Papua New Guinea - Third Telecommunications Project

Document of , < />5 65 The World Bank ) FOR OFFICIAL IJSE ONLY A*. 3 X Report No. P-5144-PNG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US*17.2 MILLION TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A THIRD TELECOMMUNICATIONS PROJECT DECEMBER 4, 1989 4b 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 (July 1989) Currency unit = Kina (K) US$1.00 = K 0.87 K 1.00 = US$1.15 FISCAL YEAR January 1 - December 31 WEIGHTS AND IMAEASURES Metric System ABBREVIATIONS AND ACRONYMS CSA Comrmercial Statutory Authonty DOFP Department of Finance and Planning GDP Gross domestic product ICB International competitive bidding IDD International direct dialing IRR Internal rate of return JICA Japan International Cooperation Agency MIS Management information system NEC National Executive Council PPF Project Preparation Facility PTC Post and Telecommunication Corporation  FOR OMCAL USE ONLY PAPUA NEW GUEA THIMD TELECOMMUNICATIONS PROJECT Loan and Prect Summary Borrower The Independent State of Papua New Guinea Beneficiay The Post and Telecommunication Corporation (PTC) Amonmt US$17.2 million equivalent Terms 20 years including a 5-year grace period, at the BanWs standard variable interest rate. On-Lending Terms The Govemment will on-lend US$16,250,000 to PTC at 3% above the IBRD interest rate for 15 years including a 5-year grace period. The Borrower will bear the foreign exchange risk. Financing Plan L~~~1 Foreign ~~Total --- ~(US$ rnln ev) IBRD 17.2 17.2 Suppliers' and Export Credits -- 16.4 16.4 PTC 11.4 31.0 42.4 Total 11.4 64.6 76.0 Economic Rate of Retur 26% Map: IBRD No. 21856 This document has a restrkted 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 authwization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A THIRD TELECOMMUNICATIONS PROJECT 1. I submit the following memorandum and recommendation on a proposed loan to the Independent State of Papua New Guinea for the equivalent of US$17.2 million to help finance a third telecommunications project. The loan would be repaid over 20 years, including 5 years of grace, at the standard variable interest rate. Part of the proceeds of the loan (US$16.25 million) would be on-lent by the Government to the Post and Telecommunicatio.a Corporation (PTC) at 3% above IBRD interest rate for 15 years, including a five year grace period. The Borrower will bear the foreign exchange risk. 2. Background. Telecommunications services in Papua New Guinea are inadequate to meet present and future needs of the economy. PNG has fewer than one telephone line per hundred persons, a telephone density much lower than other countries in the region (e.g., Fiji 4.4, Western Samoa 4.0, Vanuatu 3.0 lines per hundred persons). Telephones are concentrated in urban areas, and the widely dispersed rural population have fewer than one line per thousand persons. 3. PTC is a commercial statutory authority (CSA). It provides all public telecommunications services in PNG. In 1987, in response to the Government's request for assistance in developing strategies to improve sector performance, the Bank prepared a Telecommunications Policy Options paper and funded (through a PPF) a Network Development Plan and a Management Review of PTC. These three studies identified major sector deficiencies including inappropriate sector policies, limited institutional autonomy, inadequate tariff policy, inappropriate strategy for providing access to service, low productivity due to the lack of skilled staff and high turnover of expatriate staff, and inadequate investments. The absence of performance targets (except rate of return) has acted as a disincentive to PTC's management to expand facilities and increase access to telecommunications services. The Government's control of PTC through detailed approval procedures has diluted PTC management's responsibility and accountability. High operating costs, resulting from managerial inefficiency and low productivity, have been passed on to subscribers through high tariffs. 