India - Eighth Telecommunications Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. 3169-IN STAFF APPRAISAL REPORT INDIA EIGHTH TELECOMMUNICATIONS PROJECT February 23, 1981 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 official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currrency Unit Indian Rupee (Re) US$l = Rs 8.4 - Re 1 = US$.119 FISCAL YEAR April 1 - March 31 LIST OF ABBREVIATIONS AND ACRONYMS USED IN THE REPORT BPE : Bureau of Public Enterprise Branch ; Telecommunications Branch C&AG : Comptroller and Auditor General DEL ; Direct exchange line ERC : Economic Research Cell GDP : Gross Domestic Product GOI : Government of India HCL : Hindustan Cables Ltd. HTL : Hindustan Teleprinters Ltd. ICB International competitive bidding IDA International Development Association ITI Indian Telephone Industries Ltd. ITU International Telecommunication Union MIS : Management information system OCS : Overseas Communications Service OYT "Own Your Telephone" - A system whereby advance pay- ment of relatively large deposits gives applicant priority status for obtaining telephone service. P&T : Posts and Telegraphs Department PABX : Private automatic branch exchange PAX : Private automatic exchange PBX : Private branch exchange PCM : Pulse code modulation PCO : Public call office R&D : Research and development STD Subscriber trunk dialing Telex : Teleprinter exchange service UHF : Ultra high frequency UNDP : United Nations Development Programme VFT : Voice frequency telegraph VHF : Very high frequency  FOR OFFICIAL USE ONLY INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) EIGHTH TELECOMMUNICATIONS PROJECT Table of Contents Page No. I. THE TELECOMMUNICATIONS SECTOR ..... .............. I Background and Organization ........... ..1............. Access to Service ................... 2 Quality of Service and Existing Facilities ........... 3 Demand for service .................................. . 4 Sector Constraints ................................... 6 Sector Objectives .................................... 7 The Bank Group's Role in the Sector .................. 9 II. THE PROGRAM AND THE PROJECT ............................... 11 A. The P&T Program and Subproject .......................... 11 Network Upgrading Program ............................ 15 P&T Subproject Costs ................................. 16 Contingencies ........................................ 16 P&T Items for IDA Financing .......................... 17 Retroactive Financing ................................ 18 Disbursement ......................................... 19 Procurement .......................................... 19 Implementation ....................................... 19 B. The ITI Subproject ..................................... 20 ITI Subproject Costs ................................. 22 ITI Items for IDA Financing .......................... 23 Implementation ....................................... 23 C. The HCL Subproject .................................... 25 HCL Subproject Costs ................................. 26 HCL Items for IDA Financing .......................... 26 Implementation ....................................... 27 D. The HTL Subproject .................................... 27 HTL Subproject Costs ................................. 28 HTL Items for IDA Financing .......................... 28 Implementation ....................................... 29 Contingencies for the Factory Subprojects .... ........ 30 Procurement for the Factory Subprojects .... .......... 30 Disbursement for the Factory Subprojects .... ......... 30 Overall Project Cost Summary ......................... 31 This report is based on the findings of an appraisal mission comprising Messrs. A. Gravell, Sr. Telecommunications Engineer; J. Chang, Financial Analyst; and B. Chatelin, Economist, which visited India in July 1980. 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.  - ii - Table ofOContents, Continued Page No. III. ECONOMIC ANALYSIS ......................................... 32 Telecommunications and Development ................... 32 The Distribution of Benefits ......................... 32 Tariff Policies ...................................... 34 Local Manufacturing .................................. 35 Least Cost Solution .................................. 36 Return on Investment ................................. 37 Risks ................................................ 38 Environmental and Health Aspects ..................... 38 IV. THE IMPLEMENTING AGENCIES ................................. 39 Organization ......................................... 39 Management and Control ............................... 40 Computer Centers ..................................... 40 Accounting System .................................... 41 Billing and Collection ............................... 41 Training ............................................. 42 Audit ................................................ 43 Indian Telephone Industries .......................... 43 Hindustan Cables Ltd. ................................ 44 Hindustan Teleprinters Ltd. .......................... 45 Company Audits ....................................... 46 Company Performance Monitoring ....................... 47 V. FINANCIAL ANALYSIS ........................................ 47 Background ........................................... 47 Past Financial Performance ........................... 48 Present Financial Position ........................... 48 Revaluation ef Assets ................................ 49 Future Financial Performance of the Telecommunications Branch .......................... 51 Domestic Manufacturers ............................... 52 Performance Monitoring ............................... 53 VI. RECOMMENDATIONS ........................................... 54  LIST OF ANNEXES AND CHARTS Page No. 1. International Telephone Statistics ........................... 56 2. Statistical Summary of Existing Facilities in P&T Network at April 1, 1980 ........................................... 57 3. Countries Projected to Have More Than Eight Million Telephones in 1990 ......................................... 58 4. FY1980-90 Telephone Demand and Connections ................... 59 5. FY1981-85 Construction and Capital Program ................... 60 6. Existing Plant and Expected Achievements for FY1981-85 ....... 61 7. P&T Network Upgrading Program ................................ 62 8. Network Upgrading Program and Performance Indices .... ........ 66 9. P&T FY1981-83 Construction Program and Subproject Costs ...... 69 10. Details of Disbursements for Total Project ............. 70 11. FY1981-83 ITI Capital Investment Program ..................... 71 12. Machinery and Equipment for Factory Upgrading (HCL) .... ...... 72 13. FY1981-83 HCL Capital Investment Program ..................... 74 14. Machinery and Equipment for Factory Upgrading (HTL) .... ...... 75 15. FY1981-83 HTL Capital Investment Program ..................... 76 16. Summary of Tariffs ........................................... 77 17. Return on Investment ......................................... 80 18. Assumptions Used for Economic Analysis of Telecommunications Project by Service Categories ........ 82 19. Posts and Telegraphs Department Organization Chart (WB 15725). 86 20. Telecommunications Branch Organization Chart (WB 21982) ...... 87 21. Past P&T Staff Growth and Future Projections .... ............. 88 22. Factory Organization Charts (WB 21981) ....................... 89 23. Average Costs of P&T Procurement from Indigenous Factories ... 90 24. Major Production Targets and Achievements .................... 91 25. Income Statements (FY1977-85) ................................ 92 26. Balance Sheets (FY1977-85) ................................... 94 27. Statements of Sources and Applications of Funds (FY1981-85) .. 95 28. ITI - Actual and Estimated Accounts .......................... 96 29. HCL - Actual and Estimated Accounts .......................... 97 30. HTL - Actual and Estimated Accounts .......................... 98 31. Notes and Assumptions to P&T Financial Statements .... ........ 99 32. Performance Indicators ....................................... 101 33. Related Documents and Data Available in the Project File ..... 102 MAP: IBRD No. 13563R   I. THE TELECOMMUNICATIONS SECTOR Background and Organization 1.01 The large area of India and the widespread dispersal of population throughout the country creates a need for widespread and efficient telecom- munications services. Successive Governments of India have recognized that a free and rapid flow of information throughout the country is a necessary prerequisite to the efficient operation of agriculture, industry, commerce, transportation, and administration. This has also been recognized by the Bank Group which has assisted the sector over the past 18 years. At the present time, however, even though there are 2.6 million telephones in the country, there is still much to be done to improve access to and quality of telecommunications service. 1.02 The telecommunications sector in India is state-owned and com- prises the following: (a) the Posts and Telegraphs Department (P&T), within the Ministry of Communications, which operates all the public telecommunications facilities within India, and to adjacent countries; (b) the Overseas Communications Service (OCS), a separate Government agency, also within the Ministry of Communica- tions, which operates the international service to non- adjacent countries; and (c) the telecommunications manufacturing industry, of which the three major entities are the Government-owned Indian Telephone Industries Limited (ITI), Hindustan Cables Limited (HCL) and Hindustan Teleprinters Limited (HTL). In addition to these, there are many small-scale indus- tries, some which act as subcontractors to the major man- ufacturers 1/ and others as direct suppliers to the P&T. 1.03 The sector provides a significant source of employment with the Telecommunications Branch of P&T employing approximately 310,000 people. The three largest manufacturers together have about 32,000 employees. The majority of tnese people are employed away from the major metropolitan centers. 1/ ITI currently has about 200 small-scale industrial firms subcontracting to it, while HTL has about 170 and HCL about 90.  -2- Access to Service 1.04 While India has a comparatively large telecommunications network by world standards, with more than 2.0 million direct exchange lines (DELs) and 2.6 milliorn telephones, the ready access of the population to services and the quality of telephone service is poor compared to many other coun- tries. India's 1978 telephone density 1/ of 0.36 is low compared with Malaysia - 2.86; Papua New Guinea - 1.3; Philippines - 1.26; Thailand - 0.8; and Sri Lanka - 0.5. The average for Asia, excluding Japan, is 0.6 while the world average is 10.2 (Annex 1). 1.05 Telephone density and access is poor not only in the rural areas but also in the major cities when compared with principal cities in other countries. In India density varies from about 2 telephones per 100 popula- tion for cities such as Hyderabad, Calcutta and Lucknow to close to 4 for Delhi and Bombay. This compares with telephone densities of 4.8 for Bang- kok; 7.7 for Manila; 8.7 for Teheran; 11.2 for Nairobi; 19.6 for Singapore. 1.06 The geographical distribution of telephone services in India at March 1980 shows the greatest proportion of unsatisfied demand in Bombay and Delhi with the other cities and the rest of the country about even. This is illustrated in the following table: Telephone Services and Waiting List at March 31, 1980 % of Area Number % of Waiting (of which Demand 3/ of DELs National List OYT) 2/ Satisfied Four largest cities: Bombay 261,000 13.0 106,000 (9,260) 71.1 Delhi 174,000 8.6 59,400 (875) 74.6 Calcutta 168,000 8.4 21,600 (55) 88.6 Madras 77,000 3.8 10,300 (745) 88.2 Subtotal 680,000 33.8 197,300 (10,935) 77.5 Other cities 411,000 20.4 58,000 (3,800) 87.6 Rural areas 925,000 45.8 80,700 (4,440) 91.9 Total 2,016,000 100.0 336,000 (19,175) 85.7 1/ Telephone density: number of telephones per 100 population. 2/ OYT stands for "own your telephone" and represents a procedure under which potential subscribers (mostly business people) who pay relatively large deposits varying from Rs 3,000 to Rs 5,000 (Annex 16) on register- ing as an applicant for service, receive priority status for obtaining telephone service when facilities become available. 3/ Demand is defined as the number of DELs plus the number of registered waiters (i.e., the waiting list).  - 3 - 1.07 The present official waiting list for telephone service in India is misleading because: (a) many rural areas and towns are without service and so have no recorded waiting list; moreover, in many places with service, it is well known that prospective subscrib- ers will wait for many years before being connected and potential subscribers are consequently discouraged from registering; and (b) in order to register as an applicant for telephone ser- vice it is necessary to pay an advance deposit at the time of registering varying from Rs 5,000 (US$600) to Rs 800 (US$100) for connection to exchanges with more than 100 lines, and down to Rs 100 for small manual exchanges providing part-time service only. This arrangement was introduced in 1976 and resulted in a drop in the official waiting list from 637,000 to 250,000 in 1976 and 184,000 in 1977. At the end of 1975 the waiting list was seven times larger than the annual connection rate. Even though the waiting list is now down to two and one-half times the current annual connection rate there is a large level of suppressed or hidden demand in both rural and urban areas. 1.08 Away from the larger towns, telephone service is provided over a network of long distance public call offices (PCOs) which comprise a single open wire line (or a radio, cable or carrier circuit) with a telephone con- necting the town or village to the nearest city. As demand in such an area grows, a small telephone exchange is installed at the PCO location and the original line used as a trunk circuit to the network. The GOI and the P&T have been allocating a significant share of the available resources into noncity areas for many years and in March 1980 there were about 14,000 PCOs and 5,000 small (less than 100 lines) telephone exchanges. However, of the 45,000 towns with a population exceeding 2,000, more than half still have no telephone facilities either in the form of a PCO or telephone exchange. Quality of Service and Existing Facilities 1.09 The existing facilities in the Indian telecommunications network are outlined in Annex 2. Despite a substantial increase in the number of new lines over the last five years, India has not been able to cope with the demand and the waiting list is increasing as shown in the following table:  - 4 - 1976-1980 Waiting List for Telephone Service (1,QOOs) 1976 1977 1978 1979 1980 Total of Total of Total of Total of Total of which which which which which OYT GYT OYT OYT OYT Four major cities 143.6 50.3 127.4 40.4 122.6 29.5 155.5 21.1 197.3 10.9 Other cities 38.2 1.2 24.3 0.5 34.6 1.6 39.1 2.0 58.0 3.8 Rural areas 67.8 2.1 31.8 1.1 34.2 1.5 48.2 2.7 80.7 4.4 Total India 249.6 53.6 183.5 42.0 191.4 32.6 242.8 25.8 336.0 19.1 Due to this significant underprovision of telephone services, the calling rates in most large cities are very high and the probability of the called subscriber being busy is much higher than is considered desirable. This brings about repeated call attempts to busy numbers, and, as a result, generates even more traffic throughout the network. This, in turn, not only creates congestion in the call handling plant which is shared by all subscribers but also further increases the overall probability of encountering a busy subscriber. This type of congestion, compounded by failures of calls because of faulty equipment, results in an overall poor quality of service in the local networks. The quality of service in the long distance network is also poor because of the difficulties of completing calls through the local networks and because of inadequate provision of trunk switching equipment. The number of effective manual trunk calls, for example, is only about 77 percent of the calls attempted and the waiting time for the call to be connected is often over four hours. 1.10 The P&T has been studying the problems of service quality to determine both short- and long-term solutions. A number of measures have already been implemented and others are proposed. The project now under consideration contains an element for upgrading the quality of the network (paragraphs 2.07 and 2.08). The P&T has developed a management information system which helps identify and localize particular problems and enables performance to be monitored. There is evidence that the quality of service has improved a little in the last three years and the increasing investment proposed over the next three years together with the Network Upgrading Program (paragraph 2.07) will ensure continuing improvement. Demand for Service 1.11 A number of studies have been carried out by the P&T and the GOI Planning Commission in an attempt to accurately forcast the demand for both telephone and telex services in India. The studies are complicated by the high level of registered unsatisfied demand and the unknown level of sup- pressed demand. Also with the introduction of the advance deposit scheme in 1976 (paragraph 1.07 (b)), waiters in different areas while depositing the same amount of money, must wait for different lengths of time before secur- ing a telephone; hence, the effective cost to them is different.  - 5 - 1.12 For India as a whole, the past data and current projections for future demand for telephone service are shown in the following table: Number of Waiting Total Annual Growth DELs List Demand Rate in Demand Year (Millions) (Millions) (Millions) (Percent) 1971 .981 .309 1.290 1972 1.058 .341 1.399 8 1973 1.156 .405 1.561 12 1974 1.244 .532 1.776 14 1975 1.329 .637 1.966 11 1976 1.465 .250 1.715 (-13) 1/ 1977 1.617 .184 1.801 5 1978 1.729 .191 1.920 7 1979 1.871 .243 2.114 10 1980 2.016 .334 2.350 11 1981 2.184 .435 2.619 11 2/ 1982 2.384 .600 2.920 12 1983 2.644 .635 3.279 12 1984 2.984 .689 3.673 12 1985 3.414 .700 4.114 12 1986 3.914 .693 4.607 12 1987 4.514 .646 5.160 12 1988 5.264 .615 5.779 12 1989 6.214 .259 6.473 12 1990 7.164 .086 7.250 12 1/ 1976 was the year of introduction of the advance deposit scheme. 2/ Figures from 1981 onwards are estimates. 1.13 The Economic Research Cell 1/ in the P&T organization is current- ly involved in another demand study, investigating growth factors in a num- ber of separate cities and regions with a view to synthesizing a total demand estimate. Other studies relating to subscriber motivations and sub- scriber needs are in hand and should also help in further defining the demand estimates. 1.14 It will be seen from the table above that existing projections of future demand are generally based on a steady 12 percent per annum growth 1/ The Economic Research Cell was established at the Bank's request during the sixth telecommunications project.  rate on the existing registered demand, and that the 1990 demand is pro- jected at more than 7 million DELs compared with about 2 million at pres- ent. At a constant ratio of telephones to DELs this would give India about 9 to 10 million telephones by 1990. Sixteen other countries are expected to have a similar or greater number of telephones by 1990 and these are listed in Annex 3, together with their telephone densities and past growth rates. The projected growth rate for India does not look out of place in this context. 1.15 Demand for trunk calls in India is also difficult to predict because of the very severe shortage of long distance switching facilities. Typically in a telephone network long distance traffic grows at about double the rate of growth of DELs but there is no way at present of making a reli- able estimate of the base from which to project. The present FY81-85 five- year plan allows for the expansion of the long distance switching network as rapidly as the necessary equipment can be procured and installed in a con- trolled manner. Nevertheless, the demand will not be met in the five-year period. Following the installation of electronic automatic trunk exchanges in the four main metropolitan cities in 1981/82, more extensive traffic data will become available which will enable improved traffic forecasts to be made. 1.16 Demand for telex services also far exceeds the supply. Once again better projections of demand will become possible following the installation of electronic switching centers in the four main cities in 1981. In many countries telex demand has grown at rates of 15 percent to 25 percent per annum for many years, and the current P&T projection of demand growing at 13 percent per annum is likely to be low. However, raising the projected telex demand would not lead to a major modification in the first three years of the five-year program at this stage, because of limitations in availability of equipment and installation capacity. Sector Constraints 1.17 The major constraint to the development of an efficient telecommu- nications system in India has been the lack of resources which have been made available to the sector and the limited output of switching equipment from the local factories. This latter problem is being partly alleviated by increased imports of equipment and upgrading the capacity of the local manu- facturer which was commenced under the seventh Bank Project (1592-IN) and is continued and expanded in this project. In recent years telecommunications investment in developing countries has been around 0.3 percent of GDP; India's 0.17 percent has been low compared with Malaysia--0.34; Pakistan--0.32; Burma--0.23; USA--0.83; UK--l.23 and Japan--l.05. The new five-year P&T development plan, which is based on the ten-year horizon plan for eliminating the waiting list by 1990, provides for higher levels of investment in the sector. 1.18 Past financial constraints have related mainly to foreign exchange since adequate quantities of local currency have been generated through retained earnings of the Telecommunications Branch of the P&T. With the  - 7 - present level of tariffs and the steadily expanding subscriber trunk dialing (STD) network, P&T should be able during the next three years to produce internally over 65 percent of its investment needs, even allowing for the continuation of the policy of covering postal losses from telecommunications earnings (paragraphs 5.03 and 5.11). Sector Objectives 1.19 The GOI is preparing a new five-year plan, 1981-85, which partial- ly overlaps and supersedes the previous 1979-83 five-year plan which was the basis for the seventh telecommunications project. To provide a sound base for its part of the new five-year plan, the P&T prepared a ten-year plan (1981-90) designed to achieve a series of service objectives by 1990. The P&T's 1981-85 five-year plan is therefore derived within the context of a ten-year planning horizon and specific ten-year objectives. 1.20 The objectives of the ten-year plan are: (a) provision of telephone and telex connections on demand by 1990; (b) full automation of the local telephone exchange network; (c) extension of telephone services either through a tele- phone exchange or long distance public call office to within five kilometers of most inhabited locations in the country; (d) provision of subscriber dialing facilities on an inte- grated STD trunk network between all cities and towns with a population of 50,000 or more (these would include most district headquarters, industrial estates and important project sites); (e) provision of subscriber dialing facilities between all telephone exchanges within a secondary switching area; (f) replacement of worn out or obsolete equipment as it reaches the end of its economic life; (g) upgrading the quality of service insofar as traffic con- gestion and transmission performance are concerned in both the local and long distance networks; (h) introducing significant increases in local equipment manufacturing capability; and (i) exploitation of new technologies to reduce the cost and improve the quality of the telecommunications services.  -8- 1.21 The 1981-85 five-year plan consists of two general phases. The first phase, 1981-83 (which forms the basis of the proposed project) will necessarily follow the general objectives and goals established in the pre- vious 1978-83 plan because long lead time commitments have been made on the basis of that plan. However, during this period the P&T capacity will be increased so that in the second phase, 1984-85, the acceleration in the con- struction program necessary to reach the long-term goals will be possible. Some targets for the three and five-year periods are summarized below: FY1981-85 Five-Year Plan Targets March 1980 March 1983 March 1985 DEL's 2,016,000 2,646,000 3,416,000 Telephones 2,616,000 3,435,000 4,436,000 Telex subscribers 17,983 24,180 36,280 Telephone exchanges 7,430 9,010 10,930 Long distance public call offices 13,830 24,830 33,830 Telephone density (a) Four largest cities 3.7 4.5 5.3 (b) Rest of country 1/ 0.27 0.33 0.42 (c) All India 0.4 0.5 0.6 1/ The data for "rest of country" basically reflect individual subscriber telephones and do not give weight to increased access in rural areas through public call offices. 1.22 In the shorter term over the period covered by the proposed pro- ject (FY1981-83), the P&T is directing investment and new services to Bombay and Delhi, where the waiting lists are largest, and to the rural areas in line with the GOI policy of encouraging rural industry and development in an attempt to curb the urban population drift. This is shown in the following: Provision of DELs Over Project Period (FY1981-83) DELs at 1980 DELs at 1983 Percentage (l,OQOs) (1,000s) Growth Bombay 261 378 45 Delhi 174 251 44 Madras 77 82 6 Calcutta 168 194 15 Other city districts 11 411 520 27 Cities and towns in circles 1/ 821 1,071 30 Villages in circles 102 148 45 Total 2,014 2,644 31 1/ Districts and circles are regional management areas (paragraph 4.04).  - 9- The Bank Group's Role in the Sector 1.23 The Bank Group has been associated with the sector since 1962 and previous loans and credits comprise: Amount Loan/Credit Year (US$ Millions) Credit 28-IN 1962 42 Credit 58-IN 1964 33 Credit 153-IN) 1969 55 Loan 615-IN) Credit 241-IN 1971 78 Credit 403-IN 1973 80 Loan 1313-IN 1976 80 Loan 1592-IN 1978 120 Total 488 1.24 During this period the Bank Group has provided much of the foreign exchange required for the P&T's telecommunications development program al- though in recent years there has been an increasing injection of foreign exchange through bilateral loans and credits. The number of telephones has increased since 1962 from 373,000 to more than 2.6 million; the trunk net- work has been expanded and modernized, and an automatic telex network estab- lished with currently about 18,000 subscribers. The Bank Group has also assisted the P&T in modernizing its organizational and management structure, and in establishing an Economic Research Cell which has begun to analyze pricing, demand and investment issues in the sector. 1.25 The manufacturing entities have not always been able to grow or to secure foreign exchange in line with the P&T's needs, and the proposed credit to provide additional capital equipment for upgrading and modernizing the factories, and the construction of new factories, will help them to further increase their capacities to match the demands, further improve the quality of their existing product lines, and launch them into electronic telecommunications technologies. 1.26 The success of the Bank Group involvement with the Indian telecom- munications sector may also be judged by the declining dependence of the P&T capital works programs on Bank Group financing. During the 1970s, the annual Bank Group disbursements to India for telecommunications development have varied between US$30 million and US$40 million, while the annual capi- tal works programs have increased from around US$120 million in the early 1970s, to around US$280 million in FY79. The Bank Group's financing of the P&T construction program has dropped from about 32 percent in 1964 to about 15 percent currently. 1.27 Although the Bank Group financing is becoming smaller relative to the total capital investment in the sector, its importance is increasing by  - 10 - virtue of the freedom of choice of equipment suppliers that it gives to the P&T and the generally lower prices resulting from international competitive bidding (ICB) as against tied procurement. Over the next few years, it is particularly important that the P&T be free to select new technology systems without the major constraints imposed by the source of financing. System decisions made over the period covered by this project will have an import- ant long-term effect on the coverage, quality and cost of the Indian tele- communications network. In the past decade bilateral loans amounting to about US$100 million have been obtained by the P&T and it is likely that additional financing of this nature will be obtained during the next few years for equipment which can be procured under such arrangements. 1.28 A project performance audit has been conducted on the third and fourth lending operations to telecommuniations in India. These projects were considered by the audit to be successful. Some of the more significant observations of the audit were: (a) institutional and organizational achievements were sub- stantial including implementation of commercial account- ing and management information system; (b) the projects contributed to the development of rural telecommunications and national telecommunications industries; and (c) P&T did not achieve the high construction targets aimed at and this resulted in traffic congestion and longer than expected waiting times for connection to the system. 1.29 The project performance audit on the fifth lending operation was conducted in December 1979. In this case the project was also considered to be successful. The most significant observations of the audit were that despite achieving the aims for institutional improvements there was a short- fall in the provision of additional DELs commensurate with the growth in demand, there remained a need to retain a system of relatively severe price rationing and the quality of service continued to be poor. The audit also commented on the desirability of moving into the electronic switching tech- nology in the local factories. The sixth and seventh projects are proceed- ing satisfactorily with the Bank loan for the sixth being fully committed and for the seventh about 90 percent committed. 1.30 The present project contains a number of elements which relate to these conclusions. The factory subprojects provide for the indigenous pro- duction of electronic switching systems for trunks and rural subscribers as well as electronic teleprinters. The P&T subproject is based on a 1981-85 five-year plan which considerably raises the levels of investment in tele- communications. Although the projections show the unsatisfied demand rising in the short term, the 1990 horizon plan, based on an average demand growth rate of 12 percent per annum, forecasts that demand can be satisfied as it occurs by 1990. The subproject also contains a network upgrading element as  - 1i - a direct attempt to improve quality of service. For the time being, it will be necessary for the relatively high prices, which serve to depress demand and to allocate existing supplies to high productivity users, to be maintained. The proposed project will therefore assist in satisfying the major recommendations of the Project Performance Audit Report. 1.31 Looking to the future the Indian telecommunications sector should become more self-reliant during the 1980's. During this (eighth) telecommu- nications project the sector will adopt new technologies of great importance to its future and will establish initial manufacturing capacity for the modern systems. A ninth operation is envisaged in about three years time which could well provide a valuable consolidation phase for the sector's move into digital electronic technology, and which would further support the increased telephone penetration throughout the country. Following that it would be appropriate to determine whether there was a continuing useful role for the Bank Group within the telecommunications sector and whether the relationship should be changed in any way. II. THE PROGRAM AND THE PROJECT 2.01 This project is based on a comprehensive approach to the whole telecommunications sector of India and is broken down into a number of sub- projects to simplify description, analysis, supervision and disbursement. The major subproject relates to the P&T construction program and it is from this that the justification for the other subprojects is derived, These are factory subprojects and comprise one for each of the three major suppliers to the P&T--ITI, HCL and HTL. In each of these, there is a segment covering modernization and upgrading of existing production facilities (an extension of the programs included for the factories as subprojects in the seventh telecommunications project) and a segment covering the establishment of a new factory. The factory subprojects are designed to enable the indigenous industry to expand and modernize in order that it may continue to meet both in quantity and quality the material needs for implementation of the P&T development program. In this section, the P&T program and subproject is discussed first, followed in turn by the ITI, HCL and HTL subprojects. A. The P&T Program and Subproject 2.02 The P&T construction program is embodied in its FY1981-85 fiveyear plan. This plan has been developed from the previous FY1979-83 fiveyear plan under revised guidelines issued by the Government. Because of the rap- idly shifting technological base in telecommunications and the long lead times involved in the introduction of new technologies, the P&T made a broad perspective plan and defined targets and objectives for 1990. The existing 1979-83 program was extended to cover the period 1981-85 within the frame- work of the 1990 horizon plan. The targets and objectives for the decade of the 1980s were outlined in paragraphs 1.19 and 1.20. The year-by-year plan for DELs is shown in Annex 4.  12 - 2.03 The new 1981-85 five-year plan is framed to set a course for the achievement of these objectives. In addition to these physical targets, the 1981-85 plan provides for the introduction of new technologies in many parts of the network. The new systems comprise the following: (a) Electronic Local Exchanges: A 10,000-line electronic local exchange has been ordered for Bombay, Delhi and Calcutta. These will be commissioned during 1981/82. Further quantities of this system will be purchased and bids will be invited for the establishment of a factory to produce 500,000 lines per year of a digital electronic local switching system; (b) Electronic Trunk Exchanges: Electronic trunk exchanges have been ordered for Bombay, Delhi, Calcutta and Madras. These will be commissioned during 1981/82 and additional orders for expansion will be placed. Bids will also be invited for establishment of a manufacturing facility at Palghat for digital electronic switching equipment for primary and secondary switching centers; (c) Electronic Telex Exchanges: Telex exchanges have been ordered for Bombay, Calcutta, Delhi and Madras. These will be commissioned during 1981/82 and further expanded during the plan period; (d) Integrated Local and Transit Digital Electronic Exchanges: Electronic (digital) exchanges suitable for integrated local and transit working are under development by ITI. It is hoped to install a few of these during the plan period for trial purposes leading to large-scale intro- duction during the 1986-90 segment of the decade; (e) Digital Microwave Systems: Digital microwave systems are being used to provide junctions in the Calcutta telephone network. Additional systems are proposed to be installed in Calcutta and other metropolitan and major cities during the plan period; (f) Digital Transmission Media: Digital transmission media for long distance circuits are proposed to be imported and installed on selected routes during the plan period for eventual large-scale use during the decade; (g) Satellite Communications: A multipurpose national com- munication satellite is to be launched during FY82. This system will provide links from a number of remote areas to the main administrative, business and industrial centers in the country. In addition, circuits are pro- posed to be provided as backup between certain important  - 13 - stations. A total of 28 fixed earth stations and 3 mobile earth stations are expected to be commissioned in the first stage. In the second stage during this plan period, 20 (18 main and 2 mobile) earth stations will be constructed for serving remote and inaccessible areas; (h) Development of New Technological Systems for Integrated Development of Telecommunications in Rural Areas: Exten- sion of telecommunications facilities to rural areas and to backward, hilly and tribal areas has been given spe- cial importance in recent years. The targets for long distance PCOs and small exchanges in villages have been progressively raised. However, the facilities available in the rural areas have been very limited as compared to those in urban areas. The technologies used are old. The P&T Department has set up a small task force to carry out special studies in a few selected districts through- out the country to determine alternative technological solutions. During the 1980-85 plan, it is proposed to develop the telecommunications networks in the selected 18 districts with a variety of technologies for field trial purposes; and (i) Introduction of Computer Centers for Telephone Service: It is proposed to install and commission four computer centers in the four metropolitan cities of Bombay, Calcutta, Delhi and Madras for handling subscribers' accounts, the directory inquiry services and some of the other large-scale work, particularly relating to the management of traffic and the cable networks. While all of these technological innovations are important to the future development of Indian telecommunications, the most import is the adoption of a new electronic local switching system for manufacture in India. For this reason, during negotiations we discussed and agreed with an implementation plan and schedule for the establishment of the initial factory to produce 500,000 lines per year ((a) above). 2.04 The total cost of the five-year construction program in the plan is Rs 36,000 million (US$4,285 million). Details of the investment sub- divided by general purposes and by years are contained in Annex 5. The annual achievements resulting from this program through fiscal year 1985 are set out in Annex 6. 2.05 The three-year construction program for FY1981-83, from which the P&T subproject is derived, is summarized in the following table of costs. The three-year program comprises the proposed eighth P&T subproject, the continuing investments associated with works commenced prior to FY1981 (ongoing works) and preliminary investments associated with the commencement of works which will largely be carried out after FY1983 (future works).  - 14 - 1981-83 P&T Construction Program Cost Estimates (Including Contingencies) Rs Millions US$ Millions % of Classification Foreign Local Total Foreign Local Total Total 1. Proposed Eighth P&T Subproject 2,041 10,496 12,537 243 1,250 1,493 72 2. Ongoing Works (i) Sixth Bank project 193 187 380 23 22 45 2 (ii) Seventh Bank project 328 321 649 39 38 77 4 (iii) Existing bilateral credits 401 472 873 48 56 104 5 (iv) Domestic satellite 112 938 1,050 13 112 125 6 3. Future Works 653 1,160 1,813 78 138 216 11 TOTAL CONSTRUCTION PROGRAM 3,278 13,574 17,302 444 1,616 2,060 100 2.06 During the three-year subproject period, FY81-83, the P&T construc- tion program will provide approximately the following additions to the network: (a) 700,000 lines of local telephone switching capacity; (b) 3.7 million pair kilometers of underground telephone cables; (c) 630,000 direct exchange lines (DELs); (d) 11,000 long distance public call offices (PCOs); (e) 1,600 telephone exchanges, mostly small rural automatic type; (f) 40,000 automatic trunk switching terminations (g) 6,200 telex subscribers; and (h) 12,000 telegraph offices. The P&T subproject also includes computing equipment for the four metropoli- tan districts (US$4 million); plant, equipment and raw materials for the P&T factories (US$6 million); testing and measuring equipment for the Telecommu- nications Research Center and the Technical and Development Circle (US$6 million); transmission equipmeat for trunks and junctions (US$12 million); and plant and equipment for the network upgrading program (US$4.5 million).  - 15 - Network Upgrading Program 2.07 In parallel with, but mainly separate from the construction pro- gram, a new program for upgrading the telephone network ha- been conceived and will be implemented during the project period. It is designed to improve overall performance in terms of frequency of fault conditions, dura- tion of faults, quality of transmission and switching performance. The following items are included in the program which is set out in greater detail in Annex 7: (a) pressurization of existing junction, primary and secondary cables; (b) provision of ducts for important junction and sub- scribers' cables; (c) replacement of aluminum house wiring with copper wire; (d) replacement of iron wire in subscribers' loops with plastic insulated copper drop wire; (e) replacement or repair of faulty telephone instruments; (f) provision of digital microwave radio equipment on metro- politan junction routes; (g) provision of additional automatic traffic recording and analysis equipment in the major metropolitan districts; and (h) provision of special testing equipment and automatic transmission monitoring and regulating equipment for the long distance coaxial cable and microwave radio network. 2.08 A series of performance indicators and program monitoring indices will be used to measure the implementation of the network upgrading pro- gram. These are listed in Annex 8. The indicators and indices have been designed to show the improvement in quality of service which should result from the program as well as the progress with the implementation of the pro- gram. Assurances were given during negotiations that values of these indi- cators and indices would be included in the P&T's annual progress reports to the Association.  - 16 - P&T Subproject Costs 2.09 The total cost of the P&T subproject is Rs 12,537 million (US$1,493 million) with a foreign exchange content of Rs 2,041 million (US$243 million). These costs are itemized in Annex 9 and are summarized in the following table: P&T Subproject Cost Estimates RsIMillions US$ Millions -Subdivision Foreign Local Total Foreign Local Total (X) Local telephone system 1,090 4,429 5,519 130 527 657 (51) Long distance switching 156 585 741 19 70 89 (7) Long distance transmission 347 1,859 2,206 41 221 262 (20) Open wire and telegraphs 90 902 992 11 107 118 (9) Other land and buildings - 710 710 - 85 85 (7) Research, training, testing and P&T factories 87 533 620 10 64 74 (6) Subtotal 1,769 9,019 10,788 211 1,074 1,285 (100) Contingencies 272 1,477 1,749 32 176 208 (16) Total 2,041 10,496 12,537 243 1,250 1,493 2.10 The costs are based on FY80 average costs in the P&T network inso- far as local material supplies and labor rates are concerned and, for imported materials on current contracts and tenders associated with ongoing works. The cost estimates are reasonable. Customs duties are included in the local costs and amount to US$194 million based on an average of about 80 percent over all P&T imported materials. Contingencies 2.11 The subproject estimated cost includes price contingencies but not physical contingencies. The reasons for the non-application of physical contingencies are as follows: (a) a large proportion of the subproject comprises many small individual works and these are costed by applying average unit cost based on previous experience. For example, the costs of subscribers outside plant is based on past cable usages rates of 7 pair km in the metropol- itan districts, 6 pair km in other districts, 5 pair km in minor districts and 4 pair km in circles.  - 17 - The average unit costs based on past costs are used for duct work, telephones and lead-ins, exchange installa- tion, junction circuits, etc.; (b) on major long distance transmission works, a consider- able amount of detailed engineering design has been car- ried out which, together with a high degree of standard- ization in the designs, enables acceptable cost esti- mates to be produced, without a physical contingency allowance; (c) standard designs for technical and other buildings are used and the overall cost structures are well known; and (d) because of the large number of small works such as tele- phone instrument installations, cable lead-ins, etc., which comprise the subproject, the only practical method of estimating is by use of average unit costs and with this technique physical overs and unders are balanced out. 2.12 Price contingencies are based on annual escalations of 7 percent for 1981-83 for local costs and 9, 8 and 7 percent respectively for 1981, 1982 and 1983 for foreign costs. The imported equipment in the ongoing works will come forward on fixed price contracts and some of the imported equipment in the new project will be purchased at fixed prices by extensions of existing contracts. The price escalation has been calculated on a com- pound interest basis. The import duty, which is included in the local costs, is escalated at the same rate as the foreign exchange cost to which it is related. P&T Items for IDA Financing 2.13 The items proposed for IDA financing are listed in the following table. In the case of the direct imports by the P&T, it is proposed that 100 percent of the foreign cost be financed by the Association. In the case of the purchases from the three domestic factories the amounts to be financed by the Association are the foreign exchange costs of the imported raw materials and components included in the goods and equipment purchased by the P&T. Based on a study of current production costs and material sources of the factories and on projected product mix of P&T purchases from the factories, it has been estimated that the foreign exchange content of the purchases from the factories will be as follows: From Indian Telephone Industries (ITI): 24% of selling price From Hindustan Cables Ltd. (HCL) : 40% of selling price From Hindustan Teleprinters Ltd. (HTL): 6% of selling price  - 18 - Items in P&T Subproject Proposed for IDA Financing Amount Rs Millions US$ Millions 1. Direct Imports by P&T (a) local switching equipment 252 30.0 (b) trunk switching equipment 109 13.0 (c) telex transit and subscribers' switching equipment 38 4.5 (d) computing facilities for Bombay, Delhi, Madras, Calcutta 34 4.0 (e) capital equipment and raw materials for P&T workshops 50 6.0 (f) testing and measuring equipment for research, training and technical and development circles 50 6.0 (g) transmission equipment for trunks and junctions 101 12.0 (h) testing and measuring equipment for outside plant network maintenance 38 4.5 Subtotal 672 80.0 2. Foreign Exchange Content of Purchases from Domestic Factories (a) HCL - imported content of telephone cables and accessories 648 77.2 (b) ITI - imported content of switching, trans- mission and subscribers' equipment 710 84.5 (c) HTL - imported content of teleprinters and accessories 11 1.3 Subtotal 1,369 163.0 Total 2,041 243.0 Retroactive Financing 2.14 Retroactive financing of up to US$30 million (about 10 percent of the credit amount) is proposed to cover expenditures incurred since June 30, 1980 for the purchase of telecommunications equipment from the three indigenous manufacturers, ITI, HCL and HTL. These purchases cover equipment and supplies procured under regular ongoing arrangements in a manner satisfactory to the Association. Financing for this type of procurement which was provided in the seventh telecommunications loan was completely utilized early in 1981 and the amount of retroactive financing now proposed in this eighth project will eliminate most of the gap in Bank Group financing for these supplies that would otherwise occur.  - 19 - 2.15 The retroactive financing is considered appropriate in this case because the credit approval and agreement will come towards the end of the Indian 1980/81 fiscal year, considerably later than initially envisaged. A delay in appraisal and subsequent processing occurred, mainly due to the Association's concern that the GOI reach a policy decision on the introduction of electronic switching technology, and be in an advanced stage of preparing equipment specifications, prior to negotiations. By the expected time of credit signing, almost all of the project's anticipated first year expenditure (about US$40 million) will have been made. All of the first year expenditure would be from items 2(a) to (c) in the above table. Although bids will be called for some of the supplies covered by items l(a) to (h) prior to the credit signing it is unlikely that there will be advance contracting and no provision for retroactive financing for item 1 goods is needed. Disbursement 2.16 The disbursement of IDA funds would be made against 100 percent of the foreign costs of the direct imports listed as items 1. (a) to (h) and against the percentages shown in paragraph 2.13 of the purchase price paid by P&T for supplies from the three domestic factories up to the amounts shown as items 2. (a) to (c). In the case of the domestic factories, the percentages would be subject to review during the project period and revised if necessary due to changed conditions. Details of the disbursements for the total amount of the credit are given in Annex 10. Procurement 2.17 All the items in the P&T subproject which are to be directly imported will be procured in accordance with the Association's guidelines using international competitive bidding (ICB). 2.18 As has been the case with previous lending operations, ICB is not proposed for the equipment items in the P&T subproject which can be procured economically and efficiently from the domestic factories. The imported raw materials and components which are used in the manufacture of equipment pur- chased by the P&T are themselves procured by the three factory managements using ICB in line with the Bank Group's guidelines. Implementation 2.19 The P&T subproject will be executed by the P&T with its own staff of engineers, technicians, linemen and tradesmen. The subproject comprises many individual works spread throughout the country. Implementation of earlier telecommunications project has run later than projected due to a variety of causes. In some cases bid evaluations and technology decisions have taken longer than desirable because of the importance of the decisions relating to the introduction of new technologies and the complex Government approval procedures involved. There has also been some shortfall in produc- tion of equipment in the local factories from time to time due to power rationing and, at times, industrial holdups.  - 20 - 2.20 Very important technological decisions are to be taken during the implementation of this project and, in order to facilitate timely decisions, some bids will be called prior to approval of the credit. This applies spe- cifically to the new computing equipment for New Delhi, Bombay, Calcutta and Madras, for the medium capacity digital electronic trunk switching system and for the rural subscribers' small exchanges local switching system. In a number of other cases equipment will be procured by extending existing con- tracts which have been placed under the seventh telecommunications loan. B. The ITI Subproject 2.21 The ITI subproject comprises two parts. The first part is the upgrading and modernization program for fiscal years 1982 and 1983 for the existing factories and the second is the establishment of new production capacity at Palghat for 150,000 equivalent lines 1/ per annum of electronic switching equipment, comprising 30,000 lines (60,000 equivalent lines) of digital medium-capacity trunk switching equipment, 50,000 lines of elec- tronic combined local and transit small-capacity exchanges and 40,000 lines of private automatic branch exchanges (PABXs). 2.22 The upgrading and modernization of the existing ITI factories at Bangalore, Naini and Rae Bareli is an extension of the program financed by the Bank under the seventh telecommunications project. It comprises the following items: (a) improving the manufacturing processes for telephone instruments at the Naini and Bangalore factories. The instrument itself is to be redesigned and the assembly lines for the key elements of the telephone instrument-- the receiver, the transmitter and the dial--will be automated to obtain the quality and reliability neces- sary. Improved molding technology will be introduced. The total production of telephones from ITI is about 500,000 per year, rising to about 750,000 by FY83; (b) improving and enhancing the manufacturing processes for transmission exuipment at the Naini and Bangalore factories. This will carry on the work commenced under the seventh project and is particularly directed toward improving quality control and facilitating production of 1/ "Equivalent line" of telecommunications switching equipment is a unit approximately equal in production cost and effort to that of one line of subscribers' or local switching equipment. Trunk switching equipment is more complex and contains more components than does local switching equipment. In this subproject one line of trunk switching equipment is taken as two "equivalent" lines.  - 21 - new designs of transmission equipment with increased packaging density and higher reliability. The major components at Bangalore will comprise automatic testing facilities for inward goods and electronic components and for printed circuit boards, sub-units, semi-racks, subsystems and systems. At Naini the major investments will be for a modern printed circuit board fabrication facility and for new instrumentation for digital trans- mission technologies. The value of the total annual production of transmission equipment is about Rs 300 million (US$36 million) rising to about Rs 500 million (US$60 million) by FY83; (c) improving and expanding the research and development facilities throughout the company. Areas of R&D activ- ity proposed for expansion include digital transmission techniques over radio and optical fibers, processor con- trolled testing and evaluation equipment for ITI produc- tion lines and for service measurements and maintenance aids in the P&T network; (d) replacement of machines in the tool rooms and production lines for strowger and crossbar switching equipment at Bangalore and Rae Barelli; and (e) an amount of Rs 0.5 million (US$60,000) 1/ for continu- ation of consultancy services in the field of product and reliability engineering. 2.23 The second part of the ITI project comprises the establishment of production facilities at Palghat to manufacture annually 150,000 equivalent lines of electronic switching equipment comprising 30,000 lines of medium- sized digital electronic trunk switching equipment, 50,000 lines of inte- grated local and transit small rural digital electronic exchanges and 40,000 lines of digital electronic private automatic exchanges (PAXs). The trunk switching equipment to be manufactured will be decided through international competitive bidding while the rural local and private exchanges will be to an in-house ITI design. 2.24 The Palghat factory project represents the first indigenous move into full scale production of electronic telephone switching equipment and is of vital importance to the evolution of the telecommunications and elec- tronic industries in India. The proposed IDA financing covers the foreign costs of purchase of "know-how" and production line equipment to enable pro- duction to commence with about 40,000 equivalent lines in FY84 and an ulti- mate capacity of 150,000 equivalent lines per year. 1/ Estimated at US$10,000 per month for six manmonths.  - 22 - 2.25 Initially, quantities of the trunk system to be manufactured will be fully imported by the P&T (8,000 lines costing approximately US$8 million in 1982-83) followed by a period during 1984 when the equipment will be imported as subassemblies and finished at Palghat. Subsequent full produc- tion of the system will be possible in 1985. 2.26 The collaborator for the trunk switching will also provide the production skills necessary to convert the small rural exchanges and the PAX (and PABX), designed to the prototype stage by ITI, into production items amenable to production line processing. It is expected that the production techniques provided for the manufacture of the trunk exchange equipment will largely be applicable also to the manufacture of the indigenous designed rural and private exchanges. ITI Subproject Costs 2.27 The total cost of the ITI subproject is Rs 364 million (US$43.3 million) with a foreign exchange content of Rs 211 million (US$25.1 million). Details are shown in the following table and the full year-by- year investment program for ITI is tabulated in Annex 11. ITI Subproject Cost Estimates Cost Rs Millions US$ Millions Item Foreign Local Total Foreign Local Total Telephone Division Bangalore 16.0 9.6 25.6 1.9 1.1 3.0 Naini 12.0 7.2 19.2 1.4 0.9 2.3 Transmission Division Bangalore 14.0 8.4 22.4 1.7 1.0 2.7 Naini 15.0 9.0 24.0 1.8 1.1 2.9 Crossbar switching Bangalore 2.5 1.5 4.0 0.3 0.2 0.5 Strowger switching Bangalore 3.5 2.1 5.6 0.4 0.3 0.7 Rae Bareli 1.5 0.9 2.4 0.2 0.1 0.3 Research and Development 28.0 5.6 33.6 3.3 0.7 4.0 Technical Assistance 0.5 - 0.5 0.1 - 0.1 Palghat electronic switching factory 89.5 84.7 174.2 10.7 10.1 20.8 Subtotal 182.5 129.0 311.5 21.7 15.4 37.1 Contingencies 28.5 24.0 52.5 3.4 2.8 6.2 Total 211.0 153.0 364.0 25.1 18.2 43.3  - 23 - 2.28 The ITI subproject costs relating to the upgrading and moderniza- tion of the existing factories are based on experience gained with prices and procurement during the seventh project for imported items of equipment. Local costs include import duty and other local costs associated with installation of plant and equipment, factory modifications, etc. The costs for the new electronic trunk, local and private exchange switching manufac- turing plant at Palghat are based on budgetary prices obtained from poten- tial bidders during feasibility studies and project definition. ITI Items for IDA Financing 2.29 The amount proposed for IDA financing in the ITI subproject is 100 percent of the foreign costs. This is Rs 211 million or US$25.1 million. The items to be financed and the proposed allocation of the proceeds of the credit are set out in the following table: Items in ITI Subproject Proposed for IDA Financing Rs Millions US$ Millions 1. Upgrading and Modernizing Existing Factories (a) testing and measuring equipment 39.0 4.6 (b) production and tool room machines 24.0 2.9 (c) research and development 28.0 3.3 (d) technical assistance 0.5 0.1 (e) unallocated 11.5 1.4 Subtotal 103.0 12.3 2. Palghat Electronic Switching (a) equipment and machinery 64.0 7.6 (b) licensing and knowhow 25.0 3.0 (c) unallocated 19.0 2.2 Subtotal 108.0 12.8 Total 211.0 25.1 Implementation 2.30 That portion of the project covering the upgrading and moderniza- tion of the existing factories poses no problems for implementation. It is part of ITI's earlier 1979-83 five-year plan and the organization is geared up to proceed. The experience that ITI has acquired during its first asso- ciation with the Bank Group in the seventh telecommunications project will further facilitate its implementation.  - 24 - 2.31 The second part of the ITI subproject covering the new electronic switching plant at Palghat will require more effort to ensure timely imple- mentation. The implementation program envisaged is based on the following significant dates: Call for bids - completed Bids received - March 1981 Technical and commercial evaluation completed - July 1981 Financial evaluation completed - August 1981 Recommendation approved by P&T Board, Ministry, IBRD - November 1981 Letter of Intent - December 1981 Detailed project report and contract preparation completed and cleared by GOI - January 1982 New building completed - June 1982 Production line completed - June 1983 This represents a somewhat optimistic program but is achievable if unfore- seen problems do not arise. In view of the urgent need for electronic trunk switching equipment in the P&T network, a stringent implementation plan for its establishment is necessary. 2.32 The phasing in of production of the new trunk switching equipment is based on the following strategic timetable: * September/ October 1981: (a) System decision; (b) Orders placed for direct imports of finished switching equipment by P&T; e FY1983 (c) P&T installs 8,000 lines of fully imported equipment; (d) ITI assembles and finishes 2,500 lines of equipment imported in "semi-knocked-down" condition; * FY1984 (e) P&T installs 14,000 lines of fully imported equipment and 2,500 lines of equipment finished by ITI;  - 25 - (f) ITI assembles 10,000 lines of equip- ment imported in "completely knocked down" condition; * FY1985 (g) ITI reaches planned production rate of 30,000 lines per year. C. The HCL Subproject 2.33 The HCL subproject consists of two parts. The first is a continu- ation of upgrading and modernization of the two existing factories and is an extension of the work commenced and covered by the seventh telecommunica- tions project. The second part comprises the establishment of a new cable factory at Hyderabad. This new factory is required by FY84 in order to con- tinue to meet the telephone cable needs of the P&T's development program. 2.34 The first part of the HCL subproject covers the replacement of obsolete and worn out production machinery and replacing and adding new testing equipment for production line and R&D purposes. The replacement program is also being used to update the technology especially in the Rupnarainpur factory where there will be a major shift from lead sheathing to polyethylene sheathing of cables and modern automatic test equipment will be introduced. Details of the machine replacements are contained in Annex 12. 2.35 The second part of the HCL subproject covers the establishment of a new cable manufacturing plant at Hyderabad. This factory is required to meet the growing demands for cable to satisfy the P&T's development plans. Present output of telephone cables from the two existing factories and the cable needs (quoted in units of million conductor kilometers) to implement the P&T program are shown in the following table: HCL Projected Cable Output and P&T Needs (Unit = million conductor kilometers) Year HCL Output P&T Program Rupnarainpur Hyderabad Total Needs 1980/81 1.6 1.07 2.67 2.00 1981/82 1.6 1.38 2.98 2.36 1982/83 1.8 1.38 3.18 3.04 1983/84 2.1 1.38 3.48 4.00 1984/85 2.3 1.38 3.68 5.00 The P&T is currently importing some small sized jelly filled cable due to the inability of HCL to meet the full demand and HCL is currently supplying small quantitites of large size dry core cable to fulfill export orders.  - 26 - However, it is clear that a critical supply situation will arise in FY84 and, to meet this situation a new factory at Hyderabad, with a potential capacity of 3 million conductor kilometers per year is to be established. Based on a projected growth of 12 percent to 15 percent per annum in DELs in the P&T network, the annual cable requirements will grow to about 7 million conductor kilometers by 1988 thus utilizing by that time the full capacity of the new factory even if HCL ignored the export market. HCL Subproject Costs 2.36 The total cost of the HCL subproject is Rs 555 million (US$66.1 million) with a foreign exchange content of Rs 309 million (US$36.8 million). Details are shown in the following table. HCL Subproject Cost Estimates Cost Rs Millions US$ Millions Item Foreign Local Total Foreign Local Total Rupnarainpur Replacement of plant/machinery 42.0 22.3 64.3 5.0 2.7 7.7 Modernization of testing and R&D equipment 23.1 17.5 40.6 2.7 2.1 4.8 Hyderabad Replacement of plant/machinery 9.4 6.1 15.5 1.1 0.7 1.8 Modernization of testing and R&D equipment 4.6 3.1 7.7 0.6 0.4 1.0 New cable factory 184.0 169.0 353.0 21.9 20.1 42.0 Subtotal 253.1 218.0 481.1 31.3 26.0 57.3 Contingencies 46.0 28.0 74.0 5.5 3.3 8.8 Total 309.1 246.0 555.1 36.8 29.3 66.1 The full year-by-year investment program for HCL is shown in Annex 13. These costs are based on experience with current contracts for machines and testing equipment which have been arranged under the seventh telecommunica- tions project and detailed designs and layouts for the new cable factory at Hyderabad. HCL Items for IDA Financing 2.37 The amount proposed for IDA financing in the HCL subproject is 100 percent of the foreign costs. This is Rs 309 million or US$36.8 million. The items to be financed and the proposed allocation of the credit is shown below.  - 27 - Items in HCL Subproject Proposed for Bank Financing Amount Items Rs Millions US$ Millions 1. Upgrading and Modernization of Existing Factories (a) Replacement and additional plant 51.4 6.1 (b) Modernization of testing equipment and enhanced R&D 27.7 3.3 (c) Unallocated 16.0 1.9 Subtotal 95.1 11.3 2. New Cable Factory (a) Machinery and equipment 184.0 21.9 (b) Unallocated 30.0 3.6 Subtotal 214.0 25.5 Total 309.1 36.8 Implementation 2.38 The implementation of the factory upgrading part of the subproject will proceed with bids called during FY81 and equipment delivered and installed during fiscal years 1982 and 1983. The program for the new cable factory requires civil engineering work to be undertaken in FY81, bids to be called also in that year, and the plant installed through fiscal years 1982 and 1983. Cable production would commenpe during FY84 with full capacity of 3 million conductor kilometers being possible in FY85. This implementation schedule is a practical one. D. The HTL Subproject 2.39 This subproject consists of two interrelated parts. The first comprises a continuation of factory modernization and upgrading, consistent with a changeover to manufacture of electronic teleprinters, and the second comprises the establishment of a new factory at Hosur for the final stages of the manufacturing process of a new electronic teleprinter. 2.40 While the seventh telecommunications project has been in progress, the P&T and HTL have been examining the performance of electronic tele- printers in the Indian environment. A number of machines from different manufacturers have been found to operate very satisfactorily in the field  - 28 - and a decision has been taken to introduce electronic teleprinters into the P&T network. As a consequence, offers will be invited by ICB for collaboration with HTL in establishing indigenous manufacture of a modern teleprinter. 2.41 The modernization and upgrading of the existing factories involves replacement of machines and equipment in the machine shops, production lines and tool rooms and the proposed purchases are detailed in Annex 14. The new factory is to be established at Hosur, about 170 miles from the existing factory at Madras, and will manufacture the electronic portions of the tele- printers and carry out the final assembly, testing and packaging. HTL Subproject Costs 2.42 The total cost of the HTL subproject is Rs 139.7 million (US$16.6 million) with a foreign exchange content of Rs 73.8 milion (US$8.7 million). Details are shown in the following table and the total investment program of HTL is shown in Annex 15. HTL Subproject Cost Estimates Cost Item Rs Millions US$ Millions Foreign Local Total Foreign Local Total Existing Factory Upgrading Machine shop 11.3 9.0 20.3 1.3 1.1 2.4 Electroplating line 4.0 3.2 7.2 0.5 0.4 0.9 Heat treatment plant 2.5 2.0 4.5 0.3 0.2 0.5 Tool room 3.1 2.5 5.6 0.4 0.3 0.7 Stores modernization 1.0 0.8 1.8 0.1 0.1 0.2 New Factory 43.2 40.3 83.5 5.1 4.8 9.9 Subtotal 65.1 57.8 122.9 7.7 6.9 14.6 Contingencies 12.1 8.1 20.2 1.4 1.0 2.4 Total 77.2 65.9 143.1 9.1 7.9 17.0 HTL Items for IDA Financing 2.43 The amount proposed for IDA financing in the HTL subproject is 100 percent of the foreign costs including those associated with transfer of know-how which will be acquired through open bidding. Consequently, the amounts proposed for IDA financing and the proposed allocation of the credit is as follows:  - 29 - Items in HTL Subproject Proposed for IDA Financing Amounts Items Rs Millions US$ Millions 1. Upgrading and modernization of existing factories 22.0 2.6 2. New electronic teleprinter factory 43.0 5.1 3. Unallocated 12.0 1.4 Total 77.0 9.1 Details of the items are included in Annex 14. Implementation 2.44 The implementation of the upgrading and modernization segments of the subproject will flow on from and be based on experience with the seventh telecommunications project. Bids will be called during 1981 with delivery and intallation through 1982 and 1983. The establishment of the new factory for electronic teleprinters is planned as follows: (a) call for bids - March 1981 (b) bids received - June 1981 (c) offers evaluated - September 1981 (d) letter of intent and collaboration agreement - December 1981 (e) temporary factory building commences - July 1981 (f) initial training commences - February 1982 (g) establishment of production line - for initial assembly - June 1982 - for final phase - June 1983  - 30 - 2.45 The implementation program for the new factory production is opti- mistic and depends on timely decisions being taken at many levels of manage- ment including HTL, P&T, Minister of Communications, Electronics Commission, Ministry of Industrial Development and others. The schedule would be revised in conjunction with the collaborator when a selection has been made. Contingencies for the Factory Subprojects 2.46 The base year for the costs is 1980 and the local cost estimates have been escalated at 7 percent per annum to allow for possible price rises. Foreign costs have been escalated at 9 percent for 1981, 8 percent for 1982 and 7 percent for 1983. No physical contingencies have been included because the factories' upgradation segment has been defined in detail, the items of plant and equipment included in it have been specified and there is virtually no civil engineering work involved, most of the local costs being for import duties. In the case of the new electronic switching manufacturing plant at Palghat (ITI subproject) and the electronic tele- printer factory at Hosur (HTL subproject), the detailed designs have not yet been undertaken as these must await the choice of the systems to be manu- factured and the collaborators. The prices are based on budgetary price information from existing foreign manufacturers, and consequently the foreign costs and duty included in the local costs would not require a phys- ical contingency allowance. For each of the three new factories civil engineering costs amount to less than 15 percent of the total estimated costs and the requirements are known accurately enough to omit a physical contingency allowance on these segments. Procurement for the Factory Subprojects 2.47 All items of equipment in these three subprojects (ITI, HCL and HTL) will be procured by ICB in line with the Association's guidelines. In particular, the procurement associated with ITI's new electronic switching manufacturing plant at Palghat and HTL's new teleprinter factory at Hosur will be through ICB, including the choice of collaborator and purchase of technical expertise and know-how. Disbursement for the Factory Subprojects 2.48 The proceeds of the credit would be disbursed against 100 percent of the foreign exchange expenditure on imported items of machinery and equipment and consultancy services. The estimated schedule for disburse- ments is set out in Annex 10.  - 31 - Overall Project Cost Summary 2.49 The overall cost of the project is summarized in the following table. IDA financing is proposed for all the foreign exchange cost of the project which amounts to Rs 2,637 million or US$314 million. The closing date for the credit would be June 30, 1985. Overall Project Cost Summary (Including Contingencies) Rs Millions US$ Millions Taxes Item Foreign Local Total Foreign Local Total Duty 1/ A. P&T Subproject 2,041 10,496 12,537 243.0 1,250.0 1,493.0 194.0 B. ITI Subproject (a) Modernization and upgrading 103 53 156 12.3 6.3 18.6 (b) Palghat new factory 108 100 208 12.8 11.9 24.7 Subtotal 211 153 364 25.1 18.2 43.3 16.3 C. HCL Subproject (a) Modernization and upgrading 95 59 154 11.3 7.0 18.3 (b) Hyderabad new factory 214 187 401 25.5 22.3 47.8 Subtotal 309 246 555 36.8 29.3 66.1 23.9 D. HTL Subproject (a) Modernization and upgrading 26 21 47 3.1 2.5 5.6 (b) Husor new factory 51 45 96 6.0 5.4 11.4 Subtotal 77 66 143 9.1 7.9 17.0 5.7 Total 2,637 10,961 13,599 314.0 1,305.4 1,619.4 239.9 1/ The taxes and duty are expressed in US$ millions and are included in the estimated project costs as part of the local cost.  32 - III. ECONOMIC ANALYSIS 3.01 The 1981-85 five-year telecommunications program from which the present project has been derived is fundamentally a part of the GOI's National Development Plan. The project encompasses development of the entire sector from raw material components and the expansion of equipment manufacturing to additional telecommunications services for final consumers. Telecommunications and Development 3.02 In India there is a large and growing unsatisfied demand for tele- communications services which is unlikely to be met before 1990 at the earliest. Given this situation, the GOI is paying increasing attention to how the limited resources allocated to the telecommunications sector are used. On the manufacturing side emphasis is being directed to assuring that appropriate technical decisions are taken in a timely manner. On the tele- communications services side a high priority is being given to investment in rural and smaller district centers, and those portions of the large metropol- itan areas in which there is a large OYT demand (paragraphs 1.21 and 1.22). 3.03 The 11,000 additional rural PCOs, the 1,500 additional small rural exchanges, and the 405,000 new DELs allocated to district centers and cities other than Bombay, Calcutta, Delhi and Madras during the project period will facilitate achievement of Government's goals of stimulating economic devel- opment outside of the major metropolitan areas, encouraging decentraliza- tion, and reducing transport and communication-related costs in a wide spec- trum of economic and social sectors. 3.04 The priority provision of lines in those specific service areas of the largest cities in which there is the greatest OYT demand should help assure that potential large business and Government subscribers who will derive the highest returns from telephone usage will be able to gain access to the system. If future postal and telecommunications usage in India is similar to that in the past, during the project period approximately 43 per- cent of the purchases of postal and telecommunications services will be made by households and nonprofit institutions, 42 percent by intermediate busi- ness consumers, and 15 percent by Government departments and agencies. Of the intermediate business consumption, approximately 95 percent will fall in the tertiary sector; of that amount trade will account for 68 percent, bank- ing and insurance 14 percent, and transport 8 percent. The Distribution of Benefits 3.05 The distribution of benefits from the proposed project should touch all segments of the population in India. Indirectly, Government administration and private business should incur communication-related effi- ciency increases, or lower costs, since telecommunications is the least cost means of communication for a wide variety of economic and social welfare activities. A more direct impact will be felt by the high priority  - 33 - business and commercial OYT waiters and by the general lower income popula- tion in rural and backward areas. As a result of the emphasis on investment outside of the larger metropolitan areas, a major improvement in quality of service will be made in smaller cities and district centers, while in smaller towns and villages during the 1981-83 period almost 40 million people will receive local public access to telephone facilities for the first time. 3.06 With regard to who makes use of telephones in rural India, a recent survey of ten small rural exchanges undertaken by the National Council of Applied Economic Research showed that 75 percent of the small town subscribers were businessmen, 10 percent were employed in agriculture, 7.5 percent were professional people, 5 percent were categorized as private (residential) subscribers, and 2.5 percent were official (Government). With regard to those individuals who make use of public call offices, another survey indicated that the top two occupational categories were business, 65 percent, and Government service, 12.5 percent. Agriculture and professional or technician were the next most prominant occupations of PCO users with 7.5 percent each. In examining the purposes for which calls are made at the surveyed PCOs, it was found that 95 percent of all calls were related to participation in economic activity. The remaining 5 percent were calls to kin and friends. Over 60 percent of the calls made at the PCOs were viewed by the caller as important enough that they had to be completed on the day on which they were actually attempted. These findings support GOI's conten- tion that the small town local exchange and PCO telephone investment which is being undertaken has a widespread impact on the development of the lower income-nonmetropolitan areas. 3.07 The Telecommunications Branch of P&T has a much wider impact on the communications and other sectors in India than is apparent from tele- phone statistics. For example, the universal access postal service receives a transfer of funds from the Telecommunications Branch sufficient to cover postal losses. During the 1981-83 period the Postal Branch will receive from the Telecommunications Branch a net of Rs 1,163 million. Overall, Telecommunications Branch transfers to and from Government over this period will be as follows: (Rs Millions) Funds flowing to Government Transfers to Postal Branch 1,163 Customs duties 2,983 Debt service 1,615 Total 5,761 Funds Flowing to Branch Interest payments 920 Capital contributions (net) 1,545 Total 2,465 Net Funds to Government from Telecommunications 3,296  - 34 - Tariff Policies 3.08 Given the scarcity of resources allocated to the telecommunica- tions sector in India, pricing policy is another means by which the benefits of the sector can be focused on high priority users. Currently, the pricing mechanism is used to control access to, and priority usage of, the system. A summary of existing tariffs is given in Annex 16. If sufficient lines are allocated to high OYT areas, the advance deposit OYT scheme can provide a "safety valve" for those business and commercial interests which make the most productive use of telephone service. Also, during peak congestion day- time hours, long distance calls can be booked as regular long distance calls at regular daytime long distance rates, as urgent long distance calls at twice the regular charge, as immediate priority calls at four times the reg- ular charge, and as lightning priority calls at eight times the regular charge. 3.09 Pricing polciy is further used to promote cheaper local service for those residing outside of the larger urban areas. Both the required OYT and regular advance deposits, and the monthly telephone rental charges are generally less in the smaller telephone service areas. 3.10 Additional proposals for tariff restructuring designed to promote the efficiency and equity benefits of telephone investment in India have been recently adopted by P&T. The P&T, with input from the newly formed Economic Cell, began in 1979 to charge 33 percent more for each local call in excess of 1,750 calls per quarter per line. One of the objectives of the surcharge is to influence network traffic congestion in areas like Bombay and Delhi. In June 1980, an additional 25 percent increase in call charges was introduced for local calls greater than 5,000 calls per quarter per line. The Bank Group has encouraged and fully supports these charges. 3.11 Despite these changes and the healthy financial position of the P&T, there is need for continuing review of the tariff structure. For years to come the demand for telephone service will be greater than the supply and long waiting lists will persist. The recent adjustment to the OYT scheme did not vary the amounts of the advance deposits but did reduce the percent- age of new lines allocated to OYT waiters from 75 percent down to 25 percent of those becoming available. This was done in the light of the reducing numbers on the OYT waiting lists. An alternative strategy which might increase the effectiveness of the rationing function of the OYT scheme could be to reduce the magnitude of the advance deposit while allocating say 50 percent of new lines becoming available to OYT waiters. This will be studied by the Economic Research Cell. 3.12 Another aspect of the tariff structure which should be re-analyzed is the distance/rate/time classifications in the trunk network. It may be possible to manipulate these charges to more effectively distribute traffic with respect to time of day, or day of week, and at the same time increase the overall profitability of the trunk network. A related study would embrace charging and revenue characteristics for long distance PCOs with particular  - 35 - reference to future revenue and cost projections. Assurance was obtained during negotiations that the P&T would include such pricing studies in the study program of the Economic Cell (which is periodically reviewed by Bank supervision missions) and seek the Bank Group's comments on their terms of reference by June 30, 1981. Local Manufacturing 3.13 There are three major manufacturing entities in the telecommunica- tions sector although, as indicated in paragraph 1.02, there are in addition numerous small firms supplying material and equipment to the P&T, either directly or through subcontracting to the major manufacturers. The develop- ment of the local manufacturing industry has been planned to keep pace with the demands of the P&T for equipment for its network development programs. However the production capacity of the three companies has not always matched the needs of the P&T and not all the classes of items required by the P&T can be manufactured in India. Consequently, there is a continuing need for imports. 3.14 During the last decade, the P&T purchases from the three indige- nous manufacturers have amounted to about US$800 million. The foreign exchange component of those purchases has been about US$200 million in raw materials and components imported by the manufacturers for inclusion in the equipment produced for the P&T and about US$50 million for the total estab- lishment cost through 1980 for the factories which have manufactured the goods. Hence, indigenous manufacturing has resulted in a net direct saving in foreign exchange for India over the decade of about US$550 million. 3.15 Other benefits from local manufacturing are: (a) P&T Related: (i) it reduces supply lead times, increases reliability of supplies and provides an assured future supply of spare parts and compatible equipment for expansion purposes; (ii) it provides increased opportunity for standardization which reduces training, installation and maintenance costs leading to better network performance and reduced operating costs; (iii) it provides for equipment to be designed and produced in accordance with any special local needs and network characteristics; and (iv) it provides the potential for lower cost equipment through the use of cheaper local labor.  - 36 - (b) Industrial Development Related: (i) it provides local investment and employment opportunities; (ii) it encourages other like industries through the intro- duction of new technologies and skills into the country; (iii) it supports the establishment of a large variety of small scale industries supplying parts to the main manufacturers; and (iv) it provides the potential for earning foreign exchange through exports. 3.16 The manufacturing segment of the telecommunications sector in India is currently falling behind in its ability to produce the quantities of equipment required and is becoming technologically out of date. It is essential that these problem areas in the sector be corrected if the P&T service objectives are to be achieved and the proposed eighth telecommunica- tions project has been framed accordingly (paragraphs 2.21 to 2.48). Least Cost Solution 3.17 The individual works which comprise the project are derived from development plans which are soundly based. Telecommunications network plan- ning is based on engineering and economic studies designed to optimize the location and timing for new exchanges, buildings and transmission systems. Extensions to existing exchanges, cable and transmission equipment are dimensioned using stardard analytical techniques to ensure optimum provi- sioning periods considering both economies of scale and the cost of money. 3.18 The majority of the equipment needed to carry out the program would be locally manufactured. A comprehensive analysis of three major Indian telecommunications factories carried out in 1978 by a World Bank con- sultant demonstrated that the output cost of this equipment is in line with if not cheaper than the cost of similar imported equipment, and that the quality was generally acceptable. This analysis is still valid as the international market and the local working conditions in India have not changed substantially since the review was undertaken. 3.19 The capital expansion of the existing, and the construction of the new, factories is designed to ensure the production of equipment for P&T at least cost to the country. Some 70 to 80 percent of the total expenditure in India's telecommunications development program is for equipment and materials, and the major financial constraint on telecommunications growth is the availability of foreign exchange (paragraph 1.18). Thus one of the  - 37 - main benefits from indigenous manufacture of telecommunications equipment is import substitution which results in the saving of foreign exchange (paragraph 3.14). 3.20 The new factories proposed in the project will also be cost effec- tive. In the case of the cable factory the production techniques will be similar (although more modern) to those used in the existing factories which already produce cable at a competitive price compared with the world market. In the case of the electronic switching factory at Palghat and the new tele- printer factory at Husor the production techniques will be those already in use by the collaborator in each case and the factories will be set up under the technical supervision of the collaborator. Once the setting up problems have been surmounted the production costs should be less in India than in the country of origin of the equipments being manufactured. In the case of both teleprinters and electronic switching the P&T's requirements are more than enough to economically justify a dedicated production line. Return on Investment 3.21 The internal financial rate of return, defined as the discount rate which equalizes the present value of cost and revenue streams (at 1980 purchasing power) attributable to the FY81-85 investment program of the Telecommunications Branch of P&T is 18 percent (Annex 17). However, this figure is a significant understatement of total program benefits since it is based only on the overall measurable average willingness of subscribers to pay for final telecommunications services. As such, it does not reflect the total of consumer surplus which callers receive; a portion of the benefits accruing to receivers of calls; many of the benefits received by other sub- scribers when additional subscribers join the system; and most of the indi- rect benefits received by all through the better administration of rural development, health, transport and agricultural programs and the increases in rural and urban business and Government efficiency. Shadow pricing foreign exchange at a conversion factor of 0.8 and labor at 80 percent of the market wage rate gives an estimate of the economic rate of return as 17 percent. 3.22 In a further attempt to quantify a rough estimate of the extent of the potential benefits that could be realized from the proposed investment, several assumptions were made regarding the allocation of costs among var- ious service categories in the network, the value of a local telephone call relative to postal communication, and the proportion of long distance callers that would pay higher than ordinary prices in order to get a quick connection (Annex 18). Given these assumptions, estimates of the rate of return for selected telephone service categories are as follows:  - 38 - Illustrative Estimates of Economic Rates of Return by Service Categories Number of Rate of Return Service Category DELs Added (percent) Local Telephone Service Bombay 117,000 52 Delhi 77,000 47 Calcutta 26,000 18 Madras 5,000 36 Other large cities 109,000 32 Rural 246,000 16 Long distance system -- 47 All Categories 37 These estimated rates of return, however, are highly assumption-dependent and must be taken as being for illustrative purposes only. Risks 3.23 There are no unusual risks associated with the project. A pos- sible risk may arise out of delayed physical implementation due to unfore- seen circumstances. However, in telecommunications projects which comprise a large number of independent works, a delay in 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. The construction of the new factories would have a higher probability of slip- ping than other elements of the project but the consequences of such a slip- page would impact on future P&T works rather than those included in this project. A sensitivity analysis on the financial rate of return attribut- able to the Telecommunications Branch of the P&T indicates that a combina- tion of 10 percent higher capital and operating costs and 10 percent lower revenues would result in an internal financial rate of return of about 13 percent (Annex 17). Environmental and Health Aspects 3.24 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 urban areas where better telephone facili- ties could slow the growth in vehicular traffic.  - 39 - IV. THE IMPLEMENTING AGENCIES 4.01 There are four subprojects and four implementing agencies. The major entity of these four is the Telecommunications Branch of the Posts and Telegraphs Department (P&T). The P&T is discussed first in this chapter followed by a brief treatment of the other three implementing agencies, Indian Telephone Industries (ITI), Hindustan Cables Ltd. (HCL) and Hindustan Teleprinters Ltd. (HTL). Organization 4.02 The P&T is a Government department under the jurisdiction of the Ministry of Communications. The day-to-day control of its operations is the responsibility of a seven-member Board whose chairman is the Secretary of the Ministry of Communications. The headquarters staff of the P&T comprises the P&T Directorate who report through members of the Board to the Director General of the P&T Department. A single person is Secretary of the Ministry, Chairman of the Board and Director General of the Department. 4.03 The upper level of the organization is shown in the functional organization chart in Annex 19. The Member (Finance) is additionally responsible to the Ministry of Finance. The Board members are Government officials, appointed by Government, and the Minister, the Minister of State and Deputy Minister are members of Parliament. 4.04 The regional level organization comprises districts and circles. The districts are centered in cities and are defined as "metropolitan" (four, located at New Delhi, Bombay, Calcutta and Madras), "major" (five, located at Ahmedabad, Bangalore, Hyderabad, Kanpur and Pune) and "minor" (17 locations). The circles comprise the area surrounding the districts and are basically rural in nature. There are 15 regional circles. These districts and circles are responsible for the management of the telecommunications service within their geographic area. Other organizational units outside the directorate comprise four construction groups for major works and four maintenance groups for the long distance service. These groups are centered at New Delhi, Bombay, Madras and Calcutta and they operate in the north, west, south and east of the country respectively. Other separate units are responsible for training, research, material design and testing, workshops and stores and procurement. 4.05 A more detailed organization chart for the Telecommunications Branch is shown in Annex 20. 4.06 The P&T has reasonable autonomy. It prepares its development plans within the framework of national plans approved by the Planning Commission but is subject to Government approvals for salary scales, major tariffs, overall investment levels and organizational structure and staff levels.  - 40 - Management and Control 4.07 Management systems in the P&T have steadily improved d-uring the Bank Group's association with the sector. In consultation with the Bank Group, there have been important additions and improvements to the management and control processes. These have included improved economic analysis of demand, investment and tariff structures following the establishment of the Economic Research Cell and improved materials management and inventory con- trol, following the establishment of the materials management group. The management information system is now functioning as an effective tool of man- agement in providing both technical and financial information by regions. 4.08 The Economic Research Cell (ERC) has now been fully staffed but still its only fully qualified economist is the Director. During negotia- tions the GOI advised that the P&T has sought approval for the additional positions of Economist and Statistical Officer in the ERC. It is expected that these positions would be approved and staffed by December 1981. 4.09 The P&T staff levels are high but the staff ratio 1/ has shown a reasonably steady decline over the last decade and this is expected to continue over the project period. The staff ratio was 178 in 1972, 152 in 1980 and is expected to be 115 in 1985. The past figures and future projec- tions of staff and staff ratio are contained in Annex 21. In general, the competence of the staff is adequate and an extensive training program is operated (paragraph 4.15). Staff numbers are high because a large amount of plant in the network requires a high maintenance effort and many of the ser- vices are manual rather than automatic. Government policy to maximize employment also inhibits management action to reduce the staff ratio quick- ly. Low wage rates prevent this situation having too serious an effect on the financial performance of the entity. Computer Centers 4.10 The eighth telecommunications project will help finance the estab- lishment of P&T computing centers in each of the four metropolitan dis- tricts. The present proposals envisage these four centers undertaking sepa- rate projects which, when developed, would be used on a national basis. The systems would be developed under the guidance of a Computer Coordinating Group chaired by Headquarters and including members from each of the metro- politan districts. The presently planned initial workload is to be allo- cated as follows: 1/ Staff ratio is the number of staff per 1,000 DELs.  - 41 - Initial Work Program for Computer Center Unit Computer Systems to be Developed Bombay * Standardization of existing billing system * Directory compilation * Telephone exchange data base Delhi * Network planning * Demand register and waiting list Calcutta * Traffic recording and forecasting * Materials inventory Madras * Fault control and analysis * Cable records 4.11 These projects represent a challenging initial workload. The concept of using regional groups to develop national systems in the manner proposed is good. Accounting System 4.12 The P&T has developed a commercial accounting system for the Telecommunications Branch which is the basis for all financial reporting within P&T as well as to Government. Although the accounting system on an accrual basis was started as early as FY69, the double entry system of accounts was introduced only with effect from April 1, 1972. As agreed under credit 403-IN, P&T has now extended the accounts to the regions including all the circles and districts. P&T management is using the infor- mation based on these accounts as an element of the management information system (MIS) for its day-to-day operations. The commercial accounts are audited by the Comptroller and Auditor General (C&AG) and presented to Parliament (paragraph 4.17). 4.13 There is a need to maintain both the Telecommunications Branch's commercial accounts and the P&T's Government cash accounts under rules which have been accepted by the C&AG so that he can give his prior approval to their application and his staff is able to reconcile transactions between the accrued and cash accounts during audit. This to some degree limits the Branch's ability to expedite the closing of the final accounts, but progress is being made to reduce the delays in the past years (paragraph 4.17). Billing and Collection 4.14 The Telecommunications Branch has effectively utilized its MIS to monitor the billing and collection performance in all districts and circles. Quarterly bills are sent to subscribers in cycles; rentals are billed in  - 42 - advance and call charges in arrears. The P&T has been following a discon- nection policy for nonpayment of bills and is authorized also to disconnect Government services for nonpayment. The total value of telecommunications accounts receivable has been about two monthst of total billing, which is reasonable, and no additional measures are considered necessary for its con- trol. Billing in the four major cities is computerized using the computer facilities of external service bureaus and the transfer of customer billing to P&T's own computers (paragraph 4.10) will improve management's control of this function. Training 4.15 The P&T training program is extensive and comprehensive. There are 26 circle and district training centers and 13 regional training centers. An advanced level telecommunications training center established with the assistance of the UNDP and International Telecommunication Union (ITU) provides courses for middle- and top-level engineers not only from India but also for staff from the telecommunications organizations of other countries in the region. The number of staff trained in the past year is shown in the following table. Number of Staff Trainedby Telecommunications Training Wing Type of Training Center Category Advanced Type of Course of Staff Level Regional Circle District Total (a) Initial Engineers - 1,058 - - 1,058 Courses Technicians - 919 802 628 2,349 Supervisors - 516 84 115 715 Miscellaneous - 24 5,628 3,678 9,330 Subtotal - 2,517 6,514 4,421 13,452 (b) Refresher All Courses Categories 1,589 1,660 2,836 974 7,059 Total 1,589 4,117 9,350 5,395 20,511 4.16 The technical training program is satisfactory. Accounting and financial staff also receive training and refresher courses while all types of senior staff are eligible for training outside the P&T Department.  - 43 - Audit 4.17 Under the constitution, the C&AG is responsible for the auditing of all Government accounts. Both Postal and Telecommunications Branchs' cash accounts and the Telecommunications Branch's commercial accounts are audited by the Office of Director of Audit (P&T) under C&AG. The Telecommu- nications Branch's unaudited commercial accounts have been submitted to the Bank Group about four months after the close of the fiscal year as stipu- lated in the previous Bank loan agreement (1592-IN), and the submission of the audited accounts has been improved from a delay of as much as one and a half years to within about one year after the close of the fiscal year. The delay is mainly due to the numerous inter-Branch adjustments at year end and delays in finalizing the accounts. The P&T intends to further reduce the delays in finalizing the audited accounts and submit them within ten months of the end of each fiscal year, as prescribed in Loan Agreement 1592-IN. The present audit arrangements will continue under the proposed credit. Indian Telephone Industries 4.18 ITI is the largest of the three main manufacturers of telecommuni- cations equipment in India. It has factories located at Bangalore, Naini, Rae Bareli and Srinagar. It employs a total of about 26,000 people and man- ufactures switching equipment, transmission equipment and telephones. About 85 percent of its output is sold to the Telecommunications Branch of the P&T. 4.19 The organization chart of ITI is shown at Annex 22. The company is wholly Government owned and has been operating for more than 30 years within the ambit of the Ministry of Communications. 4.20 Successive Bank Group appraisal and project review missions have examined the organization, management and production techniques and outputs of ITI and determined that the quality and price of the equipment it sells to the P&T is comparable with world market prices and qualities. In January 1978, during the appraisal of the seventh telecommunications project, and again in November 1979 during a review mission, the Bank employed an inde- pendent consulting production engineer to accompany the Bank's missions to determine in the first instance what actions were necessary to further improve the quality and standard of factory output, and secondly to review progress on the implementation of his earlier recommendations. 4.21 The major shortcoming was found to be in the lack of modern qual- ity assurance procedures in most ITI factories and deficiencies in the research and development area. Action has commenced to correct these defi- ciencies and this will be continued in conjunction with the subproject now proposed for factory modernization and upgrading. Consultancies are being financed under the seventh loan as well as replacement machinery and addi- tional testing, measuring and research and development equipment. The con- sultancy and technical assistance proposed in this credit is for converting  - 44 - laboratory and prototype models into a design suitable for mass production and will further enhance ITI's production capabilities for modern electronic and processor-controlled telecommunications equipment. 4.22 Following from the previous loan a quality assurance manual has been prepared by ITI. To complement this a quality standards manual speci- fying quality levels and methods of inspection agreeable to the P&T should be prepared. Assurances were obtained during negotiations that the standards manual and the P&T's agreement to it be completed by June 1981. 4.23 The production program for ITI is based upon the P&T's development program--the sole reason for ITI's existence is to provide materials for the P&T construction program. Consequently, its expansion program is designed to meet that need. To date, it has not been able to fully provide the P&T requirements and this condition will persist through the project period. The works to be financed by the proposed IDA credit will help to increase ITI's capacity to produce and will also give it some experience in mass pro- duction of electronic swtiching equipment and so facilitate its next big step when it embarks on large-scale production of electronic local telephone switching equipment. 4.24 The output sold to the P&T is subject to prices determined in con- junction with the P&T under a pricing agreement which provides for a profit margin of 10 to 15 percent. 4.25 ITI has developed a number of ancilliary units in the small-scale industrial field to supply components, parts and raw materials to its main factories. About 91 such units have been developed, employing about 3,000 people and producing about Rs 55 million (US$6.5 million) worth of supplies per year. 4.26 The company also sells some of its products internationally but the scope for this is limited while there is a shortfall in production to meet the Indian P&T requirements. However, bidding in the competitive export market, even in a very modest manner, is valuable experience for the company and it provides a means of checking ITI prices against international competition. Hindustan Cables Ltd. 4.27 HCL is a wholly Government-owned entity established in 1952. It has factories at Rupnarainpur and Hyderabad where it makes a variety of telephone cables and line wire, most of which is sold to the P&T. It employs about 4,000 people. The organization chart is shown at Annex 22. The company is under the general control of the Department of Industrial Development.  - 45 - 4.28 As was the case with ITI, the operations and manufacturing pro- cesses of HCL were closely examined by Bank Group missions in January 1978 and November 1979 and the major deficiencies identified were lack of a qual- ity assurance program, obsolete testing and measuring equipment and inade- quate research and development facilities. Under the seventh telecommunica- tions project, correction of these deficiencies was commenced and it will be continued under the presently proposed credit. A quality assurance depart- ment reporting to the General Manager, Works, is being established and we confirmed during negotiations that this group would be established and adequately staffed by June 1981. An assurance was obtained that the Association would be given an opportunity to comment on the functional statement for the new department. A quality assurance manual has been prepared following the Bank Group's request during the previous loan negotiations. 4.29 New and automatic testing and measuring equipment is coming for- ward from the previous loan and more will be financed by this credit together with replacement of antiquated worn out cable making machinery by more modern high output equipment. 4.30 The current production capacity of HCL will not meet the require- ment of the P&T beyond 1983 (paragraph 2.33) and part of this subproject is the establishment of a new cable making facility at Hyderabad with a capa- city of 3 million conductor kilometers of cable per year. The new capacity would meet P&T's requirements until about 1986-88 depending on the extent to which HCL would sell cable internationally. 4.31 Cable sold to P&T is subject to a pricing agreement between the two parties and is based on a profit margin of about 10-15 percent on production costs. HCL has had some success in obtaining export orders. This is a useful test of its price and quality, and therefore its production efficiency, as well as making a modest contribution as a foreign exchange earner. In the future, the possibility of competing in the export market in a larger way needs to be explored. Hindustan Teleprinters Ltd. 4.32 HTL was established in 1960 and manufactures teleprinters and ancilliary equipment. It also produces some data modems and in the past has produced electric typewriters. The company is wholly Government owned and under the general control of the Ministry of Communications. Its factory is located at Madras and it employs about 2,000 people. An organization chart is shown in Annex 22. 4.33 HTL's production capacity on a two-shift basis is 8,000 tele- printer units per year but it has not yet reached this capacity. Over the past few years, it has averaged an annual production rate of a little under 7,000 units, the shortfall being due to industrial action, shortages of  - 46 - critical raw materials, power cuts and the like. Even the maximum produc- tion rate of 8,000 units per year would not meet the demands of P&T and other customers and capacity must be increased. 4.34 The detailed evaluation of HTL's factory operations carried out in January 1978 brought to light similar deficiencies as existed in ITI and HCL. These were the absence of a quality assurance program, lack of an appropriate research and development program, poor assembly operations and inadequate testing and measuring equipment. In conjunction with the seventh loan, these aspects have been receiving attention and some improvement is necessary and best obtained by employment of foreign expertise. This will come with the present proposed project relating to the establishment of the new electronic teleprinter factory (paragraph 4.35). 4.35 The proposed new factory for electronic teleprinters will be established with the assistance of an existing manufacturer to be selected on the basis of the quality of the machine produced in relation to Indian requirements. Competitive bids will be invited for the transfer of knowledge and collaboration required to establish efficient manufacture of up to 10,000 units per year of the new electronic machine. The existing electromechanical teleprinter will be phased out of production except for the necessary spares required to maintain existing machines in the field. The transfer of knowledge will cover the setting up of modern production line and assembly techniques for the new teleprinter including quality assurance, automatic testing procedures and production management. 4.36 As with the other manufacturing companies, HTL sells its output to P&T under a pricing agreement which provides a profit margin to the company of 10-15 percent over production costs. The cost of the present machine is low by world standards but it is obsolete and its production cost would rise in the future as the plant which makes it is approaching the stage at which it must be completely replaced. The new electronic teleprinter will be pro- duced at a cost comparable with similar modern machines because basically a similar if not identical production line, established with the aid of the collaborator, will produce it. Company Audits 4.37 All three companies are audited annually by commercial firms of chartered accountants and, under a covenant in the existing subsidiary loan agreements relating to the seventh telecommunications loan, are required to continue this practice and to provide the Association with copies of these audit reports within six months of the end of each fiscal year.  - 47 - Company Performance Monitoring 4.38 It is proposed that the performance of the three companies be reviewed annually as part of the P&T progress reporting procedure as well as during regular supervision and review missions. The formal reporting would cover the price of their products to ensure their continuing competitiveness with internationally available products (Annex 23) and their actual outputs compared with their targets (Annex 24). Assurances were obtained during negotiations that annual reporting in line with Annexes 23 and 24 would be included with P&T's progress reports. V. FINANCIAL ANALYSIS Background 5.01 As a Department of the central Government of India the P&T's finances form part of the national budget. All of P&T's funds are remitted to the Government's consolidated fund and all P&T's fund requirements are made available by the Government through parliamentary appropriation. Funds which are provided by the Government in excess of P&T's internal generation are called capital-at-charge and the Government requires that P&T pay an annual interest on these funds at the rate of 6 percent. For presentation in this report, capital-at-charge has been segregated between that obtained from long-term external financing (classified as long-term debt) and that obtained from the Government (classified as equity contribution). 5.02 P&T keeps separate accounts for its telecommunications and postal operations. For the Telecommunications Branch, P&T maintains commercial accrual accounts in addition to the conventional Government cash accounts. The commercial accounts show the Telecommunications Branch as a separate entity and are presented to the Parliament subject to the external audit by the Comptroller and Auditor General. All financial data in this report relating to P&T apply only to the Telecommunications Branch and are based on these commercial accounts. 5.03 P&T's Postal Branch has been operating at a loss, a situation which is expected to continue into the foreseeable future. This results from a long standing policy to provide a basic postcard communications ser- vice to the rural and less developed areas at such a low tariff that operat- ing costs inevitably exceed revenues. The Telecommunications Branch's com- mercial accounts show transfers from its profits to cover the postal losses, and the Government recognizes these transfers by accruing interest in favor of the Telecommunications Branch on the accumulated value of transfers. The Government has maintained the telecommunications tariffs at a level suffi- cient to enable P&T to cover the Postal Branch's losses without damaging the Telecommunications Branch's ability to meet its financial requirements.  - 48 - Past Financial Performance 5.04 The operating results of the Telecommunications Branch (the "Branch") have been satisfactory. Income statements for the period FY77 through FY80 are given in page 1 of Annex 25. During these four years, the operating ratio ranged between 54 percent and 57 percent and the rate of return on revalued net fixed assets in operation between 25 percent and 18 percent (paragraph 5.08). 5.05 Other financial indicators for the same period also show a very acceptable performance with current ratios of at least 3.5 times and debt/ equity ratios remaining fairly constant at around 18/82, reflecting the Branch's strong equity base. One significant feature of the Branch's finances has been the extent to which it is able to meet fund requirements from its internal generation; during the FY1977-80 period, net internal generation accounted for about 84 percent of total fund requirements. 5.06 The Branch's collection performance has improved through the past years. Billings in the four major metropolitan districts (Bombay, Delhi, Calcutta and Madras) are computerized (paragraph 4.14). Billing and collec- tion procedures are now being enforced with prompt disconnection of late- paying subscribers. Subscriber accounts receivable based on current bill- ings amount to about two months' billings, which is satisfactory. Present Financial Position 5.07 Detailed statements of financial position for FY77 to FY85, actual and forecast, are presented in Annex 26. The actual financial position as of March 31, 1979, and the provisional financial position as of March 31, 1980, are summarized below:  - 49 - Fiscal Year Actual Provisional Ending March 31: 1979 1980 (Rs millions) Assets Fixed Assets: Net plant in service 9,516 12,109 Plant under construction 4,407 3,671 Total Net Fixed Assets 1/ 13,923 15,780 Current assets 1,861 2,216 Other assets 3,791 4,599 Total Assets 19,575 22,595 Liabilities Equity 15,203 17,920 Long-term debt 3,324 3,823 Current liabilities 431 442 Other liabilities 617 410 Total Liabilities 19,575 22,595 Current ratio 4.3 4.4 Debt/equity ratio 18/82 17/83 1/ On historical cost basis Revaluation of Assets 5.08 In compliance with Loan Agreement 1592-IN, the Branch completed, in March 1980, a revaluation study on the life of its fixed assets and the current value of the various categories of assets. The study, which covered the period up to March 31, 1978, indicated that the net current value of assets was about 22 percent over that based on historical valued costs. The rate of return on the revalued assets (22 percent in FY79 and 18 percent in FY80) was still significantly higher than the covenanted rate of return (11 percent). The method used in the revaluation study is considered satisfactory; it takes into account the impact of price changes in the various asset categories and reflects the technological improvements and economies of scale in the manufacturing of telecommunications equipment. To calculate the rate of return in the financial forecast, the Branch's net fixed assets in operation as of March 31, 1980, is increased by about 25 percent on the basis of the study. For future revaluation, the forecast assumes an index of 6 percent per year, which is broadly in line with the past experience of other available indices of manufacturing costs of telecommunications equipment and components. For purposes of calculating future rate of return, the P&T would continue, on a memorandum basis, to review and determine annually its telecommunications assets in a manner acceptable to the Association.  - 50 - 5.09 The forecast sources and applications of funds for the period FY81 through FY85 are given in Annex 27. A summary of the financing plan for the' project period FY81 through FY83 is as follows: FY1981-83 Financing Plan From the Period Rs US$ FY81-FY83 - in millions Requirements of Funds Construction program 16,939 2,017 98 Working capital increase 319 38 2 Total Requirements of Funds 17,258 2,055 100 Sources of 'Funds Internal generation 14,054 1,673 81 Less: debt service 1,615 192 9 transfers to Postal/Government 1,163 138 7 Net Internal Generation 11,276 1,343 65 Borrowing: TBRD Loan 1313-IN 193 23 1 IBRD Loan 1592-In 329 39 2 Proposed IBRD Loan 2,041 243 12 Supplier credits and future financing 1,099 131 6 Total Borrowings 3,662 436 21 Government contributions 1,545 184 9 Other (subscriber deposits) ' 775 92 5 Total Sources of Funds 17,258 2,055 100 5.10 In the above financing plan, the Branch's construction program is shown to reach Rs 16,939 (US$2,017 million), representing about 98 percent of total fund requirements; working capital increase will account for the remaining 2 percent. During the three-year period FY1981-83, the net internal cash generation would be equivalent to 65 percent of the construc- tion program and working capital increase; Government contributions would be 9 percent and subscriber deposits 5 percent. The remaining 21 percent would be financed through external borrowings, of which the undisbursed Bank loans 1313-IN and 1592-IN would amount to 3 percent, the proposed IDA credit 12 percent, and other external borrowings, including supplier credits, 6 per- cent. The above financing plan is satisfactory and represents a reasonable mix of foreign and domestic financing resources. 5.11 The above projections assume the Branch continuing to pay 6 per- cent annual interest on capital-at-charge. If this interest rate were to increase to, say, 12 percent, the net internal cash generation would still be about 60 percent. Furthermore, in addition to the interest payments, the Branch is also required to make cash transfers to Government to cover  - 51 - Postal losses. Taking both these payments into account, the Branch's total payments to Government over the period FY1981-83 would be equivalent to an annual interest rate of about 12 percent on capital-at-charge. Future Financial Performance of the Telecommunications Branch 5.12 Forecast financial statements for the period FY81 through FY85 are given in Annexes 25 through 27 and notes to the statements are in Annex 31. A summary of the forecast operating results follows: Fiscal Year Ending March 31 1981 1982 1983 1984 1985 Operating revenues (Rs million) 6,917 7,948 9,252 10,859 12,829 Operating income (Rs million) 2,908 3,340 3,940 4,805 5,915 Rate of return (%) On historical cost base 21.9 20.8 20.0 19.8 19.7 On revalued cost base 15.9 14.9 14.2 14.0 13.9 Operating ratio (%) Reflecting depreciation on historical cost base 58.0 58.0 57.4 55.8 53.9 Reflecting depreciation on revalued cost base 62.1 62.5 62.2 60.8 59.2 Debt/equity ratio (%) 19/81 20/80 20/80 19/81 18/82 Current ratio (times) 4.5 3.9 3.6 3.6 3.4 Debt service and transfers coverage ratio (times) 5.4 5.2 4.7 4.7 4.8 5.13 The financial projections, based on existing tariffs, indicate continued satisfactory financial performance. The rate of return on revalued assets, though declining, is not expected to fall below 13 per- cent. This decline reflects the large construction program, which increases the net fixed assets from Rs 12,109 million (US$1,442 million) at the begin- ning of FY81 to Rs 33,239 million (US$3,957 million) by the end of FY85, a 275 percent increase over the five-year period. During this period some of the additional plant capacity is not fully utilized and, hence, its revenue potential is not fully realized until after FY85. The operating ratio, reflecting adjusted depreciation on account of asset revaluation, would be around 60 percent during the forecast period (the operating ratio with depreciation on historical asset cost is projected at 58 percent in FY80 falling to 54 percent in FY85). The rate of return of 11 percent on revalued assets as in the previous Bank Loan Agreement (1592-IN) would be continued in the proposed IDA credit. 5.14 The Branch's financial position remains satisfactory throughout the forecast period, FY81-FY85, with a debt/equity ratio of no more than 20/80, a current ratio of at least 3.4 times and debt service and transfers coverage ratios of not less than 4.7 times.  - 52 - Domestic Manufacturers 5.15 The three indigenous telecommunications equipment manufacturers, ITI, HTL and HCL, are Government-owned public enterprises. Their past financial performance has been evaluated by the Bureau of Public Enterprise (BPE) in the Ministry of Finance and found acceptable. 1/ All three com- panies are audited annually by commercial firms of chartered accountants; the present arrangements of submission of audited accounts within six months of the close of the fiscal year have been complied with and will continue under the IDA credit proposed. A summary of the historical and projected operating results and financial positions of these three companies for the period FY77 through FY83 are given in Annexes 28, 29, and 30. 5.16 The three companies are operating under a captive environment in what is essentially a vertically integrated telecommunications industry; they supply P&T with the major portion of their products and plan their capital expansion programs and production schedules mainly according to the requirements of P&T's telecommunications investment programs. Their produc- tion facilities have been reviewed and found acceptable, and their products are competitively priced by world standard. There has never been a cash deficit problem since their inception and this position is expected to con- tinue in the future. 5.17 Historically, all three companies have performed reasonably well, and gross margin ratios have been good, as has rate of return on net fixed assets. Over the past three years, the contribution to increased capital requirements for self-generated funds has been 36 percent on average. The considerable capital expansion over the next three years will reduce this percentage to 23 percent (see Table below), which is reasonable given that, at the end of the third year, about 50 percent of total net fixed assets is work in progress and not yet revenue-producing. L/ BPE is charged to make recommendations, instructions and guidelines for public enterprises and to review, coordinate and advise on matters related to their material, financial, personnel, industrial and produc- tion managements.  - 53 - Domestic Manufacturers - FY1981-83 Sources and Applications of Funds (Rs Millions) Indian Hindustan Hindustan Telephone Cables Teleprinters Total Industries Ltd. Ltd. Requirements Construction 1,021.0 854.1 123.3 1,998.4 Working capital 158.4 97.9 13.8 270.1 Total 1,179.4 952.0 137.1 2,268.5 Sources Internal generation 315.4 165.0 31.5 511.9 Debt 864.0 787.0 105.6 1,756.6 /1 Total 1,179.4 952.0 137.1 2,268.5 Self-generated financing (%) 27 17 23 23 /1 Debt comprises the following: Bank Group Loan/Credit Rs 747 million Suppliers credits, bilateral credits and GOI contribution: Rs 1,009.6 million. 5.18 Future projected financial results for the three companies are good; gross margin ratios will be above 13 percent and returns on net fixed assets range from 12 percent to 22 percent in 1983. 5.19 All three companies pay custom duties on their imported goods and income tax on their chargeable profits. The Indian Government has followed the practice of providing funds to the public entities on commercial terms (currently 15 years with a 3-year grace period and 11 percent interest with a rebate of one-fourth of 1 percent for prompt payments). During negotiations, the Government confirmed that the IDA credit funds would be onlent to ITI, HTL and HCL in accordance with this practice. Performance Monitoring 5.20 Performance indicators to help monitor the Branch's future finan- cial performance are given in Annex 32. 5.21 As an independent Government body, BPE conducts an annual survey to investigate the operating results of all public enterprises, including the three telecommunications equipment manufacturing companies, and compare their financial and management performance with the historical trends and  - 54 - industry norms. The survey is thorough and critical; the results are pub- lished and reported to the Parliament. To help monitor their future per- formance, assurances were obtained during negotiations that ITI, HTL and HCL would submit to the Association, through the P&T, the relevant chapters pertaining to the respective companies in the BPE annual survey report, as soon as it is available, together with comments and planned corrective actions, if any, regarding BPE's analysis and recommendations. Starting FY81, the P&T would also submit to the Association a copy of any new pricing agreements as they are concluded with the companies. VI. RECOMMENDATIONS 6.01 During negotiations, agreements were obtained on the following points: (a) the P&T's provisional accounts would be submitted to the Association within four months after the close of the fiscal year and the accounts audited by the C&AG would be submitted to the Association within a reasonable time after the close of the fiscal year (paragraph 4.17); (b) accounts of ITI, HTL and HCL would be audited annually by commercial auditors and the audited accounts and reports would be submitted to the Association within six months of the close of the fiscal year (paragraph 4.37); (c) the P&T would continue to revalue, on a memorandum basis, its telecommunications assets in a manner acceptable to the Association and periodically review the adequacy of the depreciation rates for purpose of calculating the rate of return (paragraph 5.08): (d) the P&T's telecommunications tariffs would be maintained at a level adequate to achieve a minimum of 11 percent rate of return on revalued assets (paragraph 5.13); and (e) IDA credit funds would be onlent to ITI, HTL and HCL on commercial terms in line with its routine practice (currently 15 years with a 3-year grace period and 11 percent interest with a rebate of one-fourth of 1 percent for prompt payment) (paragraph 5.19).  - 55 - 6.02 The following additional points were also discussed and agreed during negotiations: (a) an implementation plan and schedule covering the intro- duction and local manufacture of a local electronic switching system (paragraph 2.03): (b) inclusion in the P&T's annual progress reports to the Association information required to monitor the progress of the network upgrading program and the quality performance of the network (paragraph 2.06): (c) inclusion in the study program of the P&T's Economic Research Cell of pricing and tariff studies with terms of reference defined by June 30, 1981 in consultation with the Association (paragraph 3.12); (d) strengthening the professional establishment of the P&T's Economic Research Cell by December 1981 (paragraph 4.08); (e) preparation of a quality standards manual agreeable to the P&T and the Association by ITI by June 1981 (paragraph 4.22); (f) establishment and staffing of a quality assurance department by HCL, with a functional statement acceptable to the Bank, by June 30, 1981 (paragraph 4.28); (g) inclusion in the P&T's annual progress reports to the Association information concerning the average price paid for main items of supplies from the local factories and a comparison of actual and target values of the factories' outputs (paragraph 4.38); (h) submission to the Association by ITI, HTL and HCL of the annual survey reports by BPE on their financial and management performance together with any planned corrective actions (paragraph 5.21); and (i) advice to the Association of any new pricing agreements with P&T (paragraph 5.21). 6.03 With the above agreements the proposed project constitutes a suitable basis for an IDA credit of US$314 million equivalent under the normal terms for such credits.  - 56 - ANNEX I INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH EIGHTH TELECO9biUNICATIONS PROJECT International Telephone Statistics TELEPHONES - JANUARY 1980 Principal Rest of Percent of National Cities Country National 1977 Population Percent Principal (OOOs) Per Average Autom- Per Per Cities Prin- Rest 100 Annual atiza- 100 100 Pop- cipal of Total Popu- Growth tion Total Popu- Total Popul- ula- Tele- Country Total Cities Country (000s) lation 1969-78 (%) (OOOs) lation (OOOs) lation tion phones WORLD 4,138,000 NA NA 423,082 10.22 6.6 99 NA NA NA NA NA NA AFRICA 438,000 NA NA 4,237 9.67 4.3 86 NA NA NA NA NA NA Algeria 18,100 1,991 16,109 298 1.64 7.5 87 176 8.84 122 0.76 10 59 Burundi 4,100 NA NA 5 0.11 5.5 99 3 0.80 NA NA 10 100 Ethiopia 28,609 1,855 26,754 79 0.28 9.1 100 60 3.24 19 0.07 6 76 Kenya 14,384 1,385 12,963 144 1.00 9.3 100 116 8.38 28 0.22 10 81 Madagascar 7,995 1,165 6,830 29 0.36 2.0 94 29 2.09 0 0.00 15 100 Mauritius 894 143 751 29 3.24 6.8 100 12 8.39 17 7.26 16 40 Nigeria 79,059 2,139 76 920 128 0.16 6.0 30 71 3.32 57 0.07 3 55 Rhodesia 6,860 1,044 5,816 197 2.87 6.0 94 159 15.23 38 0.65 15 81 Rwanda 4,800 NA NA 4 0.08 6.5 100 4 0.80 NA NA 10 100 Seychelles 619 160 459 5 7.37 29.2 100 4 23.73 1 0.17 24 83 South Africa 26,130 8,909 17,221 2,320 8.88 5.8 87 1,703 19.08 617 3.58 34 73 Sudan 18,000 1,971 16,029 62 0.34 3.8 91 56 2.84 6 0.04 11 q0 Tanzania 16,132 1,216 14,916 74 0.46 10.1 80 59 0.80 15 0.17 7 80 Zambia 4,067 1,855 2,212 54 1.32 2.9 97 44 2.32 10 0.46 46 82 AMERICAS 577,000 NA NA 192,789 33.41 5.0 99 NA .NA NA NA NA NA Brazil 119,004 26,729 92,275 4,708 3.96 7.9 98 3,597 13.46 1,111 1.20 23 77 Canada 22,943 10,308 12,635 14,506 63.23 5.7 100 7,445 72.73 7,061 55.88 45 51 Jamaica 2,000 823 1,177 111 5.55 6.9 100 97 11.79 14 1.19 41 87 Mexico 66,944 25,477 41,467 3,712 5.54 13.6 98 3,133 12.30 579 1.40 38 85 Trinidad & Tobago 1,067 100 967 75 7.03 4.9 100 46 46.00 29 3.00 9 61 United States 217,000 43,441 173,559 161,448 74.40 4.5 100 36,365 83.70 125,083 77.07 20 23 ASIA 2,319,000 NA NA 62,877 2.71 9.9 98 NA NA NA NA NA NA Bangladesh 81,800 NA NA 89 0.01 NA 70 49 NA 40 NA NA 55 Burma 31,500 9,000 22,500 33 0.10 4.4 69 27 0.30 6 0.03 29 82 China (Taiwan) 16,866 5,340 11,526 1,685 9.99 22.1 100 986 18.46 699 6.06 32 59 Hong Kong 4,567 4,567 - 1,251 27.39 12.7 100 1,251 27.39 - - 100 100 India 632,099 31,051 601,048 2,247 0.36 8.8 86 1,200 3.86 1,047 0.17 5 53 Indonesia 138,341 15,036 123,305 32S 0.23 6.7 68 249 1.66 76 0.06 11 77 Iraq 12,500 11,500 1,000 320 2.56 12.7 96 273 1.94 97 9.70 92 70 Isreal 3,651 1,924 1,727 930 25.47 9.8 100 685 35.60 245 14.19 53 74 Japan 114,620 19,281 95,339 50,626 44.17 10.7 99 11,895 61.69 38,731 40.62 17 23 Korea (South) 35,860 14,643 21,217 1,978 5.20 16.8 97 1,419 12.77 432 0.19 41 71 Malaysia 13,086 1,439 11,647 375 2.86 10.2 99 226 15.70 149 1.28 11 60 Nepal 13,130 303 12,827 9 0.07 6.4 83 8 2.85 1 - 2 92 Philippines 44,980 8,912 36,068 567 1.26 10.0 95 519 5.82 48 0.13 20 92 Singapore 2,325 2,325 - 455 19.57 16.1 100 455 19.57 - - 100 100 Sri Lanka 13,970 955 13,015 74 0.52 2.8 97 47 4.92 27 0.21 7 64 Thailand 44,273 6,475 37,798 367 0.83 13.8 97 308 4.76 59 0.16 15 84 EUROPE 781,000 NA NA 154,829 19.82 8.0 99 NA NA NA NA N'A NA France 53,183 9,664 43,519 17,519 32.94 10.7 100 7,129 73.77 10,390 23.87 18 41 Germany, Fed.Rep. 16,767 4,216 12,551 2,860 17.06 9.3 130 1,173 27.82 1,687 13.44 25 41 Italy 56,601 20,677 35,924 16,119 28.49 9.3 100 9,236 44.67 6,883 19.16 47 57 Portugal 9,766 1,736 8,030 1,175 12.03 7.4 95 627 36.12 548 6.82 18 53 Spain 36,230 11,203 25,027 9,528 26.30 12.5 95 4,611 41.16 4,916 19.64 31 48 Sweden 8,267 3,598 4,669 5,930 71.73 4.6 100 2,882 80.10 3,048 65.28 44 49 Switzerland 6,292 2,173 4,119 4,145 65.88 5.6 100 1,919 88.31 2,226 54.04 36 46 Turkey 41,758 8,343 33,415 1,379 3.30 13.9 81 924 11.08 455 1.36 67 20 United Kingdo= 55,844 17,522 38,322 23,182 41.51 7.5 100 9,064 51.73 14,118 36.84 33 39 USSR 260,000 25,324 234,676 19,600 7.50 8.9 98 5,194 20.51 14,406 6.14 10 26 OCEANIA 23,000 NA NA 8,350 36.30 5.6 97 NA NA NA NA NA NA Australia 14,074 8,964 5,110 5,835 41.40 6.2 97 4,435 49.50 1,400 27.50 64 76 Fiji 588 87 501 33 5.61 9.5 90 16 18.39 17 3.39 15 48 New Zealand 3,146 2,181 965 1,715 54.51 4.5 96 1,308 59.97 410 42.49 69 76 Papua New Guinea 2,914 250 2,664 38 1.30 9.8 99 33 13.20 5 0.19 9 87 Source: AT&T's "The World's Telephones," a statistical compilation as of January 1978. Data for principal cities for the United States and Japan is in respect of cities with 500,000 or more telephones only.  - 57 - ANNEX 2 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) EIGHTH TELECOMMUNICATIONS PROJECT Statistical Summary of Existing Facilities in P&T Network at April 1, 1980 Local Service Capacity of local subscribers' exchanges (lines): 2,336,000 Underground cable in pair kilometers 11,748,000 Number of telephone instruments 2,616,000 Number of telephone exchanges 7,430 Number of telephone subscribers' services (DELs): 2,016,000 Number of long distance public call offices 13,800 Long Distance Telephone Service Number of four wire trunk automatic exchanges 18 Number of trunk automatic exchange terminations 40,300 Number of fixed charge STD routes 137 Number of manual trunk positions 7,106 Route kilometers of coaxial cable 16,641 Route kilometers of microwave radio 16,545 Route kilometers of UHF and VHF radio 2,712 Number of open wire trunk circuits 18,059 Telegraph and Telex Services Number of telegraph offices 24,457 Capacity of telex exchanges (lines) 22,015 Number of telex services 17,983 Number of VFT circuits 17,777  - 58 - ANNEX 3 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH EIGHTH TELECOMMUNICATIONS PROJECT Countries Projected to Have More Than 8 Million Telephones in 1990 Annual Growth Population Telephones Telephone Rate 1990 Projections (1978) (1978) Density 1968-78 of Telephones Country (Millioons) (Millions) (1978) x (Millions) USA 216 160.0 74.0 4.4 272 Japan 88 44.0 50.0 4.5 75 UK 56 23.0 41.0 6.9 53 USSR 267 20.0 7.5 8.9 56 West Germany 62 23.0 37.0 8.4 60 France 53 17.5 33.0 10.0 52 Italy 57 16.0 28.0 5.8 32 Canada 23 14.5 63.0 5.2 26 Spain 37 9.5 26.0 10.8 33 Sweden 8 5.9 72.0 4.5 10 Australia 14 5.8 41.0 6.1 12 Netherlands 14 5.8 42.0 8.0 14 Brazil 117 4.7 4.0 12.0 18 Switzerland 7 4.4 66.0 3.2 8 Mexico 67 3.7 5.5 14.0 14 India 625 2.5 0.4 12.0 9  INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH EIGHTH TELECOMMUNICATIONS PROJECT 1980-1990 Telephone Demand and Connections DEMANDi/ DELs WAITING LIST % Actual % Actual Year Total Annual Growth Total Annual Growth Total % Waiting to (March 31) (1,000s) Growth (1,000s) (1,OOOs) Growth (1,000s) (1,000s) Annual Connections 1980 2,350 11.2 236 2,016 7.7 143 334 232 1981 2,619 11.4 269 2,184 8.4 170 435 256 1982 2,920 11.8 309 2,384 9.2 200 600 300 1983 3,279 12.0 351 2,644 10.9 260 635 244 1984 3,673 12.0 394 2,984 12.9 340 689 203 1985 4,114 12.0 441 3,414 14.4 430 700 163 1986 4,607 12.0 493 3,914 14.5 500 693 139 1987 5,160 12.0 553 4,514 15.3 600 646 108 1988 5,779 12.0 619 5,264 16.6 750 615 82 1989 6,473 12.0 694 6,214 18.9 950 259 27 1990 7,250 12.0 777 7,164 15.3 950 86 9 1/ Demand equals DELs plus waiting list.  INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMiMUNICATIONS BRANCH EIGHTH TELECOMMUNICATIONS PROJECT FY1981-85 Construction and Capital Program (Rs Millions) 1980-81 1981-82 1982-83 1983-84 1984-85 TOTAL Foreign L.ocal Total Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total Local telephone systems 646 1,533 2,179 566 1,729 2,295 693 2,232 2,925 3,500 4,211 15,010 Long distance switching 19 142 161 135 214 349 160 415 575 510 555 2,150 Long diatao,ce transmi66ioo 185 568 753 280 771 1,051 213 909 1,122 1,231 1,263 5,420 Insat and Intelsat 96 204 300 16 574 590 - 160 160 80 80 1,210 Open wire and telegraphs 20 330 350 122 253 375 39 419 458 606 811 2,600 Other land and bo,ildings - 130 130 - 245 245 - 335 335 405 485 1,600 Telecommunications research center, training, testing, etc. 96 64 160 35 230 265 47 248 295 310 290 1,320 Total Base Cost 1,061 29 9 4,033 1,154 4,016 5,170 1,152 4,718 5,870 6,642 7,695 29,410 Contingencies 26 208 234 113 583 696 223 1,076 1,299 2,059 2,928 7,216 Total Construction Program 1 , 87 3,180 1 ,267 4,599 5,866 1,375 ~5794 7,169 8,701 10,623 36,626 Less petty works not capitalized 96 120 147 135 150 648 TOTAL CAPITAL PROGRAM 4,171 5,746 7,022 8,566 10,473 35.978  INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH EIGHTH TELECOMMUNICATIONS PROJECT Existing Plant and Expected Achievements for FY1981-85 Existing Five Year Estimated Item Unit April 1, 1980 1980/81 1981/82 1982/83 1983/84 1984/85 Total April 1, 1985 LOCAL TELEPHONE NETWORKS Switching equipment capacity Lines x 103 2,336 175 225 300 380 480 1,560 3,896 Underground cable Pair km x 106 11.748 1.00 1.18 1.52 2.00 2.50 8.20 19.948 Direct exchange lines (DELs) x 103 2,016 170 200 260 340 430 1,400 3,416 Telephone instruments x 103 2,616 221 260 338 442 559 1,820 4,436 Long distance PCOs (gross) Number 13,830 3,000 4,000 4,000 4,500 4,500 20,000 33,830 Telephone exchanges Number 7,430 385 510 685 845 1,075 3,500 10,930 TRUNK NETWORK Automatic switching centers, - (TAXs) primary and secondary Number 18 4 2 5 14 15 40 58 TAX capacity Lines 40,300 8,470 8,500 24,772 32,500 37,798 112,040 152,340 Point-to-point STD routes Number 137 15 15 10 10 10 60 197 Manual trunk boards Number 7,106 500 500 500 500 500 2,500 9,606 Coaxial cable Route kms 16,641 2,300 2,200 2,400 2,700 3,400 13,000 29,641 Microwave radio Route kms 16,545 2,500 3,500 3,500 3,500 4,000 17,000 33,545 UHF radio 60-channel capacity Route kms 2,712 3,000 3,000 3,000 3,000 3,000 15,000) 25,212 UHF radio small capacity Route kms 2 - 1,000 2,000 2,000 2,500 7,500) 2 Open wire carrier Circuits 18,059 2,500 1,250 1,250 1,250 1,250 7,500 25,559 TELEGRAPHS AND TELEX Telegraph offices Number 24,457 4,000 4,000 4,000 4,000 4,000 20,000 44,457 z Voice frequency telegraph Circuits. 17,777 1,400 1,400 1,400 1,400 1,400 7,000 24,777 Telex subscribers Number 17,983 1,500 1,200 3,500 4,350 7,750 18,300 36,283 Telex switching capacity, local Lines 22,015 1,000 1,200 5,200 5,050 10,050 22,500 44,515 Telex switching capacity, transit Lines - - 5,500 4,500 3,000 - 13,000 - Telex exchanges Number 136 20 20 20 20 20 100 236  - 62 - ANNEX 7 Page 1 of 4 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) EIGHTH TELECOMMUNICATIONS PROJECT P&T Network Upgrading Program Introduction 1. The telephone and telex network performs poorly for a variety of reasons. One of the major causes is the serious underprovision of facilities in relation to the demand and usage attempts and the expanded development plans will progressively eliminate this as a factor. 2. There are a number of other factors causing poor service and these relate to the standards of plant in the network and the quality of the maintenance. Numerous committees have investigated the performance of the network and the quality of maintenance and reports and recommenda- tions have been made. 3. Based on these studies, a network upgrading program has been devised and is to be implemented. The more significant elements of the program are described and quantified in the following. Telephone Instruments 4. The most important part of a telephone network is the telephone instrument and the instrument used in the past has deficiencies. An improved design is now going into production in ITI and faulty existing instruments now in the network have been identified. The most recent estimate of the number of faulty telephones is 15,000 and these will be replaced during 1981/82. A continuing check of the instruments will be conducted in conjunction with other elements of the upgrading program. House Wiring 5. Many services have been installed with aluminum internal wire between the external line wire termination and the telephone set. This wire must be replaced with copper wire and the use of aluminum wire dis- continuted. The program allows for the complete replacement of aluminum house wiring by FY84. It is estimated that approximately 650,000 instal- lations are involved and the year by year implementation plan is shown in Annex 8.  - 63 - ANNEX 7 Page 2 of 4 Iron Wire in Subscribers' Loops 6. Iron wire has been used in the subscribers' loops between the distribution box and the house terminal. This is substandard engineering design and the iron wire will be replaced by conventional copper drop wire. The total number is estimated at approximately 200,000 and the task of replacing these loops with drop wire will be completed by FY83. The imple- mentation plan is shown in Annex 8. Cable Pressurization 7. Telephone cables fail when water penetrates the sheath and main- taining gas pressure under the sheath prevents water entry and identifies and helps locate holes in the sheath. In the four metropolitan districts, there is approximately 12,600 sheath km of junction, primary and secondary cable of which some 4,600 sheath km is already under pressure. It is proposed to pressurize the remainder by FY84 in accordance with the implementation plan shown in Annex 8. Ducts 8. The installation of main cables in ducts rather than buried directly in the ground improves their maintainability and eliminates the possibility of existing cables being damaged during the installation of new cables. A program for duct installation in a number of major city networks is being undertaken. The route kilometers of cable ducts proposed for installation in the various networks for the next three years is: Duct Route km District Existing 1980-81 1981-82 1982-83 Bombay - 21.0 30.0 30.0 Calcutta 5.9 16.7 15.0 6.5 Delhi 2.3 39.7 57.3 Madras 1.4 10.0 15.4 24.8 Ahmedabad 3.0 4.5 Bangalore 5.0 12.3 Hyderabad 8.0 15.1 14.7 Pune 0.4 2.8 4.7 9.5 Trivandrum 5.0 6.2 9.6  - 64 - ANNEX 7 Page 3 of 4 Network Monitoring and Testing 9. There is a need for better surveillance of both the local and long distance network to improve its efficiency, gather more and better planning data and to undertake preventative maintenance. 10. For local networks, it is proposed to introduce an automatic traffic recording and analysis system into Bombay, Calcutta and Madras. The same system as works successfully in New Delhi is proposed. The total cost for this will be approximately Rs 30 million or US$3.6 million and the work will be completed during FY82. 11. For the long distance network, it is proposed to provide auto- matic regulation equipment on the broad band systems and to upgrade the testing, measuring and monitoring equipment at the four major repair centers and the headquarters of the regional maintenance centers. The equipment proposed is as follows: Foreign Exchange Cost Item Quantity (Rs Millions) (a) Testing instruments for 4 major repair centers 4 sets 10.0 (b) Automatic transmission measuring equipment 15 sets 37.5 (c) Supergroup pilot regulation equipment 300 sets 6.0 (d) Interruption control equipment 22 sets 6.0 (e) Automatic supergroup switching equipment 120 sets 4.0 Total Cost 63.5 (US$7.6 millions)  - 65 - ANNEX 7 Page 4 of 4 Network Performance Indices 12. Annex 8 contains indices for measuring the overall performance of the network as well as the implementation targets referred to in the above.  - 66 - ANNEX 8 Page 1 of 3 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) EIGHTH TELECOMMUNICATIONS PROJECT Network Upgrading Program and Performance Indices A. Upgrading Program Targets for Each Fiscal Year Item 1981 1982 1983 1984 Replacement of faulty telephones 155,000 185,000 207,000 240,000 Replacement of aluminum house wiring 50,000 100,000 150,000 200,000 Replacement of iron wire with copper drop wire 10,000 57,000 63,000 70,000 Sheath km of cable 1/ under pressure 6,000- 1,530 1,150 Route km of ducts provided 22 113 118 100 1/ Includes 4,300 km already completed by FY80.  - 67 - ANNEX 8 Page 2 of 3 B. Performance Indices Past Values Targets for Index 1979 1980 1981 1982 1983 Complaints per 100 stations per month: All India 54 56 Metropolitan districts 35 Major districts 35 Minor districts 45 Circles 50/40 Faults per 100 stations per month: All India 42 40 Metropolitan districts 25 Major districts 25 Minor districts 31 Circles 45/30 Average duration of faults (hours): All India 7.6 5.4 Metropolitan districts 4 Major districts 2.5 Minor districts 3 Circles 2.5 % failure of calls in local network busy hour Metropolitan district: local 3 junction 6 Major district: local 2 junction 2.5 Minor district: local 3 junction 4.5 % effective manual trunk 77 75 calls: All India Metropolitan districts 72 Major districts 75 Minor districts 75 Circles 75  - 68 - ANNEX 8 Page 3 of 3 Past Values Targets for Index 1979 1980 1981 1982 1983 % failure STD calls (level 0 busy hour) Metropolitan districts 35 Major districts 40 Minor districts 45 Circles % long distance speech circuits with more than 90% availability 68 69 80 Broad band system fault incidence: Average lost time per 100 system kms per month: (a) coaxial 3.00 1.16 1 (b) radio 2.20 1.75 1 Average number of outages per 100 system kms per month: (a) coaxial 0.52 0.36 0.4 (b) radio 0.60 0.56 0.3 % effective telex calls overall Metropolitan district 75 Major district 70 Minor district 70 Circles 65  INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH EIGHTH TELECOMMUNICATIONS PROJECT P&T 1980-83 Construction Progr:m and Subproiect Costs (Rs Millions) 1980-81 1981-82 1982-83 TOTAL 1980-83 Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total Item Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost Cost P&T SUBPROJECT 1. Local telephone system 254.5 1,072.7 1,327.2 447.6 1,572.2 2,019.8 387.9 1,784.5 2,172.4 1,090.0 4,429.4 5,519.4 2. Long distance switching 18.6 142.2 160.8 35.8 96.9 132.7 101.6 346.0 447.6 156.0 585.1 741.1 3. Long distance transmission 76.9 441.1 518.0 122.0 585.4 707.4 147.7 832.5 980.2 346.6 1,859.0 2,205.6 4. Open wire and telegraphs 13.3 329.7 343.0 37.6 153.7 191.3 39.3 418.7 458.0 90.2 902.1 992.3 5. Other land and buildings - 130.0 130.0 - 245.0 245.0 - 335.0 335.0 - 710.0 710.0 6. Research, training, testing, etc. 4.6 55.2 59.8 34.7 230.3 265.0 47.2 247.8 295.0 86.5 533.3 619.8 Total Base Cost 367.9 2,170.9 2 677.7 2,883.5 3,561.2 723.7 4,688.2 1,769.3 9,018,9 10,788.2 Contingencies 25.8 152.0 177.8 98.4 418.1 516.5 147.9 907.1 1,055.0 272.1 1,477.2 1,749.3 TOTAL SUBPROJECT COST 393.7 2,322.9 2,716.6 776.1 3,301.6 871. 871.6 4 5,743.2 2 10,496.1 12,537.5 OTHER COMPONENTS OF PROGRAM a) Sixth telecommunications project (IBRD Loan 1313-IN) 75.0 47.6 122.6 118.1 139.2 257.3 - - - 193.1 186.8 379.9 b) Seventh telecommunications project (IBRD Loan 1592-IN) 126.5 83.1 209.6 201.6 237.5 439.1 - - - 328.1 320.6 648.7 c) Bilateral credits 342.4 403.2 745.6 - - - 58.5 68.9 127.4 400.9 472.1 873.0 d) Domestic satellite 95.6 204.4 300.0 16.2 573.8 590.0 - 160.0 160.0 111.8 938.2 1,050.0 e) Government's own resources and future financing 53.5 63.0 116.5 140.0 182.6 322.6 370.4 524.2 894.6 563.9 769.8 1,333.7 Total Base Cost 693.0 801.3 1,494.3 475.9 1,133.1 1,609.0 428.9 753.1 1,182.0 1.597.8 2.687.5 4.285.3 Contingencies - 56.1 56.1 15.0 164.3 179.3 74.6 169.4 244.0 89.6 389.8 479.4 Total Cost 693.0 857.4 1,553.4 490.9 1,297.4 1,788.3 503.5 922.5 1,426.0 1,687.4 3.077.3 4,764.7 Total Program Base Cost 1,060.9 2,972.2 4,033.1 -1153.6 4,016.6 5i702 1,152.6 4,717.6 5.870.2 3,367.1 11,706.4 15073. Total Contingencies 25.8 208.1 233.9 113.4 582.4 695.8 222.5 1,076.5 1,299.0 361.7 1,867.0 2,228.7 TOTAL PROGRAM COST 1,086.7 3.180.3 4,267.0 1,267.0 4,599.0 1,375.1 5,794.1 7,169.2 3,728.8 13,573.4 17,302.2 Less petty works not capitalized - 96.3 96.3 - 120.2 120.2 - 147.0 147.0 - 363.5 363.5 TOTAL CAPITAL INVESTMENT PROGRAM 1.086.7 3.084.0 4,170.7 1,267.0 4,478.8 5,745.8 1,375.1 5,647.1 7,022.2 3,728.8 13,209.9 16,938.7  - 70 - ANNEX 10 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) INDIAN TELEPHONE INDUSTRIES (ITI) HINDUSTAN CABLES LIMITED (HCL) HINDUSTAN TELEPRINTERS LIMITED (HTL) EIGHTH TELECOMMUNICATIONS PROJECT Details of Disbursements for Total Project -Cumulative Disbursements at End of Quarter (US$ Millions) IBRD Fiscal Year Subprojects Total Project and Quarter P&T -. ITI HCL HTL 1980/81 June 30, 1981 40 0 0 0 40 1981/82 September 30, 1981 50 1.0 1.0 0.3 52.3 December 31, 1981 60 2.0 3.0 0.7 65.7 March 31, 1982 80 3.0 5.0 1.0 89.0 June 30, 1982 100 4.0 7.0 2.0 113.0 1982/83 September 30, 1982 120 6.0 10.0 3.0 139.0 December 31, 1982 140 10.0 15.0 3.5 168.5 March 31, 1983 170 13.0 20.0 4.0 207.0 June 30, 1983 180 15.0 22.0 4.5 221.5 1983/84 September 30, 1983 190 16.0 24.0 5.0 235.0 December 31, 1983 215 18.0 27.0 5.2 265.2 March 31, 1984 233 22.0 32.0 6.0 293.0 June 30, 1984 236 23.0 33.0 7.0 299.0 1984/85 September 30, 1984 240 24.0 35.0 8.0 307.0 December 31, 1984 243 25.1 36.8 9.1 314.0  INDIA INDIAN TELEPHONE INDUSTRIES LIMITED (ITI) EIGHTH TELECOMMUNICATIONS PROJECT FY1928L,3 ITI Capital Investment Program (Re Millions) 1980-81 1981-82 1982-83 Total Item Forelin Local Total Foreign Local Total Foreign Local Total Foreign Local Total 1. Ongoing Work Covered by Seventh Project 45.0 58.0 103.0 43.8 56.4 100.2 - -- 88.8 114.4 203.2 2. Eighth Project. (a) Upgrading Existing Factories _ - - 28.0 13.4 41.4 65.0 31.0 96.0 93.0 44.4 137.4 (b) Palghat Electronic Switching Factory - - - - - - 89.5 84.7 174.2 89.5 84.7 174.2 (c) Contingencies 3.0 1.8 _48 25.0 22.2 47.2 28.0 24.0 52.0 Subtotal (Item 2) - - - 31.0 15.2 46.2 179.5 137.9 317.4 210.5 153.1 363.6 3. Other Works (Including Contingencies) - 44.6 _ - 129.9 - - 280.6 - - 455.1 Total - - 147.6 - - 276.3 - - 598.0 - - 1 021.9 - .=. - . = =:= m __  - 72 - ANNEX 12 Page 1 of 2 INDIA HINDUSTAN CABLES LIMITED (HCL) EIGHTH TELECOMMUNICATIONS PROJECT Machinery and Equipment for Factory Upgrading 1/ Unit Price Total Price Item-/ Number (Rs Millions) (Rs Millions) 1. Modernization of Testing and R&D Equipment (a) Hyderabad - automatic cable tester 2 1.27 2.5 - spectrograph test set 1 0.50 0.5 (b) Rupnarainpur automatic cable tester 3 1.27 3.8 - spectrograph test set 1 0.50 0.5 capacity unbalance, mutual capacity insulation resistance test sets 12 0.80 9.6 - pulse echo test set 1 0.80 0.8 PVC testing equipment 3 0.80 2.4 polythene testing equipment 3 0.80 2.4 1/ Only items of machinery or equipment costing individually more than Rs 500,000 are listed. Those costing less than that amount are covered by "Miscellaneous and Contingencies."  - 73 - ANNEX 12 Page 2 of 2 1/ Unit Price Total Price Item- Number (Rs Millions) (Rs Millions) 2. Replacement and Modernization of Plant and Machinery (a) Hyderabad * drum twister 2 3.50 7.0 * paper slitting machine 1 1.10 1.1 * oven and vacuum pump 1 0.50 0.5 (b) Rupnarainpur - rod breakdown machine 1 1.00 1.0 * intermediate wire drawing machines 3 0.53 1.6 * fine wire drawing machine 1 0.50 0.5 stranding machine 4 3.00 12.0 plastic insulating extruders 2 3.25 6.5 plastic sheath extruder with polyal applicator 2 6.00 12.0 * armouring machines 2 3.30 6.6 3. Miscellaneous and Contingencies 23.8 4. Total 95.1 1/ Only items of machinery or equipment costing individually more than Rs 500,000 are listed. Those costing less than that amount are covered by "Miscellaneous and Contingencies."  INDIA HINDUSTAN CABLES LIMITED (HCL) EIGHTH TELECOMMUNICATIONS PROJECT FY1981-83 HCL Capital Investment Program (Re Millions) 1980-81 1981-82 1982-83 Total Item Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total 1. Ongoing Work Covered by Seventh Project 49 41 90 40 28 68 - - - 89 69 158 2. Eighth Project (a) Upgrading Existing Factories - - - 13 9 22 66 40 106 79 49 128 (b) New Cable Factory - 60 60 90 63 153 94 46 140 184 169 353 (c) Contingencies - 2 2 11 8 19 35 18 53 46 28 74 Subtotal (Item 2) - 62 62 114 80 194 195 104 299 309 246 555 3. Other Works (Including Contingencies) - - - - 43 - - 99 - - 142 Total _ - 152 _ - 305 _ - 398 _ - 855 -  - 75 - ANNEX 14 INDIA HINDUSTAN TELEPRINTERS LIMITED (HTL) EIGHTH TELECOMMUNICATIONS PROJECT Machinery and Equipment for Factory Upgrading l/ Approximate Cost Item- (Rs Millions) 1. Electroplating line 4.0 2. Heat treatment plant 2.5 3. Machine shop (a) high speed press (100 T) 2.5 (b) high speed press (50 T) 1.0 (c) Numerical control drilling and tapping machines (two) 0.8 (d) multi-spindle auto lathe 1.0 (e) numerical control milling machine 1.5 (f) projection welding machine 0.8 4. Tool room (a) spark erosion machine 1.0 (b) high precision turret lathe 0.5 5. Miscellaneous and contingencies 9.3 Total 24.9 1/ Only items of machinery or equipment costing individually more than Rs 500,000 are listed. Those costing less than that amount are covered by "Miscellaneous and Contingencies."  INDIA HINDUSTAN TELEPRINTERS LIMITED (HTL) EIGHTH TELECOMMUNICATIONS PROJECT FY1981-83 HTL Capital Investment Program (Rs Millions) 1980-81 1981-82 1982-83 Total Item Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total 1. Ongoing Work Covered by Seventh Project 5.9 4.7 10.6 6.3 5.1 11.4 - - - 12.2 9.8 22.0 2. Eighth Project (a) Upgrading Existing Factory 5.3 4.2 9.5 15.8 12.7 28.5 0.8 0.6 1.4 21.9 17.5 39.4 (b) Hosur Electronic Teleprinter Factory - 0.4 0.4 13.3 13.2 26.5 29.9 26.7 56.6 43.2 40.3 83.5 (c) Contingencies 0.2 0.1 0.3 3.1 3.0 6.1 8.8 5.0 13.8 12.1 8.1 20.2 Subtotal (Item 2) 5.5 4.7 10.2 32.2 28.9 61.1 39.5 32.3 71.8 77.2 65.9 143.1 Total 11.4 9.4 20.8 38.5 34.0 72.5 3 32.3 71.8 89.4 75.7 165.1 U' - a  - 77 - ANNEX 16 Page 1 of 3 INDIA POSTS AND TELEGRAPHS DEPARTMENT (P&T) TELECOMMUNICATIONS BRANCH EIGHTH TELECOMMUNICATIONS PROJECT Summary of Tariffs (as of June 30, 1980) (Indian Rupees) 1. Telephone (a) Advance Deposit Scheme "Own Your Telephone" (OYT) Advance payment provides applicant with priority status for getting telephone service and is applied against rental over 20 year period. Capacity of Exchange System (i) 10,000 lines and above 5,000 (ii) 1,000 lines and above but below 10,000 lines 4,000 (iii) below 1,000 lines 3,000 General and Special Category Applications (i) metered exchanges - 10,000 lines and above 1,000 - under 10,000 lines 800 (ii) flat rate exchanges - over 100 lines 1,000 - under 100 lines 100 - over 20 lines (not 24 hour service) 100 - under 20 lines (not 24 hour service) 100 (b) Installation Fee Per line 100 (150 proposed) Casual connection 50 (75 proposed)  - 78 - ANNEX 16 Page 2 of 3 (Indian Rupees) (c) Rental for Direct Exchange Line (i) Measured Rate System Quarterly charge in exchange systems of 10,000 lines capacity and above 150 Exchange systems of less than 10,000 lines capacity 125 (ii) Flat Rate System Exchanges of 100 lines and above providing 24 hours service - annual charge 600 Exchanges of less than 100 lines capacity providing 24 hours service - annual charge 500 Exchanges not providing 24 hours service - annual charge 400 (d) Call Charges (i) Local (no time limit) Up to 250 calls per quarter no charge In excess of 250 calls and up to 1,750 calls per quarter 0.30 per call 1,751 to 5,000 calls per quarter 0.40 per call 5,000 calls per quarter and above (proposed) 0.50 per call (ii) Long Distance (3 minutes) Distance STD (Kilometers) Manual Pulse Metered - --- - - - Indian Rupees - - - - -