Uganda - Posts and Telecommunications Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4392-UG STAFF APPRAISAL REPORT UGANDA UGANDA POSTS AND TELECOMMUNICATION CORPORATION (UPTC) POSTS AND TELECOMMUNICATIONS REHABILITATION PROJv'- April 25, 1983 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Uganda Shilling (U Sh) US$1.00 = U Sh 107 U Sh 1,000 = US$9.35 FISCAL YEAR July 1 - June 30 LIST OF ABBREVIATIONS AND ACRONYMS BADEA - Banque Arabe de Developpment des Etats Africains (Arab Development Bank for the African States) EAC - East Africa Community EAPTC - East Africa Posts and Telecommunications Corporation EEC - European Economic Community EXTELCOMS - East Africa External Telecommunications Corporation ICB - International Competitive Bidding IDA - International Development Association ITU - International Telecommunication Union LCB - Local Competitive Bidding MPPT - Ministry of Power, Posts and Telecommunications PANAFTEL - Pan African Telecommunication (System) UNDP - United Nations Development Program UPTC - Uganda Posts and Telecommunications Corporation UPU - Universal Postal Union VFT - Voice Frequency Telegraphy: Transmission System for Telegraphy Using Telephone Channels VHF - Very High Frequency: Radio Systems Working in the Range of 30-300 MHz  FOR OFFICIAL USE ONLY UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION (UPTC) POSTS AND TELECOMMUNICATIONS REHABILITATION PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION .................... ............. 1 II. THE POSTS AND TELECOMMUNICATIONS SECTOR 3 ..... 3 A. Background and Organization ......................... 3 B. Access to Service ....... ...................... 3 C. Use of Service ................... 4 D. Quality of Service ..........................*....... 5 E. Existing Facilities ....................... .6 F. Facilities Destroyed during the War .6 G. Demand for Services......... 7 H. Sector Goals .8 I. Sector Constraints . ..................... .11 J. Role of the World Bank Group .................... . 11 III. THE PROGRAM AND THE PROJECT ......... ............. 12 A. The Program Concept, and Status of Preparation 12 B. Status of Program Financing .... . .16 C. Project Description .. ............................ 16 D. Project Cost .......17 E. Contingencies ........ . ... 19 F. Project Financing ......19 G. Procurement......... 19 H. Project Implementation ............................. 22 I. Disbursement ..23 J. Performance Indicators ............................ 24 IV. ECONOMIC ANALYSIS . . .25 A. Communications and Economic Development . .25 B. Distribution of Benefits, and Resource Mobilization . 26 C. Demand, and Size of the Investment Program . .27 D. Program Composition. 28 E. Least Cost Solution ..29 F. Tariffs ......................................... 30 G. Return on Investment .................... . 32 H. Risk ......................... 32 I. Environmental and Health Aspects ......... ........... 33 This report was prepared by Messrs. B. Wellenius (Senior Economist), G. Buttex (Senior Telecommunications Engineer) and D. Lomax (Senior Financial Analyst), who visited Uganda in January/February 1983 accompanied by Mr. M. O'Driscoll (Postal Consultant). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of contents continued Page No. V. THE IMPLEMENTING AGENCY . .............................. . 33 A. Legal Framework ................... ................. 33 B. Organization ..................... .................. 34 C. Staffing and Training ... ........................... 35 D. Financial Management and Accounting .. .............. 36 E. Billing and Collection ............................. 37 F. Audit .............................................. 38 VI. FINANCIAL ASPECTS ..38 A. Past Financial Performance 38 B. Present Financial Position .38 C. Valuation of Assets . .39 D. Financing Plan . .40 E. Future Financial Performance .41 VII. AGREEMENTS REACHED AND RECOMMENDATIONS 42 A. Conditions of Effectiveness 42 B. Covenants and Side Letters . .43 C. Recommendations ..44  LIST OF ANNEXES Page No. 1. International Telephone Statistics ....................... 45 2. Distribution of Telephones by Category of Places ......... 46 3. Economic Activities of Telephone Subscribers ............. 47 4. Existing Local Telephone Facilities .......... .. .......... 48 5. Existing Postal Facilities .............. .. ............... 49 6. Basic Statistics, 1971-82 ................................ 50 7. Facilities Destroyed during the War ...................... 51 8. Investment Program - Annual Expenditures .. ............... 53 9. List of Goods and Services .............. .. ............... 54 10. Annual Project Costs - Investment Costs ........ .. ......... 58 11. Project Implementation Schedule (World Bank-24786) ........ 59 12. Disbursement Schedule ................... .................. 60 13. Performance Indicators .................................... 61 14. Summary of UPTC Tariffs ................................... 62 15. Return on Investment ................... ................... 64 16. UPTC Organization Chart (World Bank-24212) ........ ........ 68 17. Forecast Funds Flow Analysis ............. .. ............... 69 18. Estimated and Forecast Profit and Loss Accounts ........... 70 19. Estimated and Forecast Balance Sheets ......... .. .......... 71 20. Assumptions Used in Financial Projections ............... ... 72 21. Financial Coefficients and Indicators ......... .. ........... 76 22. Material Available in Project File .......... .. ............. 77 Map IBRD #16688: Uganda Telecommunications Network   I. INTRODUCTION 1.01 The Government of Uganda has requested an IDA credit of US$22.0 million to help finance a posts and telecommunications rehabilita- tion project. The project mainly aims at urgently rehabilitating or replacing telecommunications plant which was run down for lack of spare parts or damaged in the 1978/79 war, improving the standard of postal service in the country, and addressing selected areas of badly needed institutional development within the posts and telecommunications sector. In particular, the physical components of the project will restore to working order telephone lines currently out of service, connect new telephone lines to existing spare exchange capacity by repairing and supplementing parts of the cable and subscriber networks, increase the proportion of long distance telephone call attempts completed by repairing long distance radio and carrier equipment, and connect new telex sub- scribers by repairing a telex exchange and adding teleprinters. The project also aims at achieving next day delivery in all head post offices of letters posted in the same city; third-next day delivery among different head and departmental post offices; and ten day delivery among most other post offices. Institution strengthening will focus on establishing an adequate legal framework within which the Uganda Posts and Telecommunica- tions Corporation (UPTC, the state-owned entity responsible for all domestic and international posts and telecommunications services) can effectively operate as a commercial utility; starting up adequate accounting procedures and financial control and management practices; establishing technical plans for telecommunications system development utilizing modern electronic digital technology; preparing a strategy for the integrated development of postal and telecommunications services in rural areas; and establishing a training facility and comprehensive training program for both posts and telecommunications. 1.02 The project specifically addresses the urgent need for rehabilitation, technical assistance, and recurrent imports for operation and maintenance. The rehabilitation component mainly includes the supply and installation of containerized automatic telephone exchanges for Mbarara and Masaka; repair of and supplementary equipment for existing automatic exchanges in six other towns; cables, telephones, spare parts and other equipment and materials for repairing and supplementing telephone exchanges, long distance facilities, and cable and subscriber installations in Kampala and about 30 other places; parts and teleprinters to repair and supplement existing telex exchanges in Kampala; equipment and materials to extend basic telephone service to about 200 rural communities; assorted postal equipment; vehicles for postal and telecommunications works and operation; and materials and equipment to complete a postal and telecommunications training school, and 110 manmonths of training experts to help run it for two years. The technical assistance component of the project comprises 90 manmonths of consultancy services in the area of  -2- accounting and finances, 96 manmonths of experts in project implementation and postal operations, and 48 manmonths of experts in telecommunications system planning and future project preparation using new technology. The recurrent purchases component provides for two years' consumption of spare parts and materials for telecommunications operation and maintenance, postal operation, and existing and new vehicles. 1.03 The project is expected to cost US$26.0 million equivalent, including a foreign exchange component of US$22.0 million. The proposed IDA credit would finance 100% of these foreign costs. Local costs will be met from internally generated funds; under presently prevailing conditions, no tariff increase during the project implementation period would be needed. All procurement is in accordance with IDA guidelines. Procurement of about 60% in value of goods and services to be financed by IDA are well advanced to ensure early credit disbursement and timely project execution: bids for the supply of all major equipment and materials have been invited (or will have been invited before credit effectiveness); bids for financial consultancy services have been received; job descriptions for all other experts have been agreed between UPTC, IDA and UN agencies which will recruit them; and contracts with the selected firm of financial consultants and with the UN agencies will be signed before credit effectiveness. The project is scheduled for completion in 1986. 1.04 The project is expected to yield a financial rate of return of about 27% and a minimum quantifiable economic rate of return of about 37%. It is a self contained, high priority component of UPTC's 1982-87 investment program of about US$115 million equivalent including a foreign exchange component of US$95 million. The program as a whole is expected to have a financial rate of return of 9% and a minimum economic rate of return of 16%. During the period 1983-87, the net cash flow from UPTC to Government will amount to about U Sh 5,100 million (US$48 million), of which alutiut U Sh 2,900 million (US$27 million) will be taxes and duties. 1.05 The proposed IDA credit would be the first operation in the posts and telecommunications sector in Uganda since the breakup of the East Africa Community in 1977. Three loans had been made to the former East Africa Posts and Telecommunications Corporation (EAPTC), and a fourth was appraised but did not materialize as EAPTC gave way to independent corporations in each country. Since then, two loans have been approved for posts and telecommunications in Kenya and one credit in Tanzania. In July 1982 an IDA mission visited Uganda and prepared a posts and telecommunications sector memorandum. In October/November 1982 the project proposed for IDA financing was preappraised. In January/February 1983, it was appraised by a mission comprised of Messrs. B. Wellenius (senior economist), G. Buttex (senior telecommunications engineer), D. Lomax (senior financial analyst) and M. O'Driscoll (postal consultant).  -3- II. THE POSTS AND TELECOMMUNICATIONS SECTOR A. Background and Organization 2.01 Authority for the postal and telecommunications services is vested in the Ministry of Power, Posts and Telecommunications (MPPT). The Uganda Posts and Telecommunications Corporation (UPTC) is responsible for the operation of all postal and telecommunications services. UPTC was established in 1977 by presidential decree,!/ to take over in Uganda the services until then provided by the East Africa Posts and Telecommunications Corporation (EAPTC) and the East Africa External Telecommunications Corporation (EXTELCOMS), which broke down with the East Africa Community (EAC). The decree which established UPTC gave it a caretaker role in the framework of the EAPTC's Act of 1967. Under this interim arrangement, postal and telecommunications tariffs are approved by MPPT after cabinet clearance. MPPT also approves UPTC's annual operating and investment budget. The 1977 Presidential Decree was expected to apply for only one year, while more definitive legislation was enacted. This has not materialized, and there is now evidence that the decree is an inadequate framework for the operation of the sector on a sound commercial basis. 2.02 UPTC provides all domestic and international telecommunications services, at present mainly comprising telephone, telex and telegraph services. UPTC is also responsible for the postal services, including money orders and acting as agents for the government's postal savings bank (the latter two services are at present not provided). The military, police, civil aviation and railways authorities have limited telecommunications facilities needed to meet specialized requirements. Radio and television broadcasting are operated by the Ministry of Information and Broadcasting. There is no domestic telecommunications manufacturing at present. However, Cable Corporation of Uganda's electric cable factory near Kampala, can produce telephone drop wire and PVC internal wiring cable; total UPTC purchases of these materials would be less than US$0.1 million per year in the near future. A plant to impregnate wooden telephone poles of local production is being set up by UPTC and will be completed as part of the project to be financed under the proposed IDA credit. B. Access to Service 2.03 In December 1982 there were in Uganda about 23,000 connected telephone lines and 47,000 telephones, or 0.3 telephones per 100 inhabitants. This density is comparable to Sudan (0.3), but lower than Tanzania (0.6), Kenya (1.2) and the average for African developing countries (0.8). Annex 1 gives other international comparisons. 1/ Presidential Decree No. 15 of August 26, 1977.  -4- Furthermore Kampala, with only 4% of Uganda's population, has 58% of its telephones, as shown in the table below: Access to Telephone Service (December 31, 1981) Number of Connected Proportion of Proportion of Telephone Lines Main Lines, % Population, % Kampala 11,890 58 4 Rest of the country 8,589 42 96 TOTAL 20,479 100 100 Source: UPTC Telephone service is available in only 27 of the 32 district headquarters towns, in about 60 of the 145 county headquarters towns, and in less than 20 of the about 700 subcounty headquarters towns. Telephone density in Kampala and district headquarters is over 100 times the average for the rest of the country. There are only 2 public call office telephones and 35 radiocall stations in towns without exchange service. Overall, barely 7% of Uganda's population live in towns where there is telephone service. Annex 2 gives further details on the distribution of telephones and population by categories of places. 2.04 There are about 520 telex subscribers in Kampala, Jinja and five other towns. Telegrams are accepted and received in the 64 main post offices, and transmitted using telex or telephone; no telegraph service is available in the rest of the country. 2.05 There are a total of 360 post offices in Uganda, or about 660 square km per post office which compares favorably with about 1,200 square km per post office in Kenya and Tanzania. Eight of these are head post offices, one each in the largest towns (with 5 branch offices in Kampala and one in Jinja) and 50 departmental post offices in smaller towns, all staffed by UPTC. In addition, there are 296 subpost offices operated by private agents, and approximately 300 stamp vendor licenses have been granted to individuals, schools and hospitals. Mail correspondence is delivered to a total of 39,258 post office boxes. There is no house-to-house delivery service. C. Use of Service 2.06 In Kampala, about 58% of telephone lines are connected to business and government subscribers, and 42% to residences. Most of the former are in the communications-intensive tertiary sectors of the economy, mainly wholesale and retail trade (20% of all lines), services (15%), and government administration (11%). These proportions vary from one town to  another, depending on population, economic activity and other factors. For example, in Jinja (the second largest town in Uganda with about one-tenth the population of Kampala, and main industrial center) there is a lower share of residential subscribers and considerably higher proportions of telephone lines in industries, services and government. Annex 3 gives further details (see also para 4.02). D. Quality of Service 2.07 Telephone service is very poor and under present operating conditions is deteriorating from day to day. Damaged equipment and lack of spare parts drastically reduces the traffic capacity in some strategic points of the system causing bottlenecks and unreliable service. For example, calls from Kampala to Soroti, Lira or Gulu take several hours before they can be connected; countrywide, only 49% of operator-assisted long distance calls are connected the day they are booked. The Jinja telephone exchange is heavily congested; it can take more than five minutes to obtain a dial tone in a busy time of day. During the rainy months, widespread disruption of telephone service in Kampala is common. There are about 5,000 subscriber lines out of service throughout the country (a high 22% of the total), of which 3,000 are in Kampala (25%) and about 500 in Jinja (35%). In this respect, the situation has worsened since the first ITU sector review in 1980 following the war, according to which 20% and 12% of connected lines were out of order in April 1980 in Kampala and Jinja respectively. Further, a sample of July 1982 showed that about 80% of faulty subscriber lines in Jinja were out of operation for more than one month because of UPTC's inability to undertake prompt repairs, and 23% of them were waiting for more than one year to have service restored; 50% of the faults were due to local cable networks (which is very high, indicating a poor condition of cables), 45% to subscriber plant and 5% to switching equipment. 2.08 Postal service is almost at a standstill. Delays in the order of two weeks are common among head post offices, and examples of delays up to one or two months are frequent. Major bottlenecks develop, causing additional widespread disruptions. For example, for lack of vehicles almost ten days were recently needed to transport seven wagon loads of incoming surface mail from the railway station to the postal sorting office in Kampala. A wagon loaded with 300 bags of mail on its way to Kenya was at Tororo railway station for 3 months awaiting the solution of an administrative problem. The situation in smaller towns is even worse. Partly this relates to attempts in the 1970s to expand service rapidly outside the main centers, without a commensurate development of vehicles, sorting office space and equipment, and other facilities. Problems with control of operations and lack of adequate stationery also resulted in the suspension of postal money order services in 1980. Telegraph service in several of the main towns is not in operation due to lack of teleprinter paper.  -6- E. Existing Facilities 2.09 As of December 31, 1981, there were 112 telephone exchanges in operation having an installed capacity of 36,700 lines with 20,479 connected subscriber lines, e.g., a relatively low exchange occupation of 56% although there is a substantial unsatisfied demand. Eighty-two percent of all subscribers are connected to automatic telephone exchanges. Seven of these exchanges, however, totaling 9,945 lines capacity including one large exchange in Kampala, consist of obsolete step by step switching equipment of limited traffic handling capacity and performance, which is developing maintenance problems. The other automatic telephone exchanges are of a crossbar type, most of which have been in operation for less than ten years. The local cable networks follow the European pattern, with division points in cabinets or distribution boxes. However, the distribution (i.e., secondary) cables and subscribers installations have not been sufficiently developed, impeding full utilization of the existing capacity of local exchanges and primary cables. In particular, average primary cable occupation in Kampala is only 61% and there is spare capacity for the connection of about 5,500 additional subscribers before a practical limit of 90% average primary cable occupation is reached. A rural radio call system provides basic radiotelephone services among 35 rural places and with Kampalae A microwave system linking Kampala, Jinja and Nairobi is part of the Pan African Telecommunication (PANAFTEL) network; it carries both domestic and international traffic with Kenya and Tanzania. A microwave link has recently been completed between Kampala and Entebbe, and a microwave system between Kampala, Masaka and Mbarara is under construction. In the rest of the country, the trunk network consists of VHF/UHF links and overhead lines with carrier equipment, most of which is obsolete. However, except for segments damaged during the 1978-79 war, and for widespread reduction in capacity due to lack of spares, the main trunk routes appear to be in fair working condition. 2.10 International services are provided utilizing a standard A INTELSAT earth station commissioned in 1981. An international semi-automatic telephone exchange of recent design and a 500 line electronic telex exchange were commissioned concurrently with the earth station. A 300 line crossbar telex exchange commissioned in 1971 has been temporarily withdrawn from service due to lack of spare parts. Teleprinters linked to the telex exchange by means of VFT sytems are used to provide public telegraph service through 13 offices at 10 locations outside Kampala and telex service to 27 remote subscribers. Five telegraph offices operate in Kampala, also connected by the telex network. Annexes 4 and 5 respectively present a more detailed description of existing telephone installations and a summary of postal facilities. Annex 6 gives selected postal and telecommunications statistics for the period 1970-82. F. Facilities Destroyed during the War 2.11 From a total of 124 previously existing telephone exchanges, 21 exchanges totalling 3,995 lines capacity and 2,644 connected lines were  - 7 - destroyed during the war; two of these exchanges, at Mbarara and Masaka, were automatic with a total of 2,000 lines capacity and 1,466 connected lines. The VHF links Kampala-Masaka-Mbarara, Masaka-Kigali (Rwanda) and Soroti-Lira were also destroyed. The aerial cable along the route Kampala-Entebbe was seriously damaged, and subscriber telephone and telex apparatus including the 280 rural radio call stations in operation prior to 1979 were stolen. Six telegraph offices using VFT telex in five towns were destroyed, 9 post offices were damaged, and most other post offices were looted of equipment and materials; 75 post offices and agencies remain closed. Parts of the destroyed plant have been or are being replaced or rehabilitated with EEC and UNDP financing. This mainly includes the microwave links in the routes Kampala-Entebbe and Kampala-Masaka-Mbarara, 35 subscriber stations and a base station for the rural radio call system, and several 12-channel carrier units. Ten telephone exchanges, including Masaka and Mbarara, have been temporarily replaced by small manual switchboards; some subscribers have been connected to other exchanges. Annex 7 gives more details regarding the facilities destroyed during the war and their partial replacement. G. Demand for Services 2.12 According to UPTC's official waiting list, by the end of 1982 there were about 22,000 outstanding applications for new telephone lines. Added to 22,500 lines in service (estimated on the basis of mid-year statistics), total expressed demand was about 44,500. The table below presents forecasts of expressed demand for the period 1983-87 based on this figure and assuming 10% annual growth (which was the rate observed in the period 1971-77); the table also shows expected number of connected subscriber lines in service in accordance with the specific rehabilitation and development projects included in UPTC's 1982-87 program. Telephone Demand and Supply Connected Total Connected Lines Telephone Outstanding Expressed as % of Expressed December 31 Lines Applications Demand Demand -------------------------------ESTIMATES----------------------------------- 1982 23,000 22,000 45,000 51 -----