Uganda - Second Telecommunications Rehabilitation Project : Uganda Posts and Telecommunications Corporation (UPTC)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7437-UG STAFF APPRAISAL REPORT UGANDA SECOND TELECOMMUNICATIONS REHABILITATION PROJECT UGANDA POSTS AND T.ELECOMMUNICATIONS CORPORATION (UPTC) FEBRUARY 21, 1989 Africa Country Department II Africa Technical 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 150 U Sh 1,000 = US$6.67 FISCAL YEAR Government and UPTC: July 1 - June 30 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AFDB - African Development Bank DEL - Direct Exchange Line EAPTC - East Africa Posts and Telecommunications Corporation INTELSAT - International Satellite Organization ISD - International Subscriber Dialling NTC - Nippon Telecommunications Consultants PANAFTEL - Pan African Telecommunication (Network) POSB - Post Office Savings Bank STD - Subscriber Trunk Dialling UPTC - Uganda Posts and Telecommunications Corporation VFT - Voice Frequency Telegraph VHF/UHF - Very High Frequency/Ultra High Frequency  FOR FMCIAL USE ONLY UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION (UPTC) SECOND TELECOMMUNICATIONS REHABILITATION PROJECT STAFF APPRAISAL REPORT Table of Contents PaRe No. CREDIT AND PROJECT SUMMARY .... .. ............ ................ . i-iii I. INTRODUCTION ................... ......... ............ 1 Project History . .......................... . 1 Economic Context. ... ..... ...................I 1 II. THE TELECOMMUNICATIONS SECTOR ....................... 2 A. Background ............... ............. . 2 Use and Quality of Service ................... 2 Existing Facilities . . ........................ 3 Demand for Service . . ......................... 4 B. The Sector . . ................................... 4 Sector Goals ................. ............... . 4 Sector Constraints ........... ............... . 4 C. IDA Strategy .......... .. . .5 Experiene with Past Lending .................n 5 Project Focus ............. .. ....... 6 III. THE PROGRAM AND THE PROJECT ......................... 6 A. Description . . . .................... . 6 The Projict .................................. 7 Telecommunications Rehabilitation .....ao....n 7 Institutional Development ... . 8 Recurrent Purchases of Spares, Materials and Tools for Maintenance ............... 8 B. Costs and Financing ......................... . 9 Program Costs . ........................ . 9 Project Costs . .... 9 Contingencies ............................... . 10 Project Financing ............. 11 C. Procurement and Implementation ..... 12 Procurement .......... ........ 12 Disbursements . ..... 13 Project Implementation ....................... 14 Performance Monitoring ...... ....... 15 This report is based on the findings of a mission composed of Messrs. Gerald Buttex, Task Manager; Asaf Malik, Senior Financial Analyst; and Jerry Silverman, Senior Public Sector Management Officer who visited Uganda in May 1988. 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.  IV. THE IMPLEMENTING AGENCY .............. ............... 15 A. Origin, Objectives and Ro ee 15 B. Organization and Management... 16 Board of Directors....................... 16 Management and Organizational Structure 16 C. Operating Policies and Procedures. . 17 Policy Statement ..... . . ... 17 Operating Procedures .... 17 D. Institutional Issues ...17 Staff and Training ...17 Billing and Collection. . 19 Accounting and Auditing. . 19 Institutional Development . .. 20 Corporate Planning a n n i ng......... 21 Management Information System ... 22 Financial Planning and Management ... 22 Post Office Savings Bank.. 23 Technical Assistance for Institutional. Development ...23 V. FINAUJCIAL ANALYSIS .....25 Past Financial Performance ...25 Future Financial Performance ...27 Financial Arrangements ...28 VI. ECONOMIC ANALYSIS .................... ..... 29 Benefnits ...... 29 Tariffs ..*..................... 29 Least Cost Solution....... . 30 Return on Investment .. .31 Riss............. ks......... 31 Environmental and Health Aspects ........ ..... 31 VII. ASSURANCES AND RECOMMENDATION. .... 32  List of Annexes Page No. 1. Regional Distribution of Telephone Service ........... 35 2. Economic Activities of Telephone Subscribers ......... 36 3. Existing Telephone Facilities ........................ 37 4. Basic Statistics ............................. ...... 39 5. Telephone Demand ................................ .. . 40 6. Program and Project Costs ............................ 41 7. Schedule of Disbursements ............................ 42 8. Terms of References for Consultancy Services for the. Local Cable Networks Rehabilitation ................ 44 9. Implementation Schedule .............................. 53 10. Performance Indicators ............................... 54 11. UPTC Organization Chart .............................. 55 12. Statement of Policy .................................. 56 13. Institutional Development ............................ 59 14. TOR for Institutional Development .................... 77 15. UPTC - Number of Staff Positions ..................... 85 16. Twinning Arrangements ................................ 86 17. Income Statements - Histor:'cal and Forecast .......... 89 18. Balance Sheets - Historicai and Forecast ............. 90 19. Fun- .-low Statements - Historical and Forecast ...... 91 20. Assumptions used in Financial Statements ............. 92 21. UPTC Tariffs ......................................... 94 22. Return on Investment ................. I ............... 97 MAP: IBRD No. 16688 - UGANDA  UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION SECOND TELECOMMUNICATIONS REHABILITATION PROJECT Credit and Project Summary Borrower: Government of Uganda Beneficiary: Uganda Posts and Telecommunications Corporation (UPTC) Amount: SDR 38.3 million (US$52.3 million equivalent) Terms: Standard IDA, with a 40 years repayment period Relending Terms: The Government of Uganda will relend SDR 33.5 million (US$45.7 million) of the IDA credit to UPTC at an annual rate of 8? to be repaid over 15 years after 4 years of grace, with UPTC assuming foreign exchange risk. The balance of the IDA credit of SDR 4.8 million (US$6.6 million) allocated to finance institutional strengthening and development will be passed on by the Government to UPTC as equity contribution. Project Description: The project is an essential part of IDA's strategy for assisting Uganda in implementing its economic recovery program and would be implemented during 1989-93. It would, as a part of UPTC overall investment plan, pursue the rehabilitation of the essential telecommunications infrastructure and rebuilding of UPTC into an operationally efficient and financially viable organization started under the First Rehabilitation Project. The project would finance: (i) technical assistance, training and fellowships to further strengthen UPTC's management, planning and operational capabilities; (ii) the rehabilitation of the local cable networks and subscriber facilities in Kampala, Entebbe and Jinja, which is a first priority component of UPTC rehabilitation and development pregram; and, (iii) equipmer.t, vehicles, spare parts and materials for telecommunications naintenance and operations.  - ii - Benefits and Risks: Benefits. The project woald help rehabilitate an essential infrastructure sector which was seriously damaged by the civil war and years of lack of suitable maintenance. Benefits from the proposed project will reach most sectors of Uganda's economy and will be fplt throughout private business and Government administration. A direct benefit would be the increased efficiency and productivity of UPTC activities, achieved through UPTC's institutional development. In addition, revenues that would be generated from the project would mobilize substantial domestic resources for Government at a time of severe budgetary constraints. Risks. The main risks revolve around the overall uncertain country situation and UPTC's ability to attract, motivate, train and retain qualified people and to operate efficiently and on a commercially viable basis. Given the Government's commitment to the speedy rehabilitation of key sectors of the economy and, Government and UPTC efforts and project emphasis on upgrading UPTC operations and financial performance, these are acceptable risks. Estimated costs: Item Local Foreign Total Z of Total -(US$ million)------ Kampala-Entebbe-Jinja 3.4 28.4 31.8 54 Network Rehabilitation Computerization - 0.6 0.6 1 Rural Call Stations 0.5 1.3 1.8 3 Subscriber Terminal 0.5 2.0 2.5 4 Equipment Cable Material 0.9 1.5 2.4 4 Vehicles - 1.8 1.8 3 Engineering Consultants 1.7*/ 1.7 3 Institutional Development - 5.8 5.8 10 Total Base Cost 5.3 43.1 48.4 82 Physical Contingencies 0.3 2.2 2.5 4 Price Contingencies 0.9 4.0 4.9 9 Total Investment 6.5 49.3 55.8 95 Recurrent Purchases _ 3.0 3.0 5 Total Cost 6.5 52.3 58.8 100 */ Includes PPF of US$1.0 million disbursed prior to 1988.  - L iA. - Financing Sources: Local Foreign Total 2 of Total ---- US$ million Equivalent------- IDA - 52.3 52.3 89 UPTC 6.5 - 6.5 11 Total 6.5 52.3 58.8 100 Estimated Disbursements: IDA FY: 1989 1990 1991 1992 1993 1994 ---------US$ million Equivalent----------------- Annual 2.0 12.0 12.0 14.0 8.0 4.3 Cumulative 2.0 14.0 26.0 40.0 48.0 52.3 Economic Rate of Return: 14.32 Map: IBRD No. 16688 - UGANDA  I. INTRODUCTION Project History 1.0J. Originally appraised in September 1985, the processing of the Second Telecommunications Project has been impeded by the resurgence of the civil war and the subsequent inability of the sector's institution to meet the conditions required to complete appraisal. IDA, however, closely followed up the development of the situation during the supervision missions of *Fhe first project in June and November 1986 and in July 1987 a preparation mission for a possible project reappraisal went to Uganda to assess the status of the project, and establish a plan of action for further processing. 1.02 The request of the Government of Uganda for an advance of US$1.0 million under the Project Preparation Facili (PPF) was approved by IDA in May 1987. The advance covered the cost of preparatory engineering assistance for the project. This work is now completed and has resulted in the issuance of bids for the main project component. Preappraisal mission took place in January 1988 and the appraisal mission in May 1988. Although significant progress has been made since the July 1987 mission in convincing the Government of Uganda and the management of Uganda Posts and Telecommunications Corporation (UPTC) to address the major institutional problems, difficulties that UPTC encountered to engage senior financial staff or technical assistance personnel to prepare reliable financial statements has been a major obstacle to finalize project processing. A second PPF request of US$500,000 which includes the funding of the essential technical assistance personnel was approved in October 1988. Economic Context 1.03 The Ugandan economy faces formidable short-term challenges and continuing difficulties well into the 1990s. In the short run, Uganda must take steps to reduce inflation and achieve stability while at the same time mounting a major recovery effort to address the devastation caused by war, insecurity and mismanagement. Rehabilitation is the key short-term objective for the industry to substantially increase capacity utilization. In the transport and communications sectors, the immediate challenge is to repair damaged infrastructure, remove existing bottlenecks in order to facilitate the flow of goods and information within the country and with the outside world, which is essential to economic recovery and growth. Institutional strengthening is also a major objective of the Government Economic Recovery Program, the first priority being to restore discipline, accountability and efficiency in the public sector with a view to improve resource mobilization and allocation. 