the size of operations and inadequacy of their resources do not permit them to attract and retain the necessary quality of personnel. x. W4ith the introduction of coordinated procurement of telecommunica- tions goods; standardization of equipment and prediction of an orderly demand for equipment, a telecommunications industry can be established in Colombia. xi. External lenders including the Bank and other aid agencies could facilitate the process of consolidation of the sector by making available long-term financing through TELECOM to assist in the expansion of the exist- ing entities and to enable TELECOM to obtain an interest in these entities.  - iii - This would make a considerable contribution to the rational development of the sector, and provide for institution building with a consequent reduction in operating costs resulting from standardization and consolidation of opera- tions. Procurement of goods should preferably be carried out through inter- national competitive bids as significant savings in equipment costs are likely to accrue.   - 5 - 2.13 Fragmentation of operations among a large number of telecommunica- tions entities lowers efficiency of operation and service standards (see para. 3.06), hinders planned continuous expansion of facilities and increases costs. In addition, failure to meet demand and the unsatisfactory quality of service has serious repercussions on the economy as a whole. Planning 2.14 Empresa Nacional de Telecomunicaciones (TELECOM), Empresa Telefonos de Bogota (ETB), and Empresas Publicas de Medellin (EPM) are the only three of the fifty-four telecommunications entities who have network design and project preparation groups within their organizations. These entities have prepared five-year development programs. A few of the other larger entities have from time to time, retained consultants, to prepare telephone develop- ment plans to meet the immediate demands for telephone facilities, and then prepare detailed projects. Even so, these projects are dependent on the municipalities' interest in the development of telephone communications at that particular period of time. Current needs are usually catered for and continuous planning of facilities is rarely, if ever, done. The Ministry of Communications assists in the planning, network design and desk appraisals of projects for the remaining entities (see para. 2.03). These plans are also usually based only on piece-meal requirements in view of the limited availability of funds to the municipalities, and the pressures and demands made on these municipalities to meet the financing requirements for the development of the other services they provide. Planning and network design are almost wholly based on short-term needs. For an integrated and orderly development of telecommunications services at a minimum cost, planning has to be done on a long term and continuous basis. Training 2.15 TELECOM and ETB are the only two of the telephone entities that maintain training centers for their staff. The Technical Institute of Electronics and Communications (ITEC) at Bogota, which is operated by TELECOM imparts basic and refresher training to technical, operational, and admin- istrative staff. The training center is run efficiently and trains from 2,000-3,000 personnel per year. TELECOM also operates regional training centers at Barranquilla, Bucaramanga, Cali, Manizales, Medellin and Ibague. These training centers impart training to operational staff only. The re- gional centers train a total of from 600-800 personnel per year. ETB main- tains a very small training center to impart training to 20-30 recruits per year. The other telephone operating entities do not have any training cen- ters. In those entities some training is given on the job by senior staff. Staff are also trained by contractors during switching equipment installa- tion. The lack of proper training is reflected in the maintenance inade- quacies and inefficiencies which exist in the service given by those enti- ties.  -6- Finance 2.16 Many of the smaller entities do not prepare financial statements or follow accounting practices making possible any reasonably accurate re- porting. Though the financial staff of the larger entities are reasonably competent, the smaller entities accounting or financial personnel, where they exist, are mainly unqualified. The size of the operations of the smaller entities and the inadequacy of their resources makes it difficult for them to attract and retain the requisite quality of accounting and financial per- sonnel. 2.17 Local exchange equipment is usually obtained under suppliers' credits, the terms of financing generally being two years of grace followed by a five to eight-year amortization period. Many of the entities have been unable to meet the servicing requirements of past supplier credits, and have had to obtain Government's assistance for conversion of the foreign into local bank loans with a fresh two-year grace period. Long-term financ- ing, which is essential for economic telecommunications development has not been available to the various entities, except for TELECOM which has obtained three loans from the lWorld Bank. 2.18 The general level of tariffs is low (see paras 3.36-3.37). Many of the entities are currently planning tariff increases. While some of the larger entities would probably obtain the National Tariff Board approval, the rest of the entities, who urgently need an increase in tariffs to gen- erate sufficient funds for proper maintenance of equipment and servicing of debts, are providing such poor service that any tariff increase could result in public protests that service conditions are so poor that higher tariffs are not justified. Procurement 2.19 According to current Government regulations, all telecommunica- tions equipment (except when existing local exchange equipment is proposed to be extended by not more than 40 percent of existing capacity, when nego- tiations with suppliers of existing equipment are permissible) is required to be procured through competitive bids. Imported equipment is procured through international competitive bids and indigenous goods are obtained through local bids. 2.20 In the special case of procurement of telephone cables, the tele- phone entities have first to call for bids for the supply of lead from Peru, and copper from Chile. Bids are then called for the manufacture of the cables--with copper and lead supplied by the entities--from two local cable manufacturers. The raw materials are obtained by the telephone entities to save expenditure on import duties from which they are exempt, whereas the cable manufacturers would have to pay import duties and would include these costs in the overall cost of the finished cables.  - 7 - 2.21 Currently, TELECOMI does the procurement of its own local exchange equipment, cables and telephones; long distance transmission and switching equipment; and telegraph and telex equipment. The other 53 entities, which only operate local telephone services, procure local exchange equipment, cables and telephones. All the 54 telephone entities thus procure in sep- arate transactions at different intervals of time, many goods of a similar type some in extremely small quantities, since 45 of the 54 entities operate less than 10,000 lines, yet the whole prescribed procurement process of bid invitation, evaluation and contracting is carried out independently in each case. The advantages of large scale procurement of price economies, better control over the suppliers, standardization of equipment, economy in con- tract administration, and in many cases earlier deliveries, are thus lost. Sector Reorganization 2.22 Rapid movement of information is essential to the organization of the economy and the effective use of resources, distribution of supplies and collection of products. The fundamental purpose of the various types of telecommunications network (telephone, telegraph, telex, etc.) is to fill this need. In doing so, telecommunications are a major factor in improving economic efficiency, are important to the stimulation of trade and indus- trial growth, are essential to administration and are a vital need at times of national disaster. They also contribute to improving the standard of living and are of particular significance in facilitating distribution and collection in any process of'rural industrialization or development of agroindustries, designed to lessen population drifts to urban areas. For maximum efficiency telecommunication networks must operate on an integrated basis. 2.23 The Bank mission which in June 1970 appraised TELECOM's second development project, recommended the consolidation of the many local operat- ing entities into a single national telecommunications body. The Government of Colombia approved TELECOM's purchase of local entities and specified that part of TELECOM's revenues be set aside to purchase such entities. TELECOM has acquired seven entities during the last three years and plans to acquire 19 more during 1975-78 and all except the eight largest by 1981. Such ac- quisition of the existing entities by TELECOM has involved financial com- mitments not only for purchase of the entities but also for the necessary improvements and extension of service in the acquired entities. 2.24 To remove the sector's shortcomings (see para. 2.11) it is recom- mended that full integration by consolidation into a single national tele- communications entity should be proceeded with as the desirable long term objective. This might be achieved through compulsory acquisition. However, we understand this would only be possible following legislative action which would require a change in the country's constitution. Such a change might take considerable time, may be politically difficult and raises problems of local interest. Integration can alternatively be achieved as a continuous process of acquisition and consolidation through TELECOM. This process has  - 8 - already been commenced on the basis of purchase of existing facilities by TELECOM and through expansion by TELECOM into new areas where services do not at present exist. However, only limited progress has been made due to the unwillingness of many of the entities to sell their telecommunications operations.' 2.25 It is considered that the progressive transfer of ownership of the sector to TELECOM could be expedited by providing long term development financing channeled via TELECOM as equity participation in the other enti- ties. These arrangements could be applied first to the smaller entities which serve rural areas and then, as TELECOM's revenue base and organiza- tion expands, to the larger ones. Government should also consider whether other action could be taken to expedite transfer of ownership to TELECOM in cases where unsatisfactory service, precarious financial position or ina- bility to meet demand make this desirable. In order to facilitate coopera- tion between the local and long distance entities and greater participation in policy making for the sector as a whole, some provision might be made for representation of the other entities on TELECOM's Board. It would also be desirable in order that TELECOM could meet its greater operating respon- sibilities that administrative improvements should be made in its organi- zation. 2.26 TELECOM should, we consider, in the final integrated stage have a board of directors responsible to the Minister of Communications and with a central headquarters coordinating all national and international telecom- munications operations throughout Colombia. The central headquarters would be responsible for overall public telecommunications management, develop- ment and operations under the policy direction of the board. It would undertake overall technical and financial planning for the sector, procure- ment of all telecommunications goods and advanced training of staff. Re- gional headquarters would also be set up on a territorial basis to maintain and operate telecommunications services, carry out regional planning and operate training facilities within their regions. Advantages of Full Integration 2.27 Administration: Each of the local telephone entities employs staff for administering their organizations. TELECOM, which operates the telegraph and long distance facilities in the same towns, also employs separate administrative staff. Duplication of staff would be eliminated and economies in administration would ensue. Further in entities which operate telephones in conjunction with other public utilities services, it is difficult to provide efficient administration due to the highly techni- cal and capital intensive nature of telecommunications operation and the complex procurement procedures.  -9- 2.28 Administrative Stability: The management and staff of the small municipal telephone companies change frequently; the municipal councils and mayors influence staff appointments not always in the interest of efficien- cy. Additionally staff who can be replaced at short notice, do not have any incentive to plan continuous growth but take a short-term viewpoint, which may be sub-optimal. 2.29 Accommodation: Each of the telephone entities and TELECOM occupy separate office and technical accommodation in the same town. A merger would result in better and fuller use of existing office space and equipment. In many cases, the use of common technical equipment (power, aircondition- ing, metering, distribution frame, etc.) for both the local and long dis- tance services would eliminate duplication and reduce capital and recurring costs. 2.30 Billing and Collection: Local, long distance and international bills could be more speedily, accurately and economically prepared using a common computer. Collection of dues from subscribers would also be simpli- fied. In addition all revenue sharing arrangements between local and long distance entities would be redundant, resulting in economies in the com- puting, billing and collection of these shared revenues. 2.31 Financial: The internal generated and borrower funds of the sector could be most effectively utilized for balanced development and to solve the equipment deficiencies and weaknesses in the areas of highest priority. The smaller entities, with their limited resources, are currently not able to obtain adequate additional resources to solve their own problems. Further, for the small entities, individual financing requirements are very small and make it difficult for them to obtain attractive long-term credits from in- ternatioanl lending agencies. In general, small local companies are restric- ted to suppliers' credits which lead to high debt service requirements due to the credits being short-term transactions. Rural and semi-urban develop- ment needs initially a cross subsidy provided by urban and long distance services, until traffic increases to profitable levels. The only entity likely to generate sufficient revenues to support such development without budgetary subsidies is TELECOM. 2.32 Manufacture: After standardization (see para 2.34) is effected, the combined total annual requirements for particular types of equipment can be computed and firm orders for equipment supply placed on an annual basis. Development of local manufacturing has not been attractive because of the absence of standardization and an orderly and predictable demand for equip- ment, which could permit a local manufacturer to plan his activities to achieve high capacity utilization of his plant. When these drawbacks in setting up a manufacturing unit have been eliminated, local manufacture of telephone instruments and telephone switching plant, could be started and progressively extended.  - 10 - 2.33 Planning: The technical capability for planning and network de- sign would be greater and all efforts would be concentrated in one unit and more effectively utilized. Close and continuous coordination for the integrated provision of local and long distance facilities would result. Further, the new technical buildings could provide for all the telecommuni- cations needs in any one town within one structure. Close coordination within one entity would enable better utilization of funds to create revenue producing assets at the earliest possible time. The present multitude of telephone entities entails fragmented planning and poor investments which create alternate shortages and excess capacities. 2.34 Procurement: Individual small scale procurement of telecommuni- cations goods for system expansion becomes costly as it does not permit scale efficiencies. Currently large scale coordinated procurement is im- possible since each entity prepares a project on a sporadic and not on a continuous basis. Each purchase is also for a small quantity of goods. With integration, a single bid for large purchases of equipment could be called for annually. The single entity would then deal with one manu- facturer, have one contract to administer, and usually get better deliveries. Since the contract would be large, the entity could obtain better leverage on the contractor to maintain the requisite quality of the product and the delivery dates. 2.35 Standardization: Because each entity independently procures equip- ment, a large number of types,of equipment are now in operation in Colombia. The integration of the sector would enable the sole entity to ensure that fewer types of equipment are used in the country. Standardization, in use of one type of equipment in one area, instead of various types in all areas as at present, would enable better and more economical maintenance to be carried out with full flexibility in the use of spare parts and trained staff. 2.36 Service Standards: Good quality service requires that certain standards of provision and maintenance of service have to be attained in each telephone exchange area. In Colombia, each entity provides service at the cheapest cost to itself, irrespective of whether the service pro- vided is in line with national or international standards. An integrated organization could lay down service standards and rigidly monitor them for compliance, thus providing reliable and good quality service to all sub- scribers. 2.37 Standardized Accounting: Introduction of a standardized account- ing system would be possible. The present arrangements, apart from being deficient in accounting procedures which could produce valuable informa- tion for managerial control and systems planning, make comparison between systems difficult in the absence of a unified system.  2.38 Training: Currently training, except in two entities, is not imparted on a regular basis. The integrated entity could maintain train- ing centers in various regions and ensure that an adequate and uniform stan- dard of training is imparted to similar cadres of staff. Proper training of personnel to manage, operate, maintain and plan for extension of tele- communication facilities is essential for efficient and reliable telephone service. 2.39 Tariffs: Each telephone entity now sets tariffs after approval of the National Tariff Board. Consequently tariffs for similar services in similar sized exchanges vary in each region. Merger of the entities would enable one single policy to be adopted in setting tariffs. Rationalization and standardization of tariffs could be carried out. Moreover, a national entity would be less susceptible to political influence, than the municipal entities, and could obtain approval of tariffs that would cover costs of operation. Interim Measures 2.4n "hile the complete integration of the sector is likely to take some time, interim measures leading towards the ultimate objective of full integration could now be taken by the Government. The measures referred to in subsequent paragraphs relate to the fields of ministerial control, plan- ning, accounting, training and procurement. Ministerial Control 2.41 Background All telephone development projects prepared by the local operating entities in Colombia are required to be submitted at various stages for approval of the Ministries of Communications and Finance, and the National Planning Department (see paras. 2.02-2.07). 2.42 The general experience of the telephone entities is that, under the existing government regulations and procedures, separate, incomplete, or even contradictory advice may be received by them from each of the three Government departments authorized to scrutinize the projects. The final clearance of the project is sometimes only received two to three years after approval was requested by the entities, by which time changes in demands have sometimes required major revision of the project to be made. A fresh project has then to be prepared and its approval then goes through the same slow, involved and uncoordinated process all over again. The lack of coor- dination, poor service and current financial problems of the entities indi- cate that even this multiple scrutiny is not serving its purpose. 2.43 Recommendation It is recommended that the Ministry of Communica- tions should be designated as the controlling and coordinating authority to receive and approve projects prepared by the various telephone entities.  - 12 - Clearances from Ministry of Finance and the National Planning Department, should if necessary be obtained by the Ministry of Communications through an interministerial committee. Since a Ministry can more speedily and effectively obtain interministerial approvals, considerable saving in time and labor would ensue with a single authority processing the project pro- posals. The Ministry of Communications should aim to convey to the tele- phone entities approval of any project proposal within three months of re- ceipt. Planning 2.44 Background Except in three telecommunications entities, planning and project preparation is not done on a long-term and continuing basis (see para 2.14). For the most economic development of telecommunications, properly planned investments on a continuous basis have to be made. Tele- communications investment in Colombia is sporadic and uncoordinated. 2.45 Recommendation It is recommended that long-term local telephone development plans should be prepared for areas operated by the entities and for new areas which need basic telephone services. These plans should be sufficiently detailed and comprehensive to allow for an appraisal of the proposals, to enable the technical and financial justification and arrange- ments for implementation of the proposals to be reviewed. The Ministry of Communications has a telecommunications engineering group. The function of the Ministry of Communications should be the establishment of sector policy, licensing and regulation of the various entities operating in the sector. The Ministry should not be expected to carry out detailed planning of tele- phone facilities as an independent assessment of the plans in the course of its regulatory duties would not be possible. It is therefore recommended that the long-term planning should be carried out outside the Ministry of Communications, and since TELECOM should ultimately absorb all telephone entities, the planning section now working in TELECOM should be strengthened and allotted this task. A further advantage of this proposal, is that since TELECOM has also to plan long-term long distance facilities and these facilities are closely linked to local exchange development, an integrated plan to cover all aspects of telecommunications development could be more efficiently prepared in one office. Accounting 2.46 Background Many of the smaller entities do not prepare financial statements or follow accepted accounting practices (see para. 2.16). The accounting practices where followed also differ considerably. 2.47 Recommendations It is recommended that the Government should in- troduce uniform utility accounting practices for reporting on all actual and forecast operations. These practices would initially enable the Govern- ment to compare the financial performance of the entities and ultimately assist in the smooth integration of the entities.  - 13 - Training 2.48 Background No regular training is imparted in most sector enti- ties and only limited training in others (see para. 2.15). Lack of training affects the quality of service and the cost of maintenance. 2.49 Recommendation It is recommended that the Government of Colombia strengthen training facilities. ITEC should be made the prime center for training of (i) all operating and administrative staff stationed at Bogota; and (ii) middle level and senior technical staff of all telephone entities in the country. The regional centers at Barranquilla, Bucaramanga, Cali, Manizales, Medellin and Ibague should be strengthened and adapted to train, in addition to TELECOM's operating staff as at present, technicians, operat- ing and administrative staff of all-telephone entities within a region. With the proposed unified training provided to all telephone staff in Colombia, the standard of training could be set at a uniform high level, and all staff would then receive adequate practical and theoretical training to make them effective. A higher standard of maintenance and operating effi- ciency would not only improve the service given to the subscribers, but by reducing outages would also increase the revenues of the entities. Till integration is completed, the entities which send staff for training to ITEC and the regional centers should pay the training organizations the costs of training their staff. Procurement 2.50 Background Telecommunications goods are procured through a pro- tracted competitive bidding process. A large part of the delays caused by bureaucratic processes could be eliminated by simplifying the Government approval process (see para. 2.43). 2.51 Although the approval process is restrictive and time consuming it is not effective. For example the interpretation of existing capacity (see para. 2.19) for negotiated procurement has in some cases been taken to mean the total existing capacity of the system and has enabled some tele- phone entities to negotiate for large quantities of equipment to be installed in totally different locations. ETB has for instance been able to order one supplier's equipment successively through negotiations for utilization in all local exchanges in Bogota. In one other case, an existing local exchange in a city was replaced by higher capacity equipment, which was obtained by negotiations from a supplier other than the original, on the assumption that the exception even applies to procurement of any exchange within a group of exchanges in the neighboring area. 2.52 The time and energy spent on the procurement of cables according to the present practices (see para. 2.20) by each of the fifty-four entities is considerable. Small scale purchases of the same materials also results in delays in supply and in implementation of projects, and higher costs.  - 14 - 2.53 Recommendation TELECOM should continue to be responsible for the procurement of long distance transmission and switching equipment, and tele- graph and telex equipment, since it is the only entity that operates these services. There are two alternatives for procurement of local exchange equipment, cables and telephones, which would provide for full cootdination. The first is that the Ministry of Communications undertakes the procurement of all such goods for all the 54 entities (including TELECOM). The second alternative is that TELECOM undertakes this procurement work. Since the process of integration and consolidation of the telecommunications sector should be carried out through TELECOM, (see para. 2.24) and it would thus progressively take over the local entities and thereafter handle the pro- curement work for the integrated systems, it is recommended tlhat TELECOM should also be responsible for the procurement of local exchange equipment, cables and telephones for the sector, subject to the Ministry's approval. TELECOMI has sufficient experience in the area of procurement of all types of telecommunications goods through national and international competitive bids. The Government of Colombia should also clarify the exact basis of allowing extensions to existing capacity to be negotiated purchases by stat- ing that this applies to extensions of existing exchanges only and not to the whole system or all exchanges operated by an entity. Finally, the Government should allow the cable manufacturers to import copper and lead for use in telephone cable manufacture for supply to the telephone entities on a duty free basis.  - 15 - 3. The Sector - Developmental Aspects Existing Facilities Local Telephone Service 3.01 As of December 31, 1973, 148 local automatic and 362 manual ex- changes were in operation in Colombia with a total installed equipped capa- city for about 800,590 lines and with about 667,000 working direct exchange lines. The percentage of lines with automatic service was 97 percent. The average exchange fill i.e. the percentage of connected lines to total installed capacity, was 85 percent. In practically all exchanges with a capacity for 5,000 or less, the exchange fill was 100 percent. Annex 1 sets out the total installed capacity for lines operated by the 54 telephone entities. The capacity provided by the four largest entities at Bogota, Medellin, Cali and Barranquilla is about 75 percent of the total capacity available in Colombia. Annex 2 sets out the total capacity of exchange equipment, the total number of connected lines, and the approximate waiting list for the nine largest entities, from 1968-1973. Long Distance Service 3.02 Long distance services are provided by microwave radio systems, VHF radio systems, HF radio systems, open wire carrier systems, and open wire physical lines. As of December 31, 1973, the statistics for interurban circuits were as follows: physical lines - 34,500 (Kms), carriers on open wires - 32,828 (circuit-Kms), HF radio - 30,860 (circuit-Kms), VHF radio - 316,280 (circuit-Kms), microwave radio - 1,219,810 (circuit-Kms). Facilities for subscribers dialing of long distance calls are available to nearly all subscribers on the automatic exchange network; for the others, long distance service is provided on a semi-automatic or manual basis. Provincial and Rural Long Distance Service 3.03 Of the 916 municipal headquarters, 855 have been provided with long distance telephone service by TELECOM. Of these 420 have exchanges providing local telephone service operated by TELECOM and local entities while at the balance of the headquarters, only long distance public call office service is available. Of the 1,300 sectional headquarters, while 150 of these have been provided with long distance service, 16 have local telephone service and 134 have public call office service. The long distance service is either provided on physical lines or on HF/VHF radio systems.  - 16 - Telex and Telegraph Service 3.04 As of December 31, 1973, forty teleprinter exchanges having a total capacity of about 3,200 subscribers lines with about 2,600 subscribers, were in operation. The Government's policy of ensuring that all towns with a population of 3,000 or more, inhabitants are provided with telegraph service has been fully implemented. A network of about 1,500 telegraph offices (of which about 200 are connected to the telex network) serves the public tele- graph service needs. International Service 3.05 Colombia has good international telecommunications facilities to countries in Central and South America, Europe and the U.S. These services are provided through HF radio to Panama; VHF radio to Ecuador and Venezuela; and earth satellite station to the U.S.; and all other countries in Central and South America; and Europe. As of December 31, 1973, a total of eighty- five international circuits--68 of these are worked on a semiautomatic basis-- were in operation. An average daily traffic of about 1,000 outgoing calls (mainly to U.S. - 470, Venezuela - 170, Ecuador - 95, and Panama - 90), is handled at the international telephone exchange. Quality of Service 3.06 Lack of continuous and adequate planning in the past has caused the telephone network to have a number of deficiencies which have in turn led to indifferent and, in several cases, poor service. There is a large unfilled demand; congestion on local and long distance service; and high fault incidence with extended outages in the local telephone system. The service on the manual exchanges some of which are quite large is slow and unsatisfactory. High fault incidence is generally due to poor maintenance on outdoor plant and low insulation on cables due to unsatisfactory cable joints. Congestion in the local service is partly due to the low tariffs and partly due to repeat calls made to subscribers whose lines are faulty over long periods of time. No standards for fault clearance exist and each entity decides on clearance time depending on what they can afford to spend on maintenance staff and facilities. Extended outages also result in ineffective repetitive calls being made on long distance circuits and creates congestion on long distance circuits. Past Performance in Expansion of facilities 3.07 During the five-year period (1969-73), only five out of thirty entities which operate facilities of from 100-2,000 lines, installed between them equipment for a total of 1,900 additional lines. During the same period, only two out of nine entities operating facilities from 2,001-5,000 lines, installed between them equipment for a total of 2,400 lines. Only one of the six entities which operate facilities from 5,001-10,000 lines, expanded its  - 17 - system by 2,000 lines. Most of the expansion during this period took place in three of the remaining entities at Bogota (127,000 lines), Medellin (48,000 lines), and Cali (15,000 lines). 3.08 The pattern of past growth has been random and unorganized, and except in three metropolitan areas, and those served by TELECOM, the record for provision of telephone services has been unsatisfactory. Only seven of the thirty-nine entities operating in the smaller towns carried out any telephone development schemes. Market Demand Local Facilities 3.09 Demand forecasts based on past growth and expressed demand are unreliable (see paras 3.07-3.08) except in Bogota (ETB); Medellin (EPM) and TELECOM areas, as most of the entities do not maintain a waiting list of applicants for telephones and no attempt has been made to systematically project future demands. In Bogota, a team of consultants retained by ETB analyzed the requirements for each exchange area in Bogota by considering the number of inhabitants, the number of persons in employment, the current unfilled expressed demand, the development of townships and other relevant factors. They concluded that ETB should through 1980 plan for an annual connection growth rate of 9.5 percent. While EPM did not employ consultants, their engineers also arrived at an annual connection growth rate of 9.5 percent. TELECOM computed separately for each exchange they are currently operating, the local exchange requirements up to 1980 by considering the present unfilled expressed demand, the past growth and the commercial impor- tance of each exchange area. TELECOM forecast a 10 percent annual connection growth rate up to 1978 and an 8 percent growth rate thereafter through 1980. 3.10 The general level of growth rate in most developing countries varies between about 8 and 20 percent per year. In the present context of general growth in the Colombian economy, and the past slow extension of telephone facilities, an assumed annual connection growth rate of 9.5 percent can be considered reasonable. Based on this growth rate, the present 670,000 sub- scribers connected to exchanges having an equipped capacity for about 800,000 exchange lines can be projected to increase to about 1,266,000 by end 1980. As of December 31, 1973, none of the entities have any proposals for replacement of existing equipment up to 1980. Assuming an average fill of 75 percent over the entire network at the end of 1980, the total equipment capacity for all exchanges should be planned for about 1,680,000 lines, i.e. equipment for 889,000 additional lines would have to be installed during 1974-80. Long Distance Facilities 3.11 TELECOM which is responsible for providing long distance service has based its plans for the expansion of the long distance network on the additional local lines expected to be installed under existing contracts for  - 18 - equipment supply up to end 1978, probable additional lines to be installed thereafter up to end 1980 and the additional traffic anticipated due to growth of the local network with extension of community of interest and the improve- ment in quality of service. TELECOM has forecast a growth rate in long distance circuits of 23 percent per year up to 1978, and 20 percent per year thereafter up to 1980. This will result in an increase in long distance circuits from 4,100 existing as of end December 1973, to 11,650 at the end of 1978 and 16,800 at the end of 1980. The growth rate is reasonable and generally in line with the experience in developing countries. Long distance switching equipment extensions have been planned to terminate the additional long distance circuits to be brought into service between 1974-80 and to extend the use of subscribers long distance dialing facilities. Provincial and Rural Long Distance Facilities 3.12 The Government wants TELECOM to provide long distance telephone facilities to all municipal headquarters towns and other sectional headquarters towns. As of December 31, 1973, there were 61 municipal headquarters with no long distance services. Similarly there were about 1,150 other sectional headquarters with no long distance services. The Government has decided that long distance services should by 1976 be provided to the 61 municipal head- quarters; and the 1,150 other mayoral headquarters should be provided with long distance facilities within 5 years at an annual rate of about 300. Telex and Telegraph Facilities 3.13 The Government has decided as a matter of policy to ensure that all towns having a population of 3,000 or more should have telegraph facilities. Based on the population statistics as of December 31, 1973, TELECOM which is responsible for providing telegraph facilities in Colombia, has fulfilled completely the Government's directive for the provision of these facilities. It is expected that the population of another 100 towns would reach 3,000 during the 1974-80 period and qualify for provision of telegraph facilities. 3.14 During 1968-73, the number of telex network subscribers has grown from 2,100 to 2,600--an average growth rate of 5 percent per year. This rate of growth is very low compared with experience elsewhere. Wqith the introduc- tion of international telex service through the satellite circuits, TELECOM has noticed an increase in the demand for telex service and estimates it to reach 4,600 by 1978--an annual growth rate of 12 percent between (1974-78). In their program for this period TELECOM plans to meet this demand fully. Assuming a continuation of a similar annual growth rate up to 1980, which is probably conservative, the demand at that time would be about 6,000. International Facilities 3.15 The existing circuits (68) should according to TELECOM projections be sufficient to handle traffic up to 1976. Thirty additional circuits would be planned to be brought into service progressively from 1977-1980, to handle the increase in traffic up to 1980. The existing international automatic  - 19 - exchange would be extended by 50 international circuit terminations in 1978, to provide for termination of these additional circuits. Investment Program 3.16 To meet the anticipated annual growth rate of demand for telephone facilities of 9.5 percent during the 1974-1980 period, about 596,000 addi- tional connections would have to be installed. The total capacity of exchange equipment to be brought into service to enable these connections to be in- stalled and to keep a small reserve for providing connections till the instal- lation of equipment in the next period (1981-85) gets under way, would be about 889,000 additional lines. Annex 3 sets out as of December 31, 1973 the equipment capacity, the working lines, the projected capacity, the equipment lines on order, the additional equipment lines to be ordered and the estimated investment each year from 1976-80. The investment required for expansion of long distance facilities, teleprinter exchanges, telegraph facilities and rural services is also included in the Annex. 3.17 Orders for a total of 300,740 lines of automatic exchange equipment have already been placed and these lines are expected to be commissioned during 1975-77. The balance of the equipment (about 589,000 lines) to meet the projected demand would be ordered in 1976-78, and be progressively com- missioned during late 1977-1980. The approximate number of lines likely to be commissioned yearwise is as follows: 1975 100,000 (orders have already been placed) 1976 150,000 (drders have already been placed) 1977 66,000 (orders for 50,000 lines have already been placed) 1978 190,000 1979 200,000 1980 183,000 Total 889,000 3.18 The estimated average cost (taking into account the devaluation of the peso) of a telephone line (without long distance equipment) for the period 1976-80 is about Col$17,300 (US$550), including a foreign exchange component of about US$280. The total investment in the sector during 1976-80 would be about Col$11,834 million (US$326.4 million), including a foreign exchange component of about US$201 million. This investment includes about Col$1,645 million (US$42 million) including a foreign exchange component of US$36 million, required between 1978 and 1980 for expansion of the long distance, interna- tional, telegraph and teleprinter networks. Development Priorities 3.19 Because of the competing claims from other sectors on the limited resources available ** the development of the economy telecommunications investment in almost all developing countries is considerably smaller than  - 20 - that needed to meet the demand for service. For this reason it is desirable to allocate the limited resources available on the basis of economic priority for development. 3.20 Poor service standards have a relatively high economic cost. The maintenance of an adequate quality of service in areas already served is therefore of-the highest priority. As economic activities grow, this neces- sitates expansion of existing exchanges and long distance routes both to cater for growth in traffic originated by the existing subscribers and provide additional lines in the local exchanges so that increased usage will not result in a high percentage of called subscriber busy conditions with increased repeat call attempts and exchange overloading. 3.21 Balanced expansion and extension telecommunication facilities is necessary to maximize economic benefits. It is important that development of local, long distance and international facilities should proceed in parallel with each other and be designed within the resources available to meet growth in demand in existing areas and also extend the community of interest to new areas. The mission was not able to undertake a review of the relative economic importance of the areas at present served or which might be provided with telephone services. Other things being equal the value of a telephone call will increase with distance and the degree of isolation of the subscriber so that even though there may be strong economic justification for expansion of facilities in the major urban areas, there is undoubtedly also a need for, with major economic benefits accruing from, the provision of facilities for the smaller communities. 3.22 In most countries development of telecommunication facilities has seldom been directly related to the economic needs of the country. The deci- sion on what development should be undertaken has largely been left to the operating entities with a tendency due to the initially higher revenues and the economies in scale to develop facilities in and between the major centers of population and to neglect the smaller towns and communities in isolated areas. This position appears also to have developed in Colombia and has if anything been accentuated as a result of absence of the cross subsidization possible in an integrated national entity and the financing problems of the smaller entities. These imbalances should be remedied and hence the needs of provincial and rural areas be met as a matter of priority. Such a course will provide the necessary infrastructure for rural development and decentral- ization of industry and trade. It will also improve the productivity of the agricultural and related sectors. Further, the investment requirements are small compared to the investments needed for fully meeting the expected appli- cations in the larger cities. 3.23 These comments are essentially general and are not based on a full economic study of the benefits which might accrue from further development of facilities in both urban and other areas. Nonetheless, it is considered they give an indication of priorities for development of the national tele- communications networks. The position is reviewed further in the next section of the report on the basis of investment priorities which can be more easily defined.  - 21 - Investment Priorities 3.24 The 54 local telephone entities (including TELECOM), can be clas- sified into 4 groups. Group 1 comprises 30 entities which operate facilities of from 100-2,000 lines, with a total of 22,240 lines. Group 2 comprises 9 entities which operate facilities of from 2,001-5,000 lines, with a total of 34,000 lines. Group 3 comprises 6 entities which operate facilities from 5,001-10,000 lines, with a total of 44,550 lines. Group 4 comprises the 8 largest entities operating a total of 661,800 lines. In addition, TELECOM operates 38,000 lines over the whole country. 3.25 During the five-year period (1969-73), expansion of telephone facilities has been largely carried out in the three metropolitan areas of Bogota, Cali and Medellin where both business and residential demand is being catered for (see para 3.07). Currently nearly all entities in groups 1 and 2 have no exchange capacity to connect additional subscribers, though tele- phone demand exists. Based on the average demand forecast for Colombia, the exchanges operated by the entities in groups 1 and 2 would have to be extended by about 60,000 lines to meet the anticipated demand from 1974-80. The enti- ties in group 3 would also need equipment to be extended by about 41,000 lines during that period. 3.26 The first priority should be given to the extension of telephone facilities operated by entities under groups 1 and 2 because (a) extension of facilities has been very limited for the last five years; (b) the 39 entities operate in rural and semi-urban areas where development lags for want of financial resources, and suppliers are not generally interested in giving credits to small companies; (c) time consuming studies for determination of the most economic balance of switching equipment and line plant are unneces- sary; and (d) with relatively small investment, service can be extended to a large number of rural and semi-urban areas with resulting high economic benefits. The estimated foreign exchange cost for extension of telephone systems in categories 1 and 2 would be about US$20 million. 3.27 The second priority should be alloted to the extension of telephone facilities operated by entities under group 3, and the entities at Pereira, Manizales and Cartagena under group 4. About 70,000 lines of equipment would have to be installed to meet most of the demand in those entities. The esti- mated foreign cost for extension of telephone systems in the entities mentioned above would be about US$28 million. 3.28 The last priority could be allotted to the extension of telephone facilities of the balance of entities in group 4. There might be some impact on the lowest level of residential demand in the areas operated by group 4 entities and, particularly so, in Bogota if the investment deposit is in- creased. The effect of such an increase should be carefully weighed before further investments are made.  - 22 - Tariffs 3.29 Telephone entities in Colombia are eachi entitled to propose tariff revisions to the National Tariff Board. The National Tariff Board approves the level and structure of the proposed tariffs, and leaves the telephone entities to implement the tariff increases up to the approved level. An entity's tariffs at any time can therefore be lower than those approved. Since most of the telephone entities are operated by municipalities, political and service considerations rather than the financial needs of the entities govern the exact level of tariffs applying in the municipal areas. 3.30 The telephone tariffs in Colombia have been based on a concept different from most countries. Monthly rental charges and, where applicable, investment deposits are based often, in the case of residential subscribers on the property value of subscribers' residence, and, for commercial sub- scribers, on the share capital invested in the business. The underlying reason for following this system was an attempt to achieve social objectives. The conclusion has, we believe, now been reached in the Government, that a telephone unlike other public services, is not a social necessity, and there- fore each telephone user should be expected to pay for the cost of rendering such service. Annex 4 which gives a summary of tariffs in effect in seven large entities, illustrates the wide differences in the level and structure of local telephone tariffs in the country and also within specific exchange areas. 3.31 Local telephone tariffs in Colombia generally comprise the follow- ing: (a) a refundable investment deposit; (b) a refundable guarantee deposit; (c) an installation fee; (d) a monthly rental charge; and (e) a call charge. Investment Deposit 3.32 An investment deposit is applied by some entities. The deposit which varies in the different entities does not bear any interest; can be paid in six or twelve equal monthly installments; and is repaid to the subscribers when they give up the service. Annex 4 gives examples of the level of investment deposits in different cities. In the case of ETB which is the largest telephone entity, the deposit varies from Col$100 (US$3.85) to Col$5,200 (US$200) for residential subscribers; and from Col$3,200 (US$123) to Col$9,200 (US$354) for commercial subscribers. The investment deposit was introduced partly to provide capital funds for expansion of the telephone network and partly to limit demand. Currently the deposit has not been able to meet either of these objectives. The per line cost is now about Col$1,300 (US$500), and the expressed unfilled demand in Bogota is about 75,000. The bulk of this demand (60 percent) is in the category of residential subscribers which pay only Col$100 as a deposit. 3.33 While the investment deposit could limit demand - if it was fixed at a fairly high level - this has the following disadvantages: (a) it results in subscribers not renting sufficient lines with consequent over- loading of the circuits they have and in many cases congestion in the network  - 23 - resulting from repeat call attempts; (b) it may restrict development of small business and professional services which can be of importance to the economy; (c) development in rural areas, where the subscribers do not generally have the capacity to pay, is seriously affected. Guarantee Deposit 3.34 Generally all entities apply a guarantee deposit. The deposit varies from Col$500 (US$29) to Col$900 (US$35) - the bulk of the entities apply a charge of Col$900. The deposit is returned when the subscriber finally gives up the service after adjustment of any dues payable to the entities by the subscriber. Installation Fee 3.35 This fee is levied by all entities and it varies from Col$250 (US$10) to Col$400 (US$15). Most of the entities charge about Col$300 (US$12). This is a one time charge and represents a small part of the actual installa- tions costs (US$50). Generally this fee is intended to cover the non recover- able costs involved in providing the connection. Monthly Rental Charge 3.36 This charge also varies with the categorization of subscribers (see paragraph 3.30). In Bogota it varies from Col$10 (US$0.38) to Col$80 (US$3.08) for residential subscribers; and from Col$70 (US$2.69) to Col$90 (US$3.46) for commercial subscribers. :The existing monthly rental charges are generally low compared to similar charges in other developing countries. Rental and call charges have historically been based on a compromise between demand for service and monopoly pricing designed to optimize revenues. Call Charge 3.37 The call charge is generally Col$0.15 (US$0.006) per 3 minutes in Bogota and Col$0.10 (US$0.004) per 3 minutes generally in other area. The call charge is based on pulses on the subscribers' meters - the first pulse is registered when the called subscriber answers while the subsequent pulses are registered at 3 minute intervals. With multimetering currently in opera- tion, the subscribers pay about two units (US$0.01) in Bogota and (US$0.008) elsewhere for every call. Even so, the call charges are low compared to such charges levied by other developing countries. Long Distance Charges 3.38 The tariffs for long distance service are set out at Annex 5. There are three sets of rates one set for peak traffic, one for shoulder traffic and one for off-peak traffic. The increased cost of manual as against auto- matic call charges for a three minute period ranges from 12 percent to 33 percent for the various distance categories. When sufficient long distance  - 24 - facilities are available by 1976 or 1977, this differential may not be suffi- cient to induce subscribers to utilize direct dialing facilities in future and should be fixed at a higher level. The long distance charges are generally reasonable, and comparable to charges in other developing countries. Revenue Sharing 3.39 Long distance revenue sharing arrangements are in effect between TELECOM which owns and operates the long distance facilities and the local telephone entities. The percentage share of revenues accruing to the local entities applies only to originating traffic and varies from 22.5 percent to 33 percent for manual and semi-automatic service, decreasing with the size of the exchange area; and from 24.5 percent to 35 percent for automatic service. These percentages are low compared to the shares in other countries where local and long distance facilities are operated by different entities. In the case of international traffic, these percentages are applied on the net Colombian share of the revenues. The revenue sharing arrangements have been a constant source of disagreement, each party disputing the basis of settlement. The Ministry of Communications proposes in the near future to undertake a study to lay down a satisfactory criteria for the sharing of long distance revenues. Recommendations 3.40 National telephone tariffs can only be approved by the National Tariff Board, after receipt of an application for tariffs revision by the local telephone entities. No regulations exist for the entities to make applications for tariff revisions at stated intervals, with the result that tariffs applied by some entities date as far back as 1959, whereas others are using tariffs approved in 1974. While it sometimes makes suggestions on tariff structure and levels, the Government cannot enforce action on these suggestions by the telephone entities. The Government could however insist when approving projects (see para 2.02) that suitable tariff revisions are made as a condition of project approval. In this way the Government could rationalize and standardize tariffs gradually throughout the sector. 3.41 A suggested tariff reform could include: (1) Only two categories - residential and commercial - of subscribers. The classification of residential subscribers on property values and of commercial subscribers on capital invested should be abolished. (2) Local telephone mnthly rentals for residential subscribers should be raised: commercial subscribers could if considered appropriate and based on the added value of service to such subscribers pay higher rentals than residential subscribers. The rentals should be adjusted upwards to provide not more than 50% of the required annual local service revenues. Since the  - 25 - current rentals are low and a major increase might present political problems, rentals could be raised to this level over a 3-year period. (3) Local call charges could be increased to provide at least 50% of the required annual local service revenues. (4) Telephone installation fee could be fixed to cover the non- recoverable costs involved in providing the telephone installation. (5) Investment deposits should be considered in relation to service and economic factors (para 3.33) but should be uniform throughout the country, if they are levied as a matter of Government policy. (6) The long distance tariffs should be simplified and there could conveniently be only two tariff categories - full rate from 08.00-2Q00 hours on weekdays; and half rate from 20.00- 08.00 hours on weekdays and for all day on Sundays and Holidays. (7) The number of distance charging categories could be reduced and the charges based on multiples of the local message rate. (8) The percentage differential between manual/semi-automatic and automatic calls for a 3 minute period should be identical for all distance categories. The manual/semi-automatic call rates should be 25% higher than automatic calls in all cases. (9) Subject to the ongoing review of division of revenues, arrangements between TELECOM and the local entities should continue as at present. In due course, with progressive integration the number of agreements would decrease until at full integration, the agreements would become unnecessary. Financing 3.42 Long-term financing for telecommunications development has not been available to the telephone entities in Colombia, except in the case of TELECOM which has received three World Bank loans. Development of telecommunications facilities has therefore been generally financed through suppliers' credits. The disadvantages of suppliers' credits are: (1) The term of financing is usually two years of grace followed by a five-to-eight-year amortization period. This period is significantly shorter than the productive life of the assets financed;  - 26 - (2) The price of the equipment is generally higher, as the entity must procure equipment from a supplier who is willing to finance the purchase of equipment, without the price benefits obtained under competitive bids; (3) The planning of facilities lacks flexibility since the choices of equipment, based on technical considerations, are limited. Future development plans are based not on need but on quantum and timing of the credits made available by the suppliers. 3.43 Local exchange equipment is obtained through suppliers' credits. The procurement of cables (see paragraph 2.20) under existing procedures, further adds to the financial burden of the entities, as it is considered to be local procurement and, as such, not subject to financing. Therefore all material procured for the cable manufacture must be purchased for cash. Thus added to the debt servicing burden already made difficult by medium-term financing is the considerable cash required for the purchase of cable mate- rial. 3.44 As a result of this difficult financing environment, telecommunica- tions development in all but the largest entities has practically ceased. Even the largest entities - Empresa de Telefonos de Bogota and Empresas Publicas de Medellin (ETB and EPM) - have found it difficult to secure adequate financing to support the expansion program required to meet demand which is largely residential. Considerable waiting lists currently exist in Bogota and Medellin. 3.45 The failure of the other entities to obtain adequate financing for their development program has caused service conditions in most areas to become unsatisfactory due to utilization of old, obsolete and over extended facilities (see paragraph 3.06). Further the entities' inability to provide adequate telephone facilities has hindered progress in Colombia. For example, in Santa Marta, in an area of high rise apartment buildings, a total of 100 lines are available to provide service of about 2 lines per high rise building. Three hotel chains were only willing to construct hotels to meet the growing tourism requirements, if the local telephone entity could provide adequate telephone facilities. Currently the entity is unable to meet these demands. 3.46 The telecommunications entities have attempted to respond to their problems by unusual and unsound financial arrangements. Santa Marta pledged its revenues. They are also presently negotiating for the move of exchange equipment from one location to another at a significant cost in order to attempt to meet some of the urgent demand for service. It appears that this effort might also be wasted, as the entity does not have the cable plant necessary to distribute the service. 3.47 Compania Telefonica de Cartagena S.A. has devised another plan to obtain necessary funds. It has obtained acceptance of a US$400 installation charge from the residents of a more prosperous area of the city. This charge will provide the funds necessarv to finance the project. However, this charge  - 27 - appears to be in violation of the company's filed tariff and provides serv- ice to those who are willing to pay the higlhest price without giving con- sideration to the needs of the economy. 3.48 Many of the entities, which obtained suppliers' credits for past development projects, have been unable to meet the servicing requirements on these credits. Their default has resulted in their being liable for addi- tional interest payments in accordance with the provisions of the credits. 3.49 The Ministry of Communications has come to the aid of these entities by purchasing their foreign debt from the suppliers. The Government has replaced this debt with local bank loans on terms repayable over six years (including a two-year grace period) and bearing an interest rate of 7% per annum. The Ministry has made such loans available to 17 entities and proposes to make them available to four more. Although this measure has removed the immediate problem, it has not corrected the condition, as it does not provide the necessary long-term financing. The refinancing plus the additional suppliers' credit financing necessary to meet the expansion programs will, within a few years, again create a debt servicing crisis. Long-term financing must be made available if the sector is to be put on a sound financial basis. 3.50 The proposed 5-year (1976-80) development plan has a total estimated funding requirement of Col$11,834 (US$327) million (see Annex 8). Col$4,251 (US$117) million should be provided by internal generation but external financing sources must be located for Col$6,702 (US$185) million. These figures do not reflect money required to acquire the existing facilities of the smaller entities. Financing Arrangements 3.51 External sources of financing including the Bank and other interna- tional agencies could assist both in financing development and in institution building by making available long-term financing on reasonable terms. This would considerably facilitate rational development of the sector with a conse- quent reduction in costs of operation resulting from consolidation and standar- dization. International procurement procedures if followed could also result in significant savings in equipment cost. Subject to adequate arrangements being made to service the debt, sector loans could be channeled through TELECOM on the basis of the funds being made available by TELECOM (para 2.25) to the individual entities as equity participation but subject to the appraisal of the development plans of the entities justifying the allocations of the funds in question. Appropriate arrangements would have to be worked out on a case- by-case basis. The proposed external financing should be limited to those entities who are prepared to cooperate in the integration of the sector. 3.52 A suggested timetable for external lending including the Bank and other international agencies could be (a) a US$40 million loan in FY1977 - US$20 million for extension of telephone facilities operated by entities under categories 1 and 2; and US$20 million for extension of long distance facilities operated by TELECOM; (b) US$28 million in FY1978 - which would  - 28 - extend telephone services and provide for participation by TELECOM in all local entities except the 5 largest in group 4; and (c) these five entities could be considered for lending via TELECOM in FY1979. The amount of the loan would depend on the additional demand in these areas, after the effect of increase in deposits and rentals on the demand, is reviewed by end 1977. Operating Re