Papua New Guinea - Second Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2532 PROJECT PERFORMANCE AUDIT REPORT PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) June 6, 1979 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 PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) Table of Contents Page No. Preface Mi) Project Performance Basic Data Sheet (ii) Highlights (iii) Project Performance Audit Memorandum I. Project Summary 1 II. Main Issues 3 Sectoral Background The Bank*s Involvement in the Sector 3 Project Concept and Design 4 Project Implementation 5 a) Revision of Project 5 b) Physical Achievements 6 c) Project Cost Variations 6 Procurement 6 Supervision 7 Financial Performance 7 Tariffs, Cost of Service and Revenues 7 Institutional Development 8 Economic Study 9 Bank Performance 11 Conclusion 11 Attachment: Project Completion Report I. Introduction 12 II. Project Preparation and Appraisal 12 III. Project Implementation - Operation and Cost 15 IV. Operating Performance 18 V. Financial Results 19 VI. Institutional Performance 24 VII. Project Justification 28 VIII. Bank Performance 29 IX. Conclusions 30 Annexes 1 - Summary of Annual Program and Project Costs (Without Overheads) 2 - Summary of Financial Performance 3 - Statement of Income and Expenses for Financial Years 1972-1977 4 - Balance Sheets for the Financial Years Ending June 30, 1972-77 5 - Statement of Sources and Applications of Funds for the Financial Years Ending June 30, 1972-77 6 - Completion dates of Auditor-General's Report on P & T Finances 7 - Internal Rate of Returns 8 - Compliance with Main Covenants 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.  (i) PROJECT PERFORMANCE AUDIT REPORT PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) Preface This report presents the results of a performance audit of the Second Telecommunications Project in Papua New Guinea for which a loan for US$10.0 million (Loan 852-PNG) was made to the Government of Papua New Guinea in 1972 for expansion of the facilities of the Posts and Telegraphs Department. The loan was signed in July 1972, became effective in December 1972, and was closed in June 1977. The Project Performance Audit consists of a Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Central Projects Staff (CPS) EWTTP Department. OED has reviewed the PCR against the Appraisal Report and other documents in the Bank's files and discussed the pro- ject with Bank staff. The PPAM is generally in agreement with the PCR; however, in addition to providing a brief summary of the project exper- ience, the PPAM offers supplementary comment on certain points of inter- est, notably the high cost of service, the problems involved in and needs for localization of staff, unauthorized use of long distance facil- ities and the economic study of the sector. Following normal procedures, a draft copy of this Report was sent to the Government and Borrower for comments. However, none were received.  (ii) PROJECT jIRFORMANCE BASIC DATA SHEET PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 18.2 23.4 Overrun (Z) - 21% Loan Amount (US$ million) 10.0 10.0 Disbursed ) - 10.0 Cancelled Repaid to June 30, 1977 Outstanding to) - - Date for Completion of Physical Components 6/30/75 6/18/77 Proportion Completed by Appraisal Target Date (%) - 70 Proportion of Time Overrun (%) - 66% Incremental Financial Rate of Return (%) 17.3 21.6 Financial Performance - Better Institutional Performance Satisfactory Cumulative Estimated and Actual Disbursements (US$ million) FY 1973 1974 1975 1976 1977 (i) Appraisal Estimate 2.0 6.0 9.1 10.0 - (ii) Actual 0.3 1.5 4.3 6.5 10.0 (ii) as % of Ci) 15 25 47 65 100 OTHER PROJECT DATA Original Actual or Item Plan Revisions Current Estimate First Mention in Files or Timetable - - 10/70 Government's Application - - 1/71 Negotiations 7/71 - 7/29/71 Board Approval 4/25/72 Loan Agreement Date 7/21/72 Effectiveness Date 12/28/72 Closing Date 6/30/76 6/30/77 6/30/77 Borrower The Administration of Papua New Guinea Executing Agency The Department of Posts & Telegraphs 1/ Guarantor The Commonwealth of Australia 1/ Fiscal Year of Borrower July 1 - June 30 (prior to 1978) Jan 1 - Dec. 31 (from 1978) Follow-on Project Name nil Loan/Credit Number Amount (US$ million) Loan/Credit Agreement Date MISSION DATA Month, No. of No. of Date of Item Year Weeks Persons Manweeks Report Identification 2/ Preparation 2/ Preappraisal Mar./Apr.71 2 2 4 Appraisal Oct/Nov 71 3 2 6 4/07/72 Total 5 10 Supervision I 7/73 2 1 2 9/14/73 Supervision II 5/74 1 1 1 7/24/74 Supervision 111 10/75 1 1 1 11/19/75 Supervision TV 6/76 1.5 1 1.5 8/08/76 Supervision V 11/76 1 1 1 12/03/76 - Total 11.5 16.5 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation): Australian Dollar ($A) until Sept.1975 Kina (K) from September 1975 Appraisal Year Average 71/72 Exchange Rate: US$ = $AO.835 73 = $AO.700 74 = $AO.693 75 = $AO.763 76 = K 0.792 77 = K 0.791 1/ Since the loan was signed, Papua New Guinea has become independent and the Department of Posts and Telegraphs has become the Postal and Telecommunications Services of the Department of Public Utilities. 2/ Identification and Preparation took place during supervision missions associated with the first telecommunications project.  (iii) PROJECT PERFORMANCE AUDIT REPORT PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) Highlights The Second Telecommunications Project in Papua New Guinea consisted of a major part of the 1973-75 expansion program of the Department of Posts & Telegraphs (P & T) of Papua New Guinea. The loan was signed on July 21, 1972 became effective on December 28, 1972 and was fully disbursed by June 21, 1977. Although two changes were made in the allocation of loan proceeds, the only significant change in project content was to increase the number of long dis- tance circuits to meet additional traffic growth and to extend the system to a number of additional centers. The project objectives were satisfactorily met, both in relation to provision and extension of telecommunications services and in further developing and improving P & T organization after independence. Although the project can be regarded as having been successful in both its physical and institution building achieve- ments, P & T has continued to rely extensively on expatriate assistance. The audit report (No. 808 dated July 17, 1975) for the first telecommunications loan (Loan 540-PNG) has previously commented on expatriate dependence and the need to use national staff. The delay in localization and the topographical problems have contributed to a very costly service compared with most other countries (PCR paras. 5.02 and 5.06 and PPAM para. 32). Standards of service are, however, among the best in any developing country. An economic study initiated under the project is parti- cularly significant. The study was designed to decide investment priorities with special reference to the welfare of the poorer indigenous population. The report on the study is still under review but contains useful data on the current use of facilities and the need and possible priorities for future development (PCR para. 7.05 and PPAM paras. 35-37). The following issues raised in the audit report are of special interest: - project concept and design and need for balanced response to country requirements (PCR paras. 2.03- 2.05 and PPAM paras. 19-21); - the revision of the project in line with changing needs (PCR paras. 3.02-3.03 and PPAM paras. 22-23); - physical achievements and justified deferment of project completion (PCR paras. 3.04-3.07 and PPAM para. 24); (iv) - project cost variations (PCR para. 3.09 and PPAM paras. 25-26); - procurement (PCR para. 3.08 and PPAM para. 27); - financial performance (PCR Section 5 and PPAM para.29); - costs of service: bulk billing/toll ticketing (PCR paras. 5.01-5.02 and PPAM paras. 30-32); - institutional development, staffing, localization (PCR Section 6 and PPAM paras. 33-34); - data provided by the economic study (PPAM paras. 35-37). PROJECT PERFORMANCE AUDIT MEMORANDUM PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) Project Summary 1. The .Bank has made two loans to Papua New Guinea for tele- communications projects, for a total amount of US$17 million. The beneficiary has been the Department of Posts and Telegraphs (P & T) which has, during the period of execution of the project, been trans- formed from a non-commercial department, operating at a loss, into a dynamic, viable and commercially oriented entity (PPAM paras. 16-18). 2. Given conditions existing at the time, the project was well balanced and was designed to meet known demand for service over the period 1973-1975. Due to some slowing down in economic activity with the approach of independence, subsequently followed by an increase in activity after independence, and also an increase in long distance traffic over that forecast, the project was revised on two occasions. As part of this process, extension of local facilities was deliberately slowed down; even so, the project was about 70% complete at the ori- ginal target date (PCR paras. 2.03-2.06, 3.02-3.03 and PPAM paras.19- -24). 3. Project cost increased by about 30% due partly to currency parity changes and partly to the provision of additional plant. Although it has not been possible to establish unit costs, costs per telephone added were high but below those for the first project. Despite the need to resolve a number of issues, procurement arrangements were satis- factory; supervision of the project was adequate (PCR para. 3.09 and PPAM paras. 25-26). 4. Financial results have been satisfactory and in line with appraisal estimates with an average rate of return on net fixed assets for the 1972 to 1977 period of 9.4%, an operating ratio of 79%, a debt equity ratio of 20/80, debt service coverage of 10 times and internal cash generation of 70% of the funds needed for new fixed assets. The internal financial rate of return as recalculated on completion of the project was 21.6% compared with 17.3% calculated at appraisal (PCR Sec- tion 5 and PPAM para. 29). 5. It would seem that the installation of toll ticketing facilities with the ability to provide subscribers with detailed bills would have been a wise decision before opening international subscriber dialing. This facility could additionally have been extended with ad- vantage to national long distance dialing (PPAM paras. 20 and 32). 6. The PCR comments on both the high tariffs and the extremely high revenue per telephone. Tariffs are undoubtedly higher than they - 2 - would otherwise be as a result of the high operating costs partly caused by the extensive employment of expatriate personnel. In view of the need to provide low cost service in order to facilitate use by a wider public, this is an area of major concern and highlights the need to continue with the process of localization of employment as rapidly as possible. A tariff study directed to encouraging wider use might with advantage be undertaken. The extremely high revenue per telephone is likely in part to result from unauthorized usage and cause a net economic loss to the country (PCR paras. 5.02 and 5.06 and PPAM paras. 30-32). 7. The organizational structure and institutional performance of P & T has been generally satisfactory. P & T has successfully met the challenge of operating an expanding system during the period of transfer to self-government and independence. A number of problems remain to be resolved including, in particular, the present substantial use of expatriate personnel. The performance of the consultants employ- ed by P & T was satisfactory (PCR Section 6 and PPAM paras. 30-34). 8. In retrospect, even though the development pattern followed that in most developing countries (and in the absence of subsidization has had to be related to the need for financial viability), greater attention should in future be given to providing a balanced response to the broader aspects of development implicit in overall needs and priorities of the country including the rural population (PPAM para. 21). 