4. The country's geography makes physical communications difficult; wide dispersion of its population in rural areas requires the Government to give high priority to provision of adequate telecommunications facilities and manage them efficiently to support the country's economic development. The Government recognizes the need to change its approach to management of its CSAs, includ- ing PTC, to achieve its goals of sustained economic growth, creation of income- earning opportunities in rural areas, and reduction of social and economic ine- qualities. A Telecommunications Policy Paper was approved by the Government, which would increase access to telephone service by installing public telephones in urban and rural areas; improve network service quality; reduce tariffs in real terms at least 2% p.a. and review its tariff structure with expert advice; and increase PTC's productivity 3% p.a. while maintaining PTC's financial perform- ance.  - 2 - 5. Rationale for BAnk Involvement. The Bank has had two previous telecommunications sector operations in PNG, Loan 546-PNG for US$7 million in 1968 and Loan 852-PNG for US$10 million in 1972. Project Completion Reports for these operations consider them to have met their objectives of building the basic infrastructure of the telecommunications network under difficult physical condi- tions and developing full commercial accounting in the Posts and Telegraph r-epartment. Changing government sector priorities following independence in 1975 led to suspension of Bank involvement in the telecommunication sector in PNG. The Government is now pursuing increased sector efficiency as a high priority and has asked the Bank to renew support to the telecommunications sector. The Bank's ongoing involvement over the medium term would help overcome current sector deficiencies by assisting with policy reform, institution building and network rehabilitation and expansion. 6. Project Obiectives. The proposed project aims to expand access to service in urban and rural areas, reduce PTC's operating costs and improve service for all subscribers. Specifically, the project would: (a) assist the Government to prepare and implement appropriate sector policies, regulations and procedures; (b) improve PTC's institutional efficiency through a training program; and (c) rehabilitate and expand existing telecommunications facilities. 7. Project Description. The project components are: (a) rehabilitate about 27,000 existing subscriber lines, (b) expand local telephone service by about 10,000 new subscriber lines, (c) install new transit exchanges, (d) expand and rehabilitate the long-distance network, (e) replace the international earth satellite station, (f) introduce data communications and improve telex services, (g) replace obsolete HF radio communication stations with new stations, (h) assist the Department of Finance and Planning to improve the performance monitoring of PTC and train its staff, (i) train PTC's national engineers, (j) second PTC national engineers and managers to appropriate telephone companies, (k) introduce a modern management information system, (1) increase PTC's cus- tomer focus by the creation of district offices, and (m) improve PTC's organi- zational structure. 8. The total cost of the project is estimated at US$76.0 million equivalent with a foreign exchange component of US$64.1 million (84%). The proposed loan would finance US$17.2 million or 23% of project costs, suppliers' and export credits would finance US$16.4 million (21%), and PTC would finance $42.4 mil- lion (56%, including local costs). The loan would include retroactive financing of up to US$1.5 million for expenditures in technical assistance to prepare the policy paper and MIS components and software made after May 31, 1989. PTC has received financial offers from the Federal Republic of Germany, Belgium, France, Japan and Australia for the exchanges. Contracts are expected to be awarded in March 1990. PTC received financial offers from Japan, the United Kingdom and Malaysia for the transmission equipment. Contracts are expected to be awarded in May 1990. These measures will complete the suppliers' and export credit financing. 