1.04 The project is expected to make a significant contribution toward the achievement of these objectives. It would support the 1988/89-1992/93 telecommunications investment program, which has been carefully tailored within the framework of the overall Public Investment Program. The project would focus on: (i) rehabilitating telecommunications facilities damaged during the internal disturbances and run down due to lack of maintenance,  - 2 - and (ii) rebuilding institutional capability within the sector. An important institution strengthening component will put emphasis on developing UPTC to effectively operate and sustain itself as a commercially viable utilityt designing and implementing corporate planning, and a management information system; setting up sound operating and accounting procedures and financial control and management practices; introducing guidelines for efficient maintenance and service standards; and implementing comprehensive human resource development and training programs. II. THE TELECOMMUNICATIONS SECTOR A. Background 2.01 With the exception of limited telecommunication networks operated by the military, police, civil aviation and railways to meet their specialized requirements, UPTC provides all domestic and international telecommunications services. All the equipment and materials required for telecommunications facilities are imported. 2.02 As of December 31, 1987, Uganda had an installed capacity of 57,700 telephone exchange lines, 27,900 connected subscriber lines or direct erchange lines (DELs), and a telephone density of 0.18 DELs per 100 persons. This density is comparable to Sudan (0.2) and Tanzania (0.2) but considerably lower than Kenya (0.6) and the average for developing countries in Africa (0.4). The service is heavily concentrated in main towns (Annex 1). Kampala, with only about 4Z of the population, has 43% of DELs. Telephone density is 0.65 per 100 persons in Kampala but drops to 0.10 in provincial towns (district headquarters) and to 0.04 in county and subcounty towns and villages. There are only two public telephone call offices (Kampala and Jinja). The first public call boxes were instay ed in Kampala in early 1986. Overall, the majority of Uganda's population does not have access to telephone service. 2.03 There are about 890 telex subscribers in Kampala, Jinja and five other towns, 902 of which are in Kampala alone. Telegrams are accepted and received in the post offices, and transmitted using telex or telephone. Use and Quality of Service 2.04 In Kampala about 70Z of DELs are connected to business and government subscribers and 30Z to residential subscribers. Most of the former are in the communications intensive sectors of the economy, mainly wholesale and retail trade (22Z), services (19Z), and government administration (152). A breakdown of telephone subscribers is given in Annex 2. 2.05 During implementation of the first IDA-financed project, UPTC to some extent had succeeded in arresting the decline in telephone service in some areas and managed to restore it in others. However, during the last disturbances (1985-86), the rehabilitation work was severely disrupted. Consequently, the quality of service deteriorated and now is extremely poor, although efforts are being made by UPTC's new management to improve it. Call completion rates average only 30Z for local service compared to  the 65-752 typical of good local networks. In the Kampala zone, where the outside plant would be rehabilitated under the proposed project, on average about 4,000 DELs or 23? of total ins.alled lines are out of service at any given time, 632 of the faults are due to t1-- local cable networks, and 37Z to subscriber facilities. Detailed prepara. on of the major rehabilitation component of the proposed project has shown that damage to the local cable network and subscr1uer plant during the war was so extensive and their neglect since then so pervasive that in Kampala, Entebbe and Jinja, over 80? of the facilities are beyond repair and must be replaced. At present the fault rate is 2.7 per DEL per annum, the highest ever recorded anywhere, when a reasonable target would be 0.5. By comparison, the long distance subscriber trunk dialling (STD) service to neighboring Kenya and Tanzania and to other areas rehabilitated under the first IDA-financed project is fair. Elsewhere, the service is heavily congested, with domestic trunk call compietion rates averaging 10-20Z. Waiting time for telephone calls through operators to many areas in the country, particularly to the northern regions, is several hours or even days. On the average it takes about three minutes to get operator response to book long-distance calls within the country and twice as long to place an international call. Waiting time between one to three hours is normal for placing overseas calls. The extremely poor and unreliable service seriously impedes all economic activities, particularly domestic and foreign trade. Existing Facilities 2.06 As of December 1987, there were 21 automatic telephone exchanges in Uganda. Out of the total of about 27,900 connected subscriber lines (para. 2.02), 82? were connected to automatic exchanges. These are either crossbar exchanges, commissioned in the early 1970's and rehabilitated dur.ng the first project or digital, installed in mid-1985 during the first project and financed through a French loan. These exchanges are in relatively good working condition. However, the local cable network feeding these exchanges, most of which was installed in the 1950's and 1960's, requires extensive rehabilitation (para. 2.05). The poor working condition of the outside facilities limits the utilization of existing telephone and telex exchange capacity to only 47Z. 2.07 A microwave system links Kampala, Jinja and Nairobi as a part of the Pan African Telecommunications (PANAFTEL) network and carries domestic traffic along the Pan African Highway and international traffic to Kenya and Tanzania. The domestic trunk network also consists of microwave links between Kampala and Entebbe, and Kampala, Masaka and Mbarara, and of VHF/UHF links and overhead lines with carrier equipment in the rest of the country. Overseas international telecommunications are provided through a standard INTELSAT earth station located at Mpoma (between Kampala and Jinja). Eight hundred and ninety telex subscribers (para. 2.03) are connected to a 30C line crossbar telex exchange and a 720 lines digital telex exchange in Kampala. Teleprinters, linked to the telex exchanges b;V VFT systems, provide public telegraph and telex services outside Kampala. The existing telecommunications facilities are summarized in Annex 4 and Map IBRD 16688.  -4- Demand for Service 2.08 As of end of 1987, with about 27,900 DELs, the waiting list for telephone service totalled about 25,400 registered applicants; indicating that only 52? of expressed d&.aand was satisfied. In the Kampala zone, with 17,300 DELs and total expressed demand for some 17,900 R.ditional lines, the satisfaction rate was about 492 (Annex 5). These figures, hcwever, underestimate the potential demand to the extent that there is a significant unregistered demand which probably would oilv eamerge when the public perception of availability of new connections and reliable service changes. In the absence of reliable information on historical growth in expressed d-mand, a conservative assumption of 82 growth per annum in Kampala and IOZ elsewhere has been made during the project period. Based on this assumption and the magnitude of the Investment Program as discussed in paras. 3.03 and 3.06, telecommunications services would remain supply- constrained for the foreseeable future with no improvement in demand satisfaction (Annex 5). This supply constraint is primarily linked to the shortage of investment capital. B. The Sector Sector Goals 2.09 As a part of its overall reconstruction program the Government emphasizes rehabilitation of war damaged telecommunications facilities as well as a modest expansion in high priority areas. These objectives were supported and partially met under the first IDA Credit (para. 2.12) and need to be further pursued. In the framework of the proposed project, the sector goals are to: (a) develop the sector institution (UPTC) along commercial lines throuxgh improvement in its management, financial and operating performance, with emphasis on human resource development and training; (b) rehabilitate the telecommunications network and improve quality of local, long distance and international telecommunications servicE3 with first priority in the areas where lack of reliable service impedes growth of economic activities; and (c) enhance revenue generation from assets through improvement in operating efficiency, elimination of critical bottlenecks and appropriate tariff levels. Sector Constraints 2.10 The main constraints to sector development are: (a) lack of qualified staff at all levels within UPTC; (b) lack of staff motivation due to low salaries and benefits - the legacy of war and insecurity and mininal job satisfaction - which  to a considerable extent, are a consequence of the difficult macro-economic situation in Uganda, non-availability of operating and maintenance materials and inadequate training; (c) lack of foreign exchange, which limits procurement of equipment, spare parts and vehicles for mai..tenance and expansion; and (d) lack of effective management systems for maintenance, operations and planning. In particular, the financial, planning, engineering and personnel management systems are inadequate and have resulted in a considerable waste of resources in the past. C. IDA Strategy Experience with Past Lending 2.11 The World Bank Group has been associated with telecommunications in the East Africa Community since 1966. In February 1967, the Bank approved a US$13.0 million loan (483-EA) to East Africa Posts and Telecommunications Corporation (EAPTC) to help finance a project designed to expand local and long distance telecommunications facilities. A second loan (675-EA) for US$10.4 million was approved in May 1970 to assist in further expansion of telecommunication services. These projects were satisfactorily completed in 1974 and 1975 respectively. Proceeds of a third loan of US$32.5 million approved in May 1973 were partially applied in Uganda. The performance audit report on the first two projects, while generally positive on the Bank's role, concluded that long delays in project implementation were caused by inadequate planning and project management, and procurement problems.1 A proposed fourth project was aborted at appraisal because EAPTC was replaced in 1977 by three independent telecommunications corporations in Kenya, Tanzania arnd Uganda. 2.12 For Uganda, the first IDA credit (Credit 1367) of US$20.4 million equivalent was approved in May 1983 with the planned closing date in June 1987.2 It focussed attention on telecommunications system rehabilitation in major population and business centers damaged during the 1977178 war and/or badly maintained since then, with limited expansion to meet urgent needs, improve postal services and introduce a program of institutional development. Implementation of the project was generally satisfactory during the first two years. The UPTC Act ensuring UPTC autonomy was enacted, a commercial accounting system was introduced, subscribers' billing and collection functions were computerized and significantly improved, and rehabilitation of some strategic facilities was implemented. However, prolonged absence of stable management and leadership resulting from the resurgence of the civil war seriously eroded UPTC performance and productivity. UPTC could not meet the financial performance targets under the credit due mainly to tariffs too inadequate to compensate for the rampant in'_ation. UPTC has also not complied with the audit covenants and 1/ Operations Evaluation Department report 1893 dated October 21, 1975. 2/ The project was closed ir. December 1987.  not fully implemented its training programs. New subscriber connections have been slower than anticipated and service quality deteriorated during and after the internal disturbances in 1985-86 (para. 2.05). The second proposed project is designed to assist in the resolution of outstanding institutional issues, as well as improving the low service level which impedes communications and frustrates economic recovery. Project Focus 2.13 The proposed project would focus on (i) rehabilitating or replacing telecommunications network, equipment and plant in the high priority areas, with some limited expansion to maximize the utilization of existing assets, and (ii) institutional development of UPTC. Given the country situation, this project alone cannot be expected to and is not intended to resolve all present and future communications needs of the country but should merely be considered as providing a sound basis on which future development should be possible. The proposed project would restore confidence in the sector and thus be catalytic in attracting other sources of financing for the components of the UPTC investment program not covered by the project. Institutional development will be focussed at restoring discipline, accountability and efficiency of UPTC. The proposed project would provide for periodic tariff adjustments as needed to maintain UPTC's financial integrity (para. 6.06), foreign exchange for equipment, materials and services needed for network rehabilitation and its expansion on a limited scale, and technical assistance, training and equipment needed to improve performance. Since inadequate financial incentives on a country- wide basis are a major constraint in effectively dealing with the human resource problem, this issue, in addition to the proposed project, (para. 4.09), would also be dealt with on a cross-sectoral basis within the context of the recently approved Public Enterprise Project (Credit 1962-UG) and the proposed Second Economic Recovery Credit. III. THE PROGRAM AND THE PROJECT A. Description 3.01 UPTC's 1988/89-1992/93 Investment Program is a continuation of the 1982-87 Recovery and Rehabilitation Program, under which UPTC has made a start in rehabilitating the sector. During 1982-87 it has (i) increased the telephone exchange capacity from 37,000 lines to about 57,700, (ii) installed new digital exchanges in Kampala, Masaka and Mbarara and rehabilitated the crossbar exchanges in Jinja, Entebbe, Fort Portal and three other towns, (iii) almost doubled the capacity of telex exchanges from 520 to 1,020 lines, (iv) established microwave links from Kampala to Entebbe, Mbarara and Masaka, (v) initiated a limited program to improve its management and operations, and (vi) rehabilitated and expanded a substantial number of radio systems in the rural areas, thus improving this important service in key agricultural regions. Financing for the Kampala digital exchanges project was provided by a French loan (para. 2.06), for the microwave links by EEC and UNDP and other investments were funded under the first IDA credit.  - 7 - 3.02 Several projects included in the 1982-87 Programs were shelved because of the severe macro-economic situation in the country and limited UPTC implementation capacity. Some of these projects, with other investment proposals now form the 1988-1993 Investment Program which can broadly be described as: (i) the proposed IDA-financed project (paras. 3e04 and 3.05); (ii) extension of the microwave routes to the borders of Tanzania and Rwanda and reconstruction of some VHF/UHF transmission links; (iii) extension of the telephone switching capacity in Entebbe and Jinja; (iv) extension of tele: switching capacity; and (v) expansion of international telecommunications and introduction of international subscriber dialing (ISD). 3.03 The proposed program has been put together in the framework of the country Public Investment Program and reflects the investment limitations imposed by the present status of Uganda's overall macro-economic situation. UPTC's original investment program presented to IDA, which included large development schemes to the North and the West, was three times the size and cost of the one presented here. This reduced program which has been discussed and agreed with the Ministry of Planning, meets the sector's high priority needs and complemeiits priorities in other sectors. The program is also consistent with the likely resource availabilitys financial (particularly foreign exchange) as well as human. The program details, its phasing and estimated annual expenditure are given in Annex 6. During negotiations, it was agreed that UPTC will consult with IDA on any proposal for investment estimated to cost more than 1O of the amount established in the investment program for any one year (para. 7.01 (a)]. The Project 3.04 The proposed project is a self-contained, balanced and integrated package of high priority components within the overall investment program. Its major emphasis is on institutional development and rehabilitation of the economically critical local cable networks and subscriber facilities in the key centers of Kampala, Entebbe and Jinja to increase the utilization of existing exchange facilities and to partly meet the current unmet demand. 3.05 The main components of the project are: I. Telecommunications Rehabilitation (a) Rehabilitation of the local cable networks in Kampala, Entebbe and jinja including supply and installation of about 180,000 pair kilometers of primary and secondary telephone cables, to replace about 26,000 MDF pairs in Kampala, Entebbe and Jinja and to expand  - 8 - the cable network in the three cities by about 10,000 MDF pairs; installation of about 1,613 pair kilometers of PCM cables and 82 kilometers of 4 cores optical fiber cables, including PCM and optical fiber transmission systems for the Kampala inter-exchanges junction network; (b) Provision of telephone instruments, PBX, teleprinters, facsimile and data equipment for the rehabilitation of the subscriber facilities; (c) Provision of 100 subscriber units of rural radiocall equipment, operation consoles, and a transmitter to rehabilitate the existing radio call network; (d) Provision of cables and associated equipment for the local networks rehabilitation in provincial towns; (e) Installation of a computerized subscriber's record system and provision of microcomputers; (f) Provision of vehicles and tools; and (g) 120 person/months of engineering consultants for the design, preparation of bid documents, bid evaluation and supervision of the turnkey contract. II. Institutional Development (h) 144 person/months of expatriate staff to meet the immediate need for senior and intermediate managers in the Finance Department; (i) 24 person/months of long-term technical assistance to strengthen UPTC's planning, management and operational capacity; (j) 110 person/months of short-term consultant services to assist UPTC in implementing its medium-term institutional development strategy; (k) On-the-job and formal training, within Uganda and abroad, directly linked to UPTC's institutional development strategy which comprises 36 person/months of trainers, 50 fellowships and provision for travel and subsistence for twinning arrangements; and (1) Provision of laboratory equipment and training aids for the training school. III. Recurrent Purchases of Spares, Materials and Tools for Maintenance Three year's consumption of spare parts and material for UPTC maintenance and operations.  B. Costs and Financing Program Costs 3.06 The total program costs are estimated at US$97.2 million including a foreign exchange component of US$88.0 million. Besides Lhe project proposed for IDA financing, the program includes the ongoing works (US$13.5 million) financed by AfDB and France and other urgent investments totalling US$27.3 million for which some interest, particularly by Japan, has been shown by the donor community. Annual expenditures under UPTC's telecommunications Investment Program are given in Annex 6. On average, annual investment expenditures for telecommunications for the next three years represent about 6Z of the total Uganda Public Investment Program. This ratio of telecommunications investment to the overall country investment program is consistent with the ratio experienced in other developing countries. In addition, UPTC has embarked on expanding the Post Office Building in Kampala to accommodate its staff currently occupying rented offices. Total cost of the expansion, which will be financed by UPTC, is estimated at about US$9.5 million equivalent. Prolect Costs 3.07 The total cost of the project. is estimated at US$58.8 million 3 with a foreign exchange component of US$52.3 million. Project base costs reflect UPTC's experience with contracts under the first IDA project and in other countries in the region adjusted to December 1988 prices. Project costs are summarized below: 3/ Due to the large divergence between the local and international inflation the project costs are calculated in U.S. dollars and the price contingencies for both the local and foreign costs are calculated based on the expected increases in world prices.  - 10 - Table 3.1: PROJECT COST SUMMARY (in US$ million) Item Local Foreign Total Z of Total Kampala-Entebbe-Jinja 3.4 28.4 31.8 54 Network Rehabilitation Computerization - 0.6 0.6 1 Rural Call Stations 0.5 1.3 1.8 3 Subscriber Terminal 0.5 2.0 2.5 4 Equipment Cable Material 0.9 1.5 2.4 4 Vehicles - 1.8 1.8 3 Engineering Consultants - 1.7*/ 1.7 3 Institutional Development - 5.8 5.8 10 Total Base Cost 5.3 43.1 68.4 82 Physical Contingencies 0.3 2.2 2.5 4 Price Contingencies 0.9 4.0 4.9 9 Total In-estment 6.5 49.3 55.8 95 Recurrent Purchases - 3.0 3.0 5 Total Cost 6.5 52.3 58.8 100 *-| Includes PPF of US$1.0 million disbursed prior to 1988. Contingencies 3.08 As the final design of the project major component has been completed, physical contingencies are only 5Z on local and foreign costs. Price contingencies are based on estimated annual foreign costs and local costs expressed in dollars increasing by 3.OZ p.a. from 1989 to 1990 and 4.OZ thereafter.  - 11 - Project Financing 3.09 The IDA credit would finance 100? of the foreign costs (US$52.3 million) and UPTC would provide funds for 1OOZ of the local costs (US$6.5 million) from internally generated resources. Table 3.2: FINANCING PLAN (in US$ Million) Local Foreign Total Z of total IDA - 52.3 52.3 89 UPTC 6.5 - 6.5 11 Total 6.5 52.3 58.8 100 Because of the urgency of network rehabilitation, no effort has been made to arrange cofinancing for the project; however, IDA's involvement in the sector through the project is likely to attract other donors for the remainder of the investment program. UPTC will be the beneficiary of the entire IDA credit. The Government will onlend to UPTC the proceeds of the credit to be used for financing telecommunications equipment, plant and associated services (US$45.7 million) at annual rate of 8? to be repaid over a period of 15 years, including four years of grace, with UPTC bearing the foreign exchange risk. The remainder of credit funds (Us$6.6 million) would be transferred by the Government to UPTC as equity contribution (para. 7.01 (b)]. Signature of the Subsidiary Loan Agreement would be a condition of credit effectiveness (para. 7.02 (a)].  J;L. - C. Procurement and Implementation Procurement 3.10 Procurement arrangements are summarized in Table 3.3. Table 3.3: PROCUREMENT ARRANGEMENTS (in US$ million equivalent) a/ Project Component ICB Neg LIB E/ Other J Total. Contr.b/ 1. Network Rehabilitation 38.6 ([2.4) - - - - - - 38.8 (32.4) 2. Computerization - - - - 0.7 (0.7) - - 0.7 (0.7) 3. Rural Call Stations 1.6 (1. ) - - - - - - 1.6 (1. 5) 4. Subscribers Torminal 2.1 (2.1) - - 0.2 (0.2) - - 2.3 (2.3) Equipment 6. Cable Material 1.7 (1.7) - - - - - - 1.7 (1.7) S. Vehicles 2.1 (2.1) - - - - - - 2.1 (2.1) 7. Engineering Consultants - - - - - - 2.0 (2.0) 2.0 (2.0) 8. Institutional Development - - - - 0.2 (0.2) 6.4 (6.4) 8.8 (8.8) 9. Recurrent Purchases 1.0 (1.0) 2.0 (2.0) )- .- - 3.0 (3.0) Total 46.0 (40.8) 2.0 (2.0) 1.1 (1.1) 8.4 (8.4) 656. (62.3)e/ Percent 79.8% 3.6X - 2.0% - 14.9% - 100% Note: f/ Costs include proportionate contingancy provisions, excluding UPTC work force and force account. 