9. At the suggestion of the Bank, an economic study of the sector has been undertaken in order to establish data on the use of telephones and future investment priorities. The results of the study are still under review, but it appears that it will contribute valu- able input for P & T's future development plans (PCR para. 7.05 and PPAM paras. 35-37). 10. P & T has complied with the loan agreement covenants, except that it has not submitted audited accounts within the prescrib- ed period. Due to staffing problems in the office of the Auditor General, this requirement is unlikely to be met in the immediate future and it appears desirable that use of external auditors should be considered (PCR paras. 5.16 and 5.20 and PPAM para. 33). 11. The Bank's handling of this project has been satisfactory. It has provided useful advice and assistance to P & T during the project's execution and has initiated in-depth consideration of some of the special problems of the sector. 12. A discussion of the main issues is in Section II. General conclusions drawn by this audit are in Section III. - 3 - II. MAIN ISSUES Sectoral Background 13. Papua New Guinea has many communication problems due to the rugged and inaccessible mountain ranges, dense tropical forests, vast swamps, great rivers and wide expanses of sea. Surface transport is minimal; coastal shipping serves a few towns and the offshore islands but there is no railway service and only one major road linking the New Guinea highlands with Lae on the northeast coast. Aircraft provide the only reliable means of travel and shipment to many parts of the country. 14. In land area, the country is almost as large as Thailand though it has only six percent as many inhabitants or about 2.7 million. Eighty-five percent of the population lives in rural areas dependent largely on subsistence agriculture, isolated from one another and speak- ing different languages. Only eight urban centers have 10,000 inhabi- tants or more, including the capital city of Port Moresby, which has a population of about 100,000. The country's physical barriers pose many problems to the process of integration, provision of social services and economic development and highlight the critical nature of the relationship between modernization of the society and development of communications. Within these constraints, the country is well en- dowed with natural resources. 15. The country's long association with Australia has resulted in the adoption in many sectors of the economy of Australian methods and technical standards and the employment of Australians in many senior and skilled technical positions. These ties are expected to diminish as more countries become involved in development financing and the localization of employment is extended in senior and techni- cal positions. The Bank's Involvement in the Sector 16. When the Bank made its first telecommunications loan in 1968, the Department of Posts and Telegraphs (P & T) was operating some 28 automatic and manual telephone exchanges serving about 7,000 sub- scibers. All long distance services were operated manually, largely over HF radio links, and were overloaded, of poor quality and un- reliable. The first telecommunications loan (546-PNG) of US$7.0 million was approved in June 1968 and was intended to provide foreign exchange financing for P & T's 1968-1973 development program. The project in- cluded 10,000 lines of local exchange equipment to expand and improve local telephone services. In addition, high quality microwave and VHF systems were to be provided and link the most important urban centers. In 1969, the project was expanded to give adequate com- munications for the copper mining operations in Bougainville. 17. The Project Performance Audit on the first project (Report No. 808, dated July 17, 1975) concluded that the project was very suc- cessful, despite the challenging environment. Physcial achievements were beyond expectations and P & T became a dynamic, rapidly expanding organization, operating on a commercial basis. On the other hand, actual cost per telephone was double the appraisal estimate and tariffs were among the highest in the world. Bank performance was considered satis- factory, except for a lack of early concern on the need to steer P & T away from expatriate dependence. 18. The Bank's second loan (852-PNG) of US$10.0 million, (the subject of this audit) was intended to finance 83% of the foreign exchange cost of P & T's development program for the period 1973-1975 1/. Total project cost was estimated at US$17.2 million. The project was intended to expand local exchange capacity by a further 10,000 lines, replace 3,300 lines of obsolescent equipment, provide 650 additional long distance circuits, and provide telex exchange capacity for 600 lines (PCR para.2.05). Project Concept & Design 19. As indicated in the PCR (para. 2.03, 7.08, and 8.01), project design was substantially undertaken by P & T with some advice and assist- ance from the Bank. Faced with the problem of operating on a viable basis and also meeting the pressures for service in the areas in which Government and business are concentrated, project design has been directed to providing facilities within and between the main cities and towns. This is the initial pattern of development followed in almost all developing countries. Addition- ally, in Papua New Guinea a basic service has been provided in areas without exchange facilities, by means of about 1,500 radio telephones in isolated locations. The majority of these are, however, HF stations operated on a scheduled basis and help Government, social service and some business users in these areas but due to problems of access etc., are seldom used by the local people. One priority which has been correctly met in the light of the high financial and social cost of poor quality service has been to modern- ize the telecommunications system and provide high quality automatic local and long distance networks and microwave systems. 20. While the technological decisions taken by P & T were generally sound and provided least cost solutions, it appears likely in the light of subsequent experience that the opening of international long distance dialing (and to a lesser extent national dialing) using bulk metering and based on the use of Australian practices at that time, rather than provid- ing toll ticketing with recorded details of calls, has encouraged signi- ficant unauthorised use and possibly provision of additional facilities at extra cost to the economy. A major imbalance on calls to Australia has also resulted in relatively large foreign currency payments. The Bank also questioned, during project execution, P & T's decision to 1/ The overall program also included completion of the first project and provision of a new headquarters building. - 5 - expand HF radio telephone facilities, bearing in mind problems exper- ienced with equipment purchased for the first project. The decision was not changed, but it has not been established whether the expanded HF system has satisfactorily met requirments. 21. While the project undoubtedly provided adequately for the needs of the main centers and was conceptually sound within the con- text of available resources and the need for viable operation, it is open to question whether the project dealt with the special needs of Papua New Guinea as a whole. The Bank's Sector Memorandum (1366-PNG published in November, 1976) established that only 14% of the total population of 2.7 million, (i.e.,388,000 people) lived in areas where public telephone exchange service existed and 30% of the small towns with population of less than 5,000 were without this type of service. The importance of expanding use and coverage in rural areas is dealt with below (para. 23). Within this context, it would be desirable in the case of future investment decisions to ensure these will provide a balanced response to needs implicit in established Government prior- ities including requirements in support of economic development, admin- istration, rural services, public information and national integration. This may involve a process of cross-subsidisation which should become more practicable with the growth in size of P & T's operation. Project Implementation (a) Revision of Project 22. Growth in demand for local telephone service, which had been about 11% in 1971 and 1972, fell to about 4% as independence neared, but subsequently increased to about 9%. This led to a deci- sion first to reduce local network expansion and subsequently to spread it over a longer period. Additionally, a decision was correctly taken to extend microwave long distance facilities to additional centers and provide additional circuits to meet the growth in traffic. These factors, together with the delays in project execution and the availability of bilateral financing to meet additional project cost, led to the two revisions of the project as described in the PCR (para. 3.02). 23. One significant addition to the project initiated by the Bank in 1974 was an economic study (to be partly financed from the loan) designed initially to establish who uses telephones, nation al objectives of development, investment priorities, consequence of alternative investments, distribution of benefits with particular re- ference to the poor, and the social costs and benefits of past invest- ment in the sector. The terms of reference for this study were revised in 1975 to emphasize the economic, social and national coordination aspects of telecommunications and the contribution telecommunications could make to development of rural areas, national unity, and social - 6- and political development; the scope of the study was subsequently broadened and a proposed methodology worked out during seminars held in Papua New Guinea and Australia. Later, as the study progressed, it was decided to make it more forward-looking in scope and more in line with the original terms of reference (paras. 35-37). (b) Physical Achievements 24. The project was completed in June 1977, two years behind schedule (PCR para. 3.04), i.e., with a time overrun of 66%. The delay was in large part deliberate as P & T had in February 1973 reported on the economic slowdown and a need to review the project, with a suggestion subsequently to spread the execution over 4 years instead of 3 years. Even so, the project was about 70% complete at the original target com- pletion date. (c) Project Cost Variations 25. The data given in Annex 1 of the PCR indicate that the cost of the project increased by US$4.3 million (from US$14.0 million to US$18.3 million) or by 31%. It is, however, not possible to reconcile the figures for specific items with those given in the appraisal report as the PCR summary (and presumably P & T's records) are based on the program as a whole and also exclude overhead charges and consultancy fees. Allowing for both the devaluation of the US dollar and the revaluation of the Australian dollar, in which a large part of the equipment orders had been placed, and for the increases in extent and capacity of the long distance network and the size of the telex exchange, it appears likely that unit costs in constant prices have not varied significantly. 26. The audit report for the first project comments on the very high average cost of US$3,100 per line based on capacity provided. The figures should, however, be related to the major increases in long distance and telex facilities included in total project costs. Based on the available data, the comparable figure for exchange capacity provided for the second project was about US$2,200 which, although high, is substantially accounted for by the replacement of 3,300 lines of obso- lescent equipment, the small size of some of the exchanges (with loss of economies of scale) and the topographical and transportation problems inherent in the country. Procurement 27. Despite experience gained during the first project, a number of differences arose with the beneficiary, resulting partly from a wish by P & T to enter into extended contracts without clearly defined quantities and partly from genuine differences of opinion on the appli- cation of the Bank's Guidelines on Procurement and the protection of P & T's interests. The position was also to some extent complicated by the issue of revised Guidelines. These issues led to voluminous corres- pondence, discussions during supervision, and in one instance, a visit - 7 - by the P & T's Deputy Director. The differences were, however, dealt on a basis of good faith and understanding on both sides and were satis- factorily resolved. Supervision 28. The average period between supervision visits, from loan effectiveness to project completion, was 10.8 months. There was a higher - than - normal exchange of information by telex and through correspondence. Supervision reports were of high standard and the quality of supervision was good. The conclusions reached in the PCR (para. 8.03) on the adequacy of supervision are therefore supported. Financial Performance 29. Financial results have been satisfactory and substantially in line with the appraisal estimates (PCR Section 5). The actual rate of return on net fixed assets for 1975 was 10.3% as against a covenanted rate of return of 10%; the actual returns of 14.0% and 15.6% in 1976 and 1977 also exceeded the covenanted return of 12%. The average actual rate of return for FYs1972 to 1977 was 9.4% as against the appraisal estimate of 8.5%. Despite the increase in revenues and due to significant increases in operating costs over the appraisal estimate, the average operating ratio was 79% compared with the forecast of 70%. Debt service coverage averaged 10 times as against an appraisal estimate of 6 times and a covenanted 2 times. The average debt/equity ratio was 20/80 as against the appraisal forecast of 26/74. P & T generated 70% of the funds expended on new fixed assets as against an appraisal forecast of 72%. The recalculated internal financial rate of return for the project (PCR Annex 6) is 21.6% which compared with a figure of 17.3% calculated at appraisal. Tariffs, Cost of Service and Revenues 30. The PCR (paras. 5.02 and 5.03) presents some significant data on both the high tariffs and the extremely high average revenue per tele- phone in Papua New Guinea. Both are amongst the highest in the world. 31. The very high telephone charges as compared to other develop- ing countries restrict the use of telecommunication facilities by the popu- lation at large (para. 36) and are likely to limit provision of essential social services and development of local economic activity, together with extension of facilities into new areas where the ability to pay high charges is likely to be limited. The issue of the high'cost of service is probably the major problem facing P & T and is only likely to be solved by reducing operating costs. A study of the tariff structure, designed to encourage extended use and penetration, might, however, be undertaken based on the data obtained during the recent economic study. Given the need to expand service into new areas and meet the needs of the society as a whole, the present high operating costs of US$1,100 per line (PCR para. 5.06) are a matter of major concern. However, this problem is likely to be resolved only over the longer term as localization - 8 - of employment can be extended 1/ and other economies made in operating costs both through economies of scale 2/ (as the size of installations is increased) and through the adoption of more cost effective methods. The question of localization is dealt with more fully in para. 33-34. 32. The very high average revenue per line of about $1,200 per annum is enabling P & T to maintain its profitability, despite relative- ly high unit investment costs and very high operating costs. Undoubtedly high revenues are resulting from the present high proportion of Government and business lines and the difficult topography and lack of transportation facilities, which lead to increased use of telecommunications. Addition- ally, however, it appears that in the absence of detailed listing of inter- national and other long distance calls there is considerable unauthorized use of the facilities. Unauthorized use of this nature, if it becomes extensive, may involve an unnecessary and unjustified cost to the economy in providing facilities to meet this use or in paying overseas transit charges. Also, due to the limited resources available, unauthorized usage (by creating additional demand) may adversely affect the development pattern of the network and should be made more difficult by introducing toll ticketing (para. 20) speedily on international routes and progres- sively on national long distance routes. Initially, this may prove to be unpalatable to P & T, which stands to lose considerable revenue, but introduction of measures to correct the position is believed to be in the national interest and of significant benefit to P & T's subscri- bers. Institutional Development 33. The Audit Report for the first telecommunications project has commented on the transformation of P & T from a non-commercial department, operating at a loss, into a dynamic, viable and commercially oriented entity. Management has, during the second project, success- fully met the challenge of accepting additional responsibilities resulting from self-government and independence. One important develop- ment related to the organization of the sector has been the purchase of the assets of the Overseas Telecommunications Commission (Australia) allowing P & T to operate the profitable international services (PCR para. 5.03). The process of institution building and development has continued under the second project. One institutional failure which is recorded (PCR para. 5.18) is the failure to submit audited accounts on time. Due to the staffing problems, this requirement under the loan agreement may not on the present basis be met for some time, and it appears desirable that use of external auditors should be considered. Certain problems have arisen such as in computerization (PCR para. 5.10) 1/ In 1976 the additional cost of employing expatriate was estimated at about 20% of total operating expenses including depreciation. 2/ There is a somewhat anomolous situation here in that high tariffs tend to limit the expansion which will result in potential economies of scale. - 9 - but organization and management are considered to be sound (PCR paras. 6.01-6.07) 1/. While it is obviously necessary to maintain the inte- grity and quality of the telecommunications network, and the process of localization should be undertaken within this context, there are major disadvantages in continuing to rely on a considerable number of expatriates to assist in management and in maintaining and operating services. Additionally, the PCR (paras. 6.08 and 6.09) indicates that there is presently some over-staffing (including expatriates) and the the need under these conditions for more effective manpower planning is stressed. Recruitment of suitably educated staff and provision of adequate training have also been dealt with in the PCR (paras. 6.10-6.12). 34. The audit report for the first project has suggested that the Bank should have taken a greater interest in steering P & T away from expatriate dependence. A report by a manpower consultant made available to the Bank in May 1974 also strongly supported localiz- ation and made a number of useful recommendations on implementation of the process. The Bank's Sector Memorandum (Report 1366 PNG) dealt with the problem at some length and suggested targets for localiza- tion which were subsequently reiterated in the initial comment of the Bank on the economic study. P & T felt, however, the Bank's sugges- tions showed a lack of understanding of local conditions. The issue has been aired in correspondence, reports and discussions with P & T. It seems to have been accepted for the moment that there is little more the Bank could have done in pressing P & T to take appropri- ate action to expedite the process of localization while maintaining satisfactory standards of service. Economic Study 35. The PCR briefly mentions (para. 7.06) the economic study which was undertaken at the Bank's suggestion and partly financed from the loan proceeds. This study has provided valuable insights regard- ing the role of telecommunications as perceived by all sections of the society and will be of assistance in developing an appropriate pricing and investment strategy, but is informative rather than con- clusive. Also, even given the considerable effort which went into the study, statistical data and conclusions are based on a relatively small number of samples. 36. Review of the study is still proceeding but some of the findings as related to individual groups of subscribers are of 1/ Considerable support is still given by expatriate personnel. - 10 - immediate interest: (a) Use by Business and Administration (Business Lines) - adequate telecommunications facilities are equally important to business and government in Papua New Guinea as elsewhere (probably more so in view of transport problems and limited available expertise); - there is extensive use of business and government telephones for private purposes; this applies to both outgoing and in- coming calls, which provide access through an employee to someone who cannot otherwise be reached; (b) Use by the wealthier section of society (Residential lines) - residential telephone service is used mainly by expatriates who comprise 2% of the population but have 78% of the private telephones; - emergencies were considered an important reason for having a residential telephone in the first place; afterwards, social reasons predominated, although business use was significant; - in the case of private as distinct from business use, the international and (to a lesser extent) the long distance services were used predominently by expatriates; (c) Use by the poorer sections of society -- Public Call Offices (PCOs), etc. - social calls amongst the population are a valuable means of unifying and integrating the nation (where facilities are provided for economic reasons, the marginal cost of social use is low); - the community-of-interest pattern for PCO calls varied in different areas (82% local in Port Moresby but only 10% local in Goroka); - access barriers were listed as physical, procedural, educational, social and cost; there was a need to great- ly extend coverge, make facilities more widely accessible, educate potential users in the benefits and use of commu- nications and provide low cost service; - there was a major problem of access with 75% of personal calls made by local inhabitants directed to business or government lines; - 11 - - price was the most common reason given for not having a telephone; - the number of calls made was sensitive to the price of calls. 37. The study should contribute substantially to establishing the communication needs of the local population, identifying how these needs can best be met and optimizing the use of resources for maximum benefits to the society as a whole. Bank Performance 38. The Bank's handling of the project has been satisfactory. It has provided useful technical advice and assistance during both pro- ject preparation and execution; it has stressed the desirability of introducing toll ticketing; it has acted firmly during the procurement process but with understanding of P & T's difficulties and managed to resolve the problems and differences of opinion which arose. The Bank has also made a useful contribution in the continued process of insti- tution building. The need for localization has been pursued more energetically than under the first project but with no greater success. The Bank has also initiated an in-depth study of the present use and possible development of facilities designed to maximize benefits to the society as a whole. Conclusion 39. The project was, on the whole, successful with major achieve- ments in physical expansion of facilities and in institution building. It has covered new ground in examining in depth the present and possibly extended use of facilities and the need for development designed to benefit the society as a whole. Despite these major achievements, the continued use of expatriates, although apparently still necessary, has increased the cost of service and is a factor in limiting use by the local population. Such limitation is believed to prejudice the deve- lopment of the economy and the provision of essential social services. The present unauthorized use of facilities is economically costly and may well distort the desirable pattern of development; unauthorized use could substantially be reduced through the installation of toll ticketing equipment. Attachment -12 - PAPUA NEW GUINEA: SECOND TELECOMMUNICATIONS PROJECT (LOAN 852-PNG) PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 Telecommunications, both national and international, in Papua New Guinea are provided by the Postal and Telecommunications Services of the Department of Public Utilities. Prior to December 1975, the entity was known as the Department of Posts and Telegraphs. Prior to December 1973, the international service was owned and operated by the Overseas Telecommunications Commission (Australia). 1.02 The Bank first became involved with telecommunications in Papua New Guinea in 1967 when it helped finance the commencement of the national automatic long distance telephone network. The second telecommunications project, which was com- pleted in June 1977, was designed to increase both the local switching capacity and further extend the long distance network. In addition, it also covered the estab- lishment of the automatic telex service. II. PROJECT PREPARATION AND APPRAISAL Origin 2.01 The first telecommunications project was developed during 1967/68 and covered the expansion of the Papua New Guinea telecommunications network over the years 1969 through 1972. That project was appraised in 1967 and the loan was signed in June 1968. 2.02 The second telecommunications project was developed during 1970 and pre- appraisal and appraisal missions were undertaken in 1971. The second project was a natural follow on from the first which was proving to be highly successful by that time. Preparation, Appraisal, Negotiations and Approval 2.03 The project preparation was undertaken largely by the beneficiary, the then Department of Posts and Telegraphs (P&T) of the Administration of the Territory of Papua New Guinea, with some assistance and advice from Bank staff - 13 - during supervision missions relating to the first telecommunications project and a preappraisal mission in March 1971. Appraisal was undertaken in October 1971, negotiations took place over March 21 to 27, 1972 and the Board approval was given on April 25, 1972. Projects Role in Long-term Plan 2.04 The project comprised all of the 1973/75 P&T expansion program except that part concerned with the ongoing first project, the provision of a P&T headquarters building and provision of motor vehicles, mechanical aids and tools. The P&T's expansion program was designed within the framework of a long-term telecommunications national plan and a five-year development program. In brief, the project represented a time slice in the implementation of the P&T's develop- ment plan. Project Description 2.05 At the time of appraisal, the project comprised the 1973/75 construc- tion program but excluding ongoing works and a headquarters administration building. The project included the following: (a) Installation of 13,500 additional lines of automatic switching equipment and the recovery of 3,500 lines of obsolete equipment; (b) Installation of subscribers' cable network to add 6,100 additional direct exchange lines; (c) Installation of UHF/VHF radio systems and outstation radio equipment; (d) Installation of multiplex equipment on long distance routes to provide an additional 650 trunk circuits; (e) Installation of additional equipment in the long distance switching centers; (f) Installation of automatic telex exchange capacity to a total of 600 lines; (g) Construction of technical and operating buildings; and (h) Employment of engineering consultants. 2.06 Bank financing was proposed for the following portions of the project described in para. 2.05 above: (a) US$1.9 million for 6,200 lines of the 13,500 in (a); (b) US$1.6 million for cable in (b); (c) US$1.6 million for microwave radio and US$1.3 million for outstation radio in (c); - 14 - (d) US$1.1 million for multiplex equipment in (d); (e) US$1.5 million for telex expansion in (f); and (f) US$0.5 million for consultancy services in (h). 2.07 In the event the project was modified on two occasions through its course and was extended to include FY76-77 (see Section III). Covenants 2.08 The loan agreement provided that the borrower shall: (a) employ engineering consultants acceptable to the Bank to assist in (i) preparation of specifications and bid documents, (ii) evaluation of bids, (iii) planning, and (iv) maintenance and operations procedures; (b) provide to the Bank not later than six months after the end of each fiscal year certified copies of its financial statements and audit reports; (c) not incur any debt unless its net revenues for the fiscal year next preceeding such incurrence or for a later twelve month period ended prior to such incurrence, whichever shall have been greater, shall not be less than two times the maximum debt service requirements for any succeeding fiscal year on all debt including the debt to be incurred; (d) take all measures, including but not limited to tariff adjust- ments, to ensure an annual rate of reuurn of not less than 10% in FY75 and 12% thereafter; (e) consult the Bank prior to making any reduction in the current tariffs; and (f) until completion of the project, obtain the Bank's concurrence to a revised financing plan before committing itself to any capital expenditure not required for the project in excess of US$500,000. The performance of the P&T in relation to the covenants is discussed in Section VI. - 15 - III. PROJECT IMPLEMENTATION - OPERATION AND COST Loan Effectiveness and Project Startup 3.01 The loan was made effective on December 28, 1972. Its startup overlapped the completion of the first telecommunications project (Loan 546-PNG) which closed on March 31, 1974. The early progress was slower than predicted, although good and early progress was made with the ac- quisition of necessary sites and building construction, as well as with material ordering. In the early stages, it became apparent that the demand for telephone connections would be lower than originally predicted and this influenced the early rate of progress (see para. 3.02). Revision 3.02 The project was formally revised on two occasions during its progress. In the first revision (June 1975), it was agreed that the local switching equipment and subscribers cable provision should be reduced and the provision of long distance transmission facilities in- creased. This modification was based on a temporary lowering in demand for DELs during the transition period of self-government through to in- dependence (1973 through 1976). The second revision was agreed in December 1976 and its effect on the application of Bank financing was to increase the allocation to local subscribers works and decrease the allo- cation to the long distance network. The reasons for this were primarily that the borrower had arranged (with the Bank's agreement) separate sup- plier financing for microwave radio and multiplex equipment--thus reducing Bank funds required in this area--and the extension of the project from 1975 to 1976/77 reintroduced the need for subscribers plant for which there was no other source of financing. 3.03 Overall, apart from the enhanced trunk network, the final project did not differ greatly from the originally appraised project--the major differences being that it extended over a longer period of time, its costs increased, and ultimately the long distance network was expanded much more than planned in the initial appraisal. The appraisal was based on increas- ing the long distance network by the addition of 650 circuits and by June 1977 an additional 1,200 circuits were provided; this increased the overall cost but the greatly increased trunk and international traffic with the revenues it generated preserved the financial viability of the project and the development program. Implementation Schedule 3.04 As already stated, the implementation schedule ran later than planned. The project was originally intended to be completed by June 1975, but in fact was not completed until June 1977 with the cutover of the new Ela Beach telephone exchange in Port Moresby. - 16 - 3.05 The main reason for the time overrun was the drop off in sub- scribers' demand in the period following the announcement of self-government and independence plans, and the shift in emphasis to the long distance net- work which was made in the 1975 revision. The annual growth rate dropped in FY73 to about 8-9% compared with past growth rates of about 14-20%. At about the same time, the growth in long distance and international traffic increased significantly. Because of these changes in growth pressures, the P&T construction programs were modified to slow down investment in the sub- scribers' area of the network and increase investment in the long distance sector. Because of the longer lead times, it was also necessary to extend the closing date for the project. 3.06 Subsequently, the subscribers' plant which had been deleted from the project at its first modification was reinstated. This was possible without reducing the long distance network investment because the borrower was able to obtain supplier financing for microwave radio and multiplex equipment. 3.07 Another important reason for the time overrun was the continued uncertainty during the course of the project of availability of financing. Very early in the life of the project, the P&T developed a general proposal for additional Bank assistance through a third telecommunications project. Bank staff assisted the borrower in developing this proposal and it was also discussed with the Papua New Guinea Finance Ministry. However, although it was "just round the corner" for several years, the Government never formally requested additional assistance. Some parts of the P&T program kept on being deferred pending a third telecommunications Bank loan to finance them. Procurement 3.08 All procurement was in accordance with the Bank's guidelines and no particular difficulties were encountered. The familiarity with the Bank procedures which the borrower's staff acquired during the first project helped during the second. Costs and Disbursements 3.09 The allocations of Bank financing at the time of appraisal and as revised and finally spent are shown below: - 17 - Loan June/July 1975 Sept./Dec. 1976 Actual Category Agreement Revision Revision Disbursement - ------------ - - --US$ Million- - 1. Local exchange and 3.5 3.45 5.450 5.058 cable equipment 2. Long distance 4.0 4.52 2.199 2.592 facilities 3. Telex and telegraph 1.5 1.29 1.321 1.371 4. Technical services 0.5 0.74 1.030 0.979 5. Unallocated 0.5 0.0 0.0 0.0 Total 10.0 10.0 10.0 10.0 3.10 The costs of project and program as appraised and as actually implemented are given in Annex 1. The reasons for the differences have already been discussed (paras. 3.02 to 3.07). 3.11 The estimated and actual annual disbursements are shown in the following: Accumulated Disbursement Bank (US$ Million) Actual as Fiscal Year Appraisal Actual % of Appraisal 1973 1.967 0.3 15 1974 5.975 1.5 25 1975 9.133 4.3 47 1976 10.000 6.5 65 1977 10.0 100 Operations 3.12 The standard of equipment supplied and its installation was of high quality overall. The project and program was well planned and engineered and the quality of service being provided by the telephone network in Papua New Guinea is very high--at least equal to and in some cases better than the quality of ser- vice in developed countries. - 18 - Performance of Consultants, Contractors, Suppliers and Borrower 3.13 The consultants employed by the borrower for technical services comprised the British firm Preece, Cardew and Ryder. This firm assisted the borrower during the first project and has performed effectively. The borrower is satisfied with the firm's performance and Bank staff also re- gard the company as competent. All the major suppliers performed adequately. 3.14 The borrower's performance on the whole is judged as first class, particularly as the implementation of the project took place over a period of significant change in Papua New Guinea beginning with self-government in December 1973 and then independence in September 1975. It was a period of political and economic uncertainty and both the telecommunications authority and the network have come through it in good shape. The bor- rower's performance is discussed further in Section VI. IV. OPERATING PERFORMANCE Market 4.01 Compared with the projections at the time of appraisal, the demand for telephone services was slower than expected. This was largely due to the uncertainties introduced by the political changes in the country. The net effect is that the market growth curve has been delayed by about 12 to 18 months. 4.02 On the other hand, the growth in long distance national and inter- national telephone and telex traffic was much greater than predicted. This has produced a telephone call revenue per DEL in Papua New Guinea which would be close to the highest in the world. Although the call charges are high by global standards, the growth in long distance traffic was 11% from 1976 to 1977 (the latest available figures) and, in the four years from 1972 to 1976, it grew by nearly 300%. 4.03 A not completely foreseen demand which has emerged during the proj- ect period is that for automatic subscriber trunk dialling service from the many small towns and villages which at present have only high frequency radio outstation telephone service. This demand has now reached such a level that it will remain unsatisfied for many years unless there is a specially funded effort to meet it. Project's Role 4.04 The role of the project was to provide additional plant and facilities to cater for the increasing demand as perceived in all areas of the telecom- munications service in Papua New Guinea. It has provided the means for accom- plishing this. - 19 - 4.05 There is still an unsatisfied demand of about 3,000 (about two years' growth) for telephone service but the existing capacity of the subscriber exchanges is generally sufficient to cope with this. The trunk and junction network resulting from the project is adequate to carry the high levels of traffic, and the telex network is generally meeting the demand. 4.06 As indicated in para. 4.03, the project was not designed to extensively serve the rural area, apart from provision for high frequency outstation radio systems. Any subsequent Bank-financed project would be designed to assist in meeting this area of demand. V. FINANCIAL RESULTS Operating Performance 5.01 A summary of key financial parameters is given in Annex 2. The financial results for the Telecommunications Service have been satisfactory (see Annex 3). Revenues were significantly higher than forecast in the appraisal report and reflect the subscribers' willingness to use the avail- able STD and ISD facilities. 5.02 During the extended project period, 1973 to 1977, telephone call revenues increased from K 6.3 million to K 16.1 million reflecting an increase in total telephone revenue per DEL from K 535 to K 959, an annual growth rate of 15%. In FY77, the telephone revenue per DEL was equivalent to US$1,266, a very high figure compared with other developing countries, viz., Thailand, US$190; Fiji, US$315; and India, US$269. This results from a combination of tariffs and usage, especially STD, and since FY73, ISD, which are high by world standards. Telephone tariffs were raised in FY77, the cost of a meter pulse (a local call records one meter pulse and STD more, depending upon the duration and distance of the call) increasing from K 0.07 to K 0.09. This is equivalent to US$0.119 and is high compared to other developing countries, viz., Thailand, US$0.07; Fiji, US$0.057; and India, US$0.035. 5.03 The revenues derived from international calls have been significant since P&T took over these assets which, prior to FY73, were operated by the Overseas Telecommunications Commission (Australia). Future introduction of Automatic Message Accounting, which provides details of the number dialed, and length of call, on the accounts, may tend to limit the use of ISD and STD. 5.04 Provision of the automatic telex network proved both popular and profitable, the subscribers increasing in number from 131 in FY73 to 430 in FY77. Annual revenue from telex calls, increased from K 283,000 to K 1,855,000 during the same period. This represents more than a doubling in per line usage--about the same increase as telephone revenue per DEL. - 20 - 5.05 Operating costs were much higher than forecast in all years during the project period. In general, the higher operating costs were due to: (a) P&T taking over the operation and maintenance of the overseas telecommunication facilities from OTC (Australia) in FY74. In that year, costs which could be directly attributed to this service amounted to K 2.5 million; (b) a change in the method of allocating engineering overhead and administration costs, introduced in FY74, which caused operating costs to increase by more than K 1.0 million in that year. This change in policy, adopted for the rest of the project period, was accepted as reasonable by the Bank; (c) general inflationary effects on wages and other costs together with the sustained use of expatriate personnel; and (d) costs in excess of expectations for recruitment, overtime, travel, helicopter hire, air fares, and additional manhours required to operate the network. 5.06 Operating costs in FY77 were K 837/DEL (US$1,108/DEL) which is very high compared with other developing countries, viz., Thailand, US$127; Fiji, US$277; India, US$154. The reasons for these high costs are the high ratio of staff to DELs, the somewhat extensive use of expatriate staff, the high cost of travel for staff and air transportation of equipment and the frequent use of helicopters to service plant and equipment in inaccessible mountain locations. 5.07 From FY74 onwards, operating costs were subject to close management control, and in FY76, were less than FY75. Nevertheless, the result of these increases in costs was a higher than forecast operating ratio in all years except FY73 when the increase in revenues exceeded the increase in costs. 5.08 The rate of return achieved in FY73 exceeded the forecast signifi- cantly due to higher revenues generated by STD and ISD. In FY74, the rate of return fell to 5.2%, a level well below the forecast 7.5% because of the increases in costs due to changes in the policy of allocating engineering admin- istration and overhead costs, as explained above in paragraph 5.05. (Note that this rate of return excludes non-operating revenues and expenses. Had non- operating revenue and expenses been included, as in the supervision report of December 1976, the rate of return would have achieved the forecast 7.5%.) Thereafter, the rate of return was in line with those forecast although slightly higher than forecast in FY76 and FY77. Financial Position 5.09 P&T has been able to maintain a sound financial position throughout the project period (see Annex 4). At the end of the project, the debt/equity ratio of 27/73 and current ratio of 3.0 were very close to the forecast 28/72 and 3.3 respectively. - 21 - 5.10 A significant feature of the balance sheets since FY74 has been the large increase in accrued earnings, and from FY75, large increases in net debtors. This was due to very serious problems associated with computer billing of telephone charges. The original computer system which began operation in April 1974 was designed to operate on the Papua New Guinea Public Service computer. However, due to a poor system design and staffing problems, both at P&T and the computer center, the billing process virtually broke down causing a most serious backlog of unprocessed bills, equivalent to nearly a year's bills. Late in FY76, P&T sub-contracted the processing of the telephone bills to a firm in Hong Kong and this has enabled P&T to once again issue bills in a timely fashion. 5.11 At June 30, 1977, 40% of K7.15 million of accounts receivable were Government accounts. These have subsequently been reduced to acceptable levels following the successful operation of the new billing system. Of the remainder, a large number of accounts belonged to subscribers who were ex- patriates, some of whom have left Papua New Guinea during the period in which bills were not being processed. Arrangements have been made with authorities in Australia, where it is thought many of the owners of the delinquent accounts now reside, to proceed with actions to recover the outstanding amounts of the unpaid bills. P&T has recruited specialist temporary staff whose sole task will be to follow up through court action, recalcitrant debtors, whether in Papua New Guinea or where it is considered appropriate and necessary overseas. At the time of the last supervision mission, this action, combined with the better operation of the computer billing system, had reduced the level of accrued earnings unbilled and had assisted the collection of bills in a more timely fashion, thereby reducing the level of accounts receivable. However, P&T took the prudent action in FY77 to increase the provision for doubtful debts by KO.65 million for FY77 plus K1.15 million for previous years, making a total provision of K2 million against a gross outstanding debt of K7.15 million. Actual bad debts written off in FY77, were only K10,000. 5.12 P&T has benefited from the strong appreciation of the Papua New Guinea kina against other currencies in FY77. An extraordinary gain of K1.15 million due to unrealized foreign exchange gains on outstanding long-term debt was recorded in FY77. Appropriate adjustments were made to the recorded long-term debt and the retained earnings liabilities to reflect these unrealized gains. 5.13 P&T has maintained the holding of cash at prudent levels enabling the prompt payment of creditors as their accounts fall due. In addition, dividends were paid to the Government Treasury in FY76 and FY77 of K1.045 million and KO.5 million respectively. It was the original intention that P&T would not be required to pay dividends to the Government during the project period, but it was forecast that dividends to Government would be paid from FY76 onwards, after the project was completed. The project period was extended, but due to the satisfactory nature of P&T's cash-holding position, a voluntary contribution to the Government for compensation for equity investment was found to be feasible in FY76 and FY77. The smaller dividend in FY77 was considered appropriate in view of the substantial levels of cash tied up in outstanding debtors accounts. - 22 - Management of Flows of Funds 5.14 The following table indicates the sources and application of funds during the project period FY73-77. Further details for individual years are given in Annex 5. Financial Plan 1973-77 Department of Public Utilities, Papua New Guinea (kina '000) Appraisal Actual SOURCES Internal Cash Generation 34,671 31,860 Treasury Advances 1,827 2,086 Borrowings IBRD 546-PNG 537 2,220 852-PNG 8,423 7,553 Australia 1,000 Other 4,000 4,615 Total Borrowings 12,960 15,388 Grant-in-Aid 505 TOTAL SOURCES 49,458 49,839 APPLICATIONS Additions to Fixed Assets - Telecom 37,967 35,305 Other 1,977 4,138 Less assets written out -- (1,934) Net Increases in Fixed Assets 39,944 37,509 Debt Services Amortization 1,540 1,347 Interest 4,310 2,920 Lest Interest Capitalized -- (198) Net Debt Service 5,850 4,069 Increases in Working Capital 695 5,175 Dividend Payments 2,969 1,545 Other (Note) -- 854 Increases in Current Maturities -- 687 Total Application 49,458 49,839 Note: This item covers accounting adjustments explained in detail in the notes to the audited financial statements. A summary of the components of this item is given in Attachment 1 of Annex 5. - 23 - 5.15 The demand for new connections of telecommunications services was slower than forecast at appraisal (see paragraph 3.05) and consequently the project was extended by two years. The lower demand resulted in a lower expenditure on local network equipment and plant but, to some extent, this was offset by the takeover of assets from OTC, Australia, for the international telecommunications service in FY73 and by the bringing to account of a new submarine cable to Australia in FY77 to carry the expanded level of traffic on that route. The latter expenditure accounted for the higher than forecast level of borrowings in that year. 5.16 P&T was able to generate 70% of the expenditure on new fixed assets from internal cash generation net of debt service. This compares with a fore- cast 72% and is satisfactory. This relatively high level of internal cash generation has left P&T in a sound financial position. Debt service was lower than forecast due to a slower than forecast disbursement of loans, and the strong appreciation of the Kina against other currencies in FY77. The working capital increases were needed to fund the high level of accounts receivable (see para. 5.10). As explained in paragraph 5.13, the dividends paid to Government, while lower than forecast for the period, were paid on a voluntary basis during the project period. Accounting System 5.17 The commercial accounting system is operating in a satisfactory manner, and has assisted management in developing a sound commercial outlook with emphasis on efficiency and profitability. However, besides problems in the management of revenue billing and collection, mentioned in paragraph 5.08, the accounting system suffers from some staffing problems. Lack of suitably qualified local staff has resulted in the use of expatriates. P&T's Finance Division has 30 expatriates and 124 local staff. Changes in Papua New Guinea's conditions of service for expatriates has caused the turnover of expatriate staff to be high in recent years and this lack of continuity of staff has resulted in inefficiencies while new staff learn the accounting system and has caused delays in completing annual financial statements in a timely fashion. Total staff turnover for the Finance Division has been at- a very high rate. Auditors 5.18 The accounts of P&T have been audited by officers of the Papua New Guinea Auditor-General's Office. The auditors carried out their functions in a satisfactory manner although completion of the audit in every year of the project exceeded the six months specified in the Financial Covenant. Annex 6 lists the date of the Auditor's Report for the financial years covering the project. The Audit Report for FY76 was completed in September 1977--15 months late. Because of shortages of staff in the Auditor-General's Office, the audit of the financial statements of FY77 has not been completed. Lack of locally qualified auditing staff, and a likely exodus of expatriate staff from the Auditor-General's Office in 1979, could seriously hamper the attainment of the goal for future years, of producing audited financial statements for P&T within six months of the close of the financial year. -24 - Internal Rate of Return 5.19 The internal rate of return of the program, calculated using the assumptions set out in Annex 7, is 21.6%. This compares favorably with the appraisal forecast of 17%. This demonstrates the willingness of subscribers to pay the high charges for telecommunications services in this country where extremes of physical terrain demand reliable communication and where other means of communications are expensive, time consuming, unreliable or a combination of all three. Financial Covenants 5.20 P&T continued to use the commercial accounting system developed under Loan 546-PNG although a modification to the manner of allocating overheads was introduced in FY74. However, P&T was not able to meet the provision in the Loan Agreement 852-PNG that audited financial statements should be submitted to the Bank within six months of each financial year because of delays in completing the accounts and having them audited (see paragraph 5.18). P&T was able to generate internally cash in excess of two times the debt service requirements, and obtained Bank approval in accordance with the Covenant in Section 5.06 to obtain bilateral financing for extending the long distance network. Under Loan 546-PNG, P&T was required to generate a "reasonable" rate of return, with 8% as a goal. The rates of return on net fixe4 assets,from FY75 onwards, were 10.3%, 14.0% and 15.6% and were in excess of the covenanted 10% for FY75 and 12% there- after, under Loan 852-PNG. The value of net fixed assets in operation, as stated in the financial statements, are to be considered to represent fairly the real value of these assets--the strong appreciation of the kina has offset inflationary moves in the prices of telecommunications plant and equipment. VI. INSTITUTIONAL PERFORMANCE Management and Organizational Effectiveness 6.01 The management and the organizational structure of the P&T is considered sound. At the beginning of the project, the organization was the Department of Posts and Telegraphs. On December 10, 1975, it became the Post and Telecommunications Service of the Department of Public Utilities. The Department is under the control of a Secretary, assisted by a Deputy Secretary (who tends to concentrate more on postal matters) with three First Assistant Secretaries, one controlling Telecommunications, one Postal and the third Finance and Administration. The First Assistant Secretary, Telecommunications, is responsible for the technical and opera- tional aspects of the system with administration, personnel, finance and other like functions under control of the First Assistant Secretary, Administration. This officer also services the Postal Division. 6.02 The Secretary has responsibility also for Civil Defense and Emergency Services, Fire Services, and the Cemetary Authority. He is also "Ministerially" responsible for the Electricity Commission (ELCOM). - 25 - 6.03 The organizational structure could be improved by completely separating Postal from Telecommunications but this would have to be care- fully planned to prevent an increased demand for competent "common services" staff such as personnel, transport, finance, etc. Technically, the manage- ment is competent and adequate--this is demonstrated by the very high technical quality of telephone, telex and telegraph services and the high growth rate it has encompassed over the past five to ten years. Its regional organizational structure seems adequate and appropriate. 6.04 P&T's technical and operational planning is good but it is considered that it needs to improve its financial planning, particularly medium and long term, and its manpower planning. 6.05 During the project, the P&T successfully introduced a new computer billing system, a computerized management reporting system and a telecommuni- cations reporting system. These innovations are significant management improvements. The computer billing system experienced the "getting started" troubles so often encountered by such systems but is now functioning efficiently. 6.06 he telecommunications reporting system is also developing into a most effective management tool and will be invaluable in the future in monitoring the network's technical performance as the composition of its technical staff changes. 6.07 The greatest challenges to the organization over the project period were the changes in political and economic status resulting from self- government and independence and the effect this had on the demand for tele- communications services and on the P&T's staff. There was a period of some years of uncertainty about the future and many of the key and more competent expatriate staff left during this period. However, both the network and the organization survived the transition in excellent condition. Staff Recruitment, Training and Development 6.08 As stated in paragraph 6.04, the P&T service needs to develop a more comprehensive manpower plan. At present, it is overstaffed and probably could cope with a lesser number of expatriates. 6.09 The first priority of management over the project period was to maintain the telecommunications service as an efficient operating system that would carry the rapidly increasing call traffic without congestion, and would provide a reliable and good quality, reasonably fault-free tele- phone service. It has been successful with this aim but, with this as the primary objective, a conservative approach to staffing and use of expatriates has been adopted, i.e., the organization's telecommunications staff is in some areas greater than is necessary and there are probably more expatriates than necessary. 6.10 The training program is now gathering momentum with the completion of the first phase of the new ITU/UNDP assisted training facilities at Lae. - 26 - This new school supplements the established P&T training facilities at Port Moresby. The major difficulties in expanding the training effort have been in recruiting sufficient instructors and, until recently, lack of classroom accommodations. 6.11 During the project, there was some difficulty for a period with the failure rate in the training schools. This resulted from an over- enthusiastic recruitment program of trainees during which time insufficient attention was given to the educational standards of the recruits. However, in recent intakes the selection has been more critical and the failure rate has been more acceptable. 6.12 Apart from technical training, the P&T provides non-technical training at its own school in Port Moresby and sponsors staff members to take courses at other training institutions. Expatriates 6.13 The number of expatriates employed by the P&T was about 500 in 1972, falling to about 300 in 1977. These figures are approximate because the officially recorded figures have been classified in different ways in different years, depending on the institutional organization. The figures quoted in the following table can only be taken as indicative of the trend but they do show that some progress has been made in localization of the organization. 6.14 However, it should be noted that the drop in number of expatriates is as much due to the P&T's inability to recruit them as it is to management policy. Further, Government's targets for localization are based on the percentage of expatriate staff related to the number of total staff and this may be higher than it should be. 6.15 The P&T management and the Government have a firm policy of local- ization and intend to pursue the policy. However, they believe that P&T must continue to maintain as its primary aim the integrity of the network and therefore it will continue to adopt a conservative attitude towards localiza- tion. On the other hand, changes in policy with respect to compensation and contract conditions for expatriate personnel will probably make recruitment even more difficult in the future and result in an exodus of existing expatriates. 6.16 The management consultants performed satisfactorily throughout the project period. 6.17 The P&T was able to meet all the requirements of the covenants within the loan agreement except that relating to the timing of the sub- mission of audited financial statements. This is shown in Annex 8. - 27 - P&T Telecommunications Staff Staff Numbers Percent of Year Area Expatriate Local Total Expatriate 1972 Telecommunications 340 550 Management Services 73 86 Trainees 0 43 486 679 1,165 42 1973 Telecommunications 304 602 Management Services 164 190 Trainees 0 78 468 869 1,337 35 1974 Telecommunications 191 673 Management Services 115 329 Trainees 0 43 306 1,045 1,351 23 1975 Telecommunications 229 742 Management Services 121 468 Trainees 0 40 350 1,250 1,600 22 ]976 Telecommunications 232 799 Management Services 96 509 Trainees 0 43 328 1,351 1,679 20 1977 Telecommunications 209 880 Management Services 83 406 Trainees 0 32 292 1,318 1,510 19 NOTES: 1. The numbers quoted for management services include all staff, many of whom are servicing the Postal Division as well as the Tele- communications Division. The true figure for the Telecommunications Division alone would be less than that stated. 2. The figures quoted are for April 30 of the years shown. - 28 - VII. PROJECT JUSTIFICATION Project Achievements 7.01 The project has achieved physical targets beyond those originally established. This, of course, has taken more time and more money. However, the internal rate of return on the revised and extended program was greater than predicted and, as outlined in Section V, all of the financial targets were met. 7.02 The project increased the local exchange switching capacity by about 50% and increased the capacity on the previously inadequate and con- gested long distance netowrk. Through this relief, STD and ISD are now available to nearly all subscribers. In a country where 700 languages are spoken, replacement of manual trunk exchanges with automatic dialing facilities has largely eliminated language difficulties with operators and reduced the time taken to establish calls, thereby reducing costs and in- creasing significantly the trunk circuit utilization for effective traffic. Telex, also, has proved remakably popular. The high charges for telecom- munications have not proved to be a factor which limits the existing subscribers' use of network probably because of the physical isolation of many of the centers of population served by telecommunications, the high costs of transportation, in many cases solely by aircraft, and the lack of any alternate means of communication. For these reasons, traffic grew faster than forecast. 7.03 The high quality services have enabled the Bouganville Copper, Ltd., (BCL) copper mining operations to be administered from Pangunia on the island of Bouganville, including the management of its investment portfolio by international telex on a continuous 24-hour basis. By main- taining the operations and administrative center at Pangunia, over 4,000 jobs have been provided, of which most are filled locally. 7.04 The demand for new subscribers' services was not as great as forecast (see paragraph 3.05), and connection of new subscribers was inhibited by the deterioration in the local cable networks during a period of rapid localization of external plant staff. The diversion of staff to cable fault clearance duties delayed new connections over a period when the lines staff was 100% localized. To correct this situation, a small number of expatriate senior lines officers has been brought back from Australia as a task force operation to clean up the cable networks and extend on-the-job training of the local line supervisors. This experience has provided valuable lessons to the P&T management in increasing localization without reducing service quality to too great an extent. 7.05 The economic study of telecommunications, funded in part by the Bank, has provided much valuable information about the social and economic benefits of telecommunications, and about factors which encourage and - 29 - inhibit the use of telecommunications among the local and expatriate population, with special emphasis on the "bottom 40%." The findings of this report are still being evaluated. It is felt that the report will assist P&T in its investment decisions and provide the Bank with greater insight in this area as well as indicating areas for further investigations. 7.06 The financial performance of P&T has been satisfactory although the costs of providing service is very high by world standards. There is scope for further reduction in operating costs, and the continued process of localization and a suppression of overall staff growth should assist in this direction. 7.07 P&T has developed institutionally during the project. A commercial outlook by management resulted in tariffs being raised in FY77. This outlook was assisted by the commercial accounting system developed under the previous project. A computerized management reporting system has been introduced, and this is now providing management with timely information to take correct operating and investment decisions. Least Cost Solutions 7.08 The competent engineering staff were able ,to develop investment and operating plans well suited to the special needs of Papua New Guinea. These detailed implementation plans were designed within the framework of a broad national telecommunications development plan to ensure proper integration of the various parts of the network into a complete system. In the long distance network, detailed studies have been carried out to ensure that particular solu- tions for each route are least cost solutions. This applied also to the inter- national system and detailed economic studies were made of both satellite and microwave alternatives to the submarine cable system finally adopted. 7.09 P&T has also made innovative use of modern technology such as the use of solar cells to replace diesel generators which, in remote and mountainous jungles, had to be serviced and refueled by high altitude helicopters. Quite often, these had been grounded on mountain tops due to inclement weather at considerable cost to P&T. The solar cells should provide considerable econo- mies and operating efficiencies as well as increasing the reliability of the long distance network. VIII. BANK PERFORMANCE Overall and Specific Performance 8.01 The Bank adequately assisted in the identification and specification of the project and encouraged the P&T to process the application for a second loan in a timely fashion. During the course of the project, the Bank assisted in the procurement processes and provided technical advice on specifications and likely price levels for telecommunications equipment. 8.02 During the course of the project, it was revised on two occasions and extended in scope and time. The Bank was able to assist in defining the project modifications. - 30 - Supervision 8.03 Supervision missions visited the country approximately annually. Although the Bank found it necessary to vary both the engineering and financial personnel in the various supervision missions, this did not create problems for the borrower due to lack of continuity. The extent of supervision was adequate even though the P&T's progress reporting was not as good and regular as we would wish. However, a great deal of interchange relating to both procurement and project modification took place by correspondence and telex. Working Relationship 8.04 The working relationship between the Bank and the P&T has been good. IX. CONCLUSIONS 9.01 The second telecommunications project in Papua New Guinea has been a very successful exercise. It was implemented over a difficult period in the political and economic development of the country, which resulted in some modifications and extensions to the project (financed by supplier credits) and ultimately resulted in a very efficient telecommunications network, more than adequately meeting the business, administrative and social needs of the country. The P&T has developed organizationally and has introduced computer- ized billing, computerized management information reporting system and a technical performance reporting system. 9.02 The funds provided by the Bank, together with supplier financing, have enabled the P&T to develop its telecommunications facilities mainly in urban areas but with subscribers radio facilities in rural areas without drawing any funds from the national budget. While service standards are satisfactory and immediate demand can substantially be met in urban areas, a strong case exists for further expansion in line with economic and social needs and with particular reference to rural areas. Significant parts of the next development program would be the extension of telephone access to approximately 100 District Centers throughout the country which do not yet have access. Below District Center level, there are approximately 300 sub--district centers--the question of telephone access at these locations is still under study both from the technical viewpoint and in the light of the Evans and Bryan study jointly sponsored by the P&T and the Bank. Other parts of such a.project would be the continued expansion of the long distance network, and probably, the introduction of automatic message accounting for national trunk and international calls. 9.03 It is believed that given the Bank's previous investment in the sector, its interest in the economic study with particular reference to rural development and the remaining institutional problems, including the process of localization and reducing costs while at the same time maintaining efficiency, continued association would facilitate development in line with the broader needs of the society and would assist in solving some of the problems inherent to efficient operation of the sector. - 31 - 9.04 P&T has already made significant contributions to Government and there is a strong case that it should continue to do so--and even pay regular and formalized dividends and become a contributor to the national budget. 9.05 While the P&T has matured institutionally during the project period, there are further improvements which could be made with a need to reduce operating costs. East Asia and Pacific Regional Office October, 1978 PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNG Summary of Annual Program and Project Costs (Without Overheads) 1972-73 1973-74 1974-75 1975-76 1976-77 Total Item Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Subscribers Networks 2.311 1.695 1.962 0.984 2.042 1.435 - 0.965 - 2.192 6.315 7.271 Trunk Network 1.730 2.532 1.665 1.441 0.829 0.535 - 1.379 - 0.458 4.224 6.345 Telex Network 0.275 0.242 0.463 0.365 0.628 0.231 - 0.764 - 0.067 1.366 1.669 Radio Outstations Networks 0.500 0.314 0.500 0.159 0.380 0.169 - 0.142 - 0.499 1.380 0.983 International Sub. Cable - - - - - - - - - 4.685 - 4.685 Telecom. Buildings 0.393 0.505 0.413 0.455 1.518 0.160 - 1.360 - 0.673 2.324 3.153 Motor Vehicles and Tools 0.150 0.110 0.127 0.246 0.127 0.360 - 0.333 - 0.234 0.404 1.283 Contingencies 0.361 - 0.336 - 0.270 - - - - - 0.967 - Total Program 5.720 5.398 5.466 3.650 5.794 2.890 - 4.943 - 8.508 16.980 25.389 Total Project 4.437 4.185 5.350 3.404 4.259 2.530 - 4.610 - 3.589 14.046 18.318 Notes: (1) In addition, the loan covered Consultants' Services--provision for US$0.5 million was made at appraisal, and the actual amount spent was US$0.979 million. (2) The amounts shown as actuals are not precisely the construction expenditure in the years shown--rather they are the amounts added to the asset register in each of the years, and they would be generally indicative of the construction program actual costs. - 33 - ANNEX 2 PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNG Summary of Financial Performance 1972 1973 1974 1975 1976 1977 Return on investment (%) Appraisal 2.2 4.4 7.5 10.5 12.6 13.8 Actual 0.7 10.4 5.2 10.3 14.0 15.6 Operating ratio (%) Appraisal 92 82 71 63 58 55 Actual 98 74 88 80 70 69 Debt-equity ratio (%) Appraisal 19/81 23/77 27/73 29/71 29/71 28/72 Actual 13/87 16/84 19/81 21/79 21/79 27/73 Debt-service coverage (times) Appraisal 7.8 6.5 5.1 5.9 6.3 5.9 Actual 11.2 21.0 5.7 7.0 8.9 6.1 Internal funding (%) Appraisal 17.2 38.3 56.2 75.3 91.1 113.9 Actual 14.9 55.3 54.5 92.8 97.2 81.7 Current ratio (times) Appraisal 4.8 3.5 3.8 3.9 3.2 3.3 Actual 2.6 4.4 2.2 1.8 1.7 2.0 PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNC Statement of Income and Expenses for Financial Years 1972-77 Ending June 30 (Kina '000) 1972 1973 1974 1975 1976 1977 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Income - Telephone Rental 1,102 1,081 1,209 1,537 1,262 1,422 1,421 1,428 1,611 1,433 1,815 1,568 Calls 2.383 3,343 3,691 6,281 514 978 6,980 1275 8,690 12,882 10,320 16,126 Total Telephone 3,485 4,424 4,900 7,818 6,456 11,210 8,401 14,178 10,301 14,315 12,135 17,694 Telegrams 750 1,262 800 945 860 1,025 900 958 900 763 900 1,139 TkLex Rentals 180 100 280 129 360 190 450 134 600 252 750 321 Telex Calls 140 115 220 283 300 561 430 1064 570 1,291 770 1 Total Telex 320 215 500 412 660 751 880 1,198 1,170 1,543 1,520 2,176 Miscellaneous 446 597 450 622 550 583 495 274 565 855 570 1,265 Total Telecommunications Income 5,001 6,498 6,650 9,797 8,526 13,569 10,676 16,608 12,936 17,476 15,125 22,274 Expenses Operating Maintenance and General 3,321 4,970 3,624 6,133 3,910 10,412 4,200 11,298 4,590 9,871 5,000 12,808 Depreciation 1,123 1,166 1,645 1,089 2,000 1,644 2,370 1,797 2,750 2,258 3,200 2,547 Superannuation 160 241 170 58 170 - 170 137 160 177 150 115 Total Operating Expenses 4,604 6,377 5,439 7,280 6,080 12,056 6,740 13,232 7,500 12,306 8,350 15,470 Net Operating Income 397 121 1,211 2,517 2,446 1,514 3,936 3,376 5,436 5,170 6,775 6,804 Less write-off of equipment- - - 350 - - - - - - Total Telecom. Net Income 3/ 397 121 1,211 2,517 2,446 1,164 3,936 3,376 5,436 5,170 6,775 6,804 Plus Net Non-Operating Income- - 89 - 54 - 624 - 253 - 178 - 549 Total Postal Net Income 310 345 356 324 409 546 474 143 550 363 638 275 Total P&T Net Income 707 555 1,567 2,895 2,855 2,334 4,410 3,772 5,986 5,711 7,413 7,628 Less Interest Expensed - - 370 - 375 418 355 621 955 671 915 1,012 Total Net Profit (P&T) 707 555 1,197 2,895 2,480 1,916 4,055 3,151 5,031 5,040 6,498 6,616 2 Ave. Net Telecom. Assets in r pperation 17,863 16,368 26,912 ?4,299 32,407 29,077 37,473 32,577 43,104 36,822 48,949 43,491 Rate of Return on Telecom. Assets 2.2 0.7 4.6 10.4 7.5 5.2 10.5 10.3 12.6 14.0 13.8 15.6 Operating Ratio 92 98 82 74 71 88 63 80 58 70 55 69 1/ In FY74, the method of allocating overheads was revised to reflect more appropriately the cost of providing new assets. The result was a significant increase in overhead costs which charged to operations. 2/ In FY74, subscribers radio equipment was found to be unsuitable to PNG conditions, and accordingly, was written off against P&T before the end of its planned depreciation life. 3/ Non-Operating Income refers to income derived from non-telecommunications services provided by the Telecommunications Service. - 35 ANNE 4 PAPUA NEW GUINEA DEPARTMENT Or PUBLIC UTILITIES P)STAL AND TELZ)MMMUNIAMI0V8 SERVICES SECOND TELEICObUNICATIONS PROJECT LoAN 852-PNo Balance Sheets for the Financialfl Enin June 30, 1972-19T7 ..ina '000 1972 19273 1974 - 1975 196 1977 Apprais Actu Appraisal Actual Appraial Actual Appraisal Actua A pprais Actu a sa c ASSETS Gross Fixed Assets Telecom - 23,739 - 30,403 - 35,588 - 40,i06 - 47,298 - 57,556 Other - 1,841 - 207 - . 23 - 2,471 - 2,917 - 3.206 Total 30,744 25,580 37,979 32,500 45,659 37,824 52,846 42,577 63,458 50,215 71,938 60,762 Less accumulated depreciation 5.233 2,436 6,923 3,392 8, 9W 4,872 11451 6,253 1432 8,286 1 ia.§M Net fixed assets in operation 25,511 23,144 31,056 29,108 36,669 32,952 41,395 36,324 49,137 41,929 54,265 50,137 Work in progress 1.200 1,522 1,450 i,095 1,37 1.005 3,167 1 1.390 2.516 1,290 8 Net Fixed Assets 26,711 24,666 32,506 30,203 38,039 33,957 44,562 37,916 50,527 44,445 55,555 53,986 Current Assets Cash 668 1,628 419 1,427 312 1,696 350 2,431 391 3,209 497 2,456 Stores 2,258 2,811 2,358 2,285 2,458 1,738 2,508 1,832 2,558 2,677 2,608 2,640 Net debtors 1,714 416 1,614 1,o46 1,600 593 1,700 6,546 1,850 6,346 2,000 5,150 Other - 1,489 - - 7,663 - - 3801- 37561 Total 4,640 6,344 4,391 7,480 4,370 11,690 4,558 16,026 4,799 15,747 5,105 17,807 TOTAL ASSETS 31631 31,010 36 42A409 45647 120 51 532 60.192 60.660 "793 LIABILITIES Equity Government advances 22,915 23,358 24,742 24,891 24,742 25,943 24,742 25,768 24,742 26,146 24,742 25,949 Retained earnings 1,154 1,005 2,351 4,665 4,831 6,808 8,886 9,816 12,927 13,810 17,446 19,807 Other -.- - - - Total Equity 24,069 24,363 27,093 29,665 29,573 32,860 33,628 35,693 37,669 39,956 42,188 45,756 Long-Term Debt iBRD 546-PNG 5,752 3,643 6,ol4 5,675 5,719 5,678 5,404 5,459 5,069 5,218 4,714 4,960 852-PNG - - 1,985 226 5,450 1,052 8,423 3,117 8,130 5,012 7,778 7,287 Australia - - - - - 1,000 - 1,000 - 1,000 - 822 Other - - - - - - - - 2 0 Total 5,752 3,643 7,999 5,901 11,169 7,730 13,827 9,576 15,672 11,230 16,492 17,684 Less current maturities - - - 185 - 219 - 247 - - 686 - Net Long-Term Debt 5,752 3,643 7,999 5,716 11,169 7,511 13,827 9,329 15,672 10,634 16,492 16,998 Deferred Liabilities 562 563 562 615 522 - 500 195 480 247 450 310 Current Liabilities Accounts payable 968 1,512 968 634 850 617 850 780 850 918 850 303 Other - 929 - 868 - 4,440 - 7,698 - 4,706 - 7,739 Current maturities - 275 185 29 219 31 247 655 596 68o 687 Total 968 2,441 1,243 1,687 1,145 5,276 1,165 8,725 1,505 9,355 1,530 8,729 TOTAL LIABILITIES 1,351 3,010 36,89 37,683 42.40 45,647 495120 5942 2 6 292 60 7!7) Current Ratio 4.8 2,6 3.5 4.4 3.8 2.2 3.9 1.8 3.2 1.7 3.3 2.0 Debt/Equity Ratio 19/81 13/87 23/77 16/84 27/73 19/81 29/71 21/79 29/71 21/79 28/72 27/73 September 1978 - 36 - ANNEX 5 PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUINICATIONS PROJECT LOAN 852-PNG Statement of Sources and Applications of Funds for the Financial Years Endina June 30, 1972-1977 (Kina '000) 1972 1973 1974 1975 1976 1977 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual SOURCES Net Operating Income - Telecom. 397 210 1,211 2,571 2,446 1,788 3,936 3,629 5,i36 5,347 6,775 7,353 - Postal 310 345 356 324 409 546 474 143 550 363 638 275 Depreciation 1,155 1,272 1,690 1,200 2,067 1,710 2,461 1,827 2,870 2,348 3,352 2,688 Deferred Liabilities - 1 - 53 - (615) - 195 - 52 - 63 Total Internal Cash Generation 1,862 1,82e 3,257 4,148 4,922 3,429 6,871 5,794 8,856 8,110 10,765 10,379 Treasury Advances 4,377 4,689 1,827 1,533 - 547 - (175) - 378 - (197) Borrowings IBRD 546-PNG 4,270 2,161 537 2,032 - 188 - - - - - - 852-PNG - - 1,985 226 3,465 826 2,973 2,065 - 1,895 - 2,541 Australia 1,000 - - - - - Other -2--5--0 - -,0 4,615 Total Borrowings 4,270 2,161 2,522 2,258 3,465 2,014 2,973 2,065 2,500 1,895 1,500 7,156 Grant-in-Aid - ---O- - - - - TOTAL SOURCES _ 8678 j6 j 3 8_387 6495 9,844 7,684 13 265 17 38 APPLICATIONS Additions to Fixed Assets Teleoo. 9,416 11,103 7,195 7,145 7,170 5,185 7,569 4,964 8,173 7,404 7,860 10,607 -Other 28 (2,754) 160 (4087 120 629 895 872 522 1,473 280 1,622 Less Assets Written Out - (213) - (244) - (580) - (446) - (315) - (349) Net Increases in Fixed Assets 9,444 8,136 7,355 6,493 7,290 5,234 8,464 5,340 8,695 8,562 8,140 11,880 Debt Service Amortization - IBRD 546-PNG - - - - 275 185 295 219 315 241 335 258 852-PNG - - - - - - - - - - 320 266 - Australia - - - - -178 Total - - - 275 185 295 219 315 241 655 702 Interest - IBRD 546-PNC 240 163 370 L61 375 349 355 404 335 319 315 298 852-PNG - - 130 37 310 69 520 172 620 322 600 429 -Australia - - - - - - - 45 - 30 - 30 -Other 140 240 255 Total 240 163 500 198 685 418 875 621 1,095 671 1,155 1,012 Total Debt Service 240 163 500 198 960 603 1,170 840 1,410 912 1,810 1,714 Less Interest Capitalized - 163 - 198 - - - Net Debt Service 240 - 500 - 960 603 1,170 840 1,4LO 912 1,810 1,714 Increases in Working Capital 825 329 (249) 1,891 137 621 210 886 261 (909) 336 2,686 Dividend Payments - - - - - - - - 990 1,045 1,979 500 Other (see Attachment 1) - 213 - (630) - 3 - 589 - 424 - 468 Increases in Current Maturities - - - 185 - 34 - 29 - 349 - 90 TOTAL APPLICATIONS 10 509 8 678 2 606 7 98 9,844 7 684 Times Debt Service Covered by Internal Cash Generation 7.8 11.2 6.5 21.0 5.1 5.7 5.9 7.0 6.3 8.9 5.9 6.1 Internal Cash Generation Ratio (.) - 17.2 14.9 38.3 55.3 56.2 54.5 75.3 92.8 91.1 97.2 113.9 81.7 (Internal Cash Generation Net of Total Debt Service/Additions to Telecom. Fixed Assets) Septe,mber 1978 ANNEX 5 - 3- Attachment 1 PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNG Note 1 - The item "Other" accounts for the accounting adjustments is explained in detail in the notes to the audited financial statements. Briefly, the adjustments can be explained in the table below: (Kina 'UOO) 1972 1973 1974 1975 1976 1977 Assets Written Out 213 244 230 446 315 349 Adjustments to Retained Earnings - (765) (227) 143 - 119 Revaluation of Stores - (109) - - (109) - Total 213 (630) 3 589 424 468 September 1978 ANNEX 6 - 38 - PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNG Completion dates of the Auditor-General's Report on P&T finances: Financial Year Date of Auditor-General's Report FY72 March 13, 1973 FY73 March 19, 1974 FY74 May 19, 1976 FY75 September 5, 1977 FY76 September 5, 1977 FY77 Not completed at July 21, 1978 - 39 - ANNEX 7 Page 1 of 2 pages PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNG Internal Rate of Return 1. The internal rate of return was calculated using the following assumptions: (a) Because the project was a balanced program, covering local network, long distance and telex facilities, the costs and benefits of the project are closely allied to and pro- portional to the total program costs and benefits for the period FY73-77. Because the individual benefits of the project cannot be isolated from the benefits of the program, the benefits of the program are assumed to be representative of and proportional to the project; (b) Capital costs are assumed to be the value of additions to the telecommunications fixed assets, discounted to FY73 prices, using the Papua New Guinea Consumer Price Index. (c) Operating costs are assumed to be that proportion of the incremental operating costs net of depreciation from FY73 onwards, attributed to the program. The proportion of incremental operating costs assumed to be attributed to the program are: FY73 20% FY74 70% FY75 100% FY76 100% FY77 100% FY78 20% The incremental costs for FY79 have been forecast using expected operating and maintenance costs of assets installed in the project period but brought into service in FY78. - 40 - ANNEX 7 Page 2 of 2 pages (d) The benefits are assumed to be that proportion of the incremental constant tariff operating revenues from FY73 onwards, attributed to the program. The proportions of these benefits attributed to the program are set out below: FY73 20% FY74 70% FY75 100% FY76 100% FY77 100% FY78 90% FY79 70% FY80 50% FY81 30% The incremental benefits for FY78-81 have been forecasted using expected traffic utilization of assets installed during the project and tariffs effective prior to the increases in December 1976. 2. Using the foregoing assumptions, the following cost and benefit streams were used: (Kina ('000) Construction Attributed Operating Year Costs Costs Benefits FY73 7,145 198 560 FY74 4,236 2,576 2,614 FY75 3,649 3,069 4,586 FY76 5,053 1,699 4,850 FY77 6,930 3,701 6,606 FY78 - 3,849 8,676 FY79 - 3,849 10,276 FY80 - 3,849 11,420 FY81-92 - 3,849 12,184 These cost and benefit streams yielded an internal rate of return of 21.6%. - 41 - ANNEX 8 PAPUA NEW GUINEA DEPARTMENT OF PUBLIC UTILITIES POSTAL AND TELECOMMUNICATIONS SERVICES SECOND TELECOMMUNICATIONS PROJECT LOAN 852-PNG Compliance With Main Covenants The Section of Brief Description Loan Agreement Compliance Comments Submit audited financial statements to Bank within six months of end of financial year. 5.02 No Para. 5.18 No incurrence of long- term debt unless debt service covered at least two times by internal cash generation. 5.04 Yes Para. 5.18 Rate of return 10% in FY75 5.05 Yes Rates of return were: 12% thereafter FY75: 10.3 FY76: 14.0 and FY77: 15.6 Obtain Bank approval for capital expenditures in excess of $500,000. 5.06 Yes Para. 5.18 Borrower not to require repayment of capital or interest on government advances. 8.02 Yes Voluntary payment made, para. 5.11  41" I44° 4 150 15 151 PAPUA NEW GUINEA EXISTING AND PROPOSED TELECOMMUNICATION MUSSAu ISLAND N E TWOR K MANUS /StAND RENGAU E0 1 1 50 200 250 NCW ,YANGtVP El I I KAVIENG VANIMO 4' N 30 N E w WEWAK (INC BORAM) AATANA1 t/) NAW LILj T\RABAUL z G u N E A MASAVA OO 51 TOMAATUR lQ'% ADANG OLAP SOHANO 1 248: .....IoOME 2414B' ARM GOM N AKMB MT HAGEN MT OITTO N E w B R 8o ARAWA 40 NS - DjjI N KNDIAA GOROKA NAMB MATI bSATTE ARAWAN-i- 24 48 TATOROKINA YANNGTEA KAINNTU N N A12(24)1 - T - B UGA N V ISLA N D cK MT SHUNGO.- LAE WIDERU BULOLO S wA'u MT KA Dl KEREMA MT STRONG T E R R l T O R Y BO UND AR Y O EATAPINI rO9R/AND RS F EAVA MTSCACHE M5RAHEYPOPONDETTA -AR b- ISLAND 00 - - - -tCiu M AWET K ENEVI BOMANA PORT 50I SGER1 INDIA HUPPIE5E (WIC BROKO ÉXISTING PROPOSED AYS A MO "Y Exchanges CEYLON IIN NEW UIN EAK V H . F /U H F Repea ter s, ions Q Z OCEA,N - TAU V H F /U H F Trunk circuirs l-- - -- - - --H F Trunk circuits PAPUA p A p u A TropospherIC scatter Irunk circils / N DI/AN SAMARAI- ir v rukccit A U 5 T R A L IA Te rd shw on hi mapnot Microwoe Irunk circults oSCYEYA,ed s IC (10) 24/(481 Existing (CGPOciky) Circuits NEW ZEALAND 144- 147- 15* 153s FEBRUARY 1972 IBRD 373: