Document of The World Bank 5 ?' FOR OFFICIAL USE ONLY Report No. 2835-CE STAFF APPRAISAL REPORT SRI LANKA POSTS AND TELECOMMUNICATIONS DEPARTMENT (PTD) TELECOMMUNICATIONS PROJECT April 18, 1980 Transportation, Water and Telecommunications Department South Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their officia) duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1 = SL Rs 15.60 SL Re 1 = US$0.0641 SL Rs 1,000,000 = US$64,100 FISCAL YEAR January 1 - December 31 LISTS OF ABBREVIATIONS AND ACRONYMS USED IN THE REPORT AMA - Automatic Message Accounting ANI - Automatic Number Identification DEL - Direct Exchange Line IDA - International Development Association ITU - International Telecommunication Union OTS - Overseas Telecommunications Service PTD - Posts and Telecommunications Department SPC - Stored Program Control STD - Subscriber Trunk Dialing TAX - Trunk Automatic Exchange UHF - Ultra High Frequency UNDP - United Nations Development Program VHF - Very High Frequency SRI LANKA FOR OFFICIAL USE ONLY POSTS AND TELECOMMUNICATIONS DEPARTMENT (PTD) TELECOMMUNICATIONS PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TELECOMMUNICATIONS SECTOR ............................... 1 Background and Organization .......... I Access to Service ................. ............................. 1 Telephone Service Usage .......3**....*s*.**.***.*......... ... 3 Existing Facilities and Quality of Service. .. .. 3 Demand for Service ..................... ..... ........... 4 Sector Goals ..*.o ...................................... 5 Sector Constraints ......... . . . ......... .... ................ 7 The Bank's Role ......................... 8 II. THE PROGRAM AND THE PROJECT ............... ... .......... ..... 8 The Program ............. .. ... 8 Works Outside the IDA Project ....9...... ... so.... 9 The Project ........ . * * ............ o...0..... 9 Project Costs ............................................... 10 Contingencies .... ................. *oo.o.o.o.oo .................. 11 Sources of Financing and Items for IDA Financing ............ 12 Procurement * * ..... *o.o,o.o ...... o . .... ..o.o.o. .. ... . oo 13 Project Implementation ...... ....... 13 Disbursements .............. I ................................ 13 Performance Indicators .......... .... o ... ....... ...... ....*.... 13 III. ECONOMIC ANALYSIS ............... ... ...... 14 Telecommunications and Development ........... ............... 14 Distribution of Benefits *o.****....e.. o ... *.*..... ..o. 14 Tariffs *****e.-*.. *6 *ae*o *..**.**.. ...* * 15 Least Cost Solution .................... 16 Return on Investment ...... .. ..* ... ... ........ . . ....... . 16 Risks ...... o..... oo.. . .. . . .o..o. 17 Environmental and Health Aspects ........................o.. 17 This report is prepared by Messrs. D.F.D. Joshi and M. Sergo based on the findings of a Bank appraisal mission comprising Messrs. S. Sathar (Engineer) and M. Sergo (Financial Analyst) which visited Sri Lanka in November 1979. 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. Table of Contents (Cont'd) Page No. IV. THE IMPLEMENTING AGENCY ................ .. ................... 18 The Organization ............................................ 18 Telecommunications Department ............................... 18 Fundamental Planning Unit ................................... 20 Staff ........................................................ 20 Training and Consultancy .................................... 21 Accounting .................................................. 22 Audit ....................................................... 23 Billing and Collection ...................................... 23 V. FINANCIAL ANALYSIS .......................................... 24 Background .................................................. 24 Past Financial Performance .................................. 24 Present Financial Position .................................. 25 Valuation of Assets ......................................... 26 Financing Plan .............................................. 26 Projected Financial Performance ............................. 27 VI. RECOMMENDATIONS ............................................. 28 LIST OF ANNEXES AND CHARTS 1. International Telephone Statistics .............. .. ........... 31 2. Dispersion of Population and Telephone Lines Between Urban and Non-urban Areas ........................................ 32 3. Telephone Usage - Dispersion of Lines Between Businesses and Residences ................................................. 33 4. Telephone Subscribers by User Category .... ................... 34 5. Dispersion of Working Lines Based on Revenue ................. 35 6. Existing Telecommunications Facilities ....................... 36 7. Growth of Local Telephone Network - 1971-90 ......... .......... 37 8. Summary of Program Costs and Sources of Financing ....... ....... 38 9. Investment Program - 1980-84 ................................. 39 10. Ongoing Works and Estimated Expenditures during 1980-84 ...... 40 11. Other Works in the 1980-84 Program ........................... 41 12. Summary of Facilities to be Installed Under the IDA Project .. 42 13. Physical Installation Under the Project .... ............. 43 14. Contingency Provisions in the Project Cost Estimates . ....... 53 15. Implementation Schedule (Chart 21161) ........................ 54 16. Schedule of Disbursements .................................... 55 17. Performance Indicators ....................................... 56 18. Principal Telecommunications Tariffs ......................... 57 19. Rate of Return on 1980-84 Investment Program ................. 59 20. Organization Chart (Chart 21162) ............................. 61 21. Suggested Commercial Accounting Routines . .................... 62 22. Income Statement ............................................. 63 23. Balance Sheet ................................................ 64 24. Funds Flow Statement ......................................... 65 25. Notes and Assumptions on Financial Statements ................ 66 26. Related Documents and Data Available in Project File ...... *.. 69 MAP Microwave Radio Systems and Trunk Automatic Exchanges (IBRD 14824) I. THE TELECOMMUNICATIONS SECTOR Background and Organization 1.01 The island nation of Sri Lanka has an area of about 25,300 sq mi and an estimated population of 14.5 million (average population density: about 560 per sq mi) of which about 77% live in rural areas. The average per capita income is low--about US$200 in 1978--and has grown by only about 1% per year in the last two decades. Variation in topography, soil and pre- cipitation, and a climate suitable for year-round cultivation, make agri- culture a dominant economic activity in the country, ranging from small holders to organized large-scale farming. Agriculture accounts for about 33% of the GDP, 50% of the total employment (95% in rural areas) and 80% of the export earnings. Much of the activities in the manufacturing and processing industries, and transport and service sectors are also directly dependent on agriculture. Major towns and urban centers are interconnected by a network of roads but these are inadequate to carry the burdens of a growing economy. This, together with a generally underdeveloped infrastruc- ture including telecommunications, impedes business, commerce, social services and efficient administration of government services. 1.02 The domestic and international public telecommuniations services in Sri Lanka are the charge of the Posts and Telecommunications Department (PTD) 1/ under the Ministry of Posts and Telecommunications. PTD also manages the postal and other realted services, and regulates radio frequencies. A few government agencies--defense and security services, railways, civil aviation and some local administrations--operate their own private radio or terrestrial networks under license from PTD. For many aspects relating to its administration and operations, PTD is currently dependent on other government departments whose policies may not be consistent with sound public utility practices. All PTD's revenues are paid into the Government's Con- solidated Revenue Fund; hence, PTD is dependent on government advances for its recurrent and capital expenditures. PTD's proposals for additional staff require approval of the Ministry of Public Administration. Land acquisition and civil works are controlled by the Ministry of Lands and Land Development and Ministry of Local Government, Housing and Construction respectively. In absence of domestic manufacture, PTD is fully dependent on imports for all its telecommunications equipment requirements. Access to Service 1.03 The availability of telecommunications services in Sri Lanka is about the average of other countries in Asia but poor compared to developed countries in general (Annex 1). As of December 31, 1979, the average telephone density in Sri Lanka was about 0.56 telephones or 0.37 direct exchange lines 1/ Wherever used in this report and as the context requires, PTD refers to the existing Posts and Telecommunications Department and/or its successor, the Telecommunications Department, when established (paragraph 4.04). - 2 - (DELs) per 100 population. 1/ The dispersion of DELs between the urban 2/ and rural areas is shown in Annex 2. About 83% of the country's DELs are concentrated in 131 urban areas which have about 23% of the total population giving an average urban telephone density of 1.28 DELs per 100 population. The remaining 17% of DELs are in about 1,740 other communities and villages giving a highly inadequate telephone density in rural areas of only 0.08 DELs per 100 population. The Colombo metropolitan area with about 4.4% of the country's population has about 64% of the total country's telephones; even then, its telephone density of 5.2 is low compared to Manila (7.6), Singapore (19.6) and Kuala Lumpur (21.0) though somewhat higher than Bombay (4.6), Bangkok (4.8) and Karachi (3.0). 1.04 For the purposes of local government administration, population centers have been classified as municipal councils (9), urban councils (36), town councils (86) and village councils (542). All these centers have access to some telephone service--420 through mostly small telephone exchanges and the remaining 253 through long distance public call offices. About 1,100 long distance public call offices serve other rural communities below the level of village councils. Telegraph facilities are available at all popu- lation centers of the level of village councils and above. However, except for a few teleprinters in important towns, telegraph service is operated through morse or phonogram; the latter, apart from inaccuracies in trans- mission impairs the telephone servce by utilizing scarce telephone circuits for long periods without producing any revenue. There is no domestic telex service but about 300 important business and government agencies have access to international telex. 1.05 In order to obtain a telephone connection, a potential subscriber must register with the PTD to be placed on the waiting list for the particu- lar exchange serving his area. Subject to availability of exchange equipment and cable capacity, and technical feasibility for the particular telephone, connections are given in order of the date of application. Waiting lists are maintained only in areas where service is now available. The total number of pending applications registered on the waiting lists at the end of 1979 was about 23,250 (Colombo: 9,000; rest of the country: 14,250). Depending on individual exchange areas, the waiting period for a new tele- phone connection can be up to four years in Colombo and longer in the rest of the country. 1/ Current ratio of telephones to direct exchange lines ia bout 1.5. Due to shortage of exchange capacity and external plant, PTD has installed telephone extensions even when a subscriber's actual requirement is for additional exchange lines. Hence, telephone density based on direct exchange lines (DELs) better represents the telephone penetration. 2/ For purposes of this report, areas with municipalities, urban councils or town councils are classified as urban areas (paragraph 1.04). All other areas are classified as rural areas. -3 Telephone Service Usage 1.06 The distribution of telephone lines between government, business and residential users for a few representative exchanges in the country is given in Annex 3. The dispersion of lines between different business users is given in Annex 4. About 44% of all telephone lines are located in busi- ness establishments and 31% in government offices. However, actual business usage is even higher than these figures indicate because many telephones used primarily for business are known to be located in residential quarters adjacent to business premises, partly as a result of the residential tele- phone rental being only 40% of business telephone rental. Sample assessment has shown that about 40-50% of telephones rented as "residential" are used primarily for business purposes. 1.07 The traffic generated by government and business connections over a 24-hour period accounts for about 85% of the total. The actual impact of business-related usage is greater since most of the traffic generated by the business and government connections and by the residential connections used for business purposes is concentrated in a few peak calling hours and it is this peak hour calling rate which determines the traffic and engineering design of the system and hence its costs. The importance of large business and government users is also illustrated by the fact that about 6% of the connections, with average monthly bills of over SL Rs 700 each, generate about 37% of the total revenue as shown in Annex 5 and summarized below: Average Monthly Revenue per Line (SL Rs)_ Cumulative Over Over Over Over Over Over Percent of 1,000 700 500 300 100 50 Connections 2.8 6.0 19.0 42.3 74.3 98.1 Revenue 28.5 37.2 47.2 68.0 74.1 79.8 1.08 The pattern of trunk traffic reflects the predominance of Colombo as the center of the national economy. About 75% of the total long distance traffic generated in the national network originates from or terminates in Colombo. In small exchanges, about 50% of the total traffic generated is for the administrative headquarter of the revenue district which is also usually the commercial and trade center for the area. Existing Facilities and Quality of Service 1.09 Due to inadequate investment and lack of proper planning in the sector in the past, the telecommunications network exhibits a number of deficiencies. The available telecommunications facilities (Annex 6) are meager, generally poor in quality and, in many cases, highly fault-prone. Consequently, the quality of all domestic services is generally poor. Though 98% of the local switching equipment is automatic, only about 16% located in 12 (out of 257) automatic exchanges is modern. The rest com- prises antiquated worn-out automatic equipment or manual boards for all of which spare parts are a problem. Shortage of telephone lines vis-a-vis the expressed demand has increased the calling rate on available telephones which are kept busy for long periods. Repeated attempts to call these busy telephones further increase the traffic in the exchanges, exacerbating the already severe traffic congestion in the network due to common plant short- age. This, combined with technical faults in the worn-out switching equip- ment and in the poorly constructed distribution network--open-wire in most towns--leads to many call failures. Many long distance and international calls are shown to fail due to the deficient local networks. 1.10 Except for a few radio and coaxial cable systems, mostly in the southcentral and southwest, the national long distance network primarily com- prises open-wire trunk lines and carrier systems subject to frequent long interruptions. Copper wire thefts further exacerbate the problem. Thirteen towns have subscriber trunk dialing (STD) facilities among themselves; the rest of the country is served by manual trunk service. Delays on operator- controlled calls average four to six hours and result in many subscriber can- cellations of booked calls. Test calls have shown that STD service is also poor due to network congestion resulting from shortage of long distance cir- cuits and repeat call attempts when trying to call into local networks which are tied up with heavy local usage. Consequent diversion of traffic from STD to manual trunk service adds to the overload on trunk switchboards. The poor quality of domestic long distance service reduces the demand for new tele- phones in rural areas where telephones are mainly used for long distance commercial and administrative calls. Telegrams are transmitted mainly via morse or phonogram but many telegrams are also sent by post due to shortage or non-availability of telegraph circuits. Absence of automated telegraph switching and concentration of all manual transit operations in Colombo also contribute heavily towards the delays on telegrams. International calls are operator-controlled and connected primarily over satellite circuits except for calls to southern India which are currently connected over an old UHF radio system due to be replaced by a high capacity microwave radio system in 1980. Subject to the availability of domestic links, the international services are satisfactory. Demand for Service 1.11 Given the very low level of past investment in the sector and the large areas of the country now without service, it is difficult to accurately forecast the future demand for telephones in Sri Lanka. PTD has not made any systematic attempt to forecast future demand. Neither (toes the current expressed demand reflect the real demand at existing prices because: (a) demand is not registered in areas currently without telephone service; (b) many potential customers are discouraged from applying by the current long waiting lists and waiting periods; and (c) in rural areas, where tele- phones are primarily used for long distance calls, potential customers are discouraged by the current poor quality of long distance telephone service. 1.12 Experience in other countries in similar stages of development suggests that, once the quality of service is improved and the waiting period for new connections is reduced, there will be a large increase in demand. PTD had assessed the annual growth in demand at about 9% which is conservative but acceptable. Even at this conservative growth rate, and after adding about 36,700 new DELs during the project period, it is estimated that there will still be an unsatisfied demand in areas with service of about 28,000 against about 90,300 DELs at the end of 1984. Sector Goals 1.13 PTD's broad sector goals in the next 10 to 15 years are to improve the quality of service to existing subscribers, provide increased access to service in areas currently served and extend communications to the more important rural areas now unserved. PTD plans to move towards these objec- tives under the proposed project by: (a) upgrading the existing local networks by replacing the more heavily worn automatic switching equipment and local manual exchanges by modern automatic equipment, and the open-wire lines in the critical parts of the local dis- tribution networks by cables; (b) upgrading the long distance network by replacing the open-wire lines on major arterial routes by stable high capacity radio systems; (c) significantly expanding the existing local telephone networks in Colombo and other major towns; (d) appreciably improving the access to service in rural areas by increasing the capacity of existing local exchanges and installing new exchanges and long distance public call offices in major population centers now without service; (e) expanding the long distance network to cater to the addi- tional traffic generated by new subscribers and providing STD service between important centers of government administration, business and commerce; (f) improving the domestic telegraph service through conversion from morse or phonogram to teleprinters at all important centers, extending telegraph service to all communities with rural post offices, and introducing automatic telegraph switching at all traffic distribution centers; (g) providing domestic telex service to major centers in the country; and (h) institutional improvements over a wide spectrum of managerial, financial and operational activities. 1.14 For implementation of the above objectives, PTD has drawn up a 1980-84 development program (including the proposed project) which is appreciably larger than any program undertaken in the past in terms of both investment and physical installations as indicated below: Percent 1976-79 1980-84 Increase Average annual investment (US$ Millions) 8.2 21.3 160 Average number of DELs connected annually 2,641 4,660 76 The higher increase in average annual investment compared to increase in DELs is due to heavy investments on replacements and extensive long distance and rural telecommunications facilities under the proposed project. 1.15 The increase in exchange capacity, DELs and other parameters from 1971 to 1979 and the forecast growth from 1980 to 1990 are shown in Annex 7. Selected parameters reflecting estimated changes in access to service over the project period are indicated below: At End of Year Percent 1979 1984 Increase Direct Exchange Lines (DELs) Sri Lanka 53,600 90,400 68 Colombo Metropolitan Area 26,300 39,600 51 Rest of Sri Lanka 27,300 50,800 86 Telephones per 100 Population Sri Lanka 0.56 0.86 54 Colombo Metropolitan Area 6.18 8.53 38 Rest of Sri Lanka 0.30 0.50 67 Telephone Availability l' (Percent) Sri Lanka 70 76 9 Colombo Metropolitan Area 76 80 5 Rest of Sri Lanka 65 74 14 Unsatisfied Demand Sri Lanka 23,250 27,900 20 Colombo Metropolitan Area 8,300 10,000 20 Rest of Sri Lanka 14,950 17,900 20 1/ Telephone availability is defined as the ratio of DELs to expressed demand. (Expressed demand is the sum of DELs plus unsatisfied demand). -7- Sector Constraints 1.16 The major constraints impeding development of the sector have been inadequate investment in the past, continued reliance of obsolete equipment designs and manual operations, and institutional deficiencies. 1.17 Financial. After meeting its operating expenses, PTD is able to generate adequate local funds needed for its expansion program. After the proposed increase in international telephone and telex tariffs (paragraph 3.09) and as STD and telex services with their high revenue potential are expanded, PTD could, at the end of the project period, generate local funds surplus to its needs. However, under the present institutional arrangement whereby PTD is required to deposit all its revenues with the Treasury, the development of the sector is tied to government advances for capital expen- diture, including foreign exchange for imports. Hence, the Government's willingness to make funds available for PTD's investments is a constraint on sector expansion. 1.18 Institutional. The management under one entity of the capital intensive, high technology and rapid growth telecommunications services together with the labor intensive and low growth postal services tends to inhibit efficient management and development of the telecommunications services. The absence of a long-term planning organization, shortage of engineers and inadequate training facilities also inhibit development. A further problem is the inadequate telecommunications background of the traffic staff who control all day-to-day traffic, operational and customer related functions, and their recruitment from and interchangeability with the postal staff. The overcentralization of traffic functions leads to long delays in utilization of installed facilities for new connections with cnsequent loss of potential revenues and poor service. PTD needs to under- take urgently a manpower study to assess the manpower required, and there- after ensure adequate availability of personnel trained in appropriate skills without further incresing the staff-telephone ratio. The management of tele- communications services should be separated from the postal services and day-to-day management decentralized to regional or exchange levels as appro- priate. 1.19 Technical. Continued reliance on obsolete equipment, besides inhibiting satisfactory service, has in the past also prevented adoption of least-cost solutions for network designs, and deprived customers and PTD of benefits and facilities offered by new equipment. In addition, somewhat ad hoc bilateral assistance and suppliers' credits have contributed to haphazard and piecemeal development. PTD, therefore, needs to provide for phased re- placement of obsolete and ill-suited equipment on a national and controlled basis. -8- The Bank's Role 1.20 Though the Bank has not been involved previously in the telecommuni- cations sector in Sri Lanka, the proposed investment under the project would be timely at this stage when a major countrywide effort towards increasing public access to telecommunications facilities is being undertaken for the first time. The Bank could play a significant role in guiding the Government and the entity in various facets of development, operation and management of telecommunications services, e.g. (a) guide the entity in integrated develop- ment with emphasis on improving access to service in rural areas, and expan- sion of facilities which nave high revenue potential such as those providing long distance and international telephone and telex services; (b) guide the Government and the entity on important decisions on investment priorities and pricing policies consistent with development in other sectors; (c) provide technical assistance to the entity in adoption and procurement of modern equipment at least cost in a field where the international rate of change in technology--and obsolescence--is the highest; (d) assist in identification and implementation of much needed institutional improvements over a wide spectrum of managerial, operational and financial activities; and (e) serve as a catalyst to attract external funds more significantly than in the past and on a more coordinated and better planned basis. II. THE PROGRAM AND THE PROJECT The Program 2.01 PTD has drawn up a five-yar (1980-84) telecommunications develop- ment program comprising the following components: (a) ongoing works carried over from the previous years into the program period (paragraph 2.03); (b) works under the project proposed for IDA financing (paragraph 2.06); (c) other works to be executed during the program period (paragraph 2.04); and (d) preinvestment for development works to be undertaken from 1985 onwards (paragraph 2.05). 2.02 The estimated cost of the 1980-84 program is SL Rs 1,659.0 million (US$106.4 million) with foreign costs of SL Rs 1,358.0 million (US$87.1 million). The local and foreign costs of the different components of the program and the sources of financing are given in Annex 8. The annual investments for the years 1980 to 1984 are detailed in Annex 9. The total net increase in fixed assets (before revaluation) between 1980 and 1984 is expected to be SL Rs 1,280.0 million (US$82.1 million), an increase of nearly 220% over the end 1979 values. - 9- Works Outside the IDA Project 2.03 Ongoing Works. Brief details of the ongoing works, estimated expenditure during 1980-84, and anticipated completion dates are given in Annex 10. The total investment on ongoing works during the project period is estimated at SL Rs 805.0 million (US$51.6 million) including a foreign component of SL Rs 655.4 million (US$42.0 million). 2.04 Other Works. Subject to availability of financing for their foreign costs, PTD proposes to undertake during the project period other works as per details at Annex 11 which would supplement the development under the project. However, delays in execution of any or all of these works will not affect the implementation of the project or realization of major benefits thereof. The estimated cost of these works is Sl Rs 237.6 million (US$15.2 million) including foreign cost of Sl Rs 194.6 million (US$12.5 million). 2.05 Preinvestment. Some advance works will be undertaken in the 1980- 84 period in respect of items scheduled for the next phase of development. The preinvestment on these works is estimated at SL Rs 50.0 million (US$3.2 million) with a foreign content of SL Rs 40.0 million (US$2.6 million). Funds for these works have still to be arranged. The Project 2.06 The project proposed for IDA financing is a high priority self- contained component of the 1980-84 program. It provides for a balanced and integrated development of telecommunications facilities and some essential institutional improvements to be implemented between 1980 and 1984. The main physical components of the project are as follows: (a) installation of about 9,300 lines of local automatic exchange equipment in 88 exchanges 1/, about 41,600 pair-kilometers of telephone cables, and associated subscriber's plant for connection of about 16,200 lines and 250 local public call offices; (b) replacement of 7,900 lines of antiquated, worn-out local switching equipment in 268 exchanges (144 manual exchanges and 46 rural automatic exchanges to be closed, and 78 exchanges to be replaced), and about 31,400 pair-kilometers of old cables; (c) installation of three new trunk automatic exchanges with about 650 terminations, and expansion of existing eight trunk automatic exchanges by about 650 terminations; 1/ Includes 78 exchanges which are fully replaced as per item (b). - 10 - (d) installation of automatic number identification equipment (ANI) in all existing local exchanges and automatic message accounting equipment (AMA) in four tertiary trunk automatic exchanges for introduction of toll-ticketing and installation of bill processor; (e) upgradation of two microwave systems and installation of five new microwave systems, about 150 UHF/VHF systems and multiplex equipment for about 5,250 channel ends for the above systems; (f) installation of about 500 long distance call offices for extension of service to rural population centers with post offices, but currently without telephone service; and (g) civil works and other facilities for implementing the project. 2.07 Annexes 12 and 13 indicate the facilities to be added under the project and their scheduled commissioning dates. The map (IBRD 14824) shows the existing microwave radio system and trunk automatic exchanges, those under installation under ongoing works, and the new systems and exchanges to be installed under the project. Project Costs 2.08 The total cost of the project is estimated at SL Rs 566.4 million (US$36.3 million) with foreign cost of SL Rs 468.0 million (US$30.0 million). The schedule below summarizes the cost of major components of the project. The base costs reflect the estimated early 1980 prices and are based on PTD's experience with contracts relating to ongoing works with adjustments to bring them up to the projected early 1980 levels. The projected costs are reason- able. PTD is exempt from payment of customs duty on imported telecommunica- tions equipment and pays no taxes; hence, local costs amount to about 17% of total costs. - 11 - SL Rs Million US$ Million Item Local ForeiRn Total Local Foreign Total Local Facilities Switching equipment 16,06 78.00 94.06 1.03 5.00 6.03 Cables and accessories 26.05 78.00 104.05 1.67 5.00 6.67 Subscriber's plant 5.00 7.80 12.80 0.32 0.50 0.82 Sub-total 47.11 163.80 210.91 3.02 10.50 13.52 Long Distance Facilities Switching equipment 2.50 15.60 18.10 0.16 1.00 1.16 Microwave systems 5.92 46.80 52.72 0.38 3.00 3.38 UHF/VHF systems 14.82 78.00 92.82 0.95 5.00 5.95 ANI and AMA equipment and bill processor 0.62 39.00 39.62 0.04 2.50 2.54 Sub-total 23.86 179.40 203.26 1.53 11.50 13.03 Air conditioning equipment 1.10 7.80 8.90 0.07 0.50 0.57 Standby generators 1.10 7.80 8.90 0.07 0.50 0.57 Vehicles and cable laying equipment 2.33 15.60 17.93 0.15 1.00 1.15 Training equipment and office machines 1.00 7.80 8.80 0.06 0.50 0.56 Consultancy service 0.10 7.80 7.90 0.01 0.50 0.51 Estimated base costs 76.60 390.00 466.60 4.91 25.00 29.91 Contingencies Physical 1.56 7.80 9.36 0.10 0.50 0.60 Price 20.28 70.20 90.48 1.30 4.50 5.80 Total contingencies 21.84 78.00 99.84 1.40 5.00 6.40 Estimated total project costs 98.44 468.00 566.44 6.31 30.00 36.31 Contingencies 2.09 The provisions for equipment and civil works under the project are based for the most part on detailed designs and engineering. In view of this, the proposed quantities are not expected to change significantly. Also, the continuous and dispersed nature of telecommunications development allows adequate flexibility for adjustments and experience has shown that unexpected increases at some points are compensated by decreases at others. However, to cover unforseen requirements over the 5-year project period, a physical contingency amounting to 2% of annual base lQcal and foreign costs has been provided and is considered adequate. - 12 - 2.10 Price contingencies have been provided on the basis of the follow- ing year-by-year increases in base local and foreign costs plus physical con- tingency: 1980 - 10.5%; 1981 - 9%; 1982 - 8%; 1983 and 1984 - 7% each year. Telecommunications equiipment contracts are normally made on a fixed price basis; hence, the foreign costs increases are applied to the contract date. Major equipment cont- icts are likelv to be sir,ned in 1981 and 1982 and most of the equipment siupt Lied by the end of 1983. Based on this, the local and foreign price contingencies amount to 25.6% ard 17.6% respectively of base costs plus physical contingencies (Annex 14). Sources of Financing and Items for IDA Financing 2.11 The local cost of the project (US$ 6.31 million) shall be financed from advances to PTD by the Government. The foreign cost of the project shall be financed in full by the proposed IDA credit of US$30 million. 2.12 The items for IDA financing (in US$ million) are as follows: Local telephone exchange equipment 5.0 Telephone cables, associated plant and accessories 5.0 Subscriber facilities, public tele- phones and associated plant 0.5 Trunk switching equipment 1.0 Automatic number identification and message accounting equipment, and bill processor 2.5 Transmission equipment 8.0 Air conditioning equipment 0.5 Standby generators 0.5 Vehicles and cable laying equipment 1.0 Training equipment and office machines 0.5 Consultancy services 0.5 Contingencies 5.0 TOTAL 30.0 The training equipment and consultancy requirements and the basis of consul- tants' costs are discussed in paragraphs 4.11 and 4.12. - 13 - Procurement 2.13 All equipment to be financed through the IDA credit shall be procured through international competitive bidding in accordance with Bank guidelines for such procurement, except for automatic switching equipment worth US$0.7 million (2.3% of IDA credit) required for extension of eight existing combined local and trunk exchanges. For purposes of compatibility, equipment required for extension of these exchanges is proposed to be pro- cured through negotiations with the supplier of the existing equipment (NEC of Japan). IDA credit would be utilized for such procurement provided the prices are reasonably in line with prices of similar equipment procured through recent international competitive bidding in Sri Lanka and elsewhere. Qualified domestic manufacturers of items such as cable ducts and accessories, air conditioning equipment, etc., would be allowed a preference in bid evalua- tion of 15% of the CIF price or the existing rate of customs duty, whichever is lower. To meet any emergency requirements, PTD will be permitted to pur- chase off-the-shelft items with the provision that the cost of each such item does not exceed US$10,000 with an aggregate limit of US$250,000. The local procurement system permits competition and is satisfactory, and will be used for procurement of small items manufactured locally. Project Implementation 2.14 The proposed project implementation schedule is set out in Annex 15 and is realistic. PTD engineers will prepare engineering designs and tech- nical specifications for all equipment execept for electronic switching equip- ment for the local and trunk automatic exchanges for which consultants are to be employed. PTD would lay and commission all cables and supervise the laying of cable ducts and other civil works by local contractors. PTD staff will carry out all equipment installations except in case of new sophisticated types of switching equipment where they would work under the supervision of the supplier's staff. All acceptance and commissioning tests will be carried out by PTD engineers. PTD management is capable of managing the works under the project satisfactorily and no delays are anticipated in implementation. The project is expected to be completed by December 31, 1984. Disbursements 2.15 The estimated schedule of disbursements is set out in Annex 16. Disbursements would be made 100% of foreign expenditure for directly imported goods including cost of supplier supervision where necessary, 100% of ex- factory prices of locally manufactured items, 75% of the costs of items pro- cured locally off-the-shelf and 100% of foreign costs of consultants. IDA disbursements are expected to be completed by June 30, 1985. Performance Indicators 2.16 A set of indicators which will help monitor PTD's performance on project implementation and its operational and financial performance are set out in Annex 17. - 14 - III. ECONOMIC ANALYSIS 1/ Telecommunications and Development 3.01 The usage of telephone service in Sri Lanka is heavy with substantial unsatisfied demand and significant traffic congestion in the local network in Colombo and in the long distance network. The expressed demand as currently forecast is not expected to be met by the end of the project period in 1984 (Annex 7). * 3.02 The growth in national economy is currently hampered by inadequacy of the essential infrastructure. With the stress by Government on steady expansion of the agricultural base of the economy, dispersal of industry into regions outside Colombo, development of tourism, etc., the need for better communications is increasing rapidly and for an increasing proportion of the population, some form of telecommunications service is becoming the least cost means of communications. 3.03 PTD's 1980-84 development program provides for (a) increased distri- bution of telecommunications services to regions outside Colombo; (b) improved access to service in the isolated rural areas; (c) upgrading of the quality of local and long distance services through part replacement of antiquated and worn-out switching equipment and open-wire lines; and (d) expansion of the system capacity. In Sri Lanka, the telephone and telegraph services tend to function as inputs in the production of goods and services, and are heavily used in most agricultural, industrial, commercial, government and service activities. The project will help economic integration and administrative and management efficiency in Sri Lanka by: (a) reducing loss in marketing efficiency and in production resulting from lack of communications; (b) reducing wastage of resources consumed by higher cost means of communication such as transport; (c) facilitating improvement in service sectors and in transport and delivery services in both urban and rural areas; (d) bringing more efficient government administration to rural areas; and (e) reducing the wastage of time caused by telephone users having to make repeated call attempts during daytime business hours. Distribution of Benefits 3.04 There are both efficiency and equity aspects to the distribution of benefits from the proposed project. The benefits resulting from the proposed investment will be felt directly or indirectly by all segments of the Sri Lanka's society. The greater efficiency in the administration of business and government and in the implementation of projects in other development sectors, and the upgrading of facilities for use in social service sectors such as health and education should impact throughout the nation. 1/ The economic analysis in this section relates to the 1980-84 telecommuni- cations development program of which the IDA project is an integral part. - 15 - 3.05 Regarding the equity aspects of the project, telephone service will be significantly expanded into the rural areas. Provision of about 500 long distance public call offices in small communities in rural areas with post offices but without access to telecommunications services, and about 125 local call offices in urban areas will extend public access to telephone facilities to a broad spectrum of the population both in geographic and economic terms. The establishment of national high-capacity stable long distance transmission links through upgradation and expansion of existing systems, and installation of new systems, will provide a base from which small capacity radio links can be subsequently extended to many more small communities in the hinterland. The increased access to the telecommunication services in rural areas together with a financial cross-subsidy from more profitable urban centers to those rural facilities which prove to be financially unprofitable should ensure a more equitable distribution of the benefits of the telephone service in Sri Lanka. 3.06 Finally, the proposed investment program should have a favorable long-term impact on government financps. At the end of the development program, revenues generated by the telecommunications sector and deposited with Consolidated Revenue Funds of the Government in excess of advances to the PTD for telecommunications operations and development can be used for develop- ment projects in other sectors. Tariffs 3.07 PTD's current domestic telecommunications tariffs came into force on March 1, 1980. The total increase averaged about 25% over their previous levels. Nevertheless, tariffs are still low given the large excess demand for connections and the significant traffic congestion. A summary of prin- cipal tariffs is set out in Anenx 18. 3.08 Local calls are charged on an untimed basis. In an effort to ensure that subscribers with the greatest need at peak hours, primarily business and government, pay a price which more closely reflects the cost which they impose on the system, long distance calls are priced higher during prime business hours than during nights and weekends. Rental charges for business and government commercial entities are higher than rentals for private and other government subscribers. Due to high traffic congestion and long waiting times (paragraphs 1.09 and 1.10), subscribers in areas with STD facility often require operator assistance to connect their long distance calls. Such "operator connected STD calls" have a surcharge of Rs 1.0 per call as compared with the rate for normal STD calls (Annex 18, 3(b) and (c)), and unlike STD calls, full three minute periods are charges even if only a fraction is used. Furthermore, the night and weekend discount is substan- tially lower for operator assisted calls. This differentiation in tariff is justified as the costs for operator connected calls are higher than that for the pure STD calls. When long distance facilities are improved during the project period, the lower STD tariff will induce subscribers to use - 16 - the facilites for automatic long distance dialing instead of requiring assistance by operator. Telecommunications tariffs should be designed to generate adequate funds and allocate scarce resources to meet the Government's goals of efficiency and equity. The terms of reference of the proposed Fundamental Planning Unit (paragraph 4.08) provide for a review of the tele- communications tariffs in conjunction with the Tariff Committee of the PTD. 3.09 PTD's international tariffs were increased about 40% in October 1978 as a consequence of the November 1977 devaluation of the Rupee by about 85% from its previous level. International tariffs were low even before the November 1977 devaluation and the tariff increase was insufficient to correct this situation. As a consequence, PTD's current collection rates are substan- tially below the international accounting rates (Annex 18, items 4 and 5), which has contributed to distort traffic patterns with an unproportionately high outgoing international traffic as compared with incoming traffic. Furthermore, the low international rates have a serious negative impact on PTD's finances (in extreme cases PTD pays foreign administrations more for their participation in a call than it collects from its subscribers). An increase in international tariffs of about 40% is needed to put PTD's collection rates on par with the international accounting rates for telephone and telex calls, which would be in line with the recommendations of the International Telecom- munication Union (ITU) and would help to reduce the current distortion of international traffic. This matter was discussed with PTD's management and Government. The need for a revision of international tariffs was recognized and no objections were raised against the mission's proposals. During nego- tiations, assurances were obtained that, by September 30, 1980, PTD's collec- tion rates for international telephone and telex calls will be raised to about the level of the accounting rates. Least Cost Solution 3.10 The configuration of existing network and the development targets proposed under PTD's 1980-84 program do not give much scope for viable alter- native technical solutions. The works under the IDA project are based on standard engineering and economic techniques, appropriate provisioning periods for various plants, and studies designed to determine the least cost solution for each work. The technologies adopted (e.g., SPC-stored program control- digital exchanges; microwave, UHF and VHF radio systems) are acceptable and effective in promoting low initial installation and recurring maintenance costs. The dimensioning and timing of the works under the project are based on the least cost means of meeting the project targets. Return on Investment 3.11 The internal financial rate of return, defined as the discount rate which equalizes the present value of cost and revenue streams (at 1979 pur- chasing power) attributable to the program, is 17%. 3.12 This rate of return significantly understates the real benefits to be derived from the investment program partly because the benefits - 17 - stream used in the calculation does not include any consumer surplus which telephone users receive. The 1980 increase in tariffs (paragraph 3.07) caused virtually no decrease in traffic or reduction in applicants on waiting lists indicating a substantial amount of consumer surplus. With projected high inflation, prices are expected to fall in real terms. To illustrate, a portion of the consumer surplus can be estimated by (a) tabulating over the program period the prices in 1979 real terms, which the existing subscribers and e-xisting registered applicants have demonstrated a willingness to pay; (b) assuming that the new applicants will also be willing to pay the same amount as existing subscribers and waiting applicants have demonstrated a willingness to pay; and (c) assuming that the projected increase in international tariffs will be accepted without decrease in traffic. Given these assumptions, all of which are considered reasonable, the quantifiable estimate of the economic rate of return would be 33%. PTD employs mostly skilled labor of which there is no surplus in Sri Lanka and the exchange rate for the SL Re reflects fairly its market value; hence no shadow price adjust- ments are necessary. Risks 3.13 There are no unusual risks associated with the project. A possible risk may arise out of delayed physical implementation due to unforeseen cir- cumstances such as delays in receipt of equipment which is virtually fully imported. However, in telecommunications projects which comprise a large number of independent works, a delay i,n implementation of a few works does not generally prevent the use of other newly created assets. Furthermore, the costs and benefits are also delayed in roughly the same degree so the impact on the return on investment is not significant. A sensitivity analy- sis on the financial rate of return (Annex 19) indicates that a combination of 10% higher capital and operating costs and 10% lower revenues would result in an internal financial rate of return of not less than 13%. Environmental and Health Aspects 3.14 No adverse environmental or health effects are expected from the project. Telecommunications works have very little negative impact on the environment. The plant consumes little energy. On the other hand, through its use as an alternative to communications involving physical movements, telecommunications has the potential to conserve energy and reduce environ- mental pollution, particularly in Colombo and other urban areas where better telephone facilities are expected to slow the growth in vehicular traffic. Better telecommunications would also result in better utilization of trans- port for movements of food, medicine and patients in emergency situations. - 18 - IV. THE IMPLEMENTING AGENCY The Organization 4.01 PTD, the proposed beneficiary and the project implementing agencv, is a government department under the Ministry of Posts and Telecommunications. The head of the PTD is the Postmaster-General and Director of Telecommunica- tions, his title reflecting the two services--postal and telecommunications-- which are his charge. PTD has grown along historically established lines and is functionally divided into six divisions--Administration, Finance and Accounts, Postal, Telecommunications Engineering, Traffic and Oveseas Tele- communications (Anenx 20). 4.02 The Administration and the Finance and Accounts Divisions are shared between the postal and telecommunications branches for budgeting, accounting and personnel related functions. The Engineering Division is responsible for planning, development and engineering maintenance of domestic telecommunications services whereas the Overseas Division performs similar functions for international services. In the engineering branch, the number of qualified personnel is insufficient, particularly in the planning and development wings, but the shortage is currently offset to some degree by their high caliber. The Traffic Division provides the commercial interface with the telecommunications customers and also operates all manual telephone exchanges and the public telegraph system. The traffic staff are mainly recruited from and interchangeable with the postal staff. Few of the traffic staff have telecommunications background. Traffic engineering and traffic management essential to proper development of a fully automatic service are lacking. Management of most of the operations and even of day-to-day customer related functions is overcentralized in Colombo, resulting in poor operational efficiency, long delays in full utilization of installed assets in spite of pending demand, customer dissatisfaction and loss of revenue. Telecommunications Department 4.03 The problems of management of the capital intensive, high techno- logy and rapid growth telecommunications services and the labor intensive, slow growth postal services are quite different. For efficient management and rapid development of the telecommunications services, the management of the two services should be separate at all levels. For telecommunications services, the long-term objective should be the establishment of an inde- pendent parastatal telecommunications corporation. However, because of the administrative and other implications of such a major changeover from a government department to a public sector corporation (e.g. revision staff status, revision of financial arrangements with Government, rearrangement of pensions, amendment to Telegraph Act), the changeover needs to be effected in two steps, with the first step--establishment of a Telecommunications Department (paragraph 4.04)--being implemented during the project period. 4.04 The managements of the postal and telecommunications services should be separated and a separate Telecommunications Department established. - 19 - To be effective, the new department should be vested with adequate powers and authority for operating as a financially viable and commercially oriented entity within the Ministry of Posts and Telecommunications, and fully account- able to the Government which would lay down policy guidelines for its manage- ment. It will not be difficult to separate out the staff of the engineering, traffic and overseas divisions which are even now distinct for the telecom- munications services. However, the existing administrative, and finance and accounts staff and some assets such as buildings currently common to both services would need close attention when apportioning between the two services. The Government appreciats the need and the urgency of this separa- tion and does not anticipate any special difficulty in its implementation. In order not to affect the promotion prospects of the postal staff currently operating the telegraph service, some positions in the telegraph cadre in the telecommunications branch will be initially reserved to be filled by postal staff on temporary secondment but with a program of such reservation being phased out in a few years. Also, at small stations where the traffic may not justify establishment of a separate telegraph office, the telegraph service will be operated by the postal branch on an "agency" basis through postal staff trained in phonogram operation, morse signalling or teleprinter oper- ation. During negotiations, assurances were obtained that the Government will create, by December 31, 1981, a separate Telecommunications Department with adequate powers, satisfactory to the Association, for effective and efficient management, operation and development of telecommunications services. 4.05 In establishing the Telecommunications Department, measures should be instituted to eliminate the current coordination difficulties between the engineering, traffic and overseas divisions. The recruitment of the traffic staff from the postal branch and their interchangeability with the postal staff should be discontinued; instead, the traffic staff should be closely integrated with the engineering staff. Unlike the present when, in most areas, the postal staff untrained in telecommunications are responsible for the management of telecommunciations services except engineering maintenance, all aspects of telecommunications operations including commercial interface with the public should be made the responsibility of personnel clearly iden- tified as telecommunications staff to both the public and the management. The day-to-day telecommunications operations and local planning should be decentralized at exchange or regional level as appropriate, with the head- quarters organization retaining the functions of laying down policy guide- lines, national planning, budgeting and allocation of resources. 4.06 The overseas division currently operates as a semi-independent entity within the PTD, publishes its own annual report and financial state- ments (which are then consolidated with the statements for other PTD opera- tions) and executes works in respect of international facilities without coordinating them with the engineering division in charge of the domestic facilities with which they are closely linked. This leads to inefficiency and diseconomies. Except that the overseas division should continue to main- tain separate accounts and prepare financial statements to meet the special requirements of international telecommunications agreements and for exchange of accounts with other countries and international agencies, all aspects of - 20 - international telecommunications services--planning, development, operations, billing and revenues--should be fully integrated with those for the domestic services. 4.07 The Government and PTD appreciate the present deficiencies and the need for the reorganization and, based on recommendations by the Bank's sector and project identification missions, have initiated action on these items. During negotiations, the progress on reorganization was reviewed. As recorded in the agreed minutes of the negotiations, the Government agreed to complete the reorganization of the telecommunications branch (paragraphs 4.05 and 4.06) by June 30, 1981. Fundamental Planning Unit 4.08 PTD's planning organization is weak. In absence of an organization to assess the long-term (10 to 20 years) telecommunications needs of the country and consequent absence of long range plans, the development has been piecemeal and haphazard. PTD, therefore, should establish a fundamental planning unit to: assess the long-term needs and set sector development objectives and priorities in consultation with other government agencies and private national organizations; study the latest technology in telecommunica- tions and its application to Sri Lanka; assess likely trends in development and operating costs; based on these, determine least cost solutions for meeting the development objectives; prepare broad short-term (three to five years) plans; estimate the material, financial and manpower resources for each plan; review in conjunction with the tariff committee the tariff level and structure with regard to the need for generating adequate funds and for better allocation of resources to meet the efficiency and equity goals of the Govern- ment; propose changes in the organizational structure and functions within PTD; consider the basis and justification of establishing domestic manufac- ture, etc. The Fundamental Planning Unit should also in the near future undertake an economic study of telecommunications in Sri Lanka. The unit should comprise small group of engineers, financial analysts and economists. PTD is capable of organizing the unit and, except for economists, staffing it internally and managing the proposed functions. During negotiations, assurances were obtained that the Government will set up a Fundamental Planning Unit within the proposed Telecommunications Department (paragraph 4.04) by December 31, 1982. The Association will assist the Government and the management of the new Telecommunications Department in drawing up suitable terms of reference for the unit. Staff 4.09 As of June 30, 1979, the number of staff in PTD was 26,188 dis- tributed as follows between the postal and telecommunications branches: - 21 - Division Postal Telecommunications Total Postal 16,191 - 16,191 Administration 1/ 232 155 387 Finance and Accounts 1/ 538 359 897 Engineering - 5,660 5,660 Traffic 3,626 3,626 Overseas - 605 605 TOTAL 16,961 10,405 27,366 1/ The apportionment of the administration and the finance and accounts staff shared between the postal and telecommunications branches is approximate. With about 80,400 telephones in service, the staff-telephone ratio for tele- communications branch is about 129 staff per 1,000 telephones. This is very high by world standard and high even compared to some developing countries. The factors contributing to this high ratio are: (a) large number of small manual exchanges which require minimum level of staffing irrespective of number of connections at each exchange; (b) manual operation of a major portion of the long distance trunk service; (c) manual transiting of all telegraph traffic; (d) extensive highly fault-prone open-wire long distance and local distribution networks; (e) inadequacy of vehicles and office machines leading to maintenance, administration, finance, accounts and billing works being unduly labor intensive. PTD has little difficulty in recruiting staff of requisite quality and staff turnover is negligible. The staff pay scales are reasonable and in line with other government agencies. 4.10 Increased productivity, economies of scale due to larger size of unit installations, and more modern methods of construction and operation will reduce future manpower requirements in PTD. Further, with the gradual automation of the local and long distance services using sophisticated electronic switching equipment and replacement of open-wire lines by modern radio systems or cables, PTD will need fewer men but with specialized knowl- edge and higher skills for telecommunications maintenance and operations. Therefore, in order that future recruitment and training can be geared to the new staff requirements and anticipated higher productivity, the present and future structure of manpower in PTD and their skills in telecommunications needs review. Accordingly, PTD had been requested to undertake a manpower study to assess in detail its staff and training needs for its telecommuni- cations operations for the next five years. During negotiations, the interim report of the "Manpower Planning" study for the telecommunications branch carried out by PTD with the assistance of an ITU expert was discussed. Based on current findings and expectations, it was agreed that PTD could achieve a reduction in the staff-telephone ratio of five percent per annum during the project period through increased productivity, restricting new employment to fewer people with higher skills to meet the demands of new sophisticated technology, and normal attrition. While, in absolute terms, the staff in - 22 - the telecommunications branch will increase from about 10,400 in 1979 to about 13,300 in 1984 to meet the requirements of 68% increase in network capacity during the same period, staff per 1,000 telephones ratio will redutce by about 29% from 129 in 1979 to about 100 in 1984. The annual man- power target and the staff-telephone ratio to be achieved by PTD under the project have been prescribed as "Performance Indicators" for the project (Annex 17). Training and Consultancy 4.11 PTD's current training facilities established in 1973 with UNDP/ITU assistance for training engineers and technicians are inadequate and deficient in all respects. The accommodation is unsuitable and crowded, the training aids and equipment and literature are limited and the quality of instructors is poor. Due to slow pace of past development and consequent slow recruitment, the effects of these inadequacies have not been significant. How- ever, with the increasingly rapid development proposed under the 1980-84 program and employment of new technologies, the training facilities need to be expanded and upgraded. In addition to training new engineers and techni- cians, in-service training needs to be imparted to existing staff. With the establishment of a separate telecommunications department (paragraph 4.04), the training of telephone operators and telegraphists will also need to be taken over from the Postal Branch currently responsible for their training. Training courses in telecommunications management, finance and accounts also need to be introduced. PTD recognizes these training needs and has started construction of buildings for a new training center with a capacity of about 1,500 man-months (against 750 man-months at present). PTD has assessed the cost of equipping the new training center at about US$850,000 and the cost of 30 man-months of training experts at about US$150,000. PTD also needs 150 man-months of consultants' services in respect of (a) frequency monitoring and management; (b) maritime telecommunications; (c) traffic engineering; (d) telegraph switching; (e) redesign of Colombo local network based on electronic digital technology; and (f) drafting technical specification for digital switching. PTD has assessed the total costs of these consultants at about US$750,000 on the basis of US$5,000 per man-month. 4.12 During negotiations, the Government informed that the UNDP/ITU have agreed to provide US$500,000 to finance the cost of 30 man-months of training experts for the training center, 20 man-months of training fellow- ships to Sri Lanka staff and 50 man-months of consultants' services for items (a) to (d) in above paragraph. The cost of 100 man-months of consultants' services estimated at US$500,000 for remaining items (e) and (f) above will be financed under the proposed IDA credit. To finance part costs of equip- ping the training center and purchase of some badly needed office machines, US$500,000 has been provided under the IDA credit; the balance costs of train- ing center equipment will be financed by the Government through bilateral sources. - 23 - AccountinR 4.13 PTD's cash accounting functions well and provides a reasonable separation between postal and telecommunications services. Certain commer- cial accounts are kept on a notional basis within PTD and year end adjust- ments of the cash accounts are made to produce more commercially oriented financial statements. However, to monitor PTD's financial performance ade- quately, additional commercial accounts would have to be introduced (Annex 21). PTD's accounts are kept manually. The introduction of additional accounting routines would call for a greater use of mechanical aids (e.g., calculators and accounting machines). 4.14 Additional accounting routines (Annex 21) as suggested by the mission were discussed with PTD's financial management and with the Auditor General. No objections were raised and PTD is expected to start introducing these routines in 1980. Some steps in this direction (inventory of assets, introduction of depreciation rates and collection of billing records) have already been taken. 4.15 During negotiations, assurances were obtained that, commencing January 1, 1981, PTD will progressively introduce accounting routines satis- factory to the Association and that such routines shall be reflected in PTD's financial statements for fiscal year 1981 onwards so that PTD's financial performance thereafter can be adequately monitored. Audit 4.16 As a government department, PTD's accounts are by law audited by the Auditor General, who has four accountants permanently assigned to this task in addition to auxiliary staff and PTD's own internal audit department. The Auditor General is responsible for the audit of commercially oriented government corporations in addition to government departments and has a staff experienced in audits of commercial accounts. These arrangements are satisfactory. 4.17 PTD cannot close all its accounts until about four months after the end of its fiscal year as certain accounts have to be reconciled with treasury accounts, which are available only at about that time. It would therefore be reasonable to require PTD to send to the Association its unaudited accounts within eight months of the end of its fiscal year and corresponding audit report two months later. This was discussed and agreed on with PTD's financial management and the Auditor General. 4.18 During negotiations, assurances were obtained that PTD will provide to the Association financial statements for its telecommunications operations within eight months of the end of its fiscal year and provide the corresponding audit report within two months thereafter. - 24 - Billing and Collection 4.19 PTD billing for the greater Colombo area (about 65% of total number of subscribers) is done in Colombo by the commercial section of the Traffic Department. Billing for outstations is done by the main post office of the district in which the exchange is located. Billing routines and reporting requirements vary between greater Colombo and outstations. A unification of procedures would be desirable. Furthermore, the telecommunications service should handle its own billing except in cases where practical considerations justify continuance of billing by postal staff. This would simplify proced- ures as the basic information for the billing (e.g., meter readings and long distance tickets) are produced by the telecommunications service and the action to be taken (e.g., disconnections and reconnections) are to be taken by this service. 4.20 The fixed rental is billed annually in advance. Other charges are billed bi-monthly in the greater Colombo area and monthly in outstations. It takes about one and a half months to produce the bills for the greater Colombo area and about ten days for outstations. This is satisfactory con- sidering that the billing process is done nearly entirely by hand. Office machines (calculators, etc.) could help to reduce this time substantially and would be necessary to absorb projected larger number of bills to be processed towards the end of the project period. 4.21 If the subscriber does not pay his bill within a month after the date of billing, the amount is included in the subsequent bill and the subscriber is notified. The subscriber is disconnected if total accumulated amounts are not paid before the third bill is sent out. Regarding government subscribers, no standard procedures for disconnection exist. Subscribers in outstations who make a guarantee deposit are not disconnected before the total amount due exceeds the deposit. 4.22 Billed amounts are not routinely reported to the accounts depart- ment, which only receives information on collected amounts. Payment for certain government subscribers' bills is made directly to the treasury, which informs PTD about amounts received. To enable PTD's Accounts Department to adequately book the billing and accounts receivable, billed amounts should routinely be informed. Steps are being taken in this direction (paragraph 4.15 and Annex 21). 4.23 Lacking exact information, the value of PTD's accounts receivable for telecommunications services is estimated to equal about three months of billing. This is acceptable considering PTD's current billing procedures. With adequate mechanical aids, this time may be reduced by about half a month. 4.24 About 600 subscribers in the greater Colombo area have free service. Members of the Parliament and others are billed and the amounts of free service is booked notionally as operating cost. However, other subscribers with free service (mainly PTD's service telephones) are not billed and the value of this service is not shown in PTD's financial statements. To more - 25 - accurately show the total value of PTD' service and to enable a control of the value of free services, all telephones should be billed and the value of free service shown as an operating cost. The proposed new accounting routines (Annex 21) cover this item. V. FINANCIAL ANALYSIS Background 5.01 For more than three decades PTD has, in addition to cash accounting as required by Government, maintained certain commercially oriented accounts on: fixed assets; debt and debt service to Government for the financing of these assets; and free services given to or received from other government departments. The Government considers PTD as part of its operations, however, and no similar commercial accounts are kept by the Treasury. The financial analysis as presented below is based on PTD's cash and notional commercial accounting, with certain adjustments deemed necessary for an adequate pre- sentation (see financial statements at Annexes 22 to 24 and notes and assump- tions on the financial statements at Annex 25). Figures may, therefore, not be exact but should present fairly the financial position of PTD's telecom- munications operations and provide an acceptable basis for evaluation of its financial performance. Past Financial Performance 5.02 A summary of notional income statements for fiscal years 1976-79 (Annex 22) for PTD's telecommunications operations is given below in SLRs. million: Revised Actual Budget Years Ending December 31: 1976 1977 1978 1979 Operating revenues 157.9 197.7 223.1 270.5 Operating expenditures 1/ 132.9 155.9 196.1 231.8 Operating income 25.0 43.8 27.0 38.7 Operating ratio (%): Historic cost basis 82 76 83 82 Revalued basis 84 78 88 86 Rate of return (%): Historic cost basis 21 27 16 18 Revalued basis 14 23 9 10 1/ Including depreciation on revalued assets (paragraph 5.05). - 26 - Operating expenditures include payments to foreign telecommunications adminis- trations for their participation in international calls. Due to the low pricing for these calls (paragraph 3.09), PTD's operating ratio and rate of return have been adversely affected. Even so, PTD's past financial perform- ance hias been sat.bfactocy. Present Financal Position 5.03 Notional balance sheets for fiscal years 1976-79 for PTD's tele- communications operations are given in Annex 23. A summary of fiscal year 1979 in SLRs million is given below: Years Ending December 31: 1979 1/ Percent Assets Net plant in service 2/ 421.6 60 Work in progress 273.4 39 Net current assets 4.9 1 TOTAL ASSETS 699.9 100 Liabilities Equity 2/ 253.2 36 Long-term debt 3/ 446.9 64 TOTAL LIABILITIES 699.9 100 1/ Based on revised budget. 2/ Include revaluation adjustments of fixed assets (paragraph 5.05). 3/ See Annex 25, notes and assumptions on PTD's financial statements. As records of PTD's receivables are not kept (paragraph 4.22) and current liabilities are not booked adequately, no meaningful current ratio can be given for 1979. On the whole, however, PTD's financial position appears to be sound. Valuation of Assets 5.04 PTD's records on fixed assets and their cost of acquisition are de- tailed and contain information from the early thirties. Depreciation, however, has been calculated on an annuity basis that may not properly reflect the expected useful life of the assets. Furthermore, fully depreciated assets that have been taken out of service still figure in PTD's books. 1/ Finally, I/ This report assumes that 50% of asset acquired before 1955 have been taken out of service. - 27 - no separate records are kept on work in progress. PTD is well aware of these deficiencies and has initiated a study, which is expected to result in new accounting procedures by end of 1980. 5.05 PTD has made no attempt to establish the effect of inflation on the value of its fixed assets. An adequate classification of the assets and appropriate indices for their revaluation are lacking. Therefore, for the purposes of this report, PTD's fixed assets have been revalued up to 1979 according to an index arrived at by dividing the exchange rate between the SL Rupee and the US dollar at the year of revaluation with the exchange rate at the year of acquisition (over 80% of the total cost of PTD's fixed tele- communications assets is for imported equipment), resulting in an average 44% revaluation of PTD's fixed assets in operation as of December 31, 1979. This revaluation (44%) may be on the low side considering higher dollar costs for imported equipment, especially since 1972. On the other hand, a substantial part of the equipment is obsolete and will be replaced under the proposed project (e.g., obsolete, worn out exchanges by electronic types and open-wire land lines by radio links). On the whole, in this case the exchange rate approach appears reasonable. For financial projections, an annual revaluation of 9% in 1980, 8% in 1981 and 7% from 1982 onwards has been assumed according to the estimated average increase in cost of telecommunications plant and equipment (Annex 25). 5.06 During negotiations, assurances were obtained that PTD will: (a) undertake and complete an inventory and classification of its fixed tele- communications assets and propose to the Association by March 31, 1981, a method for their revaluation; and (b) for the purpose of calculating the rate of return, commencing with the financial statements for its telecommunications operations for fiscal year 1981, review and establish the value of these assets annually according to methods agreed on with the Association. Financing Plan 5.07 The projected funds flow statement for PTD's telecommunications operations for 1980-84 is given in Annex 24. A summary of PTD's requirements for its telecommunications operations and the sources from which they would be met is given below: - 28 - 1980-84 SLRs. US$ % Requirements Project 566.4 36.4 31 Other capital works 1,092.6 70.0 60 Increase in working capital 153.2 9.8 9 TOTAL REQUIREMENTS 1,812.2 116.2 100 Sources Internal cash generation 1,672.2 107.2 92 Less: debt service 715.3 45.8 39 Net internal cash generation 956.9 61.4 53 Borrowing: Proposed IDA-Credit 468.0 30.0 26 Other borrowing 387.3 24.8 21 TOTAL SOURCES 1,812.2 116.2 100 Of total requirement during the project period, PTD's net internal cash generation (based on notional commercial accounting) is expected to contribute 53%, which is satisfactory. The proposed IDA credit will contribute 26% and the remaining 21% will be financed by Government. As the debt service to Government is purely notional (paragraph 5.01) PTD's telecommunications oper- ations will have a positive fiscal impact on the Government. Projected Financial Performance 5.08 Projections of PTD's (telecommunications operations) financial statements for 1980-84 are given in Annexes 22 to 24. Notes and assumptions on the statements are given in Annex 25. A summary is given below: Years Ending December 31: 1980 1981 1982 1983 11984 Operating income (Rs. million) 108.9 169.1 219.7 291.5 363.1 Operating ratio (%) 1/ 73 69 67 65 64 Rate of return: On historic cost (%) 29 25 23 25 27 On revalued assets (%) 20 18 17 18 19 Debt/equity ratio (%) 66 67 59 52 43 Current ratio (times) 2.1 2.2 2.4 2.7 3.2 Debt service coverage (times) 1.8 1.9 2.1 2.5 3.1 1/ Including depreciation on revalued assets. - 29 - An increase of international telephone and telex tariffs averaging 40% has been assumed to be effective as from July 1980. No further tariff increase is forecast for the project period. 5.09 At the end of 1984, PTD is expected to have a current ratio of 3.2, a debt/equity ratio of 43%, an operating ratio of 64% and a rate of return on revalued assets in operation of 19%. The projected rate of return over the project period averaging about 18% on revalued assets is mainly due to the current high proportion of business and government subscribers who will be heavy users of the improved and expanded long distance, telex, and interna- tional facilities provided under PTD's 1980-84 investment program. Under subsequent investment programs with a higher proportion of investments in local subscribers' equipment, however, the percentage annual increases in traffic and revenues should moderate. Therefore, PTD should not reduce the July 1980 tariff levels (after the proposed 40% increase of international tariffs). 5.10 During negotiations, assurances were obtained that PTD's telecommu- nications tariffs shall not be reduced below the July 1980 levels and shall be maintained at levels sufficient to achieve a rate of return on revalued (paragraph 5.05) average net fixed telecommunications assets in operation of (a) at least 15% for each of the fiscal years 1980 to 1984, and (b) such rate of return as shall be agreed between the Government and the Assocation by June 30, 1984, for the fiscal years 1985 onwards. VI. RECOMMENDATIONS 6.01 During credit negotiations, assurances were obtained that: (a) the Government will raise, by September 30, 1980, the collection rate for the international telephone and telex calls to the level of the accounting rate (paragraph 3.09); (b) the Government will create, by December 31, 1981, a separate Telecommunications Department with adequate powers, satisfactory to the Association, for efficient and effective management, operation and development of telecommunications services (para- graph 4.04); (c) the Government will set up within the Telecommunications Department a Fundamental Planning Unit by December 31, 1982 (paragraph 4.08); (d) commencing Janaury 1, 1981, PTD will progressively introduce new accounting routines satisfactory to the Association and such routines shall be reflected in the financial statements for the fiscal years 1981 onwards (paragraph 4.15); - 30 - (e) PTD will provide to the Association financial statements for its telecommunications operations within eight months of the closing of its fiscal year and the corresponding Audit Report within two months thereafter (paragraph 4.18); (f) PTD shall (i) complete by March 31, 1981, an inventory and classification of its fixed telecommunications assets and propose to the Association a method for their revaluation and (ii) commencing with the financial statements for its tele- communications operations for fiscal year 1981, for purpose of calculating the rate of return, review and establish the value of these assets annually according to methods agreed with the Association (paragraph 5.06); and (g) The Government will not reduce the telecommunications tar- iffs below the July 1980 levels and will maintain them at levels sufficient to achieve a rate of return on revalued average net fixed telecommunications assets in operation of (i) at least 15% for each of the fiscal years 1980 to 1984, and (ii) such rate as shall be agreed between the Government and the Association by June 30, 1984, for the fiscal years 1985 onwards (paragraph 5.10). 6.02 Subject to the above, the proposed project constitutes a suitable basis for an IDA credit of US$30 million equivalent under the normal terms for such credits. -o 0| pcvWe>| 99 09 ONr: 9V| H3 v3*Hw =3s>w o t 999 * o w 999 00,9 -'99 99 - 0 c 99s 09> w 9 99999 99 P w _ *v1_s 99. s P .9r09000v
Groupe de la Banque mondiale · Staff Appraisal Report
Sri Lanka - Telecommunications Project
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Organisation
Groupe de la Banque mondiale
Type de document
Staff Appraisal Report
Pays
Sri Lanka
Source
Banque mondiale