6/ Negotiated contracts. sl Limited International Bidding. Other includes Bank's Cuidelines for tho use of consultants. o/ IDA financing in parenthesis  - 13 - 3.11 The procurement procedures are consistent with IDA guidelines. The wsupply and erect" contract for the reha1ilitation of the local cable networks (US$36.6 million including local expenditures and contingencies) will be awarded and the equipment for subscriber facilities (telephone instruments, dropwire and accessories US$4.8 million) will be procured under ICB following IDA guidelines. Supply of spare parts for switching and transmission (US$2.0 million) which are proprietary in character and obtainable only from specified manufacturers will be procured through negotiated contracts, subject to IDA approval to ensure that the prices obtained are comparable to world market prices for similar equipment. Tools, mini computers and miscellaneous materials that cannot be grouped to form packages of more than US$100,000 equivalent, (US$1.1 million), will be procured through limited international tendering (LIB). Nippon Telecommunications Consultants (NTC) have been selected as engineering consultants. Consultants and technical assistance personnel for the implementation of Institutional Development Program will be selected in accordance with IDA Guidelines for the Use of Consultants. The training disciplines and fellowship assignments for UPTC staff will be selected by UPTC in consultation with IDA. All IDA-financed contracts over US$100,000 will be subject to IDA's prior review. These will cover about 95Z of the total value of all contracts under the project. Other contracts in packages of less than US$100,000 will be subject to selective post-award IDA review. Disbursements 3.12 Except for payment against contracts of less than US$100,000 equivalent, which will be disbursed against statements of expenditure, the IDA credit of US$52.3 million would be disbursed against full standard documentation for 10OZ of foreign expenditures for the turnkey contract, technical assistance and training, and 1002 of foreign expenditures or 80S of local expenditures for supply of telecommunications equipment, spares, tools, vehicles and miscellaneous equipment. To facilitate rapid disbursements, a Special Account of approximately US$2.0 million will be established in U.S. dollars in a commercial bank through the Bank of Uganda and maintained on terms and conditions acceptable to IDA. The US$2.0 million special account represents about four months of estimated disbursements during the peak disbursement period of 1992. The Special Account would be used for disbursements against all expenditures. Application for replenishment will be submitted on a monthly basis promptly after reconciliation of the monthly bank statement.  - 14 - Table 3.4 Disbursement of IDA ^.redit Category Amount $ Million Percentage Financed 1. Local network 32.4 100Z of foreign .turnkey contract) expenditures 2. Telecommunications 11.3 10OZ of foreign equipment, spares, expenditures, 802 of tools, vehicles and local expenditures recurrent purchases 3. Consultants and Training 7.1 1002 of foreign expenditures 4. PPF refinancing 1.5 52.3 3.13 The disbursement schedule for the project is given in Annex 7. Under the standard disbursement profile for IDA telecommunications projects, the credit closing date would be June 30, 1996. However, a better than standard performance is expected because (a) advanced procurement for US$36.6 million will be a condition of credit effectiveness (paras. 3.16 and 7.02), (b) use of a "supply and erect" contract for the major project component, (c) requirement under the project that most of the technical assistance be in place at the beginning of project implementation, and (d) IDA's good experience under the first project with UPTC with regard to procurement and disbursements. Due to the advanced state of procurement and other reasons mentioned above, disbursements for this credit are expected to be completed by December 31, 1993. Project Implementation 3.14 The project will be implemented by UPTC, assisted by consultants and contractors. The basic design and preparation of bidding documents for the local network rehabilitation have been prepared by NTC, engineering consultants, who were selected and financed under an initial PPF (paras. 3.07 and 3.11). The same consultants have assisted UPTC in bid evaluation and also will assist UPTC in supervising and commissioning this major project component. Terms of reference of the engineering consultants are given in Annex 8. The UPTC staff will install the subscriber plant, radio call equipment and rehabilitate the outside plant in some provincial towns. The use of a "supply and erect" contractor for the major physical  - 15 - rehabilitation component [para. 3.05 I (a)] is both necessary and appropriate because of the size, complexity and urgency of the works and the lack of current managerial and technical capacity within the UPTC to undertake the major rehabilitation work proposed; including the lack of UPTC engineers and technicians trained in erection of outside plant. 3.15 An important feature of the project is the opportunity provided by the local networks contractor's assumption of responsibility for physical rehabilitation works to focus attention and energy on the parallel development of UPTC's institutional capacity. That program is described in Chapter IV (paras. 4.15 - 4.23). Although the local networks contractor will be required to utilize UPTC staff and, thus, contribute to the development of UPTC's capacity for operating and maintaining the rehabilitated networks, primary responsibility for assisting UPTC to develop its institutional capability will be assigned to UPTC management assisted by consultants other than the engineering consultants who will be directly involved in the supervision of this major contract. This approach would be used to ensure that the institution-building program is not de- emphasized in the face of pressures to complete physical rehabilitation. 3.16 Given the above arrangements and the technical assistance built therein for a major part of the project, UPTC's current management and manpower (para. 4.08) are adequate to implement the project. A qualified UPTC senior staff member has been designated as Project Coordinator. His duties include day-to-day follow-up of project preparation and implementation within UPTC and liaison with consultants and contractors. The tender documents for the supply and installation of local cable networks have been cleared by IDA and bids were invited in May 1988, and are being evaluated. The award of the contract for the network rehabilitation will be a condition of credit effectiveness [para. 7.02 (b)]. The implementation schedule for major project components is in Annex 9. The project is expected to be completed by June 30, 1993 (para. 3.13). Performance Monitoring 3.17 UPTC's overall performance during the project implementation period (1989-1993) will be monitored against performance indicators (Annex 10). This program contains the standard technical and financial performance indicators and the targets for investments, subscriber connections, staffing, institutional improvements, and procurement. Monitoring of these indicators will assist UPTC in upgrading its management systems and will allow timely corrective actions to be taken. During negotiations, targets for 1989 and 1990 were agreed upon as representing desirable and feasible levels; the targets for later years are indicative and will be reviewed and established jointly by IDA and UPTC by September 30 of the preceeding year [para. 7.01 (c)]. IV. THE IMPLEMENTING AGENCY A. Origin, Objectives and Role 4.01 The UPTC, which under the direction of its Board of Directors will have overall responsibility for project management, became operational on December 1, 1984 and, effective the same day, replaced the former caretaker  - 16 - corporation established in '977. The broad objectives and functions of UPTC are to provide postal and telecommunications services within Uganda, between Uganda and the rest of the world, and to regulate and control radio communications operated from and received in Uganda. The Corporation also manages and controls, on behalf of the Government of Uganda, a Savings Bank. In the conduct of its affairs, the UPTC is required, by its Act, to operate on sound commercial principles and generate sufficient revenue to meet its expenditures and make a reasonable profit. B. Organization and Management Board of Directors 4.02 UPTC is managed by its Board of Directors through the Managing Director in accordance with the UPTC Act. The number of Directors at any time cannot be less than eight nor more than ten, including the Chairman and the Managing Director. All Board members are appointed for a three- year period by the Minister of Transport and Communications, who is responsible for general guidance and control of UPTC. There are currently nine Directors including the Chairman, the Managing Director and seven other members, who were appointed at various times; some members have served since the inception of the former caretaker organization in 1977. The present Board represents a balanced representation of technical, financial and legal expertise. Three members are from the private sector: a lawyer (the Chairman), an accountant, and a telecommunications engineer. Management and Organizational Structure 4.03 The Managing Director is the Chief Executive of UPTC. He is nominated by the President of Uganda and his appointment is ratified by the Board. Below the Managing Director there are nine director level positions responsible for specified functions distributed among the same number of major departments. These departments are: (i) Postal, (ii) Savings Bank, (iii) Personnel and Training, (iv) Finance, (v) Corporate Services, (vi) Corporate Planning, Marketing, and Information Systems, (vii) Engineering Planning and Construction, Cviii) Corporation Secretariat, and (ix) Telecommunications Operations and Maintenance. Of these, the first two departments are responsible for functions without direct impact on the Corporation's telecommunications operations, the last department is exclusively concerned with telecommunications operations, and the six remaining Departments service all three of the major functions of the Corporation: postal, savings, and telecommunications. UPTC's organization chart and summary descriptions of each department, are given in Annex 11. 4.04 The present organizational structure is to some extent based on the report submitted by two experts from British Telecoms in 1907. The report focussed primarily on organizational structure issues and job descriptions for senior planning and management staff. After incorporating several modifications recommended by UPTC management, the Board of Directors approved the consultant's recommendations. The process of reorganization has started. The newly adopted organization and management structure represents a vast improvement over the previous organization and would adequately meet the corporation's immediate and medium-term requirements.  - 17 - The major problem affecting UPTC op2rations at present is its inability to attract qualified staff. This issue to a large extent is a reflection of the broader country-wide human resource problem as discussed in paras. 4.08 to 4.10. 4.05 The Managing Director is both the Chief Executive Officer and the Chief Operating Officer of the Corporation At present he directly supervises nine department directors and four other senior level staff i.e., Chief Internal Auditor, Executive Assistant, Principal Public Relations Officer and Senior Internal Relations Officer. Considering the extent of work being performed by the Managing Director, UPTC will conduct a review of its organizational structure and develop proposals aimed at reducing the workload of the Managing Director. During negotiations it was agreed that such proposals will be reviewed with IDA and implemented by December 31, 1989 [para 7.01 (d)]. C. Operating Policies and Procedures Policy Statement 4.06 To supplement the institutional objectives and roles outlined in its enabling legislation, UPTC has adopted a Policy Statement to serve as a guide to its operations (Annex 12). The Statement of Policy elaborates and builds on the key features of the UPTC Act, which provides a suitable framework for an administratively independent, financially responsible and commercially oriented institution with adequate authority and flexibility in managing its affairs, including determination of tariffs and compensation for employees. It provides a sound basis for UPTC's current operations and future development, reflecting sound operating policies and procedures, and a balanced approach to its development and growth. Adherence to this policy would be in the long-term interest of both the institution and its clients. Assurances were obtained at negotiations that this policy would not be changed without consultation with IDA [para. 7.01 (e)]. Operating Procedures 4.07 In order to realize its overall corporate objectives, UPTC would need to modify existing procedures and practices and develop new procedures where necessary to conform to its new organizational structure and Policy Statement. In the context of its institutional development strategy (para. 4.15 and 4.22 and Annex 13), assistance would be provided under the project to enable UPTC to develop and improve its systems and procedures and, where needed, to prepare comprehensive Operations Manuals [para. 4.22 (d)]. D. Institutional Issues Staff and Training 4.08 As of December 31, 1987, UPTC had about 2,140 staff with about 1,820 staff employed for telecommunications, or about 63 staff per 1,000 DELs (Annex 15), which is comparable to the staffing levels in the other East African countries (Ethiopia 66, Tanzania 68). This staff ratio however, does not reveal that UPTC suffers from a lack of skilled managers  and quali.tid technicians and accountants. Also, only 1,453 or 682 of approved positions of UPTC's new organizational structure are currently filled; The remaining 687 persons (321 of currently employed staff) are employed in redundant positions carried over from the previous organization structure. Up to now, no assessment has been made to determiiLe if all the employees are suitable for training and continued employment in UPTC. 4.09 While a number of UPTC's senior staff have received a high level of education in Uganda and abroad and have proven capable of operating modern sophisticated equipment, th^ performance of most mid and lower-level staff has been poor due to a lack of motivation resulting from low salaries, difficult country situation and poor working conditions. In many respects, the UPTC situation reflects the countrywide problem of inability to attract qualified staff and of poorly trained staff, ill-equipped to handle their functions effectively. In order to improve staff motivation, UPTC is ready to and would review annually its remuneration package to ensure its competitiveness with the general salary structure in the private sector and in other parastatals in Uganda - such as Uganda Electricity Board, Uganda Railways - with which it competes for recruitment of technical staff and, if necessary, make appropriate adjustments. UPTC would also design and establish with the assistance of consultants an appropriate incentive system by June 30, 1989 ((Annex 13 para. 3 (g)]. Assurances from UPTC and the Government to this effect were obtained during negotiations [para. 7.01 (f)]. 4.10 At the present level UPTC may be overstaffed but distribution of experience and qualifications of its staff, in many cases, does not correspond to its requirements. Therefore, assurances were obtained during negotiations that an initial review of the staffing requirements and the determination of both staffing gaps and redundancies would be comspleted by December 31, 1989. UPTC has agreed and during negotiations the Government's agreement was also obtained that until the results of the staffing assessment are made available, with the exception of filling some critical vacant positions, a hiring freeze for mid and low-level staff will be instituted. UPTC has agreed to retain consultants for this purpose and review their recommendations with IDA (para. 7.01 (g)]. To assist UPTC in the conduct of the staffing study, the project would finance three person- months of consultant services. 4.11 For several years there was no formal training of new staff or refresher courses for existing personnel. Limited technical training is presently given in the new training center completed under the first IDA financed project. Technical training needs to be expanded and training in other areas such as: (i) planning and management; (ii) accounting and financial control functions; (iii) operations maintenance; and (iv) engineering management, project planning, design, and implementation needs to be introduced. Therefore, in conjunction with the staffing assessment (para. 4.10), staff training needs would be identified and a detailed training program would be prepared for the entire organization by December 31, 1989 [para. 7.01 (h)]. The training program will emphasize: (i) on- the-job training through working with consultants; (ii) the offering of courses in Uganda organized and conducted by foreign and local trainers and professors; and (iii) establishment of an effective twinning arrangement for in-service training and exchange of professional knowledge and  - 19 - &:!perLenca. Scn'e teL:antCe wculd be placea on formal trZLnLng abroad for staff in key technical areas. An estimated 24 UPTC staff (96 person/months) would participate directly in the in-service twinning program (Annex 16), although others would also benefit from working with the exchange staff from the 'sister" institution; 50 staff would receive fellowships for foreign training ranging in dura.tion from 3-12 months (480 person/months); and 960 staff would benefit from short courses offered in Uganda (960 person/months). UPTC has contacted the postal and telecommurications authorities of the Republic of Ireland and would invite proposals from other similar organizations and there are good prospects for finalizing a satisfactory twinning arrangement. Agreement was reached during negotiations that a satisfactory twinning arrangement along the lines described in Annex 16 would be in place by September 30, 1989 [para. 7.01 (i)]. Billing and Collection 4.12 UPTC bills its telephone subscribers monthly through a computerized billing system. Computer installation problems resulted in a backlog of nine months in 1985 but as of now the system is running satisfactorily, the backlog has been significantly reduced and bills are now issued within 45 days. Further improvement is required to issue the bills within 15 days and will be achieved through provision cf technical assistance under the project (para. 4.22). Telex billing is still manual and is one to two months late. At negotiations assurances were obtained that from June 30, 1989 bills for telephone and telex services will be issued within 15 days (para. 7.01 (j)]. 4.13 As of June 30, 1988 UPTC accounts receivable, other than from foreign telephone companies, are estimated at about US$29.9 million or equal to 392 days sales revenue for the 1987/88 financial year. Both the Government and UPTC have, therefore, agreed that urgent action would be taken to accelerate the process of reduction. The Government, on its part, has agreed that all its ministries and parastatal bodies would pay in full all arrears for telecommunications services by June 30, 1990 and thereafter, all charges incurred by its ministries and parastatal bodies would be paid to UPTC within 30 days of the billing date. UPTC is also in the process of strengthening its billing and collection procedures to reduce its receivables from the private sector. Prior to negotiations Government and UPTC prepared an outline plan of action to reduce accounts receivable to no.more than 90 days of sales by June 30, 1990 and maintain them during project implementation period at levels shown in the performance indicators (Annex 10). The outline action plan specifically reflects the Government's agreement to deal urgently with overdue payments in respect of services provided to the Government and Parastatals. The action plan was agreed at negotiations [para. 7.01 (k)]. Accounting and Auditing 4.14 The appraisal team encountered extreme difficulty in collecting accurate and reliable actual and forecast financial information. Since then UPTC, with the help of external auditors, has updated its accounts in  - 20 - as much as that audited accounts through FY874 have been provided and draft accounts for FY88 have been prepared. A set of revised financial projections through FY93 has also been made available. The latest figures in the draft accounts and projections are grossly inconsistent with revenues and expenditures of telephone entities elsewhere in developing world 'nd thus have been revised to reflect a realisdic scenario. The Government's Auditor General has selected a private firm as UPTC's external auditors. The external auditors have ideniified several weaknesses in UPTC's accounting and internal control systems. This is not surprising considering that until recently there was virtually nobody adequately qualified working in the accounting and internal audit departments. The proposed technical assistance in the accounting and finance areas under the project (para. 4.20) would enable strengthening of the accounting department and reassignment to their regular positions of some audit personnel who were taken away from their regular jobs to act in various accounting functions. During negotiations, assurances were obtained that the Government's Auditor General would continue to appoint independent auditors to audit UPTC accounts and that beginning with FY89 audited accounts together with the auditor's report would be submitted to IDA within six months of the end of the fiscal year and the auditors would be requested to submit reports to IDA certifying that the documents and procedures supporting the statements of expenditures are in accordance with the terms and conditions of the credit [para. 7.01 (1)]. Institutional Development 4.15 Improvement in the quality of service and the efficient utilization of both the existing and projected physical facilities will not result from major investment alone; strengthening of UPTC's overall institutional capability is also crucial to improved performance. Fundamental organizational and managerial deficiencies have been identified: (i) technical skill deficiencies among executive, technical, financial, and administrative support staff; (ii) inadequate availability of qualified middle managers and supervisory personnel (especially at levels below Head of Department); (iii) lack of qualified and skilled personnel available for employment within UPTC as well as in Uganda due mainly to grossly inadequate financial incentives;5 (iv) inadequate financial and material resources; (v) absence of medium and long-term corporate planning and any system linking corporate planning, budgetting, and management information; (vi) lack of established and systematic procedures for coordination and information sharing among and between departments and between divisions in departments; (vii) low staff morale and discipline; (viii) low awareness of the business objectives of the institution, especially among the lower-level staff; (ix) ineffective procurement, stock control/inventory management and internal supply; and (x) an insufficient commercial orientation and lack of procedures directed toward enhanced customer service. UPTC's management is committed to 4/ Effective 1987 UPTC's accounting year was changed from December 31 to June 30. 51 UPTC's compensation package compares favorably with most parastatals but is grossly inadequate in absolute terms as well as in comparison with organizations such as the Uganda Commercial Bank and the private sector.  - 21 - improving UPTC's performance and is expected to prepare an institutional development policy program (Annex 13), including an action-plan for implementation. The program would, amongst other things, reemphasize commercialization of UPTC operations and its financial and administrative autonomy as envisaged in the enabling legislation and reflected in UPTC's Policy Statement. Given the present human resource constraints, however, it is unrealistic to expect UPTC to put together a meaningful program on its own. To assist UPTC in this task a second PPF has been provided. During negotiations it was agreed that submission of a comprehensive institutional development program satisfactory to IDA would be a condition of credit effectiveness (para. 7.02 (c)l. Oorporate Planning 4.16 UPTC will, for several years, be operating in a situation in which its needs will substantially exceed financial, managerial, and staffing resources. In order to avoid inefficient utilization of effort and resources through ad-hoc decision making, an Annual Corporate Plan establishing medium-term five-year business objectives and financial projections as well as annual budget will be prepared and updated on a yearly basis. The Annual Corporate Plan would specifically reflect the objectives of UPTC as set out in its Statement of Policy adopted by the Board of Directors (para 4.06). The plan will be based on estimated (i) customer demand by type of service required; (ii) distribution of demand among categories of potential customers and their locations; (iii) financial, human and fixed physical resources available to UPTC; (iv) proposed capital expenditure on rehabilitation and/or improvement of existing infrastructure and new facilities; and (v) manpower development and training programs. Based on these estimates the plan would establish: (i) priorities among clients by type and/or geographical locations; (ii) aggregate investment targets linked to those priorities; (iii) sources of funds (internally generated cash, government contribution and loan capital); (iv) non-financial resource requirements (e.g. personnel by number and their distribution among various functions, facilities, and equipment); and (v) assignment of responFibilities to specified departments and units within the organization. The Annual Corporate Plan would also include a discussion of assumptions used and strategies built into the operating and investment programs and amalgamation of yearly plans into five-year projections, and critique performance in key areas such as customer service, bill collection, write-offs, administrative costs, staffing, performance evaluations, manpower development, and training activities. 4.17 To give practical effect to the corporate five-year and annual plans, they will need to be disaggregated into annual departmental and sub- departmental work plans. Each department, work unit and field office within UPTC would be directly responsible for preparing their own specific work plans according to guidelines issued by the Department of Corporate Planning and Management Information Systems. 4.18 The Department of Corporate Planning and Management Information Systems would have specific responsibility for developing UPTC's Annual Corporate Plan and Financial Objectives as a framework for preparation and updating of five-year projections. N,evertheless, the planning process  - 22 - would require inputs from UPTC managers at all levels. In order to ensure effective and timely participation in the process, the Department of Corporate Planning and Management Information Systems would develop a "planning cycle". Detailed instructions and guidelines would be issued explaining the corporate objectives, outlining the kind of information required and its format, designating responsibility for its preparation and timing for submission. These instructions would also set out a process for reviewing the performance of income and cost control at appropriate levels within UPTC. To assist the Corporation in the design and implementation of a new corporate planning system, the project would finance approximately six person/months of short-term consulting services (para. 4.23). Management Information System 4.19 The various Management Teams within the UPTC will require timely information regarding their performance and the repercussions of their performance on the operational and financial performance of other units within the institution. The provision of such information will be well targetted to specific managers so as not to overwhelm the system nor the managers themselves. A comprehensive management information system (MIS) which integrates such information would therefore be established within UPTC. Although the HIS has not yet been designed in detail, its key features and clients are indicated in Annex 13. The project would finance a total of 15 person months of short-term consultant services (para. 4.23) to assist the Corporation to assess its specific management information needs, design an overall system and computer software, train staff, evaluate and review the first phase operation of the new system and redesign the software, as necessary. Financial Planning and Management 4.20 UPTC intends to staff the management positions from among the pool of suitably experienced persons in Uganda. Senior managers have already been selected to head technical and other line functions. However, the majority of financial and accounting management positions are vacant, and because the available pool of such persons is very limited in Uganda, meeting the immediate need for senior and some intermediate managers from either within the organization or through local recruitment could prove extremely difficult in the short and medium-term. As the positions of Finance Director, Chief Accountant, Financial and Expenditure Accountant, Management Accountant and Systems and Procedures cum Data Processing Manager are crucial to efficient business operations, assurances were obtained at negotiations that these positions would be filled by June 30, 1989 and would remain filled throughout the life of the project with qualified and experienced staff. In view of the shortage of qualified financial staff in Uganda, funds are provided under the project to cover the cost of 144 person-months (para. 3.05) of expatriate staff. In the event that any of the above positions are financed out of the proceeds of the credit, the terms and conditions of employment would be acceptable to IDA (para. 7.01 (m)]. Pending the filling of the key positions in the Finance and Accounting Department, UPTC urgently needs short-term technical assistance to review and suggest appropriate modifications to its existing financial, accounting, planning and control systems and procedures and management information systems to enable provision of reliable financial  - 23 - informatiLn in a current basis. During negotiations, it was agreed that appointment of outside consultants and recruitment of a Financial and Expenditure Accountant and a Management Accountant under terms of reference satisfactory to IDA would be conditions of effectiveness (para. 7.02 (d)]. An amended second PPF request for this purpose and recruitment of short- term consultants to assist UPTC in institutional development program (para. 4.15) has been approved. Since the cost of expatriate staff is several times the cost of local recruits, UPTC would ensure that the TORs of short- term consultants and long-term technical assistance personnel will include specific programs for training suitable Ugandan replacements, to avoid retention of expatriate staff longer than absolutely necessary. Post Office Savings Bank 4.21 The Uganda Post Office Savings Bank (POSB) was established in 1935. In 1937, under the Savings Bank Act, the Managing Director of UPTC was entrusted with the management and control of the Savings Bank on behalf of the Government. POSB operates through a network of 120 Post Offices and Sub-Post Offices and Agencies and thus is well placed vis-&-vis other financial intermediaries to mobilize savings and provide basic financial services on a country-wide basis. This advantage, however, is not reflected in the volume of business handled by POSB. In 1987, 340,000 saving accounts with about U Sh 19 million were maintained with POSB. In consequence, the Savings Bank had a large number of very small accounts: the average balance was U Sh 55. The main reason for POSB's poor performance appears to be a much lower interest rate, which it is allowed to offer by law. Compared with 18 to 22 per cent given by the commercial banks, interest on POSB deposits is only 8 per cent. There is, however, a proposal under consideration for increasing the interest rate to 12 percent. Other factors contributing to POSB's poor results are: limited number of withdrawals (only one per week); and no credit facilities to its customers. POSB's main source of income is through its mandatory investment of half of its surplus funds in Government securities. However, despite the legal requirement, often the Government has refused to accept these funds, resulting in considerable loss of income to POSB. These problems have been compounded by a severe lack of commercial approach by POSB to its business and failure to attract large depositors. POSB is also lacking in qualified staff and support facilities. 4.22 Assessment of POSB's financial performance is impossible, since it was in 1977 that.its financial statements were last prepared. However, it can be safely assumed that with limited income and large overheads POSB has not operated on a financially viable basis. Under the project, technical assistance of up to six person-months would be provided to address the problems and difficulties facing POSB and propose measures which would equip POSB to operate as a commercially oriented financial institution. Technical Assistance for Institutional Development 4.23 With reference to assistance for the implementation of UPTC's institutional development strategy, 144 person months of long-term  - 74 - technical assistance would be provided to staff critical positions in UPTC's Finance Department,6 24 person-months to assist the UPTC to improve billing and collection, and an additional 110 person months of short-term consultant services would be provided to: (a) review and redesign of a new corporate planning system (6 person/months); (b) prepare planning guidelines (7 person/months); (c) design and conduct annual action-planning workshops and train local trainers/facilitators (32 person/months); (d) design systems and coach middle managers in appropriate staff and materials management techniques and prepare operations manuals (12 person/months); (e) provide direct consultant servJces to the various management teams within UPTC on a recurrent, but non-residential, basis (person/months); (f) assess UPTC's management information needs (3 person/months); (g) design a management information system - MIS (3 person/ months); (h) design appropriate computer software for the MIS, train staff in its use, and evaluate, review, and redesign software followl.g initial operations (10 person/months); 'i) assist UPTC in the conduct of a staffing study (3 person/ months); (j) conduct a training needs assessment (4 person/months); (k) design a comprehensive training program (6 person/months); (1) identify and describe career paths for key occupational specialities (12 person/months); and (m) design of an appropriate incentive package and system for the management of it (6 person/months). Broad terms of references for the above consultancy services will be prepared and reflected in Annex 14. These were reviewed and agreed during negotiations. 6/ A part of the funds provided would be utilized to finance short-term consultants to update UPTC accounts (para 4.20).  - 25 - V. FINANCIAL ANALYSIS Past Financial Performance 5.01 As indicated in Annexes 17 to 19 prior to 1986 the financial performance of UPTC was not satisfactory. In 1985, UPTC incurred an operating loss of about U Sh 2.63 billion, equal to about US$1.88 million.a/ In October 1986 UPTC was allowed a massive tariff increase, followed by another significant tariff adjustment in May 1987. As a result, during the last two years UPTC's operations, excluding an exchange loss equivalent to US$41.82 million in 1987, have been reasonably profitable as indicated below. In 1986 and 1987 UPTC's self-generated funds were 55? and 29Z respectively of the capital investment requirements. UPTC tariffs prior to the adjustments made after the latest devaluation of Uganda Shilling are given in Annex 21). 1985 1986 1987 b/ (US$ millions) C/ Operating Revenues 2.23 17.67 14.70 Operating Costs (4.11) (11.80) (8.19) Operating Profit/(Loss) (1.88) 5.87 6.51 Interest (1.53) (1.78) (0.06) Exchange loss (5.04) - (41.82) Net Income (8.45) 4.09 (35.37) Operating Ratio 184 67 56 Rate of Return on Book Value (Z) - 76.4 50.0 Current Ratio (times) 0.75 1.81 0.89 Debt/Equity Ratio - 90/10 70/30 Debt Service Coverage (times) - 5.2 88.8 a/ At the exchange rate of U Sh 1,400 = US$1 b/ Results for six months of 1987. c/ At the exchange rate of U Sh 60 = US$1  - 26 - A summary of UPTC balance sheet as at June 30, 1987 is given below: (US$ millions) Percent Net Fixed Assets 45.43 28 Work in Progress 0.67 1 Current Assets 115.21 71 TOTAL ASSETS 161.31 100 Government Contribution 0.47 - Reserves and Retained Earnings 8.92 6 Long Term Debt 22.20 14 Current Liabilities 129.72 80 TOTAL LIABILITIES 161.31 100 Nearly 98Z of the current assets are represented by accounts receivable (US$112.61 million). The problem of accounts receivable stems from large amounts due by foreign telephone companies to whom UPTC owes equally large or greater amounts and also from errors in processing the bills and in meter reading, the latter not having been carried out on a regular basis. In addition, the Government departments and parastatals have been chronic defaulters. Steps would be taken under the project to reduce the overdue accounts to an acceptable level; 90 days of sales (para. 4.13).  - 27 - Future Financial Performance 5.02 UPTC forecast financial statements for 1988-1993 are given in Annexes 17 through Annex 19 and are summarized below: FY ending June 30 1988a/ 1989 1990 1991 1992 1993 (US$ millions) Operating Revenue 27.82 24.76 27.60 33.10 38.89 44.66 Operating Expenses 10.65 14.23 16.29 20.86 24.38 27.50 Operating Income 17.17 10.53 11.31 12.24 14.51 17.16 Interest 2.36 2.97 4.16 5.76 7.41 8.80 Income Tax - - - 0.41 4.26 5.01 Net Income 14.81 7.56 7.15 6.07 2.84 3.35 Operating Ratio 38 61 59 63 63 62 Rate of Return (Z)bM 27.0 13.2 13.3 11.6 11.6 12.4 Current Ratio (times) 0.98 0.99 0.96 1.13 1.62 3.54 Debt Equity Ratio 33/67 37/63 44/56 49/51 54/46 56/44 Debt Service Coverage 8.3 3.8 2.0 2.3 1.8 1.9 Net Internal Cash Generation as a percentage of new Investments 44 60 37 56 48 77 Note: Assumptions used in Financial Projections are given in Annex 20. a/ Since the data for 1988 is tentative it is grouped together with forecast statements. b/ UPTC's assets were revalued in 1987. Since then UPTC has not acquired assets of significant value. The current book value thus reflects the market value cf assets in operation. UPTC's financial performance over the project period is satisfactory and will enable UPTC to meet the agreed performance indicators (See Annex 10). During negotiations, agreement was reached with both Government and UPTC that UPTC's tariffs will be adjusted so that net cash flow in any one year will meet or exceed the local funds requirement of the agreed investment program in the following year and that the rate of return on its net revalued assets would not be less than 121 (para 7.01 (n)]. UPTC's financial projections are based on the assumption that adequate adjustments in its tariffs would be allowed to enable the Corporation to maintain its revenue constant in dollar terms. All of the future increases in UPTC's revenues are assumed to come from increased business activity e.g., project and other investments.  - 28 - Financial Arrangements 5.03 Following is the summary of the UPTC's financing plan for 1988-93: (US$ Million Equivalent) Amount Percent Sources Net Income Before Interest 73.24 33 Depreciation 30.86 14 Internal Cash Generation 104.10 47 Government Contribution 29.56 13 Borrowing 90.36 40 Total Sources 224.02 100 Applications Proposed Project 49.30 22 Other Investments 94.88 42 Total Investment Program 144.18 64 Debt Service 41.69 19 Increase/(Decrease) in Working Capital 38.15 17 Total Applications 224.02 100 UPTC's net internal cash generation (after debt service) would be equal to about 431 of total investment program over the 1988-93 period. The average debt service coverage over the same period is projected to be 2.5 times. UPTC's projected rate of return on net revalued fixed telecommunications assets in operation would be at least 12 percent. This is mainly due to nearly doubling of the net average working telephone lines during the program period and to an increased utilization of the services. The Projected Balance Sheet as at June 30, 1988 is given below: US$ millions Percent Net fixed Assets 81.83 39 Work in progress 0.67 0 Current Assets 127.54 61 Total Assets 210.04 100 Government Contributions 30.03 14 Reserves and Retained Earnings 23.73 11 Long Term Debt 26.56 13 Current Liabilities 129.72 62 Total Liabilities 210.04 100  - 29 - About 94? of the current assets are represented by accounts receivable (US$119.33 million). However, about 772 of total receivables represent amounts due from foreign telephone companies. Conversely, nearly 1002 of the creditors (US$129.72 million) are represented by accounts payable by UPTC to foreign telephone companies. Government contributions consist mainly of assets directly paid for by the Government transferred to UPTC in 1987 (ElO B Exchange, Fourth Satellite Station, Microwave/TV channel and a telex exchange). Long-term debt includes IDA Credit 1367-UG (US$22 million) and french protocol (US$4.36 million). Reserves and retained earnings include approximately US$36 million of assets revaluation reserve. VI. ECONOMIC ANALYSIS Benefits 6.01 Benefits from the proposed project will reach most sectors of Uganda's economy and will be felt throughout private business and Government. A direct benefit would be the increased efficiency and productivity of UPTC's activities, achieved through institutional development, which should increase resource transfer to the Government. 6.02 For business, improved telecommunications will enhance management efficiency, improve coordination of economic activities and thus facilitate increased business productivity and growth. Compared with alternate means of communications, reliable telecommunications generally are more efficient in terms of capital, energy consumption and user time. For rural communities, improved access to service would facilitate integration of rural areas with the rest of the economy, improve the efficiency of production and marketing of agricultural produce, and support the creation of small business. Telecommunications would also support the extension and enhancement of health, education, government administration and other services to rural areas. For the Government itself, the proposed project would facilitate improvements in the efficiency of Government administration and parastatals in a way similar to improvement in private business efficiency. In addition, revenues generated from investments included in the project would mobilize substantial domestic resources for Government at a time of severe budgetary constraints. The Government would share in UPTC's profits through taxing (60Z) of UPTC's overall income. It is estimated that during the project period, the Government would receive about US$10 million by way of tax on UPTC's profits. In addition, UPTC would pay interest (8Z) on IDA credit funds (about US$46 million) onlent by the Government. Annual payments to the Government after the credit is fully drawn down would amount to some US$4 million. Additional payments to the Government may result by way of distribution of UPTC net profits depending on UPTC's needs for funds for investment and other purposes as determined by its Board of Directors. Tariffs 6.03 UPTC's latest available tariffs are summarized in Annex 21. They mainly follow the structure of the former EAPTC tariffs, with some adju3tments to reflect devaluation of the Uganda Shilling. The  - 3o - Government's policy is for UPTC to be financially self-sufficient and meet the financial obligations of its investment programs. This is demonstrated by the two massive tariff increases in the past two years (para. 5.01) which enabled UPTC to turn in reasonable operating profits in 1986 and 1987. Although large tariff increases require approval of the Government, UPTC's Board of Directors, on the recommendation of the management, determines the size and timing of such adjustments. In the case of last two changes, UPTC Board was instrumental in deciding their magnitude, and the revised tariffs more or less reflect the Board's decision. 6.04 UPTC's telecommunications tariffs have been among the lowest in the world. However in October 1986, following Government approval, UPTC's tariffs were increased manyfold followed by another adjustment in May 1987 (para. 5.01). Following the U Shilling devaluation which occurred after appraisal UPTC has readjustes its postal and telecommunications tariffs. These increases mostly offso t the devaluation of the U Shilling, therefore the adjusted domestic and international tariffs at present are at reasonable levels. 6.05 Given the high level of inflation (currently about 70X p.a.) and the pressure on the value of U Shilling, it is imperative that a mechanism for regular tariff adjustments to offset at least inflation-related cost increases be established. During negotiations, assurances were obtained that UPTC would review the adequacy of its tariffs every six months on the basis of financial forecasts prepared by UPTC and satisfactory to IDA to meet the rate of return covenant, and submit to the Government and IDA a report on this review within one month of the review date. Assurances were also obtained that based on the review, if tariff adjustments are necessary, UPTC and the Government would take all necessary actions to adjust the tariffs within three months of the review date [para. 7.01 (o)]. 6.06 The Government has agreed for UPTC to apply some automatic adjustment formula to ensure, as an interim measure, at least a partial adjustment of tariffs without Government's clearance, particularly for international services to account for high cost increases or currency depreciation in the period between the formal reviews. One possibility is to tie both the international and domestic tariffs at least partially to the value of the U.S. dollar relative to the Uganda Shilling and make the adjustments as a surcharge on a monthly bill based on the average value of the Uganda Shilling during the billed month. In addition. at negotiations agreement was reached with UPTC to undertake prior to December 31, 1989 with the help of consultants a full-scale study under TORs acceptable to IDA, to evaluate the adequacy of its existing tariff levels and structure and, if warranted, recommend appropriate changes and establish an automatic tariff adjustment formula acceptable to IDA tpara 7.01 (p)]. Least Cost Solution 6.07 The project design is based on standard engineeringfeconomic techniques for minimizing capital and recurrent costs. Appropriate provisioning periods for different types of plant will be adopted and international competitive bidding will be used for the majority of procurement. Turnkey contract installation for the key project component will ensure the earliest possible utilization of plant for revenue generation.  -391 - Return on Investment 6.08 The proposed project is an integral part of UPTC 1988-1993 investment program. Since costs and benefits of all components of the program are interrelated, the financial rate of return is calculated on all of the investment during the period rather than on the specific items included in the proposed project. On the basis of projected incremental expenditures and revenues generated from the investment program the financial internal rate of return is 10.6Z (Annex 22). 6.09 The financial rate of return understates the economic benefits of the investment program. It does not take into account all indirect and external benefits (e.g. transport substitution, administrative efficiency) derived by non-users of the service. Given the present country situation and lack of even rudimentary data, no effort has been made to quantify indirect benefits. After adjusting the financial rate of return for taxes, the economic rate of return is 14.32. 6.10 A sensitivity analysis has been carried out (Annex 22) which establishes that the rates of return are highly sensitive to fluctuation in the revenue. It indicates that a 102 increase in program and operating costs, combined with a 102 decrease in revenues, would result in a negative financial rate of return and would reduce the economic rate of return to less than 12. However, as indicated in para. 5.02 and Annex 20 both the revenue and expenditure estimates are based on very conservative assumptions. During the project period while revenues are projected to remair. constant in dollar terms, the expenditures during the same period are assumed to increase by at least 52 p.a.. Also a major part of the project costs i.e. (network rehabilitation) would be incurred on a turnkey basis and hence there is little likelihood of a significant variations between actual and estimated capital expenditures. Risks 6.11 The main project risks relate to the country situation. Considerable institutional risks in terms of poor financial performance or inadequate management controls also exist, but will be covered through the financial and tariff covenants (paras. 5.02 and 6.06), use of technical assistance (para. 4.23), and performance monitoring (para. 3.17). The focus on training is also expected to reduce the institutional risks. Physical implementation and the commercial or market risks are small due to requirements on advanced procurement (para 6.03), large demand for services, and implementation performance under the first project. Environmental and Health Aspects 6.12 The project is expected to have no adverse environmental or health impacts. The plant is mostly unseen and it consumes little energy. Improved telecommunications services have the potential to conserve energy, reduce environmental pollution, and facilitate improved services including health delivery and emergency care.  - 32 - VII. ASSURANCES AND RECOMMENDATION 7.01 During negotiations, it was agreed that: (a) UPTC will consult with IDA on any proposal fcr investment estimated to cost more than 102 of the amount established in the investment program for any one year (para. 3.03); (b) Proceeds of the credit used for financing telecommunications equipment, plant and associated services (US$45.7 million) would be onlent by the Government to UPTC at annual rate of 82 to be repaid over a period of 15 years including 4 years of grace, with UPTC bearing the foreign exchange risk and the remainder of credit funds (US$6.6 million) would be given to UPTC as equity contribution (para. 3.09); (c) Performance indicators for FY 88/89 and FY89/90 would be as given in Annex 10 and that for subsequent years, every year during the pruiect implementation period, UPTC will: (i) prepare for IDA a review and analysis of its performance vis-&-vis agreed indicators; and (ii) reach an agreement with IDA on targets, monitoring and necessary corrective actions for the subsequent years (para. 3.17); (d) UPTC will conduct a review of its organizational structure and develop proposals aimed at reducing the workload of the Managing Director. Such proposals will be reviewed with IDA and implemented by December 31, 1989 (para. 4.05); Ce) UPTC will not change its policy statement without consultation with IDA (para. 4.06); (f) UPTC will annually review its remuneration package to ensure its competitiveness with the general salary structure in the private sector and other parastatals in Uganda and if necessary make appropriate adjustments, and design and establish an appropriate incentive system by June 30, 1989 (para. 4.09); (g) UPTC, with the help of the consultants, will conduct an initial assessment of its staffing needs and the initial revision of the staffing requirements and the determination of both staffing gaps and redundancies would be completed by December 31, 1989 and until the results of staffing assessment are made available, with the exception of filling some critical vacant positions, a hiring freeze for mid and low-level staff will be instituted (para. 4.10); (h) UPTC will prepare a detailed training program to be agreed with IDA by December 31, 1989 (para. 4.11); (i) Prior to September 30, 1989 UPTC will have finalized twinning arrangement satisfactory to IDA for in service training and exchange of professional knowledge and experience (para. 4.11);  - 33 - (j) Starting June 30, 1989 telephone and telex bills would be issued within 15 days (para. 4.12); (k) Government ministries and parastatal bodies would settle by June 30, 1990 all the arrears for telecommunications services provided and UPTC would reduce its accounts receivable to no more than 90 days of sales by June 30, 1990 and maintain them thereafter at that level (para. 4.13). (1) Government's Auditor General would continue to appoint independent auditors to audit UPTC accounts and that beginning with FY89 audited accounts together with the auditor's report would be submitted to IDA within six months of the fiscal year. The auditors would be requested to submit reports to IDA certifying that the docurants and procedures supporting the statements of expenditures are in accordance with the terms and conditions of the credit (para. 4.14); (m) The positions of Finance Director, Chief Accountant, Financial and Expenditure Accountant, Management Accountant and Systems and Procedure/Data Processing Manager would be filled throughout the life of the project with qualified and experienced staff; and in the event that any of the above positions are financed out of the proceeds of the credit, the terms and conditions of employment would be acceptable to IDA (para. 4.20); (n) UPTC's retained earnings each year (after debt service, transfer to Government, etc.) will cover the estimated local currency requirements of the following year's investment program, and the rate of return on its net revalued assets would not be less than 122 (para. 5.02); (o) UPTC would review the adequacy of its tariffs every six months to meet the rate of return covenant and based on the review, make tariff adjustments if necessary. UPTC and the Government would take all necessary actions to adjust the tariffs within three months of the review date (para. 6.05); and (p) prior to December 31, 1989 UPTC, with the help of consultants, would undertake a study under TORs acceptable to IDA to evaluate the adequacy of its existing tariff levels and structure, and, ir warranted, recommend appropriate changes and establish an automatic tariff adjustment formula acceptable to IDA (para. 6.06). 7.02 Conditions of credit effectiveness would be: (a) Signature of the Subsidiary Loan Agreement on behalf of the Borrower and UPTC (para. 3.09);  - 34 - (b) award of the turnkey contract for the network rehabilitation (para. 3.16); .z) submission of a comprehensive institutional development program satisfactory to IDA (para. 4.15); and (d) appointment of financial consultants and recruitment of a Financial and Expenditure Accountant and a Management Accountant (para. 4.20); 7.03 Subject to the above conditions and assurances, the proposed project constitutes a suitable basis for an IDA credit to the Government of Uganda of SDR 38.3 million (US$52.3 million equivalent) on standard terms, with a 40 years repayment period.  - 3. - ANNEX 1 UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION (UPTC) SECOND TELECOMMUNICATIONS REHABILITATION PROJECT Regional Distribution of Telephone Service (December 31, 1987) ZONE Number of Proportion Population TELEPHONE: (DELS) PER DELS of DELS Z millions 100 Population Kampala 17294 62 2.642 0.65 Jinja 3510 12.6 1.501 0.23 Mbalp 2883 10.4 2.907 0.10 Masaka 1850 6.6 3.512 0.05 Fort Portal 1468 5.3 2.380 0.06 Gulu 850 3.1 2.546 0.03 TOTAL 27855 100 15.488 0.18 March 1988  - 36 - ANNEX 2 UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION (UPTC) SECOND TELECOMMUNICATIONS REHABILITATION PROJECT Economic Activities of Telephone Subscribers (December 31, 1987) Kampala (including Entebbe Jinja (percent) (percent) Residences 31 33 Commerce (retail and wholesale) 30 22 Services: Banking (including insurance) 3 4 Communication and transport 3 2 Education (including state) 5 4 Professionals 4 4 Water and electricity 4 1 other services 1 4 Subtotal 20 19 Government administration (including defence and police 11 15 Industry 6 10 Other a/ 2 1 Subtotal 100 100 Number of Subscribers 17,294 3,510 Z of Total DELs 64 12 a/ Churches, political party offices, embassies, conference center, etc. Source: UPTC, Telephone Sales Office, Kampala. March 1988  37 - ANNEX 3 Page 1 of 2 UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION (UPTC) SECOND TELECOMMUNICATIONS REHABILITATION PROJECT Existing Telephone Facilities (December 31, 1987) Installed Installed Lines Exchange Switching Cable in Exchange Zone Type Capacity (lines) Pairs Service Fill Z Kampala Central ElOB 15,000 C400 Xbar 5,000 Subtotal 20,000 21,814 9,486 47 Lugazi C23 Xbar 100 115 90 90 Nsambya E10 B Rlu 3,000 1,600 1,038 34 Kawemjee EWE Rlu 1,500 405 337 22 Kyambogo C23 Xbar 1,000 2,000 332 33 Makerere E10 B 5,000 a/3,000 1,247 24 Mbuya ElOB Rlu 3,000 a/2,000 1,006 33 Mengo C400 Xbar 3,600 3,200 1,371 38 Lubowa E10 B Rlu 600 100 272 45 Mukono E10 Rlu 600 300 287 47 Bombo Rurax 100 200 68 68 Entebbe C400 Xbar 1,200 1,675 1,190 99 Manual 1,340 1,543 570 42 Subtotal 41,040 37,952 17,294 42 Jinja Jinja C400 Xbar 4,000 3,900 2,600 86 Kakira C23 Xbar 100 115 70 70 Manual 1,410 1,386 840 59 Subtotal 5,510 5,401 3,510 77 Mbale Mbale Strowger 800 800 764 96 Mbale C23 Xbar 800 800 671 84 Tororo Rurax 350 900 350 100 Manual 1,645 2,310 1,098 67 Subtotal 3,595 4,810 2,883 80  - 38 - ANNEX 3 Page 2 of 2 Installed Installed Lines Exchange Switching Cable in Exchange Zone Type Capacity (lines) Pairs Service Fill Z Masaka Masaka HDX10 dig. 2000 2800 790 39 Mbarara HDX10 dig. 2000 2000 340 17 Manual 1170 1390 720 62 Subtotal 5170 6190 1850 35 Fort Portal Fort Portal C23 Xbar 600 600 460 74 Manual 1530 1795 1008 66 Subtotal 2130 2395 1468 68 Gulu Manual 1200 1200 850 71 GRAND TOTAL 57645 57948 27855 49 Auto 862 82Z Manual 142 182 Source: UPTC March 1988 March 1988  UGANDA POSTS AND TELECOUMUNICATION (UPTCI SECOND TELECOMMUNICATIONS REHABILITATION PROJECT Beai Statistics, 1975-87 December 11 / 1976 1976 1977 1978 1979 1980 19 1 1982 1983 1984 ls98 1986 1987 TELEPHDNE SERVICE Number of exchanges 97 106 121 124 108 106 112 11 118 119 121 121 121 Capacity (lines) 31,166 33.976 38,176 88.405 16,875 U6,480 38,440 36,790 30,966 37,09C 65,000 55,645 57,622 of which autoatic (%) 77 78 77 77 77 77 77 77 77 77 64 85 s6 Connected lin-e DELIu 20,116 19,980 21,058 22,661 19,692 20,626 20,479 22,962 24,067 24,971 25,660 26,799 27,865 exchange occupation (X) 86 69 66 69 54 67 56 62 66 S7 46 48 48 Telephoneu 46,001 46,108 48,884 62,183 46,359 46,892 43,424 62,762 64,439 S5,820 68,600 67,316 69,263 Oustanding applications 13,340 16,126 18,042 13,561 13,467 15,289 21,233 21,922 19,678 20,200 23,100 22,684 26,374 TELEX SERVICE Numbr oSf7 xchangq 1 1 1 1 1 1 1 1 1 1 2 2 2 Capaeity (Lines) *- 300 300 300 300 300 300 520 620 620 520 1,020 1,020 1,020 Connected lines b/ 201 233 298 279 285 288 418 419 419 449 650 760 894 e"change occupation (U) 87 78 66 93 96 96 sO 80 80 80 S4 62 87 Outstanding applications 28 66 115 201 268 286 296 306 336 400 280 284 43 a TELEGRAPH SERVICE Number of offices 68 64 62 64 64 86 00 66 68 66 6S 67 a6 Paid words, domestic (108) 0.23 0.29 0.26 0.26 0.09 0.09 0.08 0.06 0.05 0.06 0.04 0.036 0.030 International outgoing (10