Ghana - Second Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7163-GH STAFF APPRAISAL REPORT REPUBLIC OF GHANA SECOND TELECOMMUNICATIONS PROJECT June 6, 1988 Industry and Energy Operations Western Africa Department Africa Region 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 authorizaton.  Currency and Eauivalent Units Currency Unit = CEDI US$1 - CEDI 186 (Auction Rate on May 13. 1988) WEIGHTS AND MEASURES Metric System LIST OF ABBREVIATIONS CCCE - Caisse Centrale de Cooperation Economique (France) CDR - Committee for the Defense of the Revolution DEL - Direct Exchange Line ERP - Economic Recovery Program GOG - The Government of Ghana GPT - Ghana Posts and Telecommunications Corporation ICB - International Competitive Bidding IDA - International Development Association JCC - Joint Consultative Committee LCB - Local Competitive Bidding LIB - Limited International Bidding MOTC - Ministry of Transport and Communication OECF - Overseas Economic Cooperation Fund (Japan) PABX - Private Automatic Branch Exchange PMBX - Private Manual Branch Exchange PPF - Project Preparation Facility SOE - State Owned Enterprise TMS - Telecommunications Master Plan UHF - Ultra High Frequency VFT - Voice Frequency Telegraph F?scal Year Government : January 1 - December 31 GPT : January 1 - December 31  FOR OMCIL USE ONLY GHANA SECOND TELECOMMUNICATIONS PROJECT STAFF APPRAISAL REPORT Table of Contents Page No CREDIT AND PROJECT SUMMARY ...... ........................... iv I. INTRODUCTION .......................................... 1 II. THE TELECOMMUNICATIONS SECTOR ......................... 2 1. BACKGROUID A. General ......................................... 2 B. Access to Service ............................... 2 C. Usage of Service ................................ 3 D. Existing Facilities and Quality of Service ...... 3 E. Demand for Service .............................. 4 2. THE ENTITY A. Organization and Management ..................... 5 B. Staff and Training .............................. 6 C. Accounting System ............................... 8 D. Billing and Collection .......................... 8 E. Audit ........... ................................ 9 3. DEVELOPMENT A. Sector Goals .................................... 9 B. Sector Development Constraints ..... ............. 10 C. Bank's Role and Strategy ........................ 10 2III. THE PROGRAM AND THE PROJECT ........................... 12 1. DESCRIPTION A. Project Concept ................................. 12 B. Project Objectives .............................. 13 C. Project Description ............................. 13 This report is based on the findings of a Bank mission to Ghana in November 1987, comprising Messrs. R. Kayani (Task Manager), D. Lomax, R. Pradhan and P. Adams. Mr. S. Brushett participated in the preparation of the project. 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 of Contents (continued) Page No 2. COSTS A. Project Costs ................................... 17 B. Contingencies ................................... 18 C. Project Financing ............... .............. i8 3. PROCUREMENT AND IMPLEMENTATION A. Procurement ..................................... 20 B. Disbursements ............... 22 C. Implementation .................................. 23 D. Overall Project Management ...................... 24 E. Performance Indicators .......................... 24 IV. FINANCIAL AND ECONOMIC ANALYSIS ........................ 25 1. FINANCIAL ANALYSIS A. Past Financial Performance ...................... 25 B. Past Financial Position ......................... 27 C. Future Financial Performance .................... 28 D. Financing Forecast .............................. 29 2. ECONOMIC ANALYSIS A. Tariffs ........ 30 B. Benefits ........................................ 31 C. Return on Investment ............................ 31 D. Risks ........................................... 32 E. Least Cost Solution ............................. 32 F. Environment ..................................... 32 V. AGREEMENTS REACHED AND RECOMMENDATION ............ 33  - iii - ANNEXES AND CHARTS Page No 2-1 Basic Telecommunications Facilities (1976-1987) ...... 36 2-2 Existing Telecommunications Facilities .... ........... 37 2-3 GPT Organization Chart ............................... 41 2-4 Staffing . ............................................ 42 3-1 Investment Program (1987-1992) ........................ 43 3-2 Telephone and Telex Facilities Over the Project Period (1987-1992) ....................... 46 3-3 Detailed Project Description ......................... 47 3-4 Terms of Reference for Consultancy Services .... ...... 53 3-5 Schedule of Disbursements ............................. 73 3-6 Implementation Schedule ............................... 74 3-7 Action Plan for Consultancy Services .... ............. 75 3-8 Overall Project Management Organization Chart ......... 76 3-9 Technical Performance Indicators ...................... 77 4-1 GPT Income Statements (Historic) ...................... 78 4-2 GPT Balance Sheet (Historic) ......... ................. 79 4-3 GPT Projected Income Statement ........ ................ 80 4-4 GPT Balance Sheet ..................................... 81 4-5 GPT Funds Flow Statements ........... .................. 82 4-6 Financing Plan ....................................... 83 4-7 Notes and Assumptions on the Financial Forecasts ...... 84 4-8 Primary Indicators ..................................... 86 4-9 Telecommunications Tariffs ............................. 87 4-10 Return on Investments ................................. 88 6 Selected Documents and Data Available in Project File ............................. 91 Map IBRD No. 20626  _ iv - GHANA SECOND TELECOMMUNlCATIONS PROJECT Credit and Proiect Summary Borrower: Republic of Ghana Beneficiary: Ghana Posts and Telecommunications Corporation (GPT). Amount: SDR 13.8 million (US$19.0 million equivalent). Terms: Standard, with 40 years maturity. On-Lending Terms: The Government of Ghana (GOG) will onlend the credit proceeds to GPT at the interest rate of 7.72Z (the IBRD rate at the time of negotiations) fcr a period of 20 years including five years of grace. GPT will assume the foreign exchange risk. Project The proposed project aims to support a program of Description: institutional and management improvement of the telecemmunications sector and to improve the quality of telecommunications service. The project comprises: consultancy services for reorganization, corporate planning, and telecommunications master plan; management assistance for operations and maintenance, planning, financial management, and project management; fellowships and equipment for training; and rehabilitation of the existing telecommunications network focused on Accra, Kumasi, Tema, Tamale, Koforidua, Cape Coast, Sekondi and 26 rural towns. Proijct Benefits All sectors of the economy will benefit from the and Risks: project. Well functioning telecommunications services are esser,tial to support GOG's objectives under the Economic Recovery Program. In particular, fuel costs will be saved due to a more efficient use of transport; markets for agr'-ultural and export goods will work more efficiently, and GOG's administration will be more efficient. Investments under the project will lead to rehabilitation and limite. expansion of the telecommunications network consistent with expressed demand in the largest towns and with least cost technical solutions. The principal risk is that past weaknesses in sector management and organization and staff shortages will persist and project benefits will not be fully realized.  - v - This risk is however mitigated by the upfront commitment of GPT and GOG to an action plan for strengthening the sector and entity management, and for manpower development. Proiect Costs (USS million equivalent)l/ Foreign as Local2/ Foreign Total Z of Total Switching equipment 1.6 30.6 32.2 95.0 External cable network 10.1 52.9 63.0 84.0 Radio and multiplex equip. 1.0 14.9 15.9 94.7 Satellite Earth Station 0.1 6.6 6.7 98.5 Telephones, teleprinters PABX and PMBX 0.1 2.8 2.9 96.6 Power and airconditi.ning equipment 0.1 1.7 1.8 94.4 Vehicles 0.0 1.5 1.5 100.0 Computer, tools and test equipment 0.1 1.4 1.5 93.3 Civil works 2.0 3.4 5.4 63.0 Technical Assistance (Consultancy and training) 0.8 18.8 19.6 95.9 Base cost 15.9 134.6 150.5 89.4 Physical contingency 1.6 6.7 8.3 80.7 Price contingency 5.2 9.0 14.2 63.4 Total proiect cost 22.7 150.3 173.0 86.9 1/ Equipment costs are inclusive of spares for new and existing equipment. 2/ GPT is exempted from customs duties for equipment.  - vi - Project Financing Plan: LOCAL FOREIGN TOTAL SOURCE -------------Us$ Million Equivalent-------------- IDA 0.7 18.3 19.0 France (CCCE)11 -- 21.8 21.8 Hollandt/ -- 18.8 18.8 Japan (Grant) -- 9.2 9.2 Japan (Exim) -- 7.0 7.0 Japan (OECF)3/ 6.7 69.5 76.2 Ireland (Telectron)4/ -- 1.7 1.7 GOG 9.8 1.5 11.3 GPT 5.5 2.5 8.0 22.7 150.3 173.0 I/ US$10.7 million equivalent of CCCE loan is yet to be confirmed. 2/ Consists of 50Z soft loans and 502 commercial credit. 3/ OECF has appraised the project. The credit amount is expected to be confirmed by the end of September 1988. 4/ Supplier's credit. Estimated Disbursements: IDA FY: 1988 1989 1990 1991 1992 1993 ------------------US$ Million Equivalent----------------- Annual 0.2 1.8 7.0 5.2 2.8 2.0 Cumulative 0.2 2.0 9.0 14.2 17.0 19.0 Economic Rate of Return: 212  GHANA SECOND TELECOMMUWICATIONS PROJECT I. INTRODUCTION ;.01 To rehabilitate the economy and reverse the economic deterioration suffered over the past decade, the Government of Ghana (GOG) with support from International Development Association (IDA), the International Monetary Fund (IMF), and donor countries, introduced an Economic Recovery Program (ERP) in April 1983. To broaden the policy reforms, GOG further developed a comprehensive structural adjustment program which was supported by a Structural Adjustment Credit (Credit 1777-GH approved in April 1986). A major element of GOG's structural adjustment is a comprehensive reform of the stace-owned enterprise (SOE) sector. A Public Enterprise (PE) project (Credit 1847-GH app-,oved in October 1987) provides critical assistance needed to implement the agreed reforms and also to lay the groundwork for longer-term reforms by str ,-gthening the key institutions and developing further SOE reform and restructuring measures. Reforms in the larger and important SOEs in sectors such as telecommunications are being reinforced and implemented through individual sector operations. In the case of Ghana Posts and Telecommunications Corporation (GPT), there is a need to: (a) develop restructuring programs to achieve financial self- sufficiency and implement immediate operational and managerial improvements to increase autonomy; and (b) revise legal framework and institute performance and investment monitoring procedures. 1.02 GPT, one of the strategically crucial enterprises in the public enterprise (PE) sector, is responsible for operating all public telecommunications services in Ghana. Given the importance of well functioning telecommunications services for the ERP and on the basis of its financial and budgetery importance, GOG has assigned a high priority to the rehabilitation program of GPT. GOG has requested IDA assistance in the development of the telecommunications sector. In line with GOG and IDA strategy in the SOE sector reform, GOG's objectives in the telecommunications sector are to rehabilitate the network and improve sector management. The project will improve the quality and increase the quantity of telecommunications services, and result in GPT being financially self- sufficient by 1991. It will also ease some of the constraints on economic improvements in Ghana. Currently, significant costs, especially additional fuel costs, are being incurred in key sectors of the economy, such as mining and agriculture, because of deficiencies in telecommunications services. 1.03 GPT's investment program for 1987-1992 amounts to US$173.0 million equivalent, including US$150.3 million in foreign exchange. The overall investment program, which is identical with the project, will be financed as follows: US$11.1 million from Caisse Centrale de Cooperation Economique  - 2 - (CCCE) of France, US$18.8 million from the Netherlands (mixed credit and soft loan), US$16.2 million equivalent from Japan (grant and EXIM loan), US$1.7 million from Ireland (supplier's credit), US$76.2 million expected from Japan (OECF), additional US$10.7 million expected from CCCE, US$11.3 million f-om GOG, US$8.0 million from GPT's internal generation, and the balance will be financed out of the proposed US$19.0 million IDA credit. 1.04 The main thrust of the proposed project is to strengthen the sector and entity management, and improve the quality of service of the existing network. This will be achieved through appropriate technical assistance and training, and provision of equipment for rehabilitation and maintenance. The components of the project identified for IDA financing will help remedy the institutional problems and provide spares and complementary assets to optimize the utilization of those installed under the Bank's First Telecommunications Project (para. 2.30;. II. THE TELECOMMUNICATIONS SECTOR 1. BACKGROUND A. General 2.01 GPT, an autonomous government-owned corporation established by decree in November 1974, provides all public telecommunications and postal services in Ghana. In addition to the public telecommunication services, dedicated networks exist to meet the specialized requirements of the police, military, railway and civil aviation services. Private users a'so operate radio link services in areas inadequately served by the public network, upon obtaining a license issued annually by GPT. GPT also carries out some regulatory functions such as setting equipment standards and granting of equipment type approvals. Management of the radio frequency spectrum is carried out by the Ghana Frequency Registration Board. B. Access to Service 2.02 With about 38,0001/ direct exchange lines (DELs) at the end of 1987, Ghena had a telephone density of 0.3 DELs per 100 people. Ghana is cne of the few countries in the world where telephone facilities have decreased over the past seven years. Telephone density in 1981 was 0.4 DELs per 100 and the number .-f DELs were higher than in 1987 (Annex 2-1). The existing facilities are not only inadequate for the present level of economic development but their distribution between urban and rural areas is unbalanced. Telephone service is presently concentrated in the ten regional headquarters, which account for 752 of the total DELs but only 1OZ of the population. Accra alone (with 6Z of the population) has 452 of the DELs, a density of 1.8 DELs per lOO people. The remaining regional headquarters 1/ On average, less than 50X of the DELs were working at any one time during 1987.  have 302 of the DELs, an average density of 1.4 DELs per 100 people. The remaining 252 of DELs serve the rural areas (with 902 of the population giving a density of only 0.07 DELs per 100 people, which is low. 2.03 About 90% of the subscribers are served from automatic exchanges located in 21 towns, and the remaining lines are provided by 413 manual exchanges scattered over the whole country. At the end of 1987, autom.tic telex service was available to 472 subscribers of whom 350 (74Z) were located in Accra. C. Usage of Service 2.04 Current statistics do not directly distinguish between the different categories of users of the telecommunications network nor the traffic composition, but billing information indicate that the government and the parastatal sector together make up about 50X of the users. The remaining users could be categorized into business and residential but in Ghana, like many developing countries where telephone service is underprovided, many of the residential telephones are used for both business and private purposes. D. Existing Facilities and Quality of Service 3.05 As of December 31, 1987, total switching capacity was 55,900 lines consisting of 45,000 automatic and 10,900 manual lines. Total telex capacity was 780 lines. The average exchange utilization (fill) for telephone and telex were 682 and 602, respectively, which were low (para. 2.06) due to defective manual exchanges and the una-ailability of external cable plant. Ghana is served by an extensive long distance network comprising of high capaci microwave systems connecting the large towns and small capacity systems (radio and land line) to the smaller towns. Ix,ternational services are provided through a standard A earth satellite station located at Nkutunze in Accra with direct circuits to 5 countries. Ghana does not have an automatic international telephone exchange. As a result, all international calls from Ghana must go through an operator. Details of all the existing facilities are given in Annex 2-2. 2.06 The quality of service is poor. On average, less than 502 of the connected lines were working at any time during 1987. Of the 413 manual exchanges with capacity of 10,900 lines, only 46 of them (3,300 lines) were in service; the rest have been out of service for more than three years mainly due to the lack of spares for power supplies and faulty overhead trunk transmission routes, leaving the areas served by these exchanges without telephone service. The telephones work intermittently. On average, each telephone is down for more than six months a year and fault clearance time averages more than 30 days. While the average call completion rate of 60Z for local service is barely accepta. le, the rates for subscriber trunk dialing (STD) and international are low at about 202 and 122, respectively. Outgoing international telephone service is manual and waiting time for calls usually exceeds six hours. On average, 402 of all calls are cancelled because of the long waiting time. Currently, the call completion rate from England, Ghana's main international correspondent, is only about 122 resulting in loss of potential foreign exchange revenue to Ghana.  - 4 - 2.07 The poor quality of service is attributed to the following: (a) frequent breakdown of the local cable network due to old age, non-standard installations and use of improper materials; (b) congestion in exchanges caused by old, obsolete, defective and insufficient equipment and long distance circuits; (c) inadequate international facilities for switching and transmission; (d) inadequate operations and maintenance organization; (e) lack of spare parts, tools, test equipment and vehicles; and (f) lack of trained staff. The project will address the above shortcomings (para 3.03). E. Demand for Service 2.08 Despite substantial investments in switching and transmission equipment, the actual number of subscribers fell between 1981-1987. The historical data for connected subscribers is shown in Annex 2-1. At the end of June 1987, only 55Z of expressed demand (connected subscribers plus registered waiting applicants) was satisfied. The registered waiting list of 30,000 applicants was about 82Z of existing working subscribers and the actual unsatisfied demand is likely to be much higher considering potential subscribers who have been discouraged from applying for telephone service because: (a) the average waiting time for connection is long (exceeding five years); and (b) the quality of service has been poor (para 2.06). In the absence of reliable data, it is difficult to estimate the actual demand for telephone service. With the prospect of sustained economic growth, and the improvement in the quality of telephone service as a result of this project, demand will be stimulated and the total expressed demand is expected to increase substantially. The waiting list at the end of the project in 1992 is expected to remain at the present level, despite an average modest subscriber growth rate of 1O per annum during 1987-1992. One of the objectives of the telecommunications master plan study (para. 3.06), under this project, is to estimate long-term demand and strategy for meeting such demand. 2.09 The demand for telex service has the same characteristics as that for telephone service. At the end of December 1987, only about 36Z of the expressed demand was satisfied. The growth in telex connections over the next five years is estimated te be ajout 15Z per annum. Although the demand for telex service i8 declining worldwide, the situation it. Ghana is different due to substantial hidden demand and a lack of alternative services at present such as telefaceimile, teletex and data. Until these options are fully established, which is unlikely over the next five years, demand for telex service is expected to grow.  -5- 2. THE ENTITY A. Organization and Management 2.10 All public telecommunications services in Ghana are provided by the GPT, a government owned corporation established by decree in 1974. GPT falls under the supervision of the Ministry of Transport and Communications (MOTC), which is responsible for approval of investment programs, budgets and changes in tariffs. Under the decree, GPT enjoys considerable autonomy in financial and administrative matters, but has limited control over staff remuneration which have to fall within the framework of all parastatal organizations. However, GPT's continued dependence on financial support from the government has eroded GPT's autonomy and made it function as if it were a government department. This has not been conducive tn efficient operation of GPT, especially when there is lack of consistent development and operational policies from the government. Under this project, a telecommunications advisor will be employed to assist MOTC in the formulation of sector development and operational policies (para. 3.07). The advisor is expected to be appointed before September 30, 1988. The lack of a Board of Directors since 1982 has also contributed to the weak sector management. A Board of Directors has just been appointed. 2.11 GPT is managed by a Director General, with two Deputy Director Generals for Posts and for Engineering (Telecommunications). Management decisions are subject to discussions at an internal Joint Consultative Committee (JCC) consisting of top management, the Union and the Committee for the Detense of the Revolution (CDR). The organization structure of GPT is given in Annex 2-3. In the past four years, there have been frequent changes in top management (three Director Generals) which have weakened the institution's capacity. In addition, there has been a severe shortage of skilled manpower at all levels of the organization (para. 2.14). 2.12 GPT's organization structure and procedures are inadequate to manage the current telecommunicaticins assets and the vital rehabilitation program, or to administer a viable and sustained growth of the sector. GPT's present management systems are not only inadequate, but also fragmented. Because of the lack of management information systems, management is unable to obtain pertinent information when needed. Planning is virtually non-existent in GPT at the moment. The poor quality of services is partly due to the lack of proper operations and maintenance systems (para 2.07). Substantial improvements are required in management information systems, planning, operations and maintenance, finance, billing and collection, procurement and project implementation. 2.13 GOG has recognized the need to strengthen GPT's operations and organization; improve efficiency to maintain and operate the existing network; undertake rehabilitation; and plan for future expansion. GOG has decided to split GPT into separate legal entities for postal and telecommunications services and to strengthen these entities to make thpm more responsive to the needs of individual sectors. A preliminary report  containing proposed organization structures and job descriptions of senior management positions has been prepared. However, there still remains a lot of work to be done before the split and reorganization are implemented. In this project, IDA is providing the necessary assistance through the P?F advance for working out the modalities for the reorganization, including preparation of detailed action plans for execution of the reorganization and support in the implementation phase (para. 3.06). Agreement has been reached with GPT that the consultants will submit their recommendations by September 30, 1988. GPT will discuss the consultants' recommendations with IDA by December 31, 1988, and implement agreed recommendations by June 30, 1990 according to a schedule acceptable to IDA. B. Staff and Training 2.14 The single most important issue in GPT is the severe shortage of trained and experienced manpower at all levels, especially in the engineering and financial areas. Telecommunications staff at end-1987 were 4,038 (Annex 2-4). Out of 76 positions for engineers, only 21 positions (28Z) were filled. In the finance department, non-qualified personnel occupy positions that ought to be filled by qualified accountants; out of the 91 occupied positions, there is only one qualified accountant. During the past seven years, GPT lost about 1,500 skilled staff, mostly from the engineering cadres. The loss in skilled engineering staff has been largely due to poor economic conditions in Ghana, poor remuneration and lack of incentives. The poor economic conditions are being addressed through GOG's ERP. Improvement in the manpower situation can only be achieved over a long period of time during which intensive training at managerial and technical levels will be undertaken. In the interim period consultants, working with Ghanaian counterparts, will be employed to fill key skill gaps (para. 2.32). GPT has initiated action for developing a manpower plan. A manpower rationalization committee has been created to look into the present staff utilization and propose ways of improving staff efficiency. The data collected and the reorganization work under the PPF advance will serve as essential inputs for a manpower study to be carried out under the project. Consultants will assist GPT in identifying long-term manpower requirements, and draw-up a manpower development plan including training programs and incentive schemes. It was agreed that the letter of invitation for proposals to prepare the manpower development plan will be issued by September 30, 1988 (para. 3.08(h)). GPT will discuss the consultants' recommendations with IDA by October 31, 1989, and begin their implementation by December 31, 1989. 2.15 Since a key factor for the success of GPT will be its ability to attract and retain trained staff, the consultants will also assist GPT in a review of staff emoluments and benefits and recommend appropriate incentive schemes. Housing has been identified as an important incentive to attract and retain trained personnel. GPT is currently unable to provide housing, because of a severe shortage of building materials. The project will finance building materials for about 100 residential units. GPT has also  - 7 - embarked on a new recruitment and training scheme where GPT would finance students to acquire relevant professional and technical qualifications in universities and technical colleges. In the scheme, in-service trainable staff and other trainable recruits would be sponsored by GPT with the provision that they work for GPT for a fixed period of time of at least five years (depending on the duration of training) after completion of training. An average of 15 trainees will be sponsored every year commencing in 1989. The project will provide support for this scheme. 2.16 GPT operates a school dedicated to basic telecoirmunications and postal training. The school has been in existence since 1949, but postal craining did not start until 1982. Through UNDP financing, it was modernized and fully equipped in 1965 to provide up to mid-level technician training. Since then, no investments have been made to update its facilities to match the growth in the size of the GPT network and the changes in technology. Teaching facilities are inadequate, antiquated and in most cases different from the facilities actually installed in the field. Currently, there are no facilities for the digital equipment which is already in operation in Ghana. Like the rest of GPT, there is severe shortage of trained manpower (teaching staff) and the few available staff need urgent training in the latest digital and other (e.g. optical fiber) technology. The project would provide modern training equipment and sponsor instructors for overseas training in the digital technology. GPT will employ outside instructors in tne interim period while undertaking intensive training of local instructors. 2.17 GPT's in-house facilities are supplemented by established national training institutions (universities, technical schools and management schools) and attachments with overseas telecommunications administrations, universities and manufacturers. The overall (in-house and external) annual training volume has averaged about 7,300 student weeks over the past five years, a figure that is expected to increase to 16,000 by 1992 as a result of the project. 2.18 GPT's training function is currently under the Director of Internal Services, but arrangements are being made to transfer it to the Director of Personnel and General Services. The management of the training function needs urgent attention in two areas: there is no capacity for systematic assessment of training needs of GPT staff; and for preparing and implementing staff development plans. This capacity is expected to be built during the project through recruitment and training of suitable personnel. 2.19 GPT has no regular program for managerial, administrative and financial training. Training in these areas is done on an ad-hoc basis using external institutions such as the Ghana Institute of Management and Public Administration (GIMPA) and overseas facilities. The project provides for about 93 man-months of fellowships for these disciplines.  -8- C. Accounting System 2.20 GPT prepares commercial accounts based on an accounting system that was installed in 1975-76 under the Bank's First Telecommunications project, but the accounts are not yet fully on accrual basis. Although separation of postal and telecommunications accounts under this system is possible, there have been weaknesses in the implementation of the system due to insufficient trained staff and poor financial management. In addition, tha accounts are consistently late and subject to audit queries. There is little coherent and timely financial information prepared for senior management. In order to improve its financial management and the commercial accounting system, GPT has, through OECF financing, employed expatriate financial consultants since September 1985 to fill the positions of Financial Controller and Deputy Financial Controller. There have been some improvements, most notably in billing and collection; but many of the problems remain. The project provides for consultants to continue once the current contract is over, and additional consultants to implement an accrual accounting system. It was agreed with GPT that by June 30, 1989, proposals would be submitted to IDA for the introduction of an accrual accounting system and that the consultants' recommendations acceptable to IDA will be fully implemented by December 31, 1989. D. Billing and Collection 2.21 Separate billing is performed for domestic and external services. For external services separate bills are produced for each of the three services (telephone, telex and telegrams). Customers without external services accounts have to pay in cash at the post offices to use the external facilities; about 40Z of international telephone calls made from Ghana are cash calls. 2.22 GPT has centralized billing for all regions except for Ashanti and Eastern Regions. From April 1987 billing, all bills in Accra have been prepared monthly. For Ashanti and Eastern Regions, bills are still prepared on a quarterly basis. 2.23 Collection performance of GPT has been consistently poor in the past with collection rates at about 30? in Dec--ber 1986, as compared to an average of over 65Z in most West African telec nications entities. Poor collection was due mostly to delays and inaccuracies in the billing. About 90? of the bills had wrong charges, and incorrect subscriber names and/or addresses. This was due to inadequate coordination among the various GPT units involved and to staff not following standard operational procedures. GPT's financial consultants are assisting in reducing the billing and collection problems. This has resulted in trebling of the collection rate to about 90Z in the third quarter of 1987. To sustain this performance, the billing and collection will be strengthened through continued technical assistance under this project. It war agreed with GPT that an action plan would be submitted to IDA to reduce the outstanding subscriber receivables from 4 months in 1987, to 3 months in 1988, and 2 months of revenue equivalent, thereafter.  -9- E. Audit 2.24 GPT established an internal audit system as required under the First Telecommunications Project (Loan 1122-GH). The Chief Internal Auditor reports to the Director General. The internal audit service has a staff of 43, none of whom is a qualified accountant. The department has not successfully addressed the major accounting problems of GPT, concentrating instead on matters affecting cash. A considerable part of internal audit time is spent on carrying out a pre-audit of cash vouchers. The role of the internal audit depart-went will be redefined by the consultants working on the reorganization of GPT to focus on reviewing the effectiveness of the accounting system and ensuring compliance with laid down policies and procedures. 2.25 GPT's accounts have been audited by a local accounting firm since 1975/76. The quality of audit reForts has been generally poor. The standard of management reports 4.eiued by the auditors needs to be improved if GPT is to receive sound advice on how accounting systems and accounts presentation can be improved. In addition, the audited accounts have consistently been late. This has been due mostly to delays by GPT in the preparation of draft accounts for each fiscal year caused by the lack of qualified staff to prepare the accounts. The draft FY86 accounts were completed in March 1988. This delay is due to the lack of qualified staff to prepare the accounts. Under the project, consultants will be provided to assist GPT in the implementation of an accrual accounting system and in the preparation of accounts. The draft FY86 financial statements have been submitted to IDA and the submission of audited FY86 financial statements is a condition of credit effectiveness. The Association has also agreed with the Borrower that the FY87 unaudited and Rudited financial statements will be submitted by September 30, 1988, and December 31, 1988 respectively. For FY88, unaudited and audited financial statements will be submitted to IDA within six and nine months, respectively. For FY89 and onwards, unaudited and audited financial statements will be submitted to IDA within four and seven months, respectively. 3. DEVELOPMENT A. Sector Goals 2.26 A well functioning telecommunications network has been identified by the GOG as being strategically crucial to the success of ERP. The GOG is aware of the need to optimize the utilization of existing assets through the execution of effective rehabilitation programs and installation of appropriate maintenance systems. The main sector goals are to: (a) improve the quality of service and operational efficiency through network rehabilitation and expansion, installation of an effective operations and maintenance program, and improved management and staff development programs;  - 10 - (b) ensure that installed assets are optimally utilized through installation of complementary assets; and (c) improve sector financial performance to eliminate existing GOG subsidies and eventually generate revenues for GOG. B. Sector Development Constraints 2.27 The main constraints to sector development are: (a) lack of management capacity and trained manpower to operate and maintain the existing facilities efficiently and to plan and implement development programs; and (b) lack of funds (local and foreign) which limits GPT's ability to procure essential equipment and materials for maintenance and expansion. 2.28 To overcome some of the current institutional deficiencies and to develop an information base for detailed planning and implementation of the proposed project, GPT will appoint consultants under the project to carry out these tasks (para 3.05) and assist in training to build in-house capacity. 2.29 Due to poor financial performance, GPT has been dependent on GOG subsidies for its operations and development work (para. 4.02). Delays in obtaining local funds from GOG was one of the main constraints to timely completion of the Fir.t Telecommunications Project. In addition, GPT has had virtually no access to foreign exchange for essential spare parts and routine operational requirements due to the severe shortage of foreign exchange in general and the relatively low priority accorded, until recently, to the telecommunications sector by the GOG. The project would pro-ride urgently required services, equipment and materials for rehabilitation and maintenance. C. Bank's Role and Strategy 2.30 Past Involvement. IDA has been associated with the telecommunications sector in Ghana since 1971. Under the First Telecommunications Project (Loan 1122-GH), a loan of $23 million was approved in June 1975. The project was a slice of the 1976-80 investment program whose objectives were to improve the quality of service, extend services to new subscribers and strengthen the newly created GPT. Unfortunately, these objectives were not met, in fact there has been a serious decline in the sector's performance since 1980 manifested by the deteriorating quality of service, and the long list of waiting applicants and poor financial performance. The main causes for the failure of the first project are discussed in detail in the Project Completion Report (PCR) dated April 18, 1986 and are summarized below:  - 11 - (a) difficult economic conditions in Ghana; (b) lack of adequate staff and management at GPT; (c) initial delays in what was an overly optimistic implementation schedule, in retrospect; (d) local unavailability of key construction materials; (e) large overruns in local costs that GPT could not finance without GOG support; and (f) delays in meeting a cost overrun in foreign exchange due to a decision to change switching technology from electromechanical to digital electronic. 2.31 Besides 2.30(c) and 2.30(f) above, the other reasons could be linked in one way or another to the difficult economic conditions in Ghana, which were the result of poor economic policies, mismanagement, the troubled international economic environment and prolonged drought. Due to these difficult economic conditions, many skilled staff had to seek employment outside Ghana, resulting in a braindrain for the country, especially in the fields of engineering and finance. The large staff turnover was also due to poor remuneration and lack of incentives. A severe shortage of foreign exchange led to shortage of materials, and delays in obtaining funding for the foreign component of the cost overruns. GPT could not finance local cost overruns because of poor financial performance (para. 4.01). 2.32 Implications of Past Experience for the Proposed Proiect. The lessons learnt under the first project have been taken into account in designing the proposed project. The difficult economic conditions are being addressed through the ERP. All other issues are being addressed under the project to ensure its successful and timely completion. To compern-ate for management and staff shortages, consultants are being hired to fill in the gap. Some of these consultants will be employed at key line management positions for about four years while intensive training of Ghanaians is being undertaken at all levels. When GPT staff are fully trained, or qualified new staff available, the consultants will be replaced. Consultants will be retained in those areas where no suitable Ghanaians are available. 2.33 The implementation period of the five year program has been extended to six years and delays will be avoided by ensuring that project management consultants are selected before credit effectiveness. All works will be implemented on turnkey basis, where suppliers will also be responsible for installation and commissioning. 2.34 Financial performance of GPT will be improved through: (a) proper management by financial consultants to be employed under the proposed project; and (b) the increase in revenue expected due to the improvement in  - 12 - quality of service and network expansion as a result of this project. However, GPT will still require financial support from GOG for project implementation up to 1990 (para. 3.12). GOG will provide local funds for the project through 1990 (para. 4.08). Employment of financial consultants is a condition of credit effectiveness (para. 3.08(b)). 2.35 IDA's Role. IDA has three main roles in the telecommunications sector in Ghana. IDA is in a unique position to assist the government in improving the sector management and organization, financial management, investment planning and staff training. Second, IDA's involvement is needed to maintain a balance between physical and institutioual development of the sector. Without IDA's presence, adequate attention to setting appropriate policies and goals, management improvements, strengthening technical and financial systems and maintenance is unlikely; efforts would instead focus on network expansion and many of the past mistakes would be repeated. IDA's third role is to help focus and coordinate the various sources of bilateral assistance. IDA's involvement in this sector has been catalytic in attracting cofinancing from Japan, France, and Holland and in directing available resources into priority areas such as rehabilitation of subscriber cable networks. 2.36 Strategy. Given the experience under the first project and the sectors' goals and constraints (paras 2.26 and 2.27) IDA's strategy is: (a) to provide technical assistance for institution building including supporting sector reorganization, setting a policy framework, designing and implementing a management improvement program, planning and training; (b) to finance urgent equipment rehabilitation and maintenance needs including spare parts; (c) to ensure through consultations with donors that available funds are initially directed towards priority rehabilitation needs rather than pure expansion. III. THE PROGRAM AND THE PROJECT 1. DESCRIPTION Proiect Concept 3.01 The project is identical with GPT's investment program for the period 1987-1992 (Annex 3-1). The program, prepared by GPT with the assistance of IDA, has been designed within the framework of GOG's overall Economic Recovery Program and is consistent with the sector goals (para 2.26). The program is not sufficient to meet the rising demand for telecommunications services (para 2.08), but reflects the resource constraints (para. 2.27). The program consists of the following main  - 13 - components: rehabilitation, including limited expansion of the local external cable network, national switching system, long distance, and international networks; civil works, procurement of vehicles, power, airconditioning and subscriber terminals; enhancement of GPT's institutional and management capacity; and training. Facilities to be added to the network over the project period are given ir. Annex. 3-2. 3.02 The cost of the program is estimated at Cedis 35.3 billion (US$173.0 million) including Cedis 30.6 billion (US$150.3 million) in foreign exchange. B. Proiect Obiectives 3.03 The project has the following main objectives: (a) to support a program of institutional and management improvement for the telecommunications sector; (b) to improve the quality of service offered to telecommunications subscribers through, inter alia, rehabilitation and replacement of old obsolete assets, improving maintenance and providing complementary assets to enable optimum utilization of existing assets; and (c) to improve GPT's financial performance so as to eliminate existing government subsidies and enable GPT to eventually become a net contributor to the GOG. C. Project Description 3.04 The project described in detail in Annex 3-3 consists of the following components: Part 1 - Rehabilitation and Expansion (a) provision of spare parts for existing telecommunications equipment; (b) replacement of 23,400 lines of obsolete and defective exchanges and cables in Accra, Kumasi, Tema, Takoradi, Tamale, Koforidua and Cape Coast, and expansion to meet excess demand in these towns; (c) replacement of old manual exchanges by automatic exchanges in 26 rural towns; (d) provision of a 330 line international exchange and rehabilitation of the satellite earth station to improve international services;  - 14 - (e) provision of a 1000 line telex exchange; (f) provision of 20,OOC telephones, 500 teleprinters, 500 Private Manual Branch Exchanges (PMBX), 200 Private Automatic Branch Exchanges (PABX), and 500 Public Call offices to cater for replacement of old instruments and to connect new subscribers; (g) replacement equipment for digital trunk exchange, microwave equipment, multiplex equipment and power plant damaged by floods; (h) replacement of 3 old microwave and 7 UHF transmission systems, provision of: a Coast Station, rural transmission facilities including cables for 62 District Centres, VFT/TDM Systems and sub base band insert equipment; (i) provision of 150 vehicles for planning, construction operation and maintenance works; (j) provision of power and air conditioning equipment; (k) provision of building materials to support GPT's construction program of equipment and residential buildings and construction of flood protection works; and (1) provision of computer, tools and test equipment. Part 2 - Technical Assistance and Training (a) for strengthening GPT's management capacity (organization, financial and engineering) to plan, maintain and operate the network efficiently, and MOTC's capacity to set clear policies and create an appropriate regulatory and operating environment; (b) for improving the training school including provision of modern training equipment, development of appropriate curricula and provision of instructors; (c) for training of staff in telecommunications management, digital technology, finance, accounts and procurement. This training is exclusive of factory training which will be undertaken for all new equipment to be procured under this project; and (d) sponsorship for technical and other professional qualifications in universities and technical schocls in Ghana. 3.05 The technical assistance under IDA financing pro'vides for a total of 636 man-months of consultants' services for .echnical, financial, stores and institutional strengthening (Annex 3-3). In addition, there are 6 man- months of an ongoing financial management contract financed by OECF. In  - 15 - this project, OECF is financing an additional 200 manmonths of consultancy service to implement the portion under its financing. The large technical assistance will assist GPT to fill skill gaps at various management and technical levels (para. 2.14) initially, while recruitment and training is being undertaken. Consultants under IDA financing will be provided in three phases: Phase I 3.06 Consultants have been selected under PPF I (50 man.-months), approved in May 1987, to assist GPT in preparatory tasks (para 2.28) for the project including preparation of action plans for the split and reorganization of GPT, preparation of a telecommunications master plan and corporate plan. The terms of reference are detailed in Annex 3-4. Phase II 3.07 A second PPF (PPF2) was aprroved in May 1988 to meet the cost overrun under PPF1 (due to appreciation of the Yen and the Sterling Pound relative to the US dollar), and to ensure that key consultants (under phase III - para 3.08) will be selected prior to credit effectiveness. These will include 34 man-months of: (a) consultants for project management team to prepare technical specifications and bid documents; (b) Chief Accountant to replace the incumbent who is departing in September 1988; and (c) telecommunications advisor at the MOTC. The terms of reference for the assignments are included in Annex 3-4. Phase III 3.08 This phase which is expected to commence after credit effectiveness will provide 552 man.-months of management assistance to: (a) establish a Project Management Team to assist GPT in the implementation of the total project and continue with the task commenced by project management team under PPF2, including: (i) design work, detailed engineering, procurement, supervision of installation, acceptance testing and commissioning of all equipment and civil works; (ii) coordination of implementation of different physical components of the project; and (iii) physical project management including supervision ot contractors. The Project Management Team will require four experts in external cable, switching, transmission, power and airconditioning to work with Ghanaian counterparts throughout the implementation period of the project (240 man- months in total). The letter of invitation for proposals was issued on May 6, 1988. The selection of consultants is a condition for credit effectiveness.  - 16 ^ (b) Provide expertise in financial management. The financial function is now being managed by two experts financed by OECF. This arrangement will need to continue after the current contract expires in September 1988. In addition, financial expertise will also be required to design and implement financial management systems, including improvement of the accounting system, budgeting, forecasting, cost cont,ol, etc. to ensure that the financial objectives of the projeLt are achieved (120 man-months in total). The letter of invitation for proposals was issued on May 6, 1988. The selection of consultants is a condition for credit effectiveness. (c) Provide expertise for network planning. Four experts (96 man- months) in traffic engineering, external plant, switching and transmission will be employed. The letter of invitation for proposals for the four experts will be issued by September 30, 1988. (d) Draw up operations and maintenance systems. Experts will be emploved for 24 man-months to control and coordinate operations and maintenance; implement standards for quality of service set in the Telecommunications Master Plan (TMS); update engineering instructions aj.1 produce operations and maintenance statistics. The letter o. "-ritation for proposals for these experts will be issued by September 30, 1188. (e) Provide expertise in materials management. Experts will be required for 24 man-months to set-up comprehensive and integrated materials and stores management control procedures. The letter of invitation for proposals will be issued by September 30, 1988, and consultants' agreed recommendations will be implemented by June 30, 1990. (f) Assist GPT in reviewing tariff levels and structure and preparing a tariff policy proposal and a resource transfer policy (10 man-months). The letter of invitation for proposals wiill be issued by September 30, 1988 and the consultants' final recommendations will be discussed with IDA by September 30, 1989 and agreed recommendations will be implemented by December 31, 1989. (g) Establish an appropriate management information system to enable delivery of relevant data to management for timely performance monitoring. Experts will be required for 24 months to undertake this task. The letter of invitation for proposals will be issued by September 30, 1988, and consultants' recommendations will be discussed with IDA by December 31, 1989, and agreed recommendations will be implemented by June 30, 1990.  - 17 - (h) Identify long-term manpower requirements and draw up a manpower development plan including training programs and incentive schemes. An expert will be employed for 12 months. The letter of invitation for proposals will be issued by September 30, 1988 (para. 2.14). Consultants recommendations will be discussed with IDA by October 31, 1989 and implementation of agreed recommendations will start by December 31. 1989. (i) Assist MOTC in formulating sector development and operational policies (para. 2.10). An expert will be employed for 24 months. Appointment of this expert is expected before September 30, 1988. (j) Assist GPT in preparing a financial restructuring plan. The letter of invitation for proposals will be issued by September 30, 1988 and by December 31, 1989, GPT will submit an action plan acceptable to the Association for the implementation of the restructuring plan. Detailed terms of reference for the tasks have been discussed and agreed upon with GPT. GOG and GPT will identify counterpart personnel for each assignment, at the time of the issuance of the letter of invitation for proposals. GPT will review with IDA each year the impact of technical assistance, including counterpart staff training and agree on the implementation objectives for the following year. The implementation of the consultancy services for the project and financial management wil' be done in two phases. The first phase will cover the first 24 months aId the second phase will cover the remaining period of the project (24 months). A comprehensive review of the staff situation in GPT will be carried out after the first phase to determine the extent to which further consultancy services will be required for the second phase. 2. Costs A. Project Costs 3.09 The total cost of the project is estimated at Cedis 35.2 billion (US$173.0 million equivalent) with a foreign exchange cost of Cedis 30.6 billion (US$150.3 million equivalent), i.e. about 872 of total cost. The base cost estimates are based on equipment prices and installation costs in May 1988. Project costs are summarized in Table 3.1.  - 18 - Table 3.1: PROJECT COST SUMMARY1/ ForeIgn as Loca12 Foroign Total Local Fore gn Total X of total -Cedis mill -- US----S11