Colombia - Fifth Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2795- CO STAFF APPRAISAL REPORT COLOMBIA FIFTH TELECOIIJhUNICATIONS PROJECT EMPRESAS PUBLICAS DE MEDELLIN (EPM) March 7, 1980 Latin American and Caribbean Regional Office Transportation, Water and Telecomturni.cations Department This document bas a restricted distribution and may be used by recipients only in the Performance of their official duties. Its contents may not otherwise be disOlosed withiout World Bank a.thoriz2tion.  CURRENCY EQUIVALENTS US$1 = Col $44.05 (January 8, 1980) Col$1 = US$0.0227 Col$1,000,000 = US$22,700.00 FISCAL YEAR January 1 - December 31 LIST OF ACRONYMS IN THE REPORT EDA Empresas Departamentales de Antioquia - an organization owned by the Department of Antioquia and which is respons- ible for the operations of local telephone services in the Department (except Medellin and Yarumal) and long distance services within the Department. EPM Empresas Publicas de Medellin - an autonomous company responsible for the operations of electric power, water and sewerage, and telephones within the municipal limits of Medellin; and telephones at the request of the res- pective municipalities in nine other municipal areas around Medellin. STD Subscribers' trunk (long distance direct) dialling. TELECOM: Empresa Nacional de Telecomunications--a state- owned, autonomous company responsible for all long distance national telecommunications (except in Depart- ment of Antioquia) all international services, and local services in several cities including Yarumal.  FOR OFFICIAL USE ONLY COLOMBIA FIFTH TELECOMMUNICATIONS PROJECT EMPRESAS PUBLICAS DE MEDELLIN (EPM) STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TELECOMMUNICATIONS SECTOR IN COLOMBIA ............... 1 Background and Organization .. ................. . I Access to and Quality of Service 1....................... 1 Sector Problems ..... .... ................................... 2 The Bank's Role ............... 2 II. THE PROJECT AREA SUBSECTOR .............................. 3 Background and Organization ............................. 3 Access to Service ..... . ....... ................. . . ..... . 3 Telephone Service Usage ....................................... 4 Quality of Service .......... . ............................... ... 4 Demand for Service .......... o........................ 5 Subsector Goals ..... . ..... .. . .. .................. .. ........... . 5 Bank's Role ............. ... o....................................... 6 III. THE PROGRAM AND THE PROJECT ............................. 7 The Program .......... ............................................... 7 The Project .... ......................................... 7 Project Cost ........ ....o............................................ 8 Contingencies ........................................................ 9 Items and Sources of Financing ..........9............... 9 Procurement .............................. ............ 9 Project Implementation ...*....................... ..... 10 Disbursements ... o ............... ....9 .................... .......... 10 Performance Indicators . ........ ................ ......... 10 This report is based on information obtained from EPM, and from the findings of a Bank appraisal mission composed of Messrs. M. DeLima and J. Chang which visited Colombia in November/December 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 (Continued) Page No. IV. ECONOMIC ANALYSIS ....................................... 10 Telecommunications and Development ...................... 11 The Distributions of Benefits ........................... 11 Tariff Policy ........................................... 11 Tariff Study ............................................ 12 Least-Cost Solution ..................................... 12 Return on Investment .................................... 13 Risk .................................................... 13 Environment and Health Aspects .......................... 13 V. THE IMPLEMENTING AGENCY ................................. 14 General ................................................. 14 Organization ............................................ 14 Staff ................................................... 15 Training ................................................ 16 Accounting and Audit .................................... 16 Billing and Collection .................................. 16 Insurance ............................................... 17 VI. FINANCIAL ANALYSIS ......................... 17 Past Performance and Present Position ................... 18 Accounts Receivable ..................................... 19 Revaluation of Assets ................................... 19 Local Telephone Revenues ................................ 20 Financing Plan .......................................... 21 Pension and Severance Reserves .......................... 22 Future Finances ......................................... 22 Investment Limitation ................................... 23 Fund Utilization Limitation ............................. 23 Debt Limitation ............... 23 VII. RECOMMENDATIONS ......................................... 23  List of Annexes, Charts and Map Page No. 1. International Telephone Statistics ........................ 25 2. Exchange Capacity and Connected Lines as of December 31, 1978 and December 31, 1979, and Forecast (1980-84) ....... 26 3. Basic Data as of December 31, 1979 and as of December 31, 1984 .27 4. Investment Program (1980-84) .28 5. Physical Program (1980-84) .29 6. Schedule of Construction - Chart No. WB 20978 .31 7. Schedule of Disbursements ................................. 32 8. Performance Indicators .................................... 33 9. Summary of Tariffs ........................................ 34 10. Return on Investment ..................................... 36 11. Organization - Chart No. WB 20977 ........................ 38 12. Staff Details ............................................ 39 13. Actual (1977-1978) and Provisional (1979) Financial Statements: Power, Telephone, Water/Sewerage, and Consolidated EPM ........................................ 40 14. Summary of Projected Financial Performance (1980-1984): Power and Water/Sewerage Departments .41 15. Income Statements, Telephone Department (1977-84) .42 16. Balance Sheets, Telephone Department (1977-84) .43 17. Funds Flow Statements, Telephone Department (1980-84) 45 18. Debt Statements, Telephone Department (1980-84) .46 19. Notes and Assumptions on Financial Statements .... ........ 47 20. Related Documents and Data Available in Project File ..... 52 Map Local Exchange Network (IBRD No. 14804)   I. THE TELECOMMUNICATIONS SECTOR IN COLOMBIA Background and Organization 1.01 Colombia has a population of about 24 million distributed over a number of distinct regions divided principally by mountain ridges. High mountain chains isolate the densely populated districts from each other and the coast; the sparsely populated districts cover a large part of the country and extend into the Amazon forests. About half the population is urban; more than a quarter live in the four main cities of Bogota, Medellin, Cali and Barranquilla, all of which are important administrative and manufacturing centers. 1.02 At present, there are 38 telecommunications companies 1/ in Colombia-- 34 are owned and operated by local municipalities and a department (Antioquia) government, three by associated companies, 2/ and one by Empresa Nacional de Telecomunicaciones (TELECOM). The municipal-owned companies provide only local telephone service, while the department-owned company provides local and long distance facilities within its territorial limit. TELECOM, which is a state-owned autonomous company, mainly operates all domestic long distance telecommunications (except the long distance facilites mentioned above); local telephone services in some municipal areas; and all international telecommuni- cations services. TELECOM has, in the past, purchased a number of small- and medium-size former municipal telephone companies; and is now continuing the integration process either through purchase of other small companies, or by association. TELECOM is also currently executing a sizeable rural telephone program. Access to and Quality of Service 1.03 The telephone density in Colombia (2.4 per 100 population at the time of the Bank's first loan in 1967) has increased as of January 1, 1978, to 5.6 telephones per 100 population which is above the average for Latin American countries. Local telepnone service is concentrated in nine large cities which have about 70% of the total telephones in the country. Out of about 4,500 rural communities, only about 500 have access to telephones. Annex 1 sets out international telephone statistics. 1.04 As of January 1, 1978, the local telephone systems in Colombia had about 1,400,000 telephones. The registered unfilled demand is estimated at about 250,000. Lack of adequate expansion has resulted in a heavy overload of the call-handling capacity of the equipment resulting in widespread network congestion 1/ In 1970, 66 companies operated services in Colombia. With Bank encourage- ment for sector integration, the number has been reduced to 38 in 1979. 2/ Associated companies are owned by the local municipalities and TELECOM-- the latter holding more than 51% of the share capital and thereby having controlling interest in these companies.  -2- and subscriber dissatisfaction. Despite considerable improvement in long distance communications, which in recent years expanded to a 20% annual rate partly as a result of four Bank operations, the quality of service still remains deficient. Call traffic congestion has continued as the surge of traffic which accompanied service improvement continually exceeded capacity. Sector Problems 1.05 The fragmentation of telecommunications operations into numerous companies in Colombia has resulted in large systemic and organizational diseconomies. Many of these entities have neither the capacity nor the organization to adequately manage their operations, and to plan and implement an effective expansion or rehabilitation plan. Small-scale purchases made independently by each company, and inadequate procurement practices have led to high capital and operating costs. Most of the operating companies are in continuous financial difficulties, due to poor financial discipline and organi- zation; use of excessive short-term financing; and inadequate tariffs. The central government undertakes the coordination functions which are necessary due to sector fragmentation, but this in turn further introduces excessive delays. The planning (where carried out) and implementation of expansion programs is protracted and inefficient. The Bank's Role 1.06 The Bank's strategy in lending for the telecommunications sector in Colombia has been to promote, as a long-term goal, the integration of the sector under TELECOM. However, the more likely final outcome (due to late start in sector integration and recent large-scale expansions in some of the largest local companies) would be the consolidation of all local services within TELECOM, with the exception of the five largest companies. These five existing largest local telephone companies at Bogota, Cali, Medellin, Barranquilla and Bucaramanga would continue to operate services in these cities as at present, and to serve municipalities and towns in contiguous surrounding areas. The extension of Bank sector recommendations is consistent with the overall strategy for consolidation and will enable the primary bene- fits of integration to materialize. 1.07 The Bank has so far been involved in four telecommunications lending operations in Colombia. Three loans were made to TELECOM for the expansion and improvement of the long distance network; the extension of local telephone service to small towns where the local municipalities could not invest the sector and requested TELECOM to do so; and institutional development and strengthening of TELECOM. 1.08 The Bank's role in the fourth loan, also made to TELECOM, addition- ally stressed the importance and acceleration of the process of sector inte- gration by providing long-term financing through TELECOM to assist in the expansion of existing local companies, after TELECOM purchased them or obtained a controlling interest in them. Bank participation thus makes a considerable contribution to the rational development of the sector and to institution  - 3 - building with a consequent improvement in service and reduction in operating costs resulting from standardization and consolidation of operations. Procure- ment of large quantities of goods at one time through international competitive bidding also results in significant savings in equipment costs. 1.09 The audit report on the first project issued on July 19, 1976, while holding an overall positive view of the Bank's achievements, pointed out delays in project implementation caused by poor planning and project management. Another comment related to the continuing unsatisfactory position of the accounts receivable pertaining to the local entities and the Government. The audit report on the second project which was issued on June 1, 1979, regarded the project as successful both in its physical and institution building achieve- ments. It also noticed the poor collection performance which persisted even though Bank took action on numerous occasions, but mentioned that the problem did not lend itself to easy resolution. It further stated that there had been some improvement, and over the longer term, the problem should diminish pro- gressively with the wider introduction of toll ticketting and TELECOM's further acquisitions or associations with local companies. The proposed Bank loan is the first for EPM's telephone department. EPM does not have any significant problems either with the collection of dues, or for payment of its dues to TELECOM and EDA (paragraphs 5.10 and 5.11). II. THE PROJECT AREA SUBSECTOR Background and Organization 2.01 Medellin is the capital city and the principal administrative, indus- trial and educational center of the department of Antioquia. Metropolitan Medellin (which includes the municipality of Medellin, and other adjacent municipalities) constitutes the densely congested urban area which occupies the Aburra Valley in the Central Cordillera--1,500 meters above sea level and almost a day's road distance from either Bogota or the coastal cities. With about 1.8 million inhabitants, metropolitan Medellin is Colombia's second largest city. It is also the country's second most important industrial center, accounting for about 23% of the industrial work force and 19% of its output. 2.02 Empresas Publicas de Medellin (EPM), the second largest telecommuni- cations entity in Colombia, is the proposed borrower. EPM operates the electric power; water and sewerage; and telephone utilities within the muni- cipal limits of Medellin, and in addition operates telephone services in nine adjacent urban and rural areas under other municipalities at their request. Access to Service 2.03 As of January 1, 1980, EPM operated 217,330 main telephones in 29 exchanges located in the municipalities of Medellin (172,351), Bello (12,094), Envigado (10,360), Itagui (11,544), Estrella (1,579), Sabaneta (1,366), Copacabana (2,675), Girardota (1,056), Caldas (1,895) and Rionegro (2,410).  - 4 - Telephone penetration averaged about 17 per 100 inhabitants 1/, which is the highest in any Colombian city although lower than in several other cities of comparable size in the developing world (e.g., Singapore 20, Caracas 19, Montevideo 18). The local telephone system is fully automatized, and national direct distance dialing is available to all subscribers. Subscribers 'may, however, have themselves disconnected from the automatic long distance service at no additional cost. All subscribers have access to operator assisted (manual and semi-automatic) long distance and international service. In order to obtain a telephone connection, a potential subscriber must register on a waiting list. Connections are made (subject to availability of exchange and cable capacity) in the order of registration. 2.04 As of October 31, 1979, there were about 43,000 applicants on the waiting lists for new connections in EPM's areas of operation. This is equiva- lent to the net increase in main telephones during the last three years. A review of the waiting list register (which is updated about once a month) shows a significant proportion of applications pending from the mid-1970s, while several are as old as late-1960s. The equipment capacity and number of connections as of year--end 1978 and 1979, and forecast for year-end 1980 through 1984 on completion of the project is set out at Annex 2. Basic data as of end 1979 and estimates as of end 1984 are set out at Annex 3. The map sets out the local telephone system in Medellin. Telephone Service Usage 2.05 As of January 1, 1979, about 77% of the total number of connections (excluding public call telephones) were classified as residential, and the balance of 23% as business (industrial, commercial, professional and govern- ment). The number of public call office telephones was about 3,400. Call traffic generated in the whole of the telephone system (based on call pulses) by the business connections accounted for about 52% of the total. The impact of business-related usage on the system is, however, much greater than is shown by these statistics, since business, and residential connections used for business purposes, generate a high proportion of the traffic during the peak business hours, and the provision for an adequate grade of service to cater for this traffic is the primary determinant of system capacity costs. Quality of Service 2.06 Local service in Medellin is significantly congested. During peak traffic hours, only 46% of local call attempts are successful; 20% of call attempts are lost due to the called party being busy. Congestion is partly caused by telephone over utilization by existing subscribers and by others currently on the waiting list; and by the necessity to make numerous repeti- tive calls to busy subscribers during peak traffic hours. 1/ Assuming 1.2 telephones per direct connection. Subscriber extension telephones are provided by EPM and by the subscribers themselves--thus the exact total number of extension telephones is not known.  -5- Demand for Service 2.07 Two major aspects of the municipal and department strategies have a strong bearing on sector consolidation and the future telephone service demand in and around Medellin. In Bello municipality, where EPM currently provides service, a new residential and commercial urban complex is proposed to be built at Niquia, which is projected to have a total population of about 80,000 in 1990. The main thrust of metropolitan Medellin's development is, however, directed toward the neighboring Oriente Cercano region which is connected to the Aburra Valley by a stretch of the Medellin-Bogota highway. The present airport at Medellin will be shifted to the nearby Rionegro area (EPM operates Rionegro telephone services) where it will operate from 1983, and where a free trade and industrial zone will be established. These facili- ties, together with availability and relatively low cost of land and labor, special development financing, and tax incentives and other factors, are expected to result in (a) some Aburra Valley industries moving or expanding into the Oriente Cercano region; (b) new industries being created there; (c) a strengthening of existing agriculture, agroindustry, and traditional manufac- turing addressed both to domestic consumption and exports; and (d) the asso- ciated development of housing and services. The Oriente Cercano area is thus likely to become a focal point of development for the whole department of Antioquia. 2.08 EPM has taken these regional development plans into consideration when forecasting demand and planning plant provisions. The demand for main connections has been forecast year by year from 1979 through 1990 for each exchange area. The methodology used, which is based on the well-established block-by-block analysis, uses parameters which are updated in the light of local experience and has proven to be fairly accurate in the past, even though such demand has not been fully met. 2.09 Forecast and actual demand and the number of connections for Medellin and the surrounding areas at year end from 1978 through 1984 are as follows: 1978 1979 1980 1981 1982 1983 1984 (actual) (actual) Demand 234,900 250,900 260,100 286,500 306-,300 327,500 350,400 Connections 206,813 217,330 224,300 238,700 262,200 291,700 326,000 Subsector Goals 2.10 EPM's goals relating to the telecommunications sector revolve around improving the quality of service in the areas currently served by EPM; enabling the future extension of service beyond EPM's operational area toward the objective of consolidating service in the region around Medellin; improving organization and management; and reducing overall sector procurement costs and consequently foreign exchange expenditures. EPM currently serves Medellin  - 6 - and nine adjacent municipal areas. EDA serves the other areas in the region but the service particularly around Medellin is limited due to small capacity of exchanges installed. In addition, all calls between Medellin and the EDA served areas are charged as long distance. Two additional municipalities at San Pedro and Barbosa have recently requested EPM to operate telephone services in their territories. Thiis would allow for the upgrading of service and a reduction in the call charges to the Medellin metropolitan area. After EPM extends its facilities under this project in Rionegro and in the areas lying between Oriente Cercano and the Aburra Valley, there will be the possi- bility for the quick inclusion of a number of additional municipal areas in the region especially in the Oriente Cercano area (including the municipalities of Carmen de Viboral, Guarne, La Ceja, Marinitla, Retiro and Santuario with a combined population of about 110,000 in 1979--all these areas are indicated as priority areas in the department development strategy) at a relatively low cost. Bank's Role 2.11 World Bank involvement in financing part of EPM's telephone develop- ment program is justified, mainly in terms of improving services in outlying areas in preparation for further subsector consolidation (paragraph 1.06), cost reductions largely through economies of scale brought about by sector consolidation and equipment procurement by international competitive bidding (paragraph 2.14), rationalization of tariffs (paragraph 4.09), and improvement of EPM's organization (paragraph 5.03). 2.12 During the period that the Bank has been involved in Colombian telecommunications (paragraphs 1.06-1.08), the Bank has pursued the need for sector integration, and has brought about change in this direction through a sector review in 1975 requested by government and through provisions under four loans to TELECOM. However, since a part of the sector will at best consolidate around several major operating companies as in the case of EPM, direct Bank involvement in large municipal entities, such as EPM, will accelerate the process of areas like those around Medellin being absorbed within the Medellin network. 2.13 In addition, EPM's internal organization should be strengthened at this stage in its development in order to provide for the more effective and efficient management of its growing telephone service. The Bank's presence and advice in this effort would assure that adequate attention is given to the planning and development, operations and the financial function within EPM. Appointing a separate manager for dealing with technical, operations and financial matters of the telecommunications department would be the first step to strengthen EPM's telecommunications management. 2.14 Finally, Bank involvement in EPM should result in substantial reduction in the cost of imported equipment by improving EPM's procurement practices, expanding the use of international competition, and ensuring independent finance and scrutiny. Bank guidance to EPM in the preparation of bid documents and technical specification for local exchange switching equip- ment and for telephone instruments has already assisted EPM's management in expediting bid processing.  -7- III. THE PROGRAM AND THE PROJECT The Program 3.01 EPM has prepared a master telephone development program for the 11-year (1980-90) period. This program aims to increase the number of connec- tions from about 217,000 at year end 1979 to about 506,000 at year end 1990--an annual growth rate of about 8.1% similar to that experienced in the previous decade. Besides this expansion of services to urban and rural areas, the program provides for the installation of a substantial number of additional public call office telephones (paragraph 4.05). The program is planned for execution in two phases, i.e., 1980-84 and 1985-90. EPM has finalized the program for the five-year (1980-84) period which comprises the following main items: (a) ongoing works for installation of exchange equipment and associated cables, and construction of equipment buildings; (b) acquisition of vehicles; (c) the project for Bank financing (paragraph 3.03); and (d) preinvestment for extension of existing equipment, and of that proposed to be installed under the project; the extension equipment which is proposed to be partly procured during 1983 and 1984 is planned for installation in the first two (1985-86) years of the second phase (1985-90) program. Contracts for ongoing works have been signed. The contracts cover the supply of about 48,600 lines of exchange equipment, and of cables for connection of about 10,000 additional lines. About 42,600 exchange equipment lines would be commissioned by end 1981, and the balance of 6,000 lines would be brought into use by end 1982. The building works would be completed progressively from 1980 through 1982. 3.02 The program is estimated to cost about Col$9,008.2 million (US$160.3 million) including a foreign exchange expenditure of about US$101.2 million equivalent. Annual program costs from 1980 through 1984 are set out at Annex 4. The Project 3.03 The objectives of the project are to meet partly the demands for telephone service, and to improve the quality of service. The current defi- ciencies in these areas are set out in paras. 2.04 and 2.06. The project proposed for Bank financing is a high priority, self-contained part of EPM's 1980-84 development program. It provides for a balanced and integrated development of local telephone facilities and will be carried out between 1980 and 1984. The project consists of the following installations:  - 8 - (a) a total of about 108,400 additional local equipment lines in Medellin and in the surrounding areas, with associated cables and subscribers' plant, and about 90,000 additional connections; (b) cables and subscribers' plant (for which exchange equipment has already been contracted) to enable the installation of another about 10,000 connections; (c) 3,300 public call telephones to serve largely urban and rural low economic level communities; and (d) building extensions to house project equipment. Project Cost 3.04 The total cost of the project is estimated at about Col$6,313.7 million (US$110.0 million) including a foreign exchange expenditure of about US$67.7 million equivalent. Project costs, which are shown in detail in Annex 4, are summarized as follows: Col$ million US$ million LXocal Foreign Total Local Foreign Total Local facilities Exchange equipment 432.9 1,666.1 2,099.0 7.0 29.5 36.5 Toll ticketing 33.0 43.4 76.4 0.7 0.8 1.5 Cables 653.7 728.2 1,381.9 11.3 13.6 24.9 Subscribers' plant 86.7 247.4 334.1 1.4 4.4 5.8 Public call telephone 12.6 87.8 100.4 0.2 1.7 1.9 Buildings 67.2 - 67.2 1.3 - 1.3 Freight and insurance 168.7 317.5 486.2 3.0 5.6 _8.6 Base Cost 1,454.9 3,090.3 4,545.2 24.9 55.6 80.5 Contingencies Physical 50.3 - 50.3 0.9 - 0.9 Price 1,006.7 711.5 1,718.2 16.5 12.1 28.6 Total Expected Cost of Project 2,511.9 3,801.8 6,313.7 42.3 67.7 110.0 3.05 The project costs are based on estimated December 1979 prices, which in turn have been based on the experience of similar equipment procured by EPM and by other companies operating in Colombia through December 1978 and then adjusted for inflation during 1979. The project costs are reasonable. EPM is exempt from payment of customs duties on imported goods, and of any other taxes on procured goods.  -9- Contingencies 3.06 Price contingencies included in project costs amount to 36% of the total of base and physical contingency costs. They result from the year-by- year estimated local cost increases of: 1980 - 22.5%, 1981 - 18.0%, and 15% annually from 1982 through 1984; and the year-by-year estimnated annual foreign cost increases of 10.5% in 1980; 9% in 1981, 8% in 1982, and 7% annually from 1983 through 1984. These contingency estimates as well as the projected exchange rates are in accordance with expectations for projects in Colombia. 3.07 Except for variations in quantities, which could occur in building construction and cable ducting works, and for which a physical contingency amounting to 7% of local costs has been provided, no other physical contingen- cies are considered necessary. Provision of local exchange lines and of telephones are based on detailed engineering and forecasts of equipment quantities. In the case of cable networks, the dispersion of these networks throughout the system permits flexibility and adjustments, which make provision of physical contingencies unnecessary. Items and Sources of Financing 3.08 Of the project's foreign cost of US$67.7 million, the proposed Bank loan would provide US$44 million; suppliers would provide US$11.5 million; commercial banks would provide US$9.9 million and the balance of US$2.3 million would be from EPM's own funds. The local cost of about US$42.3 million equiva- lent would be provided through EPM's internal cash generation. 3.09 The items for Bank financing (including CIF) in US$ million are as follows: Local exchange equipment 18.7 Cables 13.3 Telephones 3.4 Call office telephones 1.9 Contingencies 6.7 Total 44.0 Procurement 3.10 All Bank financed goods would be procured through international competitive bidding in accordance with Bank's guidelines. Of the goods pro- posed to be procured using Bank financing, cables are locally manufactured. EPM considers that some telephones and local switching equipment could also be under manufacture locally. Qualified local manufacturers would be allowed a preference in bid evaluation of 15% of the CIF price, or the existing rate of duty, whichever is lower. EPM proposes to obtain extension to equipment earlier obtained through suppliers credits, from the existing manufacturers using suppliers credits. All other imported goods would be obtained through international competitive bidding and financed by EPM's resources, and  - 10 - commercial bank loans (paragraph 3.08). Other goods which are manufactured locally like outdoor line and cable fitting materials, and ducts would be obtained through local competitive bids and financed by EPM's funds. The arrangement for local bidding permits competition and is satisfactory. Project Implementation 3.11 The proposed schedule for project execution as set out in Annexes 5 and 6 is realistic. EPM's staff are preparing engineering designs for all equipment. EPM has prepared bid documents and technical specifications for all Bank-financed goods, and these have been reviewed in the Bank. Bids for all these goods are expected to be called by end March 1980. EPM would lay and commission all local distribution and interoffice cables, and would supervise the construction of cable ducts by local contractors. All installation work would be carried out by EPM's technical staff, except in the case of new and sophisticated type of switching equipment, where EPM's staff would assist the contractor's staff. Building extensions to house project equipment will be constructed by EPM's staff. EPM's management is sufficiently experienced and is competent to carry out the project satisfactorily. The project is expected to be completed by December 31, 1984. Disbursements 3.12 The estimated disbursements schedule for the Bank loan is set out in Annex 7. Disbursements would be made for 100% of the CIF cost of the imported equipment and the foreign costs of its installation. In the case of cables (and, if applicable, telephones and switching equipment), disbursements would be for 100% of foreign expenditure and for 94% 1/ of local expenditures. All disbursements would be fully documented. The closing date of the loan would be June 30, 1985. Performance Indicators 3.13 Indicators which would assist in monitoring EPM's project implementa- tion, and operational and financial performance are set out in Annex 8. These indicators were discussed and agreed upon during loan negotiations. EPM would include the indicators in its project progress reports to the Bank for the period ending December 31 of each year. IV. ECONOMIC ANALYSIS 4.01 The economic analysis relates primarily to EPM's 1980-84 telecommun- ications investment program, of which Bank-financed project is an integral part. 1/ The balance 6% of local expenditures represents local taxes.  - 11 - Telecommunications and Development 4.02 Usage of the existing telephone service in Medellin is heavy with substantial waiting lists and suppressed demand and with traffic congestion in peak hours (paragraphs 2.04 and 2.06). EPM has taken into account existing and growing 'uture demands for telephone access in Medellin and surrounding areas and prepared its telephone investment program to support these and other local and regional development efforts. However, owing to the limitations of the available resources, the forecast demand is not expected to be met at the end of the project period in 1984 (paragraph 2.09). 4.03 The Bank-financed project is the first phase of a telephone devel- opment program, containing the highest priority works which will contribute substantially to achieving the sector's objectives outlined in paragraph 2.10. It will pave the way for additional sector consolidation, and expand and improve the quality of EPM's telephone service in Medellin and the surrounding areas, thereby improving regional administrative, social and economic services. The Distributions of Benefits 4.04 There are both efficiency and equity aspects to the distribution of benefits from the proposed telecommunications program. With regard to promoting economic efficiency, the relatively high business tariffs will help to ensure that, in areas with service, those commercial subscribers who are willing to pay the highest prices for telephones (and therefore who presumably incur the most benefits from having a telephone) can get one within, at most, one or two years of application. The primary dominance of the network by commercial usage is unlikely to change significantly over the program period. The program is designed to give priority and to expand telephone services in areas which have longer waiting lists and higher per-line revenue. 4.05 With regard to the equity aspects of the program, telephone service will be provided to various categories of residential subscribers who will be charged partly based on the value of their property--the higher the property value, the higher the telephone rental. About 70% of the planned investment is to be used in meeting the demand from middle- and lower-income households. Additionally, about 2,900 out of the 3,300 PCOs will be installed in the economically weaker population areas in an attempt to assure that all segments of the population have access to rapid two-way communications services. 4.06 As required by the municipality of Medellin, EPM pays to the muni- cipality an annual contribution, part of which is attributable to EPM's telephone operations. During the project period 1980-84, the contribution from EPM's Telephone Department operation to the general revenues of the munici- pality is estimated at about Col$293.0 million (US$5.0 million) to be utilized by the municipality for other public services in the greater metropolitan area of Medellin. Tariff Policy 4.07 EPM's telecommunications rental and deposit charges distinguish between residential, industrial/commercial, and other subscribers. For residential subscribers, such charges are set according to the residential property's value (paragraph 4.05).  - 12 - 4.08 Local calls are timed--a pulse at an average of every 120 seconds. For long distance calls, per kilometer charges decrease with distance, reflect- ing the decreasing costs. The corresponding three-minute manual call rate is higher than a three-minute automatic (STD) rate, to reflect additional manual operating costs. Also, for long distance, two charging rates (a day rate and a lower rate for nights and weekends) are used on automatic service, and three charging rates (day, mid-day period, and night) are used on manual long distance service. The night and weekend rate reflects the lower marginal cost of carrying traffic outside of the busy periods since the system was designed for peak hour usage. The higher daytime tariff ensures that those (primarily business and government) who have the greatest need at peak times will pay a price which more closely reflects the costs which they impose on the system. In contrast to this, public call office users, who are generally low income individuals, are charged about 40% less per metered pulse than regular sub- scribers. A summary of tariffs is set out in Annex 9. Tariff Study 4.09 It is proposed that in the course of project execution EPM undertakes a tariff study with Bank guidance and assistance. EPM plans to meet more than i0% or curreuLc and fuLure demand, a.,d about 3,300 additional PCOs will be installed throughout the 1980-1990 program period, thus making telephone access available to virtually the whole population in EPM's operational area. Consequently for both economic efficiency and social equity reasons, it is nccessary that EPM analyzes its telephone tariff structure and investment mix in relation to incremental costs. By the end of the project period, a tariff structure which generally reflects incremental expansion costs will be required in order to attain economic efficiency in the use of existing plant and to assist in planning the allocation of new investment. Similarly, equity objectives sought through deviations from efficiency-related marginal cost pricing require careful analysis. 4.10 Since a similar analysis is starting at TELECOM under Loan 1450-CO, the study of tariffs in Colombia would then cover both a large local and long distance entity. As is necessary, this would deal, among other aspects, with the difficult question of division of revenues between TELECOM and local companies, which has proven elusive so far, and where the Bank's presence could enrure fairness to all parties and due attention to economic efficiency. Assurances have been obtained from EPM that it will (i)-by September 1, 1981 carry out under terms of reference satisfactory to the Bank a study on the strucLure of its telephone tariffs and rates; (ii) by January 31, 1981 furnish to the Bank for its approval the terms of reference; (iii) by October 31, 1981 discuss with the Bank the conclusions of the study; (iv) by December 15, 1981 prcpare anid furnish to the Bank a program based on the conclusions of the study; and (v) by April 15, 1982 put the program into effect. Least-Cost Solution 4.11 The configuration of the existing network and EPM's expansion p-roposals and service improvement objectives within the 1980-1990 eleven-year plan (paragraph 3.01) very much limits the number of viable alternative technical solutions to comply with these targets. The dimensioning and timing  - 13 - of the works under the 1980-1984 first phase program, of which the Bank project is an integral part, are based on engineering studies designed to utilize the latest development techniques and to determine the least-cost solution for the telephone network. Return on Investment 4.12 The internal financial rate of return defined as the discount rate which equalizes the present value of the cost and revenue streams (in 1980 prices) attributable to the program is 15.9% (Annex 10). Using a standard conversion factor of 0.93 and a shadow wage rate ratio of 0.68 provides a minimum estimate of the economic rate of return of 16.8%. 4.13 The above economic rate of return does not take into account numerous indirect and external benefits. It is a minimum estimate based only on official charges paid by consumers for the services which they receive. Hence, it significantly understates the real benefits to be derived from the investment program. In fact, consumers in Medellin in the recent past were demonstrating that they were willing to pay more for telephone access and usage than they are currently paying. Since the last tariff increase in 1976, inflation has resulted in prices falling substantially in real terms and it is projected that they will continue to do so. Consequently considerable consumer surplus undoubtedly exists. 4.14 Benefits are also understated because the calculation of the internal rate of return includes costs for extending the network and providing facilities in the newly served areas, while the full benefits of the extension are not included. This is because the available capacity of various components of equipment will not be fully utilized until additional investment is made and additional lines are connected at some time in the future. Risk 4.15 The project offers limited risk. The principal risk is the possibil- ity of delayed physical implementation due to unforeseen circumstances. In telecommunications projects, which comprise a relatively large number of independent activities, delay in the completion of a few works does not gener- ally prevent the use of other newly created assets. Further costs and benefits are often delayed in roughly the same degree so that the impact on the rate of return may not be significant. A sensitivity analysis on the financial rate of return (Annex 10) indicates that the 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 11%. Environment and Health Aspects 4.16 No significant adverse environmental effects are expected from the project. On the contrary, as the project will provide wider and better telephone service, the growth in vehicular traffic congestion during business hours is expected to be reduced, accompanied by a reduction in the growth of atmospheric pollution. Better access to health and emergency services would be available to lower income areas with the installation of a large number of public call offices in these areas.  - 14 - V. THE IMPLEMENTING AGENCY General 5.01 In Decreto No. 1816 of 1955, the Government of Colombia authorized the municipality of Medellin to organize one or several of Medellin's munic- ipal services as administrative autonomous units, with the objective of providing energy, telephone, water and sewerage services to Medellin, and to other municipalities which requested Medellin for such provision. In its Order No. 58 of 1955, the Medellin municipality laid down rules and regula- tions for Empresas Publicas de Medellin (EPM)--the autonomous company created in accordance with Decreto 1816 of 1955. All assets of the above public services which had been the municipality's property, were also transferred as EPM's assets. EPM currently operates telephone services in the Medellin municipal area, and in nine other adjacent urban and rural areas under the jurisdiction of their respective municipalities. The Bank has participated in four of EPM's power projects. Organization 5.02 EPM is administererd by a seven-member board of directors with the Mayor of Medellin as the chairman. The general manager, appointed by the board of directors, is responsible for EPM's day-to-day management. The general manager oversees directly the work of (a) four managers responsible for technical matters, operations, finance and administration, respectively; (b) the secretary general in charge of legal affairs and archives; and (c) a planning director in charge of planning and coordination. Below the level of the managers, the organization is in general separated administratively into EPM's three departments. Each department works fairly independently of the others, and separate financial statements are prepared. EPM's board of directors, however, receives a consolidated financial statement for all EPM's services. EPM's organizational chart is set out at Annex 11. 5.03 While the present organizational arrangements are satisfactory for the efficient discharge of EPM's current responsibilities, the set up is not adequate for the future. EPM is embarking on a large scale expansion of telephone services in the 11-year (1980-90) period (paragraph 3.01). The total installed equipment capacity and total connections are proposed to be increased from 250,000 and from 217,330, respectively, at the end of 1979, to 407,000 and 326,000 at the end of this project in 1984; and to 605,000 and to 506,000 in 1990. This large scale expansion of local service facilities will need concentrated and specialized attention to be paid to the planning and development of facilities, and to post-installation service and maintenance. Telephone services now need more than ever before specialized attention due to rapid changes occurring in development and maintenance philosophies, and in technological advances in the field. Full-time, well informed management staff to deal only with the telephone services is highly desirable. During the project period, all telephone services (technical design, telephone planning, operations, customer services and investment activities) should be controlled by a manager solely responsible for the Telephone Department. The technical and operations divisions are currently controlled separately below the manager's level and could be easily transferred. The customer services,  - 15 - financial programing (investment), control of telephone directory, purchase and level of spares, staff and establishment are spread over planning, finan- cial and administrative divisions, and would need careful study before being transferred to the separate Telephone Department. With a 40% increase in operations by 1990 and the expected assimilation of networks distant from Medellin, the telephone branch of EPM alone would be a sizeable enterprise. Assurances have been received from EPM that it will (i) by February 28, 1981 carry out under terms of reference satisfactory to the Bank a study for reorganizing the Telephone Department; (ii) by September 30, 1980 furnish to the Bank for its approval the terms of reference of the study; (iii) furnish promptly thereafter to the Bank for review the results of the study; (iv) pre- pare a program for reorganizing the Telephone Department based on the conclu- sions of the study and Bank's comments thereon; and (v) by September 30, 1981 put into effect the program. 5.04 As of January 1, 1980, EPM's telecommunications staff totaled about 900. EPM operated on that date 217,330 connections with a staff ratio of about 4.2 per 1,000 telephones. Overall staff productivity is high. However, the standard of subscriber service is not adequate. While the number of faults per month is about 13,300 on an average and is not excessive, the average duration of each fault is high. The percentage of faults repaired within 24, 48, 72, and over 72 hours, is 38, 32, 10, and 20 respectively. The productivity of the maintenance staff is currently satisfactory and they attend to a large number of faults. However, there is considerable carry-over of faults. Additional maintenance staff could be employed and changes in fault clearance procedures made to enable at least 60% of the faults to be cleared on the day of fault occurrence. This will not only greatly increase subscriber satisfaction, but may also decrease internal congestion in some of the older exchanges and would certainly increase revenues and system benefits. EPM's general manager has agreed to consider ways and means to improve fault clearance including increasing the existing outdoor plant maintenance staff. Control of fault duration has been discussed with EPM, and agreed targets for outage time have been included in the performance indicators. Staff 5.05 During the project period, EPM expects to recruit about 600 addition- al staff for the Telephone Department. At the end of the project, EPM would operate about 326,000 telephones with about 1,500 staff. The staff ratio would be 4.7 per 1,000 telephones. While this ratio will have slightly deteriorated, efficiency will have increased considerably (paragraph 5.04). Annex 12 sets out the estimates of the number of employees in each section of EPM's Telephone Department from 1980 through 1984, the staff pay groups as of December 31, 1978, and a summary of service conditions. The pay scales are generally attractive and the requisite quality of staff can be recruited. Turnover of staff is reported to be negligible. 5.06 EPM's engineering and planning staff are well qualified, are competent and have considerable experience in project management and operation. Given a proper organization arrangement (paragraph 5.03), EPM staff qualifications and experience would enable them to efficiently manage the considerably expanded operations resulting from the project. EPM's finance and management staff are also generally well qualified and capable.  - 16 - Training 5.07 EPM has planned a training center to give courses to administrative and operational personnel of all EPM's branches and to be fully operational by end 1980. Building construction is well advanced. After 1980, regular courses would be undertaken to train new staff and to impart refresher training to existing staff. At present, EPM has training courses for new staff required to maintain outside plant and exchange equipment. Outside plant maintenance staff are given training once a year for various periods depending on staff to be trained, and is undertaken by releasing one of the existing expert staff. EPM has trained 55 exchange equipment staff during 1979, at Paris, Medellin and Bogota to maintain new and existing types of exchange equipment; and proposes to train a further 21 during 1980. Additionally training is provided for in bid documents being prepared for Bank-financed telephone equipment, in Medellin and at the contractor's works. Trained maintenance staff would be available when project goods are brought into service. The training arrangements are satisfactory. Accounting and Audit 5.08 EPM has an accrual accounting system which provides for separate accounts for each department and is appropriate. Tabulations and reporting are carried out effectively with the aid of a computer. Monthly financial statements and budget reports are available promptly, and contain the infor- mation necessary for management's review. 5.09 EPM's internal audit is adequate. The auditor is appointed by the Muncipal Council of Medellin and reports directly to EPM's board of directors and the Municipality. The annual internal audit report is issued within three months after the end of the fiscal year. To comply with the Bank's power loan audit covenant, EPM has engaged independent external auditors to audit the accounts of all its operations. The auditors have submitted acceptable reports. Assurances have been obtained from EPM that it will engage an independent external auditor acceptable to the Bank; and to provide the Bank with a set of unaudited financial statements within three months after the end of the fiscal year, and audited financial statements together with the auditor's report within five months after the end of the fiscal year. Billing and Collection 5.10 EPM's billing and collection procedures are satisfactory. Billing is computerized and subscribers are billed on monthly cycle basis. Bills become due about ten days after being received by the subscriber. While a consol- idated bill for water and sewerage, electricity and telephone services is prepared, the charge for each service is shown separately. If the subscriber does not settle the account within three months, all utility services of the subscriber are disconnected. As a result of EPM's rigid disconnection policy the level of outstanding and overdue accounts is generally low (paragraph 6.05).  - 17 - 5.11 As in the case of other municipal-owned telephone companies in Colombia, national long distance and international telephone traffic in Medellin is handled through TELECOM's facilities. Each month TELECOM bills EPM for the total number of pulses on all long distance calls registered on the channel meters on directly dialed national calls; and for m-nual national and international calls. EPM retains part (about 23%) of the total income on the long distance and international services, and pays the balance to TELECOM. EPM bills individual subscribers for the total pulses registered on each subscriber's meter--these pulses also include pulses on national automatic long distance calls, and for manual national and international calls. EPM has an arrangement similar to that with TELECOM with Empresas Departamentales de Antioquia (EDA) for the long distance telephone service provided by EDA within the department of Antioquia. These arrangements are acceptable. EPM has made regular payments to TELECOM and EDA for services rendered. Insurance 5.12 EPM has insurance coverage for buildings, internal plant and stores, against fire and special perils. Insurance protection is also maintained for vehicles, for cash in transit, and personal liability. These arrangements are satisfactory. VI. FINANCIAL ANALYSIS 6.01 EPM's consolidated financial position as well as that of each of its various departments (Power, Telephone, Water and Sewerage) have been reviewed and found satisfactory. During 1977 through 1979, the annual debt service coverage ratio for the consolidated EPM was never below 2.0. The following table summarizes the financial performance of the consolidated EPM during 1977 through 1979; detailed financial statements for each department as well as EPM on a consolidated basis are given in Annex 13: Fiscal Year Ending December 31: 1977 1978 1979 ------Million Col$----- Operating Revenues 2,448.1 3,112.7 4,342.0 Operating Expenses 1,231.2 1,940.9 2,328.3 Operating Income 1,216.9 1,171.7 2,013.7 Operating Ratio (x) 50 62 54 Debt/Equity Ratio 57/43 57/43 52/48 Current Ratio 1.4 1.7 1.4 Debt Service Coverage (times) 2.6 2.1 2.4  - 18 - 6.02 The projected funds flow of each EPM's departments up to 1984 has also been reviewed and, on this basis, EPM's forecast future finances have been found satisfactory; the annual debt service coverage for each department will not be less than 1.5 (Annexes 14 and 17). According to EPM's current projections, the future development program of each department will not impose any financial constraints on the other departments. However, the financial implications of the other departments on EPM's financial situation as a whole or on the Telephone Department, have been examined and, where necessary, appropriate covenants have been included in the proposed loan agreement (paragraphs 6.08, 6.17, 6.18 and 6.19). Since EPM's accounts and budgets are maintained separately for each department, a detailed analysis has been made only for the Telephone Department. Unless otherwise indicated, the following paragraphs relate only to the Telephone Department. Past Performance and Present Position 6.03 During 1977-79, the financial performance has been satisfactory; for the average of this period, internal cash generation has been the main source of financing and has contributed over 70% of the total funds requirement during 1977-79, while borrowings have provided the remaining funds. During the same period, the operating ratio averaged about 68%. The income statements for the period FYs 1977-79 are presented in Annex 15 and a summary is given below. Fiscal Year Ending December 31: 1977 1978 1979 ------Million Col$----- Operating Revenues 429.4 504.1 589.5 Operating Expenses 259.8 363.5 436.3 Operating Income 169.6 140.6 153.2 Operating Ratio (%) 61 72 74 Rate of Return (%) 1/ 15 11 11 Debt Service Coverage (times) 1.8 2.0 2.2 1/ On average net fixed assets in operation partially revalued for foreign exchange adjustments as required by Colombian law. 6.04 Despite the adverse effects of inflation and the devaluation of peso, the estimated EPM financial position attributable to its Telephone Department as of December 31, 1979 is still satisfactory; the current ratio of 1.7 and the estimated debt/equity ratio of 24/76 reflect a comfortable position. The actual and forecast financial position for the period 1976 to 1984 is set out in Annex 16 and the 1979 balance sheet is summarized below:  - 19 - Fiscal Year Ending December 31, 1979 Col$ US$ in millions ASSETS Net Fixed Assets in Operation 1,423.39 32.53 Work in Progress 183.00 4.18 Total Net Fixed Assets 1/ 1,606.39 36.71 Current Assets 601.50 13.75 Other 3.00 0.07 Total Assets 2,210.89 50.53 LIABILITIES Equity 933.60 21.35 Long-term Debt 1/ 2/ 299.95 6.85 Current Liabilities 2/ 354.42 8.10 Other 3/ 622.92 14.23 Total Liabilities 2,210.89 50.53 Current Ratio 1.7 Debt/Equity Ratio 24/76 1/ Revalued for foreign exchange adjustments. 7/ Current portion of long-term debts is included under current liabilities. 3/ Including subscribers' deposits, pension and severance liabilities. Accounts Receivable 6.05 EPM's billing and collection policy has been effective (paragraph 5.10). The overall accounts receivable position represents about 60 days of telephone billing in 1979; this is satisfactory. Inter-departmental accounts are also settled within two months. To monitor future billing and collection practice, EPM's telephone subscriber accounts receivable would be included in the performance indicators (Annex 8). Revaluation of Assets 6.06 EPM is required by Colombian law to revalue its assets for all departments only to offset the exchange rate adjustments on its foreign borrowings. For the purpose of calculating the rate of return, however, EPM's telephone assets should be revalued to reflect also the impact of general price inflation on the one hand and the combined effect of new technology improvement and economies of scale which could reduce the costs of telecom- munications equipment on the other. EPM's revalued telephone assets in  - 20 - operation as of December 31, 1979, are estimated to be about Col$3,609 mil- lion and the annual revaluation of assets has been included in the forecast for the project period. The average revalued net fixed assets in operation have then been used as the base to determine the rate of return (Annex 16, Attachment 1, and Annex 19, paragraph 6). During negotiations, assurances were obtained from EPM that it would revalue its telephone assets in operation yearly in accordance with a method acceptable to the Bank, and present to the Bank yearly summary report on such revaluation within the first three months of each fiscal year. Local Telenhone Revenues 6.07 In 1977 and 1978, revenues from local telephone services provided over 70% of EPM's total operating revenues; revenues from long distance and international and other services, based on the revenue sharing agreements with other entities (paragraph 5.11), provided the remaining. 6.08 The National Tariff Board (NTB) has recently approved a tariff increase program for EPM effective from December 1, 1979 (Annex 9) to produce about 70% additional revenue from its local telephone services over the period 1980-81. On the basis of current expectations on inflation, forecasts indicate that an annual rate of return of 9% on revalued telephone assets would be sufficient for EPM to meet its Telephone Department's requirements during 1980-84 and that another tariff increase to generate about 30% addi- tional local telephone revenues would be necessary only during 1983-84 to meet the required 9% rate of return, assuming no increase in the charges for long distance and international services. During negotiations, assurances were obtained from the Government and EPM that future telephone tariffs would be maintained at a level sufficient to produce a rate of return of not less than 9% on revalued telephone assets. Furthermore, to ensure that EPM continues to have sufficient funds to meet the requirements of all its departments, assurances were also obtained from the Government and EPM that, unless other- wise agreed by the Bank, EPM would maintain tariffs for the services provided by each department at a level sufficient to generate revenues to cover the administrative, operational and debt service requirements and a reasonable contribution towards the capital investment of that department.  - 21 - Financing Plan 6.09 EPM's actual and forecast funds flow statements for 1977-84 are presented in Annex 17. The financing plan covering the 1980-1984 project period is summarized below: For the Period 1980-84 Col$ US$ % ---in millions--- Sources of Funds Net income before interest 3,986.84 68.42 37.52 Depreciation 1,594.79 22.62 12.40 Net Increase in Pension and Severance Reserves 369.70 6.52 3.58 Subscriber Deposits 1,337.08 26.63 14.60 Gross Internal Cash Generation 7,288.41 124.19 68.10 Less: Debt Service 2,466.68 40.94 22.45 Net Internal Cash Generation 4,821.73 83.25 45.65 Borrowings: Proposed IBRD Loan 2,404.44 43.57 1/ 23.89 Other External Borrowings to be Arranged: For the Proposed Project 1,226.26 21.25 11.65 For Other Projects 1,886.00 33.49 18.37 Total Borrowings 5,516.80 98.31 53.91 Other 44.21 0.81 0.44 Total Sources 10,382.74 182.37 100.00 Requirements for Funds Capital Expenditures: Proposed Bank Project 6,281.46 109.57 1/ 60.08 Other Projects 2,726.76 50.71 27.81 Capitalized Expenses 934.45 15.97 8.76 Total Capital Expenditures 9,942.67 176.25 96.65 Additions to Working Capital 440.07 6.12 3.35 Total Requirements 10,382.74 182.37 100.00 1/ The difference of about US$0.43 million from the proposed loan amount (US$44.0 million) represents part of the retention money which would be disbursed during the calendar year 1985. 6.10 During 1980-84, about US$109.6 million is needed for the proposed project works, and US$50.7 million is for other project works; capitalized expenses including the interest during construction is about US$16.0 million. Net internal cash generation will account for about 45% of the funds require- ment under the greatly expanded capital investment program (average annual capital expenditure during 1980-84 is about Col$2,000.0 million as compared with Col$210.0 million during 1977-79). The total foreign exchange cost for the 1980-84 program would amount to about US$101. 2 million, of which  - 22 - US$67.7 million pertains to the proposed project and would be financed partly by the proposed Bank loan of US$44 million. The remaining foreign exchange requirements would be financed by other external borrowings and suppliers' credits and, to a small extent, by EPM's internal sources. 6.11 The proposed Bank loan is assumed at an interest rate of 8.25% per year plus a commitment charge of 3/4 of 1% with a repayment of 17 years including 4 years grace period. The terms for other foreign borrowings are assumed at an annual interest rate of 11.0% and 8.5% for commercial loans and suppliers, credits respectively, plus a commitment charge of 1/2 of 1% with a 10 years repayment including 2 years grace period; these terms are in line with the general terms for EPM's current external borrowings. Local borrowings are at an annual interest of 15% with two to five years' repayment period. EPM will finance the balance of its funds requirements from internal sources. Forecast debt statements for the period 1980-84 are given in Annex 18. During negotiations, the availability of funds for financing the foreign exchange gap of about US$55 million were confirmed. Pension and Severance Reserves 6.12 EPM maintains reserve accounts for its pension and severance liabili- ties according to Colombian law, and pays directly from these accounts to employees who are terminating their service with EPM. Annual provisions for these reserves have been sufficient to meet annual payments. The net increase in these reserves would contribute about four percent of the total financing sources during 1980-84. 6.13 In addition to low-cost housing loans which EPM provides for its employees, individual shares in the severance funds can also be utilized by employees for purchasing residential housing. EPM pays interest on the severance reserve in line with the rates charged for similar arrangements in other companies as required by law. These arrangements apply to all EPM's departments and are appropriate. Future Finances 6.14 Forecast financial statements during 1980-84 are presented in Annexes 15 through 18. A summary of financial indicators is given below: For Fiscal Year Ending December 31: 1980 1981 1982 1983 1984 Operating Revenues (Million Col$) 913.23 1,262.80 1,620.59 2,113.75 2,648.83 Operating Expenses (Million Col$) 537.84 649.97 888.89 1,157.12 1,482.40 Operating Income (Million Col$) 375.39 612.83 731.70 956.63 1,166.43 Operating Ratio (M) 59 52 55 52 54 Rate of Return on Revalued Assets (x) 10 12 10 9 9 Current Ratio (times) 1.1 1.0 1.2 0.8 1.1 Debt/Equity Ratio (X) 41/59 51/49 56/44 54/46 52/48 Debt Service Coverage (times) 3.1 4.3 3.3 4.0 2.1 Accounts Receivable Position (days) 60 60 60 60 60  - 23 - 6.15 Revenues have been projected according to the new tariff increase program (paragraph 6.08) and taking into account EPM's past experience and the effects of plant addition and network expansion during the project period. Projections for the operating expenses reflect the expanding telephone opera- tions and include annual inflation provisions. Detailed notes and assumptions on the projections are given in Annex 19. 6.16 The projections indicate that the expected financial performance will be satisfactory. Increasing revenues would be sufficient to provide an acceptable rate of return of at least 9% on the revalued assets. The debt service coverage and the debt/equity ratio would be adequate. The current ratio including the current portion of long-term debts would be about 1.0. Investment Limitation 6.17 To ensure a thorough analysis of the financial impact of any signifi- cant additional investment beyond the currently proposed 1980-84 telephone expansion program, EPM agreed during negotiations that it would seek the Bank's concurrence before undertaking any new capital investment in any one year during the project period for its telephone operations for an amount in excess of US$2,000,000. Fund Utilization Limitation 6.18 To ensure that funds generated by the Telephone Department are not used to support other departments before meeting its own requirements, assur- ances were obtained from EPM during negotiations that funds arising out of or obtained in connection with its telephone operations would not be utilized for other purposes including transfer to EPM's other departments, except funds in excess of its Telephone Department's operational, debt service and investment requirements, including the maintenance of adequate reserves in respect of its telephone operations. Furthermore, any transferred funds would be treated as a loan on commercial borrowing terms and conditions. Debt Limitation 6.19 During negotiations, assurances were obtained from EPM that it would not incur any long-term debt for any department, without Bank's prior concur- rence, unless the net revenues arising from that department exceed 1.5 times the maximum future debt service requirement relating to that department. VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During negotiations, agreement was reached that EPM will: (a) (i) by September 1, 1981 carry out under terms of reference satis- factory to the Bank a study on the structure of its telephone tariffs and rates; (ii) by January 31, 1981 furnish to the Bank for its approval the terms of reference; (iii) by October 31, 1981 discuss with the Bank the conclusions of the study; (iv) by  - 24 - December 15, 1981 prepare and furnish to the Bank a program based on the conclusions of the study; and (v) by April 15, 1982 put the program into effect (paragraph 4.10); (b) (i) by February 28, 1981 carry out under terms of reference satisfactory to the Bank a study for reorganizing the Telephone Department; (ii) by September 30, 1980 furnish to the Bank for its approval the terms of reference of the study; (iii) furnish promptly thereafter to the Bank for review the results of the study; (iv) prepare a program for reorganizing the Telephone Department based on the conclusions of the study and Bank's comments thereon; and (v) by September 30, 1981 put into effect the program (paragraph 5.03); (c) engage an independent external auditor acceptable to the Bank and provide the Bank with a set of unaudited financial statements within three months of the close of the fiscal year, and audited financial statements together with auditor's report within five months of the close of the fiscal year (paragraph 5.09); (d) revalue annually its telephone assets in operation according to methods acceptable to the Bank and present annually to the Bank a report on such revaluation (paragraph 6.06); (e) seek the Bank's concurrence before undertaking for its telephone operation any new capital investment in excess of US$2,000,000 of the provision in the 1980-84 program in any one year during the project period (paragraph 6.17); (f) not utilize funds from telephone operations for other purposes including loans to EPM's other operations, unless such funds are in excess of all reasonable requirements in respect of the telephone operations (paragraph 6.18); and (g) not incur any long-term debt for any department unless the net revenues from that department exceed 1.5 times of the maximum future debt service requirements relating to that department (paragraph 6.19). 7.02 During negotiations, agreement was reached that EPM and Government will: (a) maintain EPM's future telephone tariffs at levels sufficient to produce a rate of return of not less than 9% on telephone assets revalued according to methods acceptable to the Bank and, in general, EPM's future tariffs for services provided by each department would be maintained at levels sufficient to meet the requirements of that department (paragraph 6.08); and (b) make available funds on terms and conditions satisfactory to the Bank to cover any foreign financing gap for EPM's telephone investment program including the project (paragraph 6.11). 7.03 The proposed project constitutes a suitable basis for an IBRD loan of US$44.0 million equivalent for a term of seventeen years including a four- year grace period.  - 25 - COLOMBIA ANNEX 1 FIFTH TELEC4Ml8NICATIOHS PROJECT EMPRESAS PUBLICAS DE MEDELLIN (EPM) TELEPHONE DEPARTMENT Inter-ational Telephone Statistics GNP 1PER CAPITk l/ TELEPHONES - JANUARY 1978- GNP PER CAPITA1 NATIONAI - PRINCIPAL CITIES REST OF COUNTRY POPULA_ Direct Per- Per- TION I7 Per Av. Ann. Exchange Auto- centage centage capita Growth Lines Total Tele- Per m.ti. Total Per of Total Per of COUNTRY Mid-1977 U5S (Percent) (iELs) Telephones phonel 100 cation Telephones 100 Netll Telephones 100 NaItl (nillione) 1977 1960-77 (000s) (000s) DEL Pop. % (000s) Pop. X (OOOs) PoP. % AFRICA Aigeria 17.0 1,110 2.1 172.4 297.7 1.7 1.6 87.3 257.9 n.a. 56.6 39.8 ..a. 13.4 Bur-ndi 4.2 130 2.2 3.0 5.0 1.7 0.1 99.0 3.4 n.a. 67.1 1.6 e.n; 32.9 Caneroon 7.9 340 2.9 14.3 14.3 1.0 0.2 100.0 9.3 1.1 64.6 5.0 0.1 35.4 Central African Rep. 1.9 250 0.2 n.e. n.a. - - n.e. n.e. - - _... - - Chad 4.2 130 -1.0 2.5 3.9 1.6 0.1 100.0 2.5 0.5 64.9 1.4 0.3 35.1 Egypt 37.8 320 2.1 362.3 3 n..-/ _ - na. n.A. - - .a. - - Ethiopia 30.2 110 1.7 546 7 14 0.3 85.8 60.3 3.7 76.6 18.4 0.4 23.4 Ghena 10.6 380 -0.3 36:0 63.6- 1.8 0.7 84.9 n.a. - - n.e. Ivory Coa.t 7.5 690 3.3 25.3 3 66.5 2.6 0.9 95.5 65.7 3.1 98.8 0.8 0.02 1.2 Kenya 14.6 270 2.5 63.3- 143.8 2.3 1.0 87.4 115.7 8.4 80.5 28.1 0.2 19.5 Liberia 1.7 420 1.8 n.a. 3 8.4 - 0.6 100.0 8.3 2.3 98.2 .1 0.01 1.8 Mali 6.1 110 1.0 4.0-' n.a. _ _ n.a. n... - - n.-. . - Mauritania 1.5 270 3.6 n.e. n.a. _ _ e.a. n.e. - - n... - - M.uritics 0.9 760 n.e. 16.3 29.1 1.8 3.3 100.0 11.8 8.2 40.4 17.3 2.3 59.6 Morocco 18.3 350 2.2 c.a. 210.0 - 1.2 81.5 158.7 3.0 75.6 51.3 0.4 24.4 Niger 4.9 160 -1.4 4.4 n.e. - - n.-. n.e. - - n.e. - - R..nda 4.4 130 1.0 2.7 4.5 1.7 0.1 100.0 n.. n.a. - - Senegal 5.2 430 -0.3 20.5 42.1 2.1 0.8 99.2 42.1 0.8 100.0 0.0 O.0 0.0 Soden 16.9 290 O.1 44.2 62.3 1.4 0.3 91.4 55.7 2.9 89.4 6.6 0.04 10.6 Tanne..i 16.4 190 2.6 24.5 74.3 3.0 0.5 79.7 59.5 4.9 80.0 14.8 0.1 20.0 Uganda 12.0 270 0.7 21.0 48 9 2.3 0.4 78.5 35.5 4.9 72.6 13.4 0.1 27.4 Upper Volta 5.5 130 0.6 4.6 -/ 8:6 1.9 0.1 88.1 3.5 - 97.5 0.1 - 2.5 Zabita 5.1 450 1.5 26.2 54.5 2.1 1.3 97.1 43.9 2.4 80.5 10.6 0.5 19.5 AMERICAS Brazil 116.1 1,360 4.9 3,060.2 4,708.0 1.5 4.0 97.7 3,598.4 12.2 76.4 1,109.6 1.2 23.6 Canada 23.3 8,460 3.6 8,954.9 3/14,505.7 1.6 63.2 99.9 7,445.1 72.2 51.3 7,060.6 35.9 48.7 Colombia 24.6 720 2.7 1,163.9- 1.396.6 1.2 5.6 98.4 1.046.0 9.3 74.9 350.6 2.5 25.1 Cools Rice 2.1 1,240 3.2 101.0 145.1 1.4 6.9 99.2 128.9 19.3 88.8 16.2 1 'Z El Salvodor 4.2 550 1.8 63.2 70.4 1.1 1.6 9894 58.7 3.7 83.3 11.7 0.4 16.7 Guatmoala 6.4 790 2.8 67.8 70.6 1.0 1.4 100.0 70.6 8.8 100.0 0.0 0.0 i0_0 M4.icc 63.3 1,120 2.9 1,982.4 3,712.4 1.9 5.5 98.3 3,137.5 12.3 84.4 574.9 1.4 15.6 Trinidad 6 Tobago 1.1 2,380 1.6 40.5 74.9 1.8 7.0 99.8 46.5 46.7 62.0 28.4 2.9 38.0 United Staten 220.0 8,520 2.4 85,074.0 161,448.0 1.9 74.4 99.9 83,830.0 79.3 51.9 77,618.0 67.9 48.1 Uruguay 2.9 1,430 0.8 n.e. 268.0 - 9.6 93.8 212.0 17.5 78.4 56.0 3.5 21.6 Vene.u.la 13.5 2,660 2.7 634.6 847.3 1.3 6.4 99.6 705.8 12.6 83.3 141.5 1.9 16.7 ASIA12 . 705 4.53644 .. 44 Bangladesh 81.2 90 -0.4 72.5 89.2 1.2 0.1 70.5 47.8 n.e. 03.6 41.4 n . 46. gBtraa 31.5 140 0.9 24.4 32.6 1.3 0.1 67.9 32.6 0.1 99.9 0.8 -0 0.1 Chi.o Rep. 16.8 1,170 6.2 1,112.3 1,685.1 1.5 10.0 96.0 1,685.1 20.0 100.0 0.0 0.0 0.0 India 631.7 150 1.3 1,681.5 2,247.2 L.3 0.4 85.7 1,200.9 3.9 53.4 1,046.3 0.2 46.4 Indonenin 133.5 300 5.3 229.1 324.5 1.4 0.2 68.2 245.5 1.6 76.8 79.0 0.1 23.2 Iran 34.8 2,160 7.9 770.6 928.6 1.1 2.5 91.5 757.8 6.5 91.5 70.8 0.3 8.5 Iraq 11.8 1,550 3.8 n.e. 319.6 - 2.6 95.8 223.5 1.9 69.9 96.1 9.7 30.1 Japan 113.2 5,670 7.7 37,503.2 50,625.6 1.3 44.2 99.2 22,090.3 52.2 59.2 28,535.3 39.5 40.8 Korea, Rep. 36.0 820 7.4 1,568.7 1,978.4 1.3 5.2 97.2 1,417.8 9.2 71.7 560.6 2.5 28.3 Lcbanon 2.9 n.e. n.e. n.e. n.e. - - n.e. n.e. - - n.a. Malaynin 13.0 930 3.9 228.0 374.7 1.6 2.9 91.C, 225.6 78.9 60.2 149.1 1.2 39.8 Nepal 15.3 110 0.2 8.9 9.4 1.1 0.1 83.0 8.8 2.8 93.7 0.6 0.0 6.3 Oman 0.8 2,540 n.e. 11.1 21.1 1.9 1.9 100.0 18.7 5.3 88.6 2.4 0.3 11.4 Paki.t-n 74.9 190 3.0 230.8 287.9 1.2 0.4 n.e. c.a. - - n... - Philippines 44.5 450 2.5 341.6 567.3 1.7 1.3 95.2 -519.1 5.8 91.5 48.2 0.1 B.5 Singapore 2.3 2,880 7.5 307.8 455.1 1.5 19.6 100.0 455.1 19.6 100.0 0.0 0.0 0.0 Sri Lanka 14.1 200 2.0 5.7 74.2 1.6 0.5 99.9 47.3 5.0 63.8 26.9 0.2 36.2 Syria 7.8 913 2.3 151.1 193.0 1.3 2.5 89.6 153.9 5.4 79.7 39.1 0.8 20.3 Thailand 43.8 420 4.5 249.8 366.9 1.5 0.8 97.1 308.2 4.8 84.0 58.7 0.2 16.0 yOmen, Arab ReP. 5.0 430 n.e. n.e. n.e. _ _ n.e. o,e. - - 0.. - EURO95 Fr-ace 53.1 7,290 4.2 9,996.3 17,518.8 1.8 32.9 99.9 9,911.4 59.3 56.6 7,607.4 20.9 43.4 Gero-ny, Fed. Rep. 61.4 8,160 3.3 16,047.9 22,931.7 1.4 17.4 100.0 9,327.8 54.0 40.7 13,603.9 30.8 59.3 Sweden 8.3 9,250 2.9 4,178.4 5,930.3 1.4 71.7 100.0 2,880.4 84.3 48.6 3,049.9 62.9 51.4 Stit-erland 6.3 9,970 2.1 2,588.8 4,145.2 1.6 65.9 100.0 1,918.2 86.7 46.3 2,227.0 54.6 53.7 United Kingdoe 55.9 4,420 2.5 15,184.0 23,182.2 1.5 41.5 100.0 9,065.3 51.7 39.1 14,116.9 36.8 60.9 USSR 258.9 3,020 3.7 16,100.0 19,600.0 1.2 7.5 98.0 5,200.0 20.5 26.5 14,400.0 6.1 73.5 Yugoslavia 21.7 1,960 5.6 n.e. 1,555.7 - 7.1 98.3 685.0 20.2 44.0 870.7 4.7 56.0 OCEANIA Australia 14.1 7,340 2.9 4,055.0 5,835.3 1.4 41.5 97.4 4,432.6 49.4 76.0 1,432.7 27.4 24.0 Fiji 0.6 1,210 n.a. 18.5 32.7 1.8 5.6 90.2 16.0 18.4 49.0 16.7 3.3 51.0 New Zes1-nd 3.1 4,380 1.9 1,070.8 1,715.3 1.6 54.5 95.7 972.8 n.e. 56.7 742.5 n.e. 43.3 Papu. New Guinea 2.9 490 3.4 n.e. 37.8 - 1.3 98.6 33.5 13.4 88.5 4.3 0.2 11.5 1/ Population and GNP statistics: World Development Indicetors, The World Bank, June 1979 2/ Telephone statistics The World's Telephnnes AT&T, January 1979 3/ Statistics for these countries are derived from various reports in the World Bank, as nO statisticS ace available in the World's Telephones, AT&T.  - 26 - ANNEX 2 COLOMBIA FIFTH TELECOMMUNICATIONS PROJECT EDPRESAS PUBLICAS DE iHEDELLIN (EPM) TELEPHONE DEPARTMENT Capacity and Number of Connections at Year End 1978 and 1979, and Forecast for 1980 through 1984 Year Equipment Connected Increase Over Percentage Fill End Capacity Lines Previous Year Increase Percent - - - - - - - - - - - - - -ACTUAL- - - - - - - - - - - - - - - 1978 250,000 206,813 1979 250,000 217,330 10,517 5.1 86.9 - - - - - - - - - - - - - - - - FORECAST - - -