Ghana - Telecommunications Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report NOP-1609a-GH REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO GHANA POSTS AND TELECOMMUNICATIONS CORPORATION FOR A TELECOMMUNICATIONS PROJECT May 29, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 Unit = Gedi (M) US$ 1.00 = / 1.15 . 1.00 = ITS$0.87 / 1 million = US$ 870,000 FISCIL Y:AT July 1 - June 30 .^.BRIW IATIOIONS ' & T - lsts anri Telecommunications DenArtment GPT - Ghana Posts and Telecommunications Corporation  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT - REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAiN TO THE GHANA POSTS AND TELECOMMINICATIONS CORPORATION WITH THE GUARANTEE OF THE REPUBLIC OF GHANA 1. I subnit the following report and recommendation on a proposed loan to the Ghana Posts and Telecommunications Corporation (GPT), with the guarantee of the Republic of Ghana, for the equivalent of US$23 mil- lion to help finance a telecommunications project. The loan would have a term of 25 years, including 5 years of grace, with interest at 8-1/2 percent per annum. PART I - THE ECONOMY 2. The economic report entitled "Current Economic Situation and Prospects of Ghana" (R72-223) dated March 9, 1972, was distributed to the Executive Directors on October 3, 1972. A report on Ghana's industrial sector (465a-GH) dated October 25, 1974,,has also been distributed to the Executive Directors, and an updating economic report, the draft of which was discussed with the Government in December 1974, is expected to be dis- tributed to the Executive Directors shortly. A summary of basic data on the economy is presented in Annex 1. General Background 3. Over the past decade and a half, GDP growth averaged about 2.5 per- cent per annum and failed to keep pace with the growth of population. Export growth was slow (2.3 percent per annum) and depended almost entirely on a few traditional export commodities -- cocoa, gold arnd tinber. General neglect of agriculture during most Df the 1960s resulted in a declining trend for cocoa production and rapidly growing imports of food and raw materials for industry. Although the industrial development strategy of the early 1960s broadened the industrial base, it generally had low domestic value added content and limited employment potential. It also depended heavily on imported inputs. The imbalance in external payments resulted in a heavy accumulation of debt (both short and medium term) and in recurring balance of payments crises. The eco- nomic and social policy of the early 1960s rested on extensive involvement of the Government in the provision of a wide range of social services, in the setting up of a large number of state enterprises and in allocating re- sources through an extensive system of physical and financial controls. Since the mid 1960s, there has been a growing imbalance in public finances due to rapid growth of budget current expenditures, slow growth in budget revenues and also due to the uneconomic operations of a large number of the government enterprises. The imbalance depressed government development expenditures to an inadequate level and was also a persistent source of inflationary pressures.  4. GNP per capita was estimated at US$300 in 1972. Information on production in 1973 and 1974 is fragmentary; however, it appears that both agricultural and industrial production have risen significantly during the past two years. During the last few years, important changes have been made in the direction of economic policy. Increased emphasis is being placed on smallholder agricultural development and on the need for greater industrial efficiency, but the progress made in implementing the newq policies is still rather limited. The Government's aim is to increase and diversify agricultu- ral output - food and industrial raw materials - and to discourage excessive capital/labor substitution in manufacturing by levying duties on imported machinery and by granting employment tax credits. In addition, the Govern- ment is formulating plans and policies for the development and efficient use of the country's human resources. Guidelines have been issued for a five-year development plan to cover the period 1975-1980, with a target GNP growth rate of 5-1/2 percent a year, and work is proceeding on the preparation of sectoral programs and projects to give specific content to the macro-economic frame- work. At the same time the Government has acknowledged the importance of mobilizing larger domestic resources to finance the planned increase in investment. 5. After cocoa and timber, Ghana's principal traditional exports are gold, manganese, diamonds and bauxite. Production of some of these minerals has not increased substantially for a number of years, partly because of the depletion of ore reserves. Gold production stabilized at about 800,000 fine troy ounces annually during 1968-1973 with a potential for limited expansion, while production of manganese declined by about 25 percent during the same period. Annual extraction of diamonds averaged about 2.5 million carats a year in the last six years, while that of bauxite increased by 80 percent; there is a proposal to process bauxite in the country. The coun- try has potential to accelerate its growth and development through export promotion. 