Nepal - Telecommunications Project

Document of The World Bank Tr FOR OFFICIAL USE ONLY ONE WJEEK( Report No. 1843 RILE COPY PROJECT PERFORMANCE AUDIT REPORT NEPAL: FIRST TELECOMMUNICATIONS PROJECT (Credit 166-NEP) December 29, 1977 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT NEPAL: FIRST TELECOMMUNICATIONS PROJECT (Credit 166-NEP) Table of Contents Page No. Preface Project Performance Audit Basic Data Sheet Project Performance Audit Memorandum (Highlights) 1 - 2 Attachment: Project Completion Report 1. Background of the Sector Al 2. Preparation of the Project Al 3. Project Description A2 4. Justification of the Project A6 5. Project Implementation A8 6. Role of the Bank: Achievements and Problems A14 7. Lessons to be Learned A16 Annexes: 1. Balance Sheets, 1975 and 1976 Income Statements, 1973 to 1976 2. Compliance with Covenants Maps This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization  PROJECT PERFORMANCE AUDIT REPORT NEPAL: FIRST TELECOMMUNICATIONS PROJECT (Credit 166-NEP) Preface This report presents a performance audit on Nepal First Telecommunications Project for which Credit 166-NEP in the amount of US$1.7 million equivalent, was closed in December 1976. The report consists of Highlights prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Central Projects Staff. The PCR was prepared in December 1976 and outlines the position at that time. OED has reviewed the PCR against the Appraisal Report and has found that the PCR seems to cover reasonably well the issues relevant to the implementation of the components as well as to the economic justification of the project and to be internally consistent. On the basis of this limited review process, OED accepts the analysis and conclusions of the PCR and has summarized its main findings and added some comments on the economic aspects in the Highlights. Comments on an earlier draft of the report have been received from the Auditor General of Nepal and are reflected in the report.  PROJECT PERFORMANCE AUDIT BASIC DATA SHEET NEPAL: FIRST TELECOMMUNICATIONS PROJECT (Credit 166-NEP) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 4.15 5.21 Overrun (2)62 .1 Credit Amount (US$ million) 1.69 Disbursed ).01 Cancelled )0.01 Repaid to ) June 30, 1977 Date Physical Componenta Completed July 1973 July 1977 Proportion Completed by Above Date (M) 100 60 Proportion of Time Overrun (%) - 80 Economic Rate of Return (7) a/ 15 15 Financial Performance Worse Institutional Performance Worse OTHER PROJECT DATA Original Item Plan Revisions Actual First Mention in Files May /1966 Government's Application Negotiations ne 1623/1969 Board Approval § 1969 Credit Agreement Date Effectiveness Date MarU70 Fe Closing Date Jul131/1974 T-b I1 5 Dc/31/1976 Borrower Kingdom of Nepal Executing Agency Npal Telecommunications Corporatio Fiscal Year of Borrower G ran year 2/ Follow-on Project Name e/ Second Talecommunica Credit Number 397-NEP Amount (US$ million) 5.5 Credit Agreement Date June 1973 MISSION DATA Sent Month, No. of No. of Date of Item bP Year Weeks Persons Manweeks Report Identification Oct 1966 1 1 1 Oct/21/1966 Preparation Jun 1968 1 1 1 June24/1968 Appraisal Jan 1969 3 2 6 OcJ/07/1969 Sub Total T 8 Supervision I Oct 1970 1 1 Nov/25/1976 Supervision II Nov 1971 2 2 75 D14/1971 Supervision III Sep 1972 2 1 tiovO171972 Supervision IV Mar 1974 1 1 Apr/25/1974 Supervision V Jun 1974 1 1 1 Sep/12/1974 Supervision VI Jun 1975 1 1 1 Jul/24/1975 Supervision VII Dec 1975 1 1 1 Jan/19/1976 Supervision VIII May 1976 1 1 1 Jul/01/1976 Sub Total 5 COUNTRY EXCHANGE RATES Name of Currency: Rupee (NRp) Year- Appraisal Year Average Exchange Rate: S$ 1 N 10.125 Intervening Years Average 17$ I - 10.423 f/ Completion Year Average 17$ 1 = 12.500 a/ Reflects some project expansion and modification, higher than appraised local costs, and inflation. b/ Excludes US$0.08 millin exchange adjustment. C/ incremental financial rate of return only. Economic rate of return estimated at about 40 in appraisal and not recalculated thereafter. d/ Ends approximately mid-July. e/ A third project, for about US$10-12 million, is to be appraised in October 1977. f/ CYs 1968 to 1972 (Bcch.) - US$1 = NRp 10.125 1972 to 9/75 (Year .) A USva U NRp 10.560 10/75- present - US$1 = U 1Rp 12.500  PROJECT PERFORMANCE AUDIT MEMORANDUM (HIGHTLIGHTS) NEPAL: FIRST TELECOMMUNICATIONS PROJECT (Credit 166-NEP) Credit 166-NEP for US$1.7 million was intended to finance the foreign exchange component of a US$4.1 million telecommunications project. The project comprised mainly of the construction of long distance (including international) facilities, telephone exchange equipment and associated distribution network, telegram and telex facilities, and employment of consultants to assist in setting up a new Telecommunications Board. The project was implemented largely as planned but with a cost overrun of about 26% and a time delay of 2 to 3 1/2 years. The time delay was mainly due initially to difficulties in obtaining expert assistance and consequent delay in procurement. There were also pro- blems in carrying out civil engineering works for the main long distance microwave system because of difficult climatic and topographical con- ditions. The time delay resulted in an estimated loss of long distance traffic revenues of approximately US$0.2 million.1/ The cost overrun was mainly due to delay in execution of the project and local inflation. Average cost of expansion per main telephone line added into service was around US$790, which is considered reasonable. During negotiations, several agreements were reached with the objective of strengthening the institution. With the assistance of consultants, Nepal Telecommunications Board (NTB, now NTC) was to be reorganized and a commercial accounting system was to be established; the positions of Financial Controller and Business Manager were to be filled by expatriates; training of Nepalese staff in modern accounting procedures was to be arranged; a technical training program was to be set up with the assistance of UNDP; and further increases in staff during the period of the project were to be limited. While most of these objectives were met, although with delay and some difficulties, the accounting training program has still to be implemented. However, arrangements are being introduced with local consultants for the intro- duction of training of financial personnel. The rate of return on the incremental investment calculated at completion in FY77 was 15% (the same as the appraisal estimate), despite the cost overrun and delay in completing the project. The reason lies in increases in demand and tariff over the past four years which also compensated for increase in operating costs. 1/ Assuming domestic trunk telephone resources would have increased 50% over FY's 1974 to 1977, had the additional facilities been fully operational on time. - 2 - At the time of project preparation, initial demand data were virtually nonexistent and forecasting of service requirements could only draw on international comparisons, a method which is heavily dependent on judgment. The forecasting task was mainly under- taken by IDA. Actual overt telephone connections demand1/ in FY76 was about 30% above the level forecasted at appraisal (1969). Population growth, on which forecasts were based, was underestimated by about 15%. Further, demand forecasts had been based on comparisons with the 2/ density of main telephones in service, i.e., with supply, not demand.- As could have been expected, partly on statistical grounds alone, estimates for individual cities and towns were much wider off the mark (e.g., in 5 out of 13 cities or towns, actual FY76 demands exceeded the forecast by more than 100%). Greater accuracy could not have been reasonably expected under prevailing conditions and with the available forecasting tech- niques at the time. Furthermore, inaccuracy was least in the largest exchanges (i.e., +39% and -35% and -34% respectively, in Kathmandu, Biratnagar and Patan), the only ones with 1,000 or more actual and/or forecast 1976 connections. There are no indications that greater accuracy at this stage would have led to different solutions, lower costs or better quality of service. The following points may be of particular interest: - establishment of an institutional framework for the sector to provide and operate telecommunications facilities on a commercial basis with proper tools for effective management (PCR paras. 5.05-5.12); - development of telecommunications in a country pre- viously having negligible facilities, and their large likely impact on the country's economy (PCR paras. 1.01, 4.01 and 4.05); and - effective contribution of expatriates and consultants to these institutional and physical ends (PCR para. 6.06). 1/ Overt telephone connections demand equals the sum of main telephones in service and outstanding applications for new connections. 2/ Thus, forecast made no allowance for hidden demand, part of which may have subsequently emerged as new applications started to develop. Attachment NEPAL: FIRST TELECOMMUNICATIONS PROJECT (Credit 166-NEP) COMPLETION REPORT 1. BACKGROUND OF THE SECTOR 1.01 Until 1951 Nepal was largely isolated from the rest of the world and had only very limited internal communications consisting of a single wire telegraph line from Kathmandu to other nearby administrative centers and to the Indian border. During the fifties this telegraph line was extended to the central and eastern parts of the country, HF radio communi- cations were installed at Kathmandu. These very limited facilities proved to be completely inadequate for the administration and development of the country causing Government to give teleconmunications priority for develop- ment. USAID support was sought and a project put in hand in 1958 and com- pleted in 1964 which provided a 1,000 automatic telephone exchange at Kathmandu, transferred the old Kathmandu exchange to Biratnagar and set up low power HF radio links for telegraph service betweek Kathmandu and 57 other locations. 1.02 A telecommunications department (TDN) within the Ministry of Works, Transport and Communications was established in 1959; concerned essentially with engineering and operational functions, the Department did not operate on a commercial basis with a properly designed organization and adequate tools for efficient management. Little was done to organize satisfactory training, hence performance standards and productivity were low. 2. PREPARATION OF THE PROJECT 2.01 A verbal approach was made by the Nepalese Government to IDA in May 1966 regarding the possibility of financing major expansion of the telecommunications network. The proposals were examined in October 1966 by a member of the Bank's project department who thought they were unrealistic and that before a project could be developed suitable for Bank financing, outside expert advice and assistance was necessary. A written request for IDA assistance was made on December 19, 1967, but at that stage no outside assistance had been obtained. An ITU adviser was, however, then appointed and arrived in Nepal in May 1968. During the course of meetings between this adviser, TDN staff and visiting Bank staff held in Kathmandu in June 1968, an outline for a project consisting essentially of provision of a long distance communications between the more important centers in central and southern Nepal and local telephone service at those centers was worked out. Additionally, and in the meantime, the Nepalese Government had sought and obtained assistance through Indian aid which provided for a telephone land line with carrier facilities from the Indian border to Kathmandu; A2 further assistance was being sought from India to provide some telephone exchange facilities supplementing those which it was proposed to include in the Bank project. 2.02 Technical data and cost estimates for the proposed project were then prepared by the Telecommunications Department with the assistance and advice of the ITU adviser and appraisal was undertaken in January and February of 1969. At the time of appraisal telephone facilities consisted of some 2,300 telephone subscribers connected to the Kathmandu, Patan and Biratnagar exchanges (the Kathmandu exchange had been extended and an exchange at Patan provided utilizing Government finance) without any long distance telephone facilities. The telephone density of about .025% was the lowest recorded for any country with a telephone network. In the absence of data on demand trends and forecasts, it was necessary for the mission to themselves prepare a study based on demographic, industrial, economic and administrative factors in comparison with other developing countries in order to establish required capacities for local exchanges and long distance circuits, project justification and to permit financial forecasts to be made. It was substantially on this basis that it was possible to appraise the project. 2.03 In view of the close association of components to be financed under the Credit and those being provided under Indian aid, it was decided to treat the two provisions as part of an integrated project. Total expenditures for the project were estimated at US$4.15 million of which the proposed IDA Credit would provide US$1.70 million and Indian aid US$1.78 million with the balance of US$0.67 to be financed from internally generated funds. It was expected that the project would be undertaken during the period July 1968 to July 1973. 2.04 The handling of project proposals through to appraisal under circumstances of considerable difficulty and an almost complete absence of historical data on likely growth trends was very satisfactory and is to the credit of the ITU adviser, the Indian aid team and the Bank staff members working on the project. Some 13 months elapsed between the receipt of the written request for IDA assistance and actual appraisal. This period was reasonable in the light of the need to prepare data on which the project could be based. The loan was approved on November 5, 1969, nine months after the return of the appraisal mission and after Government had initiated steps for reorganization of the sector as a condition for Board presentation but, due to delays by Government in reaching an agreement with India on the extension of the Indian aid provisions and in meeting certain of the require- ments for sector reorganization, only became effective on February 26, 1970. 3. PROJECT DESCRIPTION 3.01 The project included all works in the Borrower's integrated program to be undertaken during the period July 1968 to July 1973. The main items consisted of: A3 (a) telephone exchange equipment and the associated distribution network for about 5,700 additional sub- scribers; this would equate to about 4,600 lines at 80% utilization of plant; (b) a land line carrier route connecting Kathmandu with the Indian telephone network at the Indian border; SHF radio systems to Birgunj; through the Terai to Biratnagar and from Kathmandu to Pokhara. The initial proposals also included a tropospheric scatter system between Kathmandu and Biratnagar; (c) a new international trunk exchange at Kathmandu; (d) telex facilities for up to 50 subscribers at Kathmandu; (e) miscellaneous facilities including buildings, vehicles, training, tools, etc.; (f) the employment of consultants to assist in setting up a new Telecommunications Board. Differences between Appraisal Proposals and Work Undertaken 3.02 The project as undertaken has been very similar to that appraised, the main changes being: (a) in view of a proposal by ITU experts to utilize the routes through Nepal as part of the Trans- Asian network and the increased demand shown as a result of a market survey, it was decided to provide 300 channel microwave rather than 60 channel SHF systems. As a result of this decision and the consequent cost increase, it was decided to cancel provision of the tropospheric scatter system and provide a microwave standby system in the second project; these changes were fully justified; (b) -based on and justified by changes in demand, increases were made in the capacities of the exchanges to be installed at Birgunj, Hetauda, Pokhara and Bhairawa, and provisions of the exchanges at Bhaktapur and Amlekganj was deferred. Project Cost 3.03 We have asked NTC, both at the time of supervision and subsequently by telex, to provide actual costs of the project. They obviously face difficulty in doing so due to the fact that commercial accounts were first produced in 1972, four years after commencement of the project and, over the final two A4 years of project execution, the project overlapped the second project with no separate records of expenditures being maintained. We have, therefore, produced the following estimates ourselves based on estimated expenditure FYs 1968 to 1971 (fortunately we have accurate figures for Indian aid pro- visions which constituted most of the work undertaken during that period) and actual expenditures, FYs 1972 through 1975 with a separation of estimated costs of the second project work known to have commenced in FY 1974 and 1975. The estimated costs at time of appraisal and at completion are as follows: NEPAL TELECOMMUNICATIONS CORPORATION (NTC) CREDIT 166 -NEP COMPLETION REPORT Appraisal Estimates Final Estimate US$ 000 US$ 000 Foreign Local Total IBRD Loan Foreign Local Total IBRD Loan 1,. Telephone Exchange Equipment, local distribution and subscribers' apparatus 835 270 1105 322 1050 420 1470 355 2. Long Distance (including international) 1591 h8 2039 907 1720 860 2580 1010 3. Telegrams & Telex 50 9 59 50 - - - 30 4. Buildings 64 451 515 - 70 770 840 - 5. Vehicles, Tools, Training 133 - 133 133 210 - 210 165 6. Consultants 100 8 108 100 100 10 110 100 7. Unallocated 188 - 188 188 - - - 40 2961 1186 4147 1700 3150 2060 5210 1700 A6 3.04 The established cost variations have been: (i) cost of the Indian aid (second phase) provisions consisting of telephone exchange installations increased by US$234,000 or 13% due to increases in exchange sizes agreed with India and some inflation of local costs; (ii) cost of the long distance microwave (replacing VHF) system increased by US$103,000 in foreign exchange or 11% - however, soil testing and construction of tower foundations originally included in the contract, was undertaken by NTC in order to keep foreign costs down and together with increased costs of civil works accounted for a local cost increase of US$410,000 or 91%. Total system cost increase was US$520,000 or 26% which can partly be related to additional system capacity (with loss of the tropospheric standby) and partly the increased civil works costs. (iii) Building costs increased by US$325,000 or 63% partly accounted for by local inflation and partly the isolated location of some of the sites. Overall foreign cost increases were substantially limited to funds available under the Credit and the foreign component of the Indian aid pro- visions and increased by only 6% whereas local costs increased by 72%. About 40% of the local cost increase was accounted for by transfer of expenditures from foreign to local and the balance due to price increases and inflation. The total project cost increase of 26% is not unreasonable in view of the changes in, and delay in execution of the project, the local problems, and the effects of inflation on local costs. 4. JUSTIFICATION OF THE PROJECT 4.01 The Kingdom of Nepal extending as it does from the Terai Plains in the south through the Siwalik Hills and Mahabharat Mountains to the peaks of the Himalayas, is subject to both topographical and climatic extremes which pose major problems in the development of satisfactory communications. The available facilities are still very limited and many areas are isolated from one another insofar as rapid transportation is concerned. One of the problems facing the Government has been how to create an integrated economy out of many small "mini,, economies which, due to the topography, have had very little interconnection. The lack of adequate surface and air communications and the high cost of the available facilities underscores the need for a reliable and extensive telecommunications network if effective administration and social services are to be provided and economic development facilitated. 4.02 The choice of the priority areas for initial development was straightforward. In Nepal there are two strips of fertile, cultivable and A7 and populated land - the Midlands and the Terai - separated by the Siwaiik Hills, and the Mahabharat Mountains and limited in the north by the Himalayas and in the south, by India. Located in the Midlands are Kathmandu, Nepal's biggest town, the seat of Government, the main tourist attraction and the main trade center and Pokhara, a trade and tourist center. Most important cash crops such as jute, oilseeds and tobacco are grown in the eastern Terai which is also the most important rice growing area. The second city of Biratnagar which has a number of industries, is also located in the eastern Terai which is responsible for much of Nepal's exports. Initial development was, therefore, substantially based on providing adequate service to these areas. 4.03 The paucity of existing services did not permit the relating of future requirements to past growth trends. The relationship of population, economic activities and telephone densities, based on experience in other developing countries was therefore utilized in assessing likely demand. New Delhi had, in 1967, a telephone density per 100 persons of 2.8 and Rawlpindi/Islamabad 2.3; the target for Kathmandu by 1973 was set at 2.5. Whereas the density in 1967 for important towns in India and Pakistan ranged from 0.8 to 2.5, the planned level for Nepal by 1973 was 0.5 to 1.75. The average density of the whole country was 0.025 per 100 persons. After completion of the project in 1973, the density planned would still be one of the lowest in the world with 0.08 per 100 persons. The project planned to provide 4,600 additional subscribers by FY 1974 with an expected waiting list of about 3,000. The target for connection of the additional subscribers was reached about one year behind schedule by which time unfilled demand had increased to 7,900, e.g., only 46% of demand had been met. (Increased pro- visions in FY 1976 somewhat improved the situation with about 59% of demand now satisfied.) 4.04 In the selection of the towns to be provided with service, con- centration of population and the importance of industry, tourism, administration and agriculture were taken into consideration. Out of Nepal's 75 districts, the 14 districts to be connected to the new trunk lines had 74% of all industrial establishments which produced 80% of the total industrial output. Located in these 14 districts were all industries employing more than 100 persons, as well as 87% of all industrial wage earners. Biratnagar, at the eastern end of the main trunk line was responsible for over 27% of value added in industry. Pokhara and Kathmandu were the main tourist centers. 4.05 The internal rate of return for the project was, at the time of appraisal, estimated at 15%. The economic benefits were, however, separately estimated on the basis of increased export economies and tourism to be more than 40%. A recalculation, taking into account the revised annual construction costs of the project and the attributable operating costs and revenues, shows an internal rate of return of 14.95%. Charges for telecommunication services in Nepal are, however, still low in relation to those in many developed and developing countries (revenue per subscribers' line is about $110 per annum) so that consumer surplus is likely to be high and, as indicated at the time of appraisal, the economic benefits are likely to be considerably higher than the internal rate of return. A8 5. PROJECT IMPLEMENTATION Physical Achievements 5.01 This was the first Bank Group project in Nepal and was originally scheduled for completion by July 1973. In the early stages there was delay by the Government in meeting all the conditions.for the Credit, followed by delays in obtaining expert assistance and consequent delay in procurement. NTB then suffered lack of continuity in top level management. There have also been problems in completing roads and erecting buildings and carrying out civil engineering works for the main long distance microwave system, partly resulting from the difficult climatic and topographical conditions. Reasonably satisfactory progress in procurement and execution has been made over the last four years with all but two telephone exchanges to be provided under the project and the initial microwave system sections in service by July 1975, and the balance consisting of the rest of the microwave system and the remaining two telephone exchanges by December 1976. The project was originally scheduled to be completed by July 1973, so that completion has effectively been delayed by two years and overall by three and one-half years. Actual achievements of telephone lines provided as against targets at the time of appraisal were as follows: Jan. July July July July July July 1969 1971 1972 1973 1974 1975 1976 Estimated working lines at appraisal 2300 4100 5150 6300 6900 - - Actual lines working 2300 3727 4563 5284 6036 7003 8904 Percentage of total target - 91 89 84 87 101 - Estimated lines to be added - 1800 1050 1150 600 - - Actual lines added - 1427 836 721 752 967 1901 Percentage of target under project Annual - 79 80 63 125 - - Cumulative - 79 79 75 81 102 - A9 5.02 While the target for connection of subscribers' circuits was met twelve months behind schedule, there was further delay in completion of individual exchange installations, the final one, that at Biratnagar, only being brought into service in December 1976, some 32 years behind schedule. This was largely caused by delay in providing the associated manual switch- boards to be financed by the Nepalese Government. 5.03 Due to initial procurement problems and later in the construction of roads and building in very inhospitable terrain (the Manager of NTB was killed during a survey for some of these civil works), there were delays in providing the microwave systems. All sections were, however, brought into service by November 1975, 28 months behind schedule but it has only been possible to connect a limited number of circuits to Biratnagar due to a delay in providing the associated long distance switchboards to be financed by the Nepalese Government. The problem, which should have been resolved more quickly, delayed also the commissioning of the Biratnagar local automatic exchange (referred to in the previous paragraph) and resulted in loss of revenues. It was probably the most serious failure in physical execution of the project. The Bank staff members might initially have questioned the wisdom of the proposal to save cost by adapting the existing manual switch- boards. Subsequently, when it became apparent that this solution offered a very limited application due to the overloading of the existing facilities and the technical problems of interworking and that, in any case, additional facilities would also be required at Kathmandu and Birgunj due to the delay in implementing the second project, there was serious delay by NTC in placing the new manual assistance and long distance switchboards on order despite reminders from the Association. .O The telex exchange facilities for 60 subscribers at Kathmandu have been completed on schedule but, due to high traffic levels, it has only been possible to connect 34 instead of the planned 50 subscribers. Reorganization of the Sector and Organizational Improvements 5.05 One of the most important aims of IDA's involvement in the Nepal Telecommunications Sector has been the replacement of a Departmental- organization based essentially on engineering and operational considerations and initially with limited technical expertise by one designed to operate on a commercial basis with a properly designed organization and adequate tools for effective management. A requirement for the Credit was, therefore, that reorganization or the sector should be undertaken with the assistance of con- sultants. Annex 2 sets out in detail the agreements relating to this re- organization. The main provisions were as follows: (1) Government would employ consultants under agreed terms of reference to recommend on and help implement the reorganization of NTB and assist in the establish- ment of a commercial accounting system; A10 (2) Government would employ two expatriate experts in an executive capacity as Financial Controller and Business Manager and, in addition, recruit five qualified accountants to introduce and operate the new accounting system; (3) Government would arrange for the training of Nepalese staff in modern accounting procedures; (4) Government would apply for UNDP assistance in setting up a technical training program; (5) after making the necessary provisions for reorganization and for the project, the Government would limit further increases in staff during the period of the project; (6) tariffs would be rationalized and maintained at an adequate level and payments by Government would be on a timely basis. 5.06 The order creating the Nepal Telecommunications Board (NTB) as a semi-autonomous agency, was issued on October 17, 1969. Its internal organization and a proposed accounting system was subsequently studied and recommendations made by consultants financed under the Credit. These recommendations have been substantially implemented in relation to the broader aspects of their application but are not yet fully in operation in relation to the accounting system and internal audit arrangements. More recently, on June 15, 1975, the Government passed legislation converting NTB into a Government owned statutory corporation which will have increased operational and financial autonomy. This legislation creating the Nepal Telecommunications Corporation (NTC) is in very broad terms and is to be supplemented by rules and regulations covering NTC's operations. These implementing rules and regu- lations have not yet been issued but should be made available to IDA shortly. Although we still await final details and further development of methods and procedures is necessary, a satisfactory framework for sector organization has been established. 5.07 NTB (now NTC), during its short history, suffered from a number of management-changes with lack of continuity. During its initial period of operation, NTB suffered from the death of its capable first manager and from delay in appointment of a successor. An efficient manager was then appointed but was suspended from duty some two years ago following financial irregularities by a member of his staff. While his successor was well regarded, he nas recently suffered from serious health problems. The previous manager has now been fully exonerated and returned to duty. He is an active and conscientious executive and his appointment will, it is believed, result in satisfactory performance. 5.08 NTC is producing commercial type financial statements but has not fully implemented the accounting recommendations of the consultants, Peat, Marwich, Mitchell and Company. Improvements have been in the billing and collection practices reflecting some of the consultant's recommendations. All The reasons for NTC not being able to complete the implementation have been the result of lack of continuity of management, a decision that it would not be possible to obtain the full benefits of additional consultancy assistance until such time as permanent accounting staff had been appointed, and lack of adequate financial staff to initiate revisions in procedures and monitor the results. The financial results obtained from the present hybrid system appear to be reasonably representative and reliable. NTC has now appointed a Chartered Accountant as Chief Accountant and has recruited four staff members with degrees in Commerce who have, however, not yet been appointed to the permanent staff. The accounting training program agreed during the negotiation of the first Credit is also awaiting the establishment of per- manent staff. Assurances have recently been obtained from the Secretary of Communications that the transfer of present temporary staff to permanent appointments is expected to be completed within a period of three months. Concurrently, arrangements are being introduced with local consultant's assistance to meet the covenants for completion of the introduction of the commercial accounting system and for the introduction of training of financial personnel. 5.09 Although the original requirement provided for in the Agreement was to utilize the services of two experts, it was found necessary after withdrawal of the ITU adviser to utilize the services of three experts (provided under the Colombo Plan) to assist in setting up an accounting system and business pro- cedures and also to strengthen the engineering branch. The services of these experts, originally provided for from three to five years, have been extended as a result of difficulty in finding satisfactory ccunterparts and the pro- motion of trained staff to senior positions elsewhere. At present the business and engineering experts still remain in Nepal. However, as the present Nepalese counterparts gain the necessary qualifications and experience, it is .important that they take over the responsibilities of Chief Engineer and Business Manager. It is anticipated that executive authority will be trans- ferred to the counterparts by mid 1977. 5.10 After initial delays, an application was made in 1971 for UNDP assistance in setting up a joint NTB/Civil Aviation Telecommunications Training School. This project ran into difficulties due to the Nepalese Government deciding that all training should come under the control of the University. Neither the UNDP, NTB nor ICAO were happy with this arrangement as they wanted the operating entities to have this training responsibility. To resolve the difficulty, IDA proposed that theoretical training of general application be undertaken through the University, supplemented by in-service vocational training at the NTC School. This was finally accepted but the project then ran into difficulty due to shortage of UNDP funds. A new project agreement has, however, now been signed and the Project Manager has already arrived in Nepal with further experts expected shortly. Delay in improving and extending technical training has been a problem in increasing productivity and in develop- ment of the sector. However, with the issues affecting the Training School now resolved, this problem should progressively be overcome. A12 5.11 At July 16, 1976, NTC had 1,407 employees. Based on the agreement reached during negotiations for the first project, total staff should be 1,405 so the existing level is satisfactory. The agreement in general terms for the second project required further improvements in productivity with a target for total staff in 1976/77 of 1,375. This has not quite been met. The failure to meet the improved target is largely due to the delay in fully implementing the training program. Major improvements have, however, been made and an increase in the size of the telephone network from 1,700 to 8,900 lines (or 523%), together with the provision of long distance and telex facilities, has been accompanied by a staff increase of from 1,200 to 1,400, an increase of 17%. The approved establishment has recently been increased to 1,625 and NTC needs to recruit more better-educated staff for training as technicians so the position will have to be carefully watched. 5.12 The tariff structure has been rationalized as required by the Association. Local telephone charges are based on a measured tariff system and are substantially in line with those operating in India and Pakistan. Long distance telephone tariffs are on the basis of a three-minute charge. Telegraph tariffs are on a per character or per word basis and are in line with those applying elsewhere in the area. Tariffs were revised in 1974 at IDA's suggestion and again increased in 1975 after a currency devaluation. Long distance tariffs were further adjusted with the introduction of improved service in April 1976. Financial 5.13 Financial results have been poor in the past because of the in- efficiencies, the type of network operated and the low tariff levels. But with the network's expansion and structural changes, the increased producti- vity of NTC's staff and the tariff increases, substantial improvements have taken place. In 1974, for the first time, NTB had a positive rate of return; results in FY 1975 and 1976 have shown further progressive improvement. The position should continue to improve as use of the profitable long distance network is extended. Financial results are expected to be satisfactory toward the end of this decade. 5.14 Actual and forecast financial results for FY 1973-80 are as follows: Actual Forecasts Year ending July 16 1973 1974 1975 1976 1977 1978 1979 1980 Net Income (Loss) (NRs million) (.3) .3 1.1 2.2 1.5 1.9 4.1 7.8 Operating Ratio (%) 98 95 88 73 72 67 61 Rate of Return (5) neg. .8 1.64 4.5 6.8 6.7 8.6 11.4 A13 Balance Sheets and Income Statements are at Annex 2.. Although the results and forecasts indicate a.continued improvement in financial performance, it will be desirable to improve efficiency rather than increase tariffs if maximum benefits to the economy are to be obtained and NTC is to make a satisfactory contribution to future network development from its cash gener- ation. NTC's rate of return for 1976 compares with the original appraisal target of 8% and the revised targetA at time of appraisal of the second pro- ject; of 7.7%. The revised covenant required 5.0%. 5.15 The financial position as of July 16, 1976, is strong with a debt equity ratio of 24/76 and with current assets almost two and one-half times current liabilities. The cash position is also strong, amounting to about 10.5 months' revenues. Despite Government's assurances, the accounts receivable position in respect of Government accounts is not satisfactory. However, the Secretaries of Communication and Finance have recently promised to take appropriate action to correct this. Financing Plan 5.16 A statement of forecast sources and applications of funds for the five-year period 1968-75 and the actual figures for the extended project period 1968-1975 is summarized below. Due to the absence of commercial accounts before 1972, these figures are notional. FYs 1968-1973 Yrs 1968-75 (Millions NRPs) (Millions NRPs) Original Uses of Funds Forecast % Actual % Capital Expenditures dealt with by NTC 24.00 50 39.54 51 Capital Expenditures Indian Aid Project 17.99 38 24.30 31 Increase in Working Capital, including cash 3.05 6 10.62 14 Expenditures in next Program 3.00 6 3.55 4 Sources of Funds 48.o 100 78.01 100 Own Cash Resources 10.26 21 16.75 21 Indian Aid 17.99 38 24.30 31 Government Budget 0.21 1 12.79 17 Subscribers Deposits 2.41 5 2.92 4 IDA Credit 17.17 35 21.25 27 48.04 100 78.01 100 A14 5.17 The cost of the project has increased by 52% but 25% of this is accounted for by the devaluation of the Nepalese rupee. Cost of the parts of the project undertaken by NTC (excluding Indian Aid) increased by 63%. Cash generation (over the extended two year period) has increased by 63% substantially in line with the increase in those parts of the project handled by NTC. One significant item in connection with the use of funds is the major increase in working capital and cash which has been allowed to accumulate. These funds will, however, be required in connection with the building program for the second project and, in any case, are available to the Government through deposit with the Rasta Bank. It will be noted under sources of funds, that Government has made a major contribution far in excess of that antici- pated at the time of appraisal. This should, however, be considered in relation to the building requirement already referred to for the second project. Auditors 5.18 Commercial auditors were appointed as required by the Association. In the case of the 1975 audit and the ongoing 1976 audit, the work is being performed by local firms. Audited financial statements for the fiscal year ended July 16, 1975, were issued almost eight months after the close of the fiscal year. A similar delay is expected in the case of the 1976 audit. Covenants in both Credit Agreements required audited financial statements to 'e submitted to the Association within five months of the close of the fiscal year. 6. ROLE OF THE BANK:ACHIEVEMENTS/PROBLEMS Organization 6.01 Considerable progress has been made with the main objective of properly organizing the sector and setting up an efficient operating entity and a rational framework for provision and operation of services on a fully commercial basis now exists. There is, nonetheless, a continuing need for assistance in the development of more detailed procedures and in fully im- plementing the intr,duction of the accounting system. The rationalization of the sector and the improvements in efficiency and productivity have brought about savings in operating cost. The overall reduction in staff level as related to the overall facilities (para. 5.11), is a good indication of the achievements in this respect, however, the position should continue to be kept under review in supervising the second project in order to ensure that further increases in productivity are made and that the manDower planning and training functions are properly implemented A15 6.02 The development of training facilities has for the various reasons described in para. 5.10 been subject to major delay largely due to disputes arising between the various entities whom it was proposed should be respon- sible for operation and provision of the facilities. The Association played a major part in resolving these difficulties. Financial 6.03 The Association has been instrumental in introducing financial disciplines, thus ensuring more efficient operation but full implementation of the accounting system remains to be done. It has also required the Government to establish adequate tariffs and ensure that Government departments and personnel pay for all services rendered on a timely basis. With the expansion of facilities, improvements in productivity and application of rational and increased tariffs, NTC has been brought to a reasonable level of productivity for the stage reached in its operations. While the accounts receivable position still needs some improvement, the responsible Secretaries of Government have shown an interest in endeavoring to resolve this outstanding problem. Technical 6.04 The Association has, through its knowledge of other developing countries, contributed substantially to preparation of initial estimates of requirements in areas where no historical data was available. These estimates have, on the whole, proven to be fairly accurate. The Association has also, together with the experts, contribaTed to the resolution of many technical problems and to.the development of local technical-managerial expertise. Procurement 6.05 Difficulty arose in connection with procurement in the initial stages largely due to the need for education in Bank Group procedures and partly the lack of continuity in management. The requirement for ICB have undoubtedly brought cost advantages to NTC. Consultants 6.06 The performance of the consultants employed as a condition for the Credit and in connection with the preparation of proposals for reorganization of the sector was, on the whole, very satisfactory probably in large part due to the use of Indian associates with a knowledge of both the language and the existing system of Government accounting. The performance of the various experts employed also as a condition for the Credit has been mixed. Some were very good, others disappointing. The position has in part been complicated by the shortage of management and financial expertise within NTC which has made it difficult to provide satisfactorily qualified counterparts. In one case, the trained counterpart was promoted and transferred'to duties elsewhere, a loss to NTC but not to the economy. A16 7. LESSONS TO BE LEARNED 7.01 As in a number of our projects we have, in appraising this first lending operation in Nepal, been over optimistic in the targets set for project execution. Nonetheless, this has probably provided some spur to speedier execution than might have otherwise have been the case. South Asia Regional Office February, 1977 ANNEX 1 TABLE 1 NEPAL TELECOMMUNICATIONS CORPORATION (NTC) CREDIT 166-NEP COMPLETION REPORT Balance Sheet (NRs thousands) As of July 16: 1975 1976 (Audited) (Unaudited) ASSETS Fixed Assets 65,670 80,360 Less: Depreciation 214,270 28,600 Net in Operation UAW 51,95 Work in Progress 14,4730 13,800 Subtotal 36,130 65,70 Current Assets Inventories 3,140 4,070 Accounts Receivable 3,140 3,990 Cash 13,620 1,610 Other 4,500 940 Subtotal 2,400 2,610 Total Assets 80,530 94,370 EQUITY & LIABILITIES Equity Capital 30,140 30,140 Accumulated Deficit (570) 1,200 Contribution 26,080 34,250 Subtotal 5,650 65,590 Long-term Debt Net 15,500 20,240 Current Liabilities Accounts Payable 6,270 5,530 Customer Deposits 3,110 3,010 Subtotal 9,350 ,560 Total Equity and Liabilities 80,530 94,370 ANNEX 1 TABLE 2 NEPAL TELECOMUNICATIONS CORPORATION (NTC) CREDIT 166-NEP COMPLETION REPORT Income Statements (NRs thousands) Year ending July 16: 1973 1974 1975 1976 (Audited) (Audited) (Audited) (Preliminary) Operating Revenues Telephone - Rentals - Local Calls 3,944 5,256 6,975 8,090 - Domestic Trunk 446 1,039 1,235 2,Oho - International 563 542 570 850 - Installation 88 125 5 530 Total Telephone 6,962 11,10 Telex 329 510 870 1,110 Telegraph - Domestic 1,2t8 1,516 1,830 2,170 - International 862 872 1,250 2 460 Total Telegraph 2,110 2,3586 3,50 Miscellaneous 390 00 410 450 Total Operating Revenues 7,870 10,260 13,140 17,700 Operating Expenses Labor 4,010 5,h00 6,430 8,290 Materials 1,390 1,720 2,480 2,970 Depreciation 2,770 2,860 3,620 4,340 Operating Income TW) 6 =1 Other Income (Expenses) 730 60 360 120 Net Income before Interest 430 340 980 2,220 Interest 300 780 920 1 080 Net Income 130 (440) 60 1,140 Rate of Return () neg. .8 1.6 4.5 Operating Ratio (") after .Depreciation 102 97 95 88 * Installation charges were wrongly shown under other income but accounts have now been finalized and audited. NEPAL TELECOMMUNCATIONS CORPORATION (NTC) Compliance with Covenants Section of Credit Agreement Description of Covenant or Agreement Compliance Comments Credit 166-NEP 4O5(c) Valuation of fixed assets by July 16, 1970 Yes 4.06(a) Instal3ation of commercial accounting system by July 16, 1970 Partly See para. 5.08. 4.06(b) Annual audited financial statements to be sub- mitted within 5 months of end of fiscal year No This may not prove practicable under local conditions. See para. 5.18. 4.07(a) Engage consultants to develop reorganization procedures and commercial accounting system Yes 4.07(b) BWploy expatriates as Financial Manager and Business Manager Yes 4.07(c) Secure services of 5 qualified accountants Partly Candidates have been recruited but not trained. L.07(d) Set up accounting training ;rograrr, No See para. 5.08. 4.07(e) Set up technical training facilities Yes See para. 5.10. 4.08 Government's accounts to be billed at normal rates after July 16, 1969, and paid promptly Partly See para. 5.15. 4.09 Seek. Association agreement tc expand develop- ment program Yes This problem has not arisen. 4.30 On lending of credit to NTC Yes 4.12i Maintain existing tariff until end of fiscal year 1973 yes b.12ii Establish trunk and telex service tariff and customer deposits Yes 4.12iii Maintain rate of return of at least 8% NA Superceded by para. 4.06(a) of Credit Agreement 397-NEP (Credit 397-NEP) ( a)ii ) Maintain rate of return of at least 5% No They only failed marginally in FY76, see para. 5.14 4.13 Debt service covenant of at least 1.5 times Yes Limitation on recruitment of additional employees Yes See para. 5.11 'o  YARCHULAUMLAQ NEPAL JG TELECOMMUNICATIONS BOARD !1 p BAJURA/ tDANDEL 0HRA' HUR /DOTI JUMLA HF RADIO AND LINE NETW ORKS ~ /f,~ ,> At ~' "-.DOLPA9 <.MUSTA G r CTIDRIKOT MANEVDRANAGAR OS 1DAILEKH DHANGARHI JJRKOT SURKHET RUKUMKOT ?MANANG I'RAJPUR9 GULAaiv eBEN \ A-NOADIBAGLUNG POKHARA SNEPALGANJ -UC ARSUW PHANJ GULMI ARATy TO DELNI ARGA-.,s KCH1KOT TANSEN GORKHA - "\f N BRNDTR D CHAUTARAS BAHAD IR N A UTWAL RHARATPUR KATHMANOU ØDURGI.J-------Z- U R ø-ULIKHEL CHARIKOT LEGEN D Au AABHAIRAWA .BH~PHE0j HAA T!EN• JUNE 19.9 il i TAP5EJU - ----AREA CONTROL STATIONS EXISTING JUNE 1968TALJN HETAURA OKHALDHUNGA IRAMECHHAP 9 CHAINPUJR - -- -- -- --ARE A CONTROL,STA TION S IN COURSE OF PROVISION THESE ARE EXIST NG DEPEDNT STATIONS) SNHL EHTU BHOJUR gPHIDIMq\ o-- - ..--DEPENDENT STATIONS EXISTING JUNE 1968 0D NKT AKALA YA K.OTANG DAKT o-- ..- --DEPENDENT STATIONS IN COURSE OF PROVISION -1R.H DAp.. -- - -NTERNATIONAL HF RADIO ROUTES AýJÅNAXPUR I ý IAH '/ J DHA RAN ' JALESWAR4I ••. .... --_.._.INTERNAL HF RADIO ROUTES <CHANJRA AN ... ....... BIRATNAGAR%ÅH RAJ 9IRAJ-". . ........ ... -- - --- LANDLINE ROUTEy. .... INTERNATIONAL BOUNDARY ------ ZONAL BOUNDARY 1, 20 1 JUNE 1969 IBRD-2540R  '\ NEPAL L. TELECOMMUNICATIONS BOARD TELEPHONE DEVELOPMENT LONG DISTANCE ROUTES & EXCHANGES NEPALGANJ POKHARA F,-F KATHMANDU * BHAKTAP UR LEGEND BHAIRAWA ---- - ----EXISTING AUTOMATIC TELEPHONE EXCHANGE H --- - ------NEW MANUAL TELEPHONE EXCHANGES 0-----------NEW AUTOMATIC TELEPHONE EXCHANGES B. *8RGUNJ -_-_-_______ MICROWAVE SYSTEM MALANGWA. _ UHF OR VHF SYSTEM RAXAUL DHARAN *JAPATNA - 0 LANDLINE AND CARRIER ROUTE PATNA JHAPA ---- HF RADIO SYSTEM ',RARAJ ..IRATNGA . - -- -SCATTER (VHF) SYSTEM JOGBANI ------------ - - - EXISTING CABLE ROUTE ------ ACTIVE REPEATER STATION o 3 40 10 MILES CL_ -------PASSIVE REPEATER STATION JUNE 1969 18RD-2541R