9. A breakdown of the project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and status of Bank Group operations in Paylna New Guinea are  - 3 - given in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report, No. 8059-PNG, is being distributed separately. 10. Actions Agreed. The Government has approved a policy paper prior to negotiations. During negotiations, agreement to the following was reached with the Government and PTC: (a) the Government will not make any material changes in its Policy Paper without prior consultation with the Bank; (b) PTC will submit audited financial statements to the Bank within 9 months of the close of the fiscal year; (c) project accounts including those for the Special Account will be audited annually by an independent auditor satisfactory to the Bank. Copies of the unaudited annual project accounts will be sent for review to the Bank no later than six months after the end of each fiscal year, and copies of the audit report not later than nine months after the end of each fiscal year; and the auditor's report will include a statement that funds disbursed against statements of expense (SOEs) were used for the purpose for which they are provided; (d) the Government will appoint the consultants for the technical assistance component of the project before August 31, 1990; (e) PTC will execute an institutional action plan, according to the dates contained in the plan, which includes measures to improve institutional performance, operational efficiency, training and localization; (f) PTC will carry on its operations in accordance with performance indicators acceptable to the Bank; (g) PTC will take the necessary steps to ensure a debt-service coverage of 2.0 and an operating ratio of 85% for the years 1990-92 and 80% for 1993 and following; (h) PTC will take the necessary steps to ensure it obtains a rate of return of at least 13% on average net fixed assets from 1990 onward; and (i) the Government and PTC will take all measures necessary to secure the right to use all land needed for the project at least 6 months before the date of commencement of construction at each site. Effectiveness of the financing arrangements for the suppliers' and export credits for the provision of the exchanges for the first two years (1990-91) under the project will be a condition of disbursement of the transmission equipment component. The execution of the Subsidiary Loan Agreement on behalf of the Borrower and PTC under terms and conditions approved by the Bank is a condition of loan effectiveness. 11. Benefits. The project would benefit all economic sectors in PNG. In particular, business subscribers would benefit from the better quality of service resulting from modernization of the network, and rural subscribers from greater access to telecommunication services. sne direct benefit would be increased efficiency and productivity of the telecommunications sector achieved through revised sector policies and institutional improvement of the operating entity. The economic rate of return is projected to be 26.0%. 12. The main risks to the project are delays in (a) implementing policy changes, (b) institution building and (c) land acquisition. The first risk has been minimized by Cabinet adoption of the Telecommunications Policy Paper prior to negotiations. Technical assistance and adequate staffing of the CSA unit in DOFP to monitor PTC's financial and operating performance will provide addi- tional safeguards. The second risk will be reduced by better management information systems to assist the Board and senior management of PTC to monitor the progress on staff training, localization, cost reduction and inicreased efficiency. Finally, the risks associated with land acquisition have been minimized since PTC has designed most of its network expansion program to use  . 4 - existing repeater station sites. Only three new sites are required by 1992.3, and the Government and PTC have made a commitment to acquire them in a timely manner (para. 10i). The project is expected to have no adverse Impact on the environment or public health. 13. Recommenda1w. I am satisfied that the proposed loan would comply wlth the Articles of Agreement of the Bank, and I recoamend that the Executive Directors approve it. Barber B. Conable President Attachments December 4, 1989 Washington D.C.  ESTLMAED CoSrS Local TForeign - ---------(US$ millon)-- Physical Development Exchanges 4.9 8.9 13.8 Cable piant 2.4 3.8 6.2 Subscriber terminals 0.1 6.1 6.2 Transmission 1.4 5.5 6.9 International exchange and satellite 0.2 11.4 11.6 Power supply 0.3 4.1 4.4 Data and telex service 0.2 5.3 5.5 Radio telephone service 0.2 3.4 3.6 Subtotal 2974 58.2 Policy and Institutional Development Technical Assistance 0.1 1.4 1.5 Training 0.1 1.4 1.5 Management information systems 0.4 2.5 2.9 Subtotal 0.6 53i2 Total Base Cost /a 10.3 64.1 Contingencies Physical 0.4 3.1 3.5 Price 0.7 7.7 8.4 Total Project Cost 11.4 64.6 76.0 La Local costs include K 4.6 mln (US$5.3 mln eqv) in customs duties and local taxes. FINANCING PLAN Local Foreign Total (US$ miillion) ------- IBRD -- 17.2 17.2 Suppliers' and Export Credits 16.4 16.4 PTC 11.4 31.0 42.4 Total 11.4 6.  Page 1 PROCUREMENT Procuement method Total ICB LCB Otber N.A cost . - - - - (US$ mln) . -.-.-.- Physical Development Exchanges 11.1 5.0 16.1 (0.9) (0.9) Cable plant 7.2 7.2 (2.7) (2.7) Subscriber terminal 7.5 7.5 equipment (2.6) (2.6) Long-distance transmis- sion equipment 7.2 1.0 8.2 Intemational telephone exchange and satellite earth station 10.0 3.9 13.9 Air conditioning, power 5.3 5.3 supply and test equip- ment Data and telex 6.6 6.6 exchanges (2-3) (2-3) Radio-telephone and 3.3 1.0 4.3 maritime service (3.3) (3.3) Policy and Institutional Improvement Technical assistance 1.0 0.7 1.7 (0.6) (0.7) (1.3) Training 1.8 1.8 (1.4) (1.4) Management information system 3.4 3.4 (2.7) (2.7) Total 52.9 0.7 76.0 (11.8) (4.7) (0.7) (17.2) Note: Figures in parentheses represent the amounts to be financed by the proposed Bank loan, including contingencies.  Schedule B Page 2 DISBtRSEMENTS Amount Portion financed Cate ory (US$'000) by the Bark Telecommunications equipment 11,200 100% of foreign expenditures Computer equipment 2,600 100% of foreign expenditnres Consultant services 700 100% Training 1,350 100% Refunding of PPF 650 -- Unallocated 700 -- Total 17,200 ESTIMAThD DISBURSEMENT SCHEDULE IsRD FY 90 91 92 93 94 95 96 -------------- (US$ mln)- Annual 0.8 5.5 6.9 2.9 0.7 0.3 0.1 Cumulative 0.8 6.3 13.2 16.1 16.8 17.1 17.2  TIMETABLE OF KEY PROJK:I PROCESSING EVENTS TIme Taken to Prepare 2 yews Prepared by PTC with Bank assistance First Bank Mission March 1987 Appraisal Mission Departure June 28, 1989 Date of Negotiations November 20, 1989 Planned Date of Effectiveness March 1990 List of Relevant PCRs and PPARs PCR 10/17/78, Loam 852-PNG PCR 7/1/75, Loan 546-PNG I  Schedule D STATUS OF BANK GROUP OPERATIONS IN PAPUA NEW GUINEA A. Statement of Bank Loans and IDA Credits La Lb (September 30, 1989) Amount (less cancellationsl Loan or Undis- credit Fiscal Bor- Bank IDA bursed number year rower Purpose (US$ mLn) 10 loans and 13 credits fully disbursed 98.5 113.7 - 2265-PNG 1983 PNG Road Improvement 31.0 - 8.4 2276-PNG 1983 PNG Agricultural Support Services 8.5 - 0.1 2395-PNG 1984 PNG Secondary Education 49.3 - 11.4 2475-PNG 1985 PNG West Sepik Provincial 9.7 - 5.0 2608-PNG 1986 PNG Nucleus Estate & SmaUholder 27.6 - 20.5 2624-PNG 1986 PNG Third Agricultural Credit 18.8 - 1.1 2722-PNG 1986 PNG Yonkd Hydroelectric 28.5 - 15.1 2742-PNG 1987 PNG Transport Improvement 45.5 - 38.0 3051-PNG 1989 PNG Land Mobilization 19.6 - 19.6 Total 336.9 113.7 1192 Of which has been repaid 54.' 3.0 Total Now Outstandin 2. 110.7 Total Undisbursed 119.2 0.0 L& The status of the projects listed in Part A is described in a separate report on all Bank-ADA-financed projects in execution, which is updated twice yearly and circulated to the Executive Direct on April 30 and October 31. Lb Prior to exchange adjustments. B. Statement of LFC Imnestments None.  IBRD 21856 141' 843 14t' I sO' lIE' 15618D215 I I . PAPAU NEW GUINEA M A NA U S POST AND TELECOMMUNICATIONS CORPORATION (PTC) SEP/K I _ANUS _ _ _ _ _ _ _ _ _ _ _ _|_ _ _ _ _ !THIRD TELECOMMUNICATION PROJECT W E 5 T S Ec P I Kl AU WEi-- S