6. Ghana imports its entire oil requirements, mainly in the form of crude which is refined domestically. Oil is used chiefly as a source of fuel for the transport industry. Oil exploration is being carried out offshore and in the Volta Basin, but no commercially viable reserves have yet been discovered. Hlydro-electric plants provide Ghana with most of its energy requirements. 7. Despite poor performance of the economy during most of the 1960s, Ghana's development is well advanced in some respects. The education system is well established; elementary education has been free and universal since 1962. Health facilities are moderately extensive, and further expansion favors rural areas. It is the declared policy of the Government to achieve a more equitable income distribution by increasing productive investments in rural areas, by expanding low cost rural housing and water supply and by improving feeder roads.  -3- Public Finance 8. There have been growing budget imbalances due to rapid growth of current expenditures and slow growth of revenues. Revenue gains due to recent improvements in the collection of non-cocoa taxes were offset by rapid increases in current expenditures and it has so far not been possible to generate more than marginal current budget surpluses. With negligible external capital inflow, the Government has had to borrow extensively from the Central Bank to finance development expenditures and such financing con- tributed to domestic inflation. The Accra cost of living index rose by 10 percent in 1972 and by 18 percent in 1973 and 1974. 9. The 1974/75 budget anticipates an increase of about 22 percent in current revenues, while current expenditures are projected to increase by 28 percent above the 1973/74 actuals. About one-third of the anticipated increase in current expenditure is accounted for by the long overdue salary adjustment granted in 1974. Public sector savings are at present negligible and a vigorous effort is required to contain government current expenditures, and to improve the efficiency of government enterprises. Balance of Payments and External Debt 10. The economy continues to be characterized by major structural imbalances on external account. Due to favorable price developments for Ghana's traditional exports (cocoa, gold, timber) in 1972 and 1973 and to the retrenchment of imports in 1972, the balance of payments situation im- proved from a current account deficit of US$175 million in 1971 to a surplus of about US$122 million both in 1972 and 1973. Net foreign exchange reserves increased from about US$20 million at the beginning of 1972 to about US$204 million at the end of 1973. 11. Petroleum imports are estimated to account for about 22 percent of imports in 1974-76, compared to less than one-tenth in 1973. Increased oil and other import prices, combined with an unusually large increase in the volume of imports, have produced a substantial current account deficit in 1974. It is estimated that food imports in 1974 amounted to more than US$100 million. The increase in import volumes was the result of a liberali- zation of import licensing. Net foreign exchange reserves declined by about US$18Q million during 1974 to a low level of US$23 million (or the equivalent of less than 2 weeks of commodity imports) at the end of December. Towards the end of the year some of the outstanding import licenses were cancelled, and strict foreign exchange budgeting is being reintroduced. 12. Medium-term projections indicate that, even with continued favor- able price prospects for major exports, the external resource constraint, which has hampered Ghana's past development, will remain severe. The Govern- ment has drawn on the IMF's oil facility, and some program assistance is available from the United States and Canada. In addition, there are good prospects for the commitment of substantial amounts of project assistance from bilateral and multilateral sources over the next three years. Most of  -4- the bilateral aid is being offered on concessionary terms, mostly for agri- cultural projects requiring considerable preparation before the lines of credit could be committed. 13. During the last two years, Ghana had made good progress in the re- payment of outstanding trade credits. However, an estimated US$80 million of arrears was still outstanding in March 1975. A substantial part of these arrears will have to be repaid before Ghana can regain access to normal trade credits. Other potential obligations include outstanding applications for remittance of profits and dividends estimated at about US$105 million in March, 1975. In addition, the Government has undertaken to pay compensation for the increased equity it has acquired in several foreign private investments, particularly in the field of extractive industries. The Government is cur- rently negotiating compensation arrangements with the foreign shareholders; some settlements have already been reached. 14. An agreement on a long-term rescheduling of Ghana's medium-term external debt was concluded at a meeting in Rome March 11-13, 1974. Under this agreement, all payments due after February 1, 1972, in respect of pre- 1966 debt obligations will be paid over a period of 28 years, including a grace period of 10 years, with an interest rate of 2-1/2 percent per annum. This agreement was the result of more than two years of negotiations between Ghana and the creditor countries in which the good offices of the Bank were provided. Speedy progress has been made in the second phase of the agreement which called for bilateral negotiations after Ghana's review of the validity of the contracts underlying the debts in question, and a final settlement has now been reached with all the creditor countries. 15. On the basis of the understanding reached at the Rome meeting, and on the assumption that a substantial part of Ghana's external borrowing requirements will be covered by aid on concessionary terms, it is estimated that Ghana's external debt service ratio will average about 5-6 percent in 1974-1976 and rise to 10-12 percent by the end of this decade. Because of the large overhang of external debt service inherited from the early 1960s, Bank Group lending to Ghana since 1969 has been exclusively on IDA terms. The recently concluded rescheduling of most of the medium-term suppliers' credits has opened up possibilities for Ghana to borrow from the Bank, and with IDA lending largely restricted to the lowest income countries, most of the Bank Group operations envisaged for the next three years will have to be financed on Bank terms. The proposed loan would be the first borrowing from the Bank since 1969 when a loan for the Volta dam was made. The Bank Group's share of Ghana's total external debt is currently about 12 percent and is expected to rise to 14 nercent over the next several years. The Bank Group's proportion of Ghana's external debt service payments - currently about 10 percent - is expected to rise towards the end of the decade as IDA financing is progressively replaced by lending on Bank terms.  -5- PART II - BANK GROUP OPERATIONS IN GHANA 16. Since 1962, when the Bank Group financed its first operation in Ghana, the Bank has made two loans amounting to US$53 million for the Volta dam and associated infrastructure works for electricity generation and the IDA has extended 11 credits totalling US$86.3 million - 5 for agriculture (including livestock and fisheries), 2 for water supply and sewerage, 2 for power distribution and 2 for highways. Annex II contains a summary state- ment of loans and credits as of April 30, 1975. There are no IFC investments. 17. - Ghana is currently engaged in restructuring its economy, with the principal objective of reducing dependence on imports generally and achieving greater self-sufficiency in agricultural products, particularly food. The main thrust of the Bank Group's operations in Ghana is to assist the Govern- ment in achieving this objective, with emphasis on increasing the productivity of small farmers, as well as on institution-building and training of Ghanaian nationals for project preparation and improved implementation. Thus, in addition to the projects already approved in the agricultural sector, a second cocoa project has been appraised and a rural development project is in preparation and should be presented to the Executive Directors within the next twelve months. In addition, a project aimied at assisting the National Investment Bank, a Government-owned institution engaged in the financing of industry, including the processing of agricultural and forest products, has been appraised. 18. In order to maximize development of agricultural and forest resources, the other sectors must also be developed. The Bank Group is therefore also assisting the Government to improve the transport and communications infra- structure and to strengthen the power sector which is based on the develop- ment of Ghana's hydroelectric potential. To this end, in addition to the proposed telecommunications project, the Bank Group has appraised a highway maintenance and feeder road improvement project, which includes provision for strengthening the domestic construction industry; a power distribution project is under consideration for FY76, and this may be followed by further investments in the Volta River generating system for which Canadian consul- tants recently completed a feasibility study. The Bank's assistance for the expansion of power generation is proposed on the basis of co-financing with other lending agencies. PART III - TELECOMMUNICATIONS IN GHANA Institutional Organization 19. Until 1974 postal and telecommunications services in Ghana were the responsibility of the Posts and Telecommunications Department (P & T) of the Ministry of Transport and Communications. The department was not  -6 - organized on commercial lines and had to rely on other government departments for services essential to its operations; its finances were incorporated with those of the rest of the Government; revenues were paid into the Government's Consolidated Fund and expenditure allocated from available budgetary resources, not necessarily in accordance with the department's needs. These limitations deterred the development of the telecommunications sector. 20. Realizing these institutional defects, the Government decided on a phased program to transform P & T into an autonomous statutory corporation. As a first step, in July 1972, P & T became a self-accounting department with- in the Ministry of Transport and Communications with autonomy in its day-to- day operations. Finally, as of November 1974, the department became a statutory corporation -- Ghana Posts and Telecommunications Corporation (GPT) -- with a board of directors responsible for formulating the corporation's policies and a Director General responsible for policy implementation and day-to-day operations. Existing Facilities 21. GPT's existing telecommunications facilities are inadequate both in capacity to meet demand for additional connections (as illustrated by a wait- ing list of about 20,300) and in the quality of service. Automomatic ex- changes, which are located in the main cities, have a total capacity of 36,800 lines of exchange equipment. However, after taking into account 9,000 exchange lines in Accra wlhich are obsolete, worn-out and in need of replace- ment, and the technical limitations of exchange utilization, only about 25,000 lines of automatic switching'equipment are in sufficiently good condition for subscriber connections; furthermore, since GPT's local cable distribution net- work is inadequate, not all of these lines can be utilized. The total number of lines connected to the automatic exchanges is presently 23,400. In many of the 415 areas with manual exchanges poor service is due to the use of obsolete and worn-out equipment. Long distance service is also poor, partly because the network expansion has not kept pace with the growth of traffic, and because of low reliability of the main radio system due to poor design. 22. The international telecommunications services, particularly tele- phone services, are also unsatisfactory. This is due to the lack of equip- ment capacity and to the use of high frequency radio systems which are prone to interference and instability resulting in inordinate delays to calls and poor speech quality. Sector Objectives 23. The Government's long-term objectives for the development of tele- communications services comprise: (a) improvement of the quality of local, long distance and international services;  - 7 - (b) extension of local and long distance services to meet about 65 percent of the demand for private connections by 1980, including extension to rural areas; (c) extension of international services; and (d) consolidation of GPT as a sound public utility enterprise. GPT Development Program 24. To achieve the above sector objectives, GPT has launched a five- year (1976-1980) development program consisting of (a) a two-phase program of rehabilitation (including replacement of worn-out and obsolete equipment) and expansion of domestic telecommunications services, (b) establishment of an earth satellite station for international telecommunications, and (c) establishment of microwave links with Togo and Ivory Coast as part of the Pan-African Telecommunications network. The five-year program is estimated to cost US$51.2 million, with a foreign exchange component of US$40.3 million. Regarding the consolidation of GPT as a sound public utility enterprise, measures will be taken to strengthen the financial position and middle-level management; and to improve staff productivity and financial organization, particularly financial control. PART IV - THE PROJECT 25, The proposed project would he the first phase of CPT's program of improvement and expansion of domestic telecommunications services. A telecommunications project was first appraised by a Bank mission in May/June 1972, but further processing was suspended because of the then prevailing uncertain economic conditions in Ghana. Moreover, the limited IDA resource then available were required for other projects. After a further review of the status of telecommunications development in May 1974, a new project was appraised in December 1974; and negotiations on the proposed loan were held in Washington from April 28 to May 8, 1975, with a delegation from GPT and Ghana Government led by Ghana's Ambassador to the United States. A report entitled: "Appraisal of a Telecommunications Project: Ghana" (No. 686a-GH), dated May 21, 1975 is being distributed separately, and a Loan and Project Summary is presented in Annex III. The project consists of the following main items: (a) installation of 18,300 lines of automatic exchange equipment; (b) improvement and extension of long distance facilities; (c) expansion of the telex system;  (d) engineering and financial consultancv services; and (e) training of staff. 26. The 18,30C lines to be installed would replace 9,000 lines of exist- ing unserviceable equipment and provide for 9,300 additional lines of exchange capacity. Cable and subscriber distribution networks with subscriber appara- tus for a total of about 16,000 additional telephone connections would also be provided. The improvement and expansion of long distance facilities would include a new microwave link between Kumasi and Takoradi, replacement of the existing Accra-Tema link and installation of additional multiplex and switching equipment on new and existing trunk routes. The expansion of the telex system would consists of the installation of 250 additional lines in the existing exchange in Accra, with conversion to semi-automatic operation in the international service, and the establishment of a new telex exchange of 50 lines in Kumasi. The project would also provide for the consolidation, including staff training, of GPT's new systems of commercial accounting financial management and control. Project Execution 27. The project would be implemented by GPT with the assistance of consultants who would carry out detailed engineering and help prepare equipment specifications and bidding documents as well as assist in bid eva- luation. Exchange equipment installation would be carried out by suppliers under the supervision of GPT staff assisted by consultants. Civil works - buildings, access roads and major duct routes - would be carried out by con- tractors under the supervision of CPT. A project unit would be established within GPT for the purpose of monitoring and controlling the execution of GPT's investment program, including the proposed project. In order to ensure that GPT has competent tDp management staff, the Governmcnt and GPT would discuss with the Bank the qualifications of persons being considered for the posts of Director General, Deputy Director General and Financial Controller (Sections 4.01(b) of Loan Agreement and 3.02 of Guarantee Agreement). GPT would also consult with the Bank on a program of recruitment and training of middle-level management staff and on the improvement of staff productivity (Section 4.01(c) of Loan Agreement). Project Costs and Financing 28. Total project costs are estimated at US$29.5 million, net of duties and taxes, including a foreign exchange component of US$23.1 million. The costs include a physical contingency of 4 percent on foreign and local costs to cover unforeseen design or engineering modifications, and price contingen- cies averaging 18 percent to *-over possible increases in the cost of equip- ment and civil works. Project costs are summarized below --  -9- Local Foreign Total ---------US$ million----- Civil works 1.46 2.14 3.60 Automatic exchange equipment 0.33 5.05 5.38 Local networks 1.33 5.56 6.89 Subscribers' plant 0.33 1.29 1.62 Long distance radio and carrier systems 1.24 2.23 3.47 Telex 0.09 1.04 1.13 Vehicles - 0.43 0.43 Miscellaneous 0.25 1.01 1.26 Consultants and training 0.22 0.73 0.95 Contingencies 1.07 3.66 4.73 Total 6.32 23.14 29.46 29. The proposed US$23 million Bank loan would finance the foreign exchange costs, i.e. about 80 percent of total project costs; GPT would finance the balance from its own resources. Procurement 30. Equipment financed by the Bank loan would be procured through in- ternational competitive bidding in accordance with the guidelines for pro- curement under Bank loans, with the exception of some switching and trans- mission equipment for extending existing installations which would be pro- cured from the original suppliers for reasons of compatibility. The foreign cost of such switching and transmission equipment, estimated at US$2 million or about 9 percent of the loan amount, would be financed from the proceeds of the Bank loan provided the prices offered are reasonably in line with inter- national prices for similar equipment. A preference of 15 percent or the applicable customs duties, whichever is the lower, would be applied to bids from local manufacturers. Civil works, which are estimated to cost in aggregate US$2.4 million, would also be submitted to international competi- tive bidding. However, these works are widely dispersed throughout the country and are unlikely to attract foreign bidders. To ensure timely and  - 10 - orderly procurement, GPT would procure equipment for the project directly instead of through the Ghana Supply Commission (Section 2.03(b) of Loan Agreement). Disbursements 31. The loan would be disbursed against the foreign exchange cost of imported equipment and supplies and consulting services and training, 40 percent of the cost of contracts for civil works and 100 percent of the ex- factory cost of equipment supplied by local manufacturers, excluding sales or similar taxes. In order to meet the procurement and construction schedules, GPT would incur expenditures of about US$75,000 for consultants services before loan approval. It is recommended that the Bank finance this amount retroactively. A schedule of estimated disbursements is presented in Annex III. GPT Finances 32. Prior to GPT's incorporation, accounting for the telecommiunication services formed part of the government accounts system which is based on cash receipts and payments. In appraising the project, proforma commercial accounts, prepared by financial consultants, were used as a basis for assess- ing the initial financial position of GPT. These accounts present a reason- ably accurate picture of the financial situation of the telecommunications services. A fully audited set of commercial accounts will be available for FY76 (Section 5.02 of Loan Agreement), the first year of GPT's development program. I 33. On incorporation GPT inherited a weak financial position from its predecessor (P & T); the latter had not been provided with adequate working capital by the Government, and in addition had incurred substantial short- term debts to the Government and its various agencies. GPT's financial position deteriorated further after incorporation following the high salary increases awarded in March 1975 and paid retroactively from July 1, 1974; telecommunications operating revenues are currently insufficient to cover operating expenses. 34. GPT's first financial objective is therefore to strengthen its current financial position and obtain sufficient funds to finance the on- going telecommunications investment. To strengthen GPT's finances the -overnment has agreed to a financial settlement which includes (i) an adequate cash payment, (ii) the conversion of the former P & T debts to the Government and its agencies into GPT equity capital, (iii) a settlement cover- ing the cost of services rendered in FY75 by GPT and its predecessor to Gov- ernment and vice-versa, and (iv) the contracting of a local loan of t7 mil- lion, under government guaran:ee, to finance GPT's ongoing telecommunications development works. Items (iii) and (iv) would be conditions of effective- ness of the proposed loan (Section 7.01 (a) and (c) of Loan Agreement). Furthermore, the Government has agreed to release GPT from any obligation  - 11 - under long-term suppliers finance agreements entered into by the Government with foreign suppliers prior to GPT's incorporation. These measures should be adequate to give GPT a sound current position in the short run. 35. GPT's second financial objective is to generate sufficient funds to meet the requirements of the proposed development program, pay debt service, maintain working capital and pay a modest return on government equity. On the basis of present forecasts, GPT needs to earn a return on net fixed assets of at least 9 percent to achieve this objective. However, since it is not possible to implement an increase in tariffs which would immediately provide the 9 percent rate of return, the Government agrees that GPT should reach this target in two stages. Accordingly, telecommunications tariffs will be adjusted so as to enable GPT to earn a rate of return of not less than 7 percent in FYs 76, 77 and 78 and of not less than 9 percent in FY79 and thereafter (Section 5.05 of Loan Agreement). The first tariff increase would be a condition of effectiveness of the proposed loan (Section 7.01(b) of Loan Agreement); this is expected to be effective July 1, 1975, and would provide a 40 percent increase in aggregate telecommunications revenues in FY76. In view of the existing deficient service, this increase is probably the maximum that could realistically be considered. Depending on GPT's operating results and requirements at that time, a second increase would be implemented in FY79; present forecasts indicate that, to achieve a 9 percelit rate of return, a further increase of 17 percent in overall revenues would be needed. 36. GPT's requirements for capital investment and working capital during the period FY76-FY80 and possible sources of financing are set out below:  Requirements US.< "illion Ongoing works - FY 76 7.9 FYs 76-80 program 1st phase (Bank-financed project) 29.5 Balance of FY76-80 program 21.7 51.2 Future program-co7.mending FY80 7.4 Total 66.5 Working capital 7.1 Total requirements 73.6 Source of financing Internal cash generation 41.9 Less: debt service (12.1) cash available for distribution (5.0) 24.8 Borrowings: ILRD 23.0 Other 25.8 48.8 Total financing 73.6 37. GPT should have small surpluses on its telecommunications services available for other purposes in FYs 77 and 78. Surpluses should be sub- stantially increased after the implementation of the second tariff adjust- ment in FY79, and depending on satisfactory operating and investment policy, should increase eveR further after FY80. 38. As part of its policy for maintaining financial stability, CPT has undertaken to observe limitations on transfer of funds from telecommuni- catior.s to postal services, On borrowings and on capital investment (Sections 5.06, 5.07, 5.08 and 5.09 of ._aan Agreement) - and also on divided payments (Section 3.04 of Guarantee Agreement).  - 13 - Benefits and Justification 39. As stated earlier (paragraph 25), the Government had sought Bank's assistance for investment in the telecommunications sector in 1972 but be- cause of financial constraints subsequently postponed the investment. GPT's 5-year program, which is quite modest, will be executed in phases. This project is the first phase of the program and contains the highest priority works for the expansion and general improvement of the quality of the service. The size, design and timing of the investment represent the least-cost solu- tion for the required development and cannot be postponed further without imposing a heavy penalty on the economy. The project is based on the premise that the provision of good quality service to existing subscribers is more important than the addition of new subscribers to an already overloaded net- work. It is self-contained, and its main benefits would be realized even if execution of the remainder of the development program is delayed. 40. Reliable telecommunications services are a vital necessity for the conduct of business and public administration in a country of Ghana's size and stage of development. The project would meet the high priority require- ments of the sector and primarily serve business and administrative needs. It is roughly estimated that Government and business utilize 80 percent of existing telephone service. Specifically the.project would: (a) provide a number of towns connected with mining and timber production, such as Bekwai, Obuasi, Dunkwa and Tarkwa, with access to good communication facilities which they do not have at present; (b) improve communications between Takoradi and Tema, the princi- pal ports of the country, and production centers in the interior; and (c) assist the Government to improve its service to agriculture by providing good communications for the timely dissemination of information on crop protection, collection and marketing. In addition, the telex expansion included in the project would provide for improved international telecommunications service which should facilitate the marketing of the all-important cocoa crop. 41. The internal rate of return on the investment for the project is estimated at 18 percent. It has been calculated as the discount rate which equalizes the present worth of incremental cost (i.e. capital cost of the project, excluding taxes and duties) and incremental revenues resulting from the project over its lifetime. A sensitivity analysis shows that should revenues decrease and costs increase simultaneously by 10 percent the return would still be 16 percent.  - 14 - 42. The true economic return on the project is higher than the fore- going suggest, since (a) the prices charged do not adequately measure the full benefits to subscribers, (b) there are external benefits which accrue to parties other than those who pay directly for the use of the facilities, and (c) the costs include the full costs of extending service to new areas, even though the full benefits of the extension will not be realized until additional lines are connected in these areas at some future time. 43. The Government considers association with the Bank important for basic institutional improvemnent in the telecommunications sector. The pro- ject would support GPT in a wide field of basic institutional improvements, there- by ensuring better management, effective planning and implementation of invest- ment and improved financial organization and control. This would permit GPT to operate as a sound public utility enterprise capable of undertaking, at the appropriate time, a program of expansion covering the needs of the sector beyond 1980. PART V - LEGAL INSTRUMENTS kND AUTHORITY 44. The draft Loan Agreement between Ghana Posts and Telecommunications Corporation and the Bank, the draft Guarantee Agreement between the Republic of Ghana and the Bank, the Report of the Committee provided for in Article ITI, Section 4 (iii) of the Articles of Agreement and a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 45. The following would be conditions precedent to the effectiveness of the loan: (a) settlement between the Government and GPT in respect of services rendered to each other in FY75; (b) completion of arrangements for a local loan for financing GPT's ongoing telecommunications development works (paragraph 34); and (c) implementation of tariff adjustments effective not later than July 1, 1975. 46. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 15 - PART VI - RECOMTENDATION 47. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachements: