Mexico - Telecommunications Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY 3Zo > Report No. P-5259-ME MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USt22 MILLION TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.N.C. (BANOBRAS) WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A TELECOMMUNICATIONS TECHNICAL ASSISTANCE PROJECT MAY 3, 1990 This document bas a restricted distribution and may be used by recipients only In the perfornance of their official duties. Its content may not otherwise be disclosed without World Bank authorization.  CURRENCY UNIT AND EOUIVALENT Currency unit Mexican peso (Mex$) On March 30, 1990, the exchange rate stood at $1 - Mex$2,719 (controlled market) $1 - Mex$2,759 (free market) The controlled exchange rate is currently being devalued by 1 peso per day FISCAL YEY2 January 1-December 31 Abbreviations and Acronvms BANOBRAS Banco Nacional de Obras y ServicLos Publicos, SNC (National Bank of Public Works and Services) CCIR International Consultative Committee for Radio of the International Telecommunication Union DGPNC Direccion General de Politicas y Normas de Comunicaciones (Directorate General of Communications Policy and Standards GOM Government of Mexico) ICB International competitive bidding iDB Interamerican Development Bank IMC Instituto Mexicano de las Comunicaclones (Mexican Institute of Communications) LCB Local competitive bidding SCT Secretaria de Comunicaciones y Transporte (Secretariate of Communications and Transport) SHCP Secretaria de Hacienda y Credito Publico (Secretariate of Finance and Public Credit) SOE Statement of expense SPP Secretaria de Programacion y Presupuesto (Secretariate of Programming and Budgetting) TELECOMM Telecomunicaciones de Hexico (Telecommunications of Mexico) (A decentralized state entity responsible for the basic transmission network and for telegraph and telex services) TELMEX Telefonos de hexico S.A. de C.V. (Telephones of Mexico) (Mexico's telephone company, 51 percent publicly owned) TELENALES Telegrafos Nacionales (National Telegraph) VSAT Very Small Aperture Satellite Terminal  FOR OMCIAL USE ONLI MEXICO TELECOhOUNICLTIONS TECHNICAL ASSISTANCE PROJECT Loan and Project Summary Borrower Banco Nacional de Obras y Servlclos Publicos, SNC (BANOBRAS) Guarantor United Mexican States Beneficiary United Mexican States Amount $22.0 million equivalent Terms Seventeen years, including a five-year grace period, at the Bank's standard variable interest rate. Economic Rate Not applicable. of Return Staff Appraisal There is no Staff Appraisal Report for this project. Luort 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.  MEMORANDUM AND RECOMKENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, Srs FOrt A TELECOMNUNICATIONS TECHNICAL ASSISTANCE PROJECT 1. I submit the following memorandum and recommendation on a proposed loan to Banco Nacional de Obras y Servlicos Publlcos, SNC (BANOBRAS) for the equivalent of $22.0 million to help finance a telecommunications technical assistance project. The loan would be repaid over 17 years, including 5 years of grace, at the standard variable interest rate. The proceeds of the loan would be on-lent to the Government for its Secretaria de Comunlcaciones y Transportes (SCT). Backg-round 2. Mexico's present telecommunications system is a major constraint to economic growth. There are over 1.5 million applications for telephone service awaiting installation and many more potential subscribers that do not bother to apply given long delays in obtaining service. Telephone service is also of poor quality, unreliable, and the network is heavily congested with the result that it is virtually impossible to get through during peak business hours. In the recent past, Telefonos de Mexico S.A. de C.V. (TELMEX), which has a monopoly in the provision of telephone services, has installd about 230,000 lines per year, which barely keeps up with the growth of demand. More advanced services (e.g., data transmission, cellular telephony, access to time-shared data processing and data banks) are only starting to develop. Given Mexico's drive to open its economy, it is becoming increasingly important to ensure that business firms operating throughout Mexico have access to state-of-the-art telecommunications and information services, and that households gain access to markets and business activities through a more effective basic telephone infrastructure. 3. Until 1972, TELMEX was controlled and managed by the private sector and still today 49 percent of its stock is publicly traded, while the other 51 percent is held by the Government. TELMEX is run as a government enterprise. Its tariffs, investment decisions, finances and management are constrained by the same factors as in other parastatal enterprises. A government ministry, the SecretarLa de Comunicaciones y Transportes (SCT) is responsible for telecommunications sector policy and regulation. The latter includes licensing of telecommunications networks, approval of customer premises equipment, and planning, administering and monitoring the use of the radio spectrum. Until late 1989, SCT also had direct operational responsibility for the provision of some services (mainly telex and data transmission), and operated a sizeable but antiquated microwave network, a modern and underutilized domestic satellite system, and a network of maritime coastal stations. These operations are now undertaken by the newly created state- owned, commercially oriented entity, Telecomunicaciones de Mexico (TELECOMN). 4. Government Strategy. The Government has decided that a major effort to step up the pace of telecommunications development is required and has set as a goal an investment program of $10 billion over 6 years (1989-94). This  - 2 - would allow increasing the telephone density from about 5.3 lines per 100 inhabitants (end-1988) to 8.4 in 1994. To achieve this objective, the Government is initiating a far-reaching program of reforms of the telecommuni- cations sector involving privatization of TELMEX, commercialization of remaining government telecommunications operations and creation of a modern regulatory framework that promotes competition in the sector and protects the public interest from potential monopoly abuses. 5. Rationale for Bank Involvement. This proposed technical assistance loan is linked to the telecommunications component of the proposed Road Transport and Telecommunications Sector Adjustment Loan, which is being processed in parallel. Together, these two loans will support the restructuring of the Mexican telecommunications service sector. In particular, once TEU4EX is privatized, technical assistance will be required to support a regulatory capability to promote competition in the sector and to control potential monopoly abuses in pricing and the provision of service. Further, the loan will support the modernization of SCT's management and monitoring of the radioelectric spectrum. Finally, the loan will support the business development of the newly created TELECOMM, which could become an important player in the development of competition in the sector. As a result of the Bank's involvement in the design of the sector adjustment program and the important policy commitments under it, the Bank is in a unique position to provide assistance in the areas outlined above. The proposed project will be the Bank's first operation in the sector. The Interamerican Development Bank (IDB), which would co-finance the adjustment program, would also collaborate to meet technical assistance needs by funding urgently needed short-term experts from a non-reimbursable project preparation facility which it administers. 6. Project Obiectives. The proposed project will: (a) assist SCT's Direccion General de PolutIcas y Normas de Comunicaclones (DGPNC) to strengthen its capability to regulate telecommunication services and networks; (b) assist SCT's DGPNC in (i) modernizing and improving its administrative and technical capability to plan and control the use of the radio spectrum, and (ii) establishing a computer-assisted radio-frequency spectrum management and monitoring system; and (c) assist TELECOMK in developing its business activities as a competitive entity in a restructured environment. 7. Proiect Description. The project consists of three components. (a) Regulation of Services and Networks (29 percent of total costs). This work would be undertaken in three stages. In Stage 1, already under way, short-term experts on telecommunications pricing and on a regime for authorizing different categories of networks and services are helping the Government to finalize the draft TELMEX license and the regulations for competitive services. In Stage 2, a consulting firm would prepare a program to strengthen SCT's capability to regulate telecommunications networks and services and help prepare  - 3 - initial implementation. In Stage 3, experts, training, equipment and other technical support to SCT required to implement the first two years of the program would be provided. (b) RegulatLon of the Radio Spectrum (69 percent of total costs). This work would be undertaken in two stages. In Stage 1 (already under way), a short-term expert would prepare an assessment of existing capabilities and ongoing work, write terms of reference for consultants and provide a tentative estimate of the composition and cost of a modernization and improvement program. In Stage 2, a consulting firm would prepare a plan for the modernization and improvement of SCT management and monitoring of the radio spectrum, prepare a detailed specification and costing of equipment and training required, and assist with the procurement of equipment and its installation. The consultants would also provide technical support to DGPNC during the first two years of implementation of the modernization program. (c) TELECOMM--Business Develooment (2 percent of total costs). This project component would provide assistance by consultants in planning the expansion and modernization of TELECOMM's satellite system and other transmission facilities, assessing the market potential of new services, and exploring opportunities for joint ventures. 8. The total cost of the project is estimated at about $24.3 million. Two components of the project (i.e., (a) regulation of services and networks and (b) regulation of the radio spectrum) will be administered by DGPNC. The third component of the project, TELECONM business development, will be administered by TELECOMN. The project would be completed by December 31, 1993 and the closing date of the loan would be June 30, 1994. Retroactive financing as from February 28, 1990 would be provided. Procurement and engagement of consultants would follow Bank guidelines. The detailed cost estimates, methods of procurement, and disbursements are shown in Schedules A and B. A timetable of key project processing events and the status of Bank Group operations in Mexico are given in Schedules C and D. A detailed project description is given in Annex 1. The proposed chronology for the project is provided in Annexes 2 and 3. Terms of reference are provided in Annex 4. Organization charts of SCT and TELECOMM are provided in Annexes 5 and 6. Background documentation available in the project file is listed in Annex 7. 9. Actions Agreed. At negotiations, final agreement was reached on the terms of reference for the consultants that would assist SCT to strengthen its regulatory capacity and its effectiveness in planning and controlling use of the radio frequency spectrum (Annex 4). SCT also agreed to furnish quarterly reports on the execution of the project and to hold annual consultations with the Bank on the progress achieved in developing its regulatory capacity, which, if necessary, could lead to a reformulation of its plans and of the staffing needs. Effectiveness of the sector adjustment loan is a condition of effectiveness of this loan. Execution of satisfa-tory on-lending arrangements between BANOBRAS and the Government is also a condition for loan effectiveness.  10. Benefits. The proposed technical assistance loan will assist the development of a regulatory capability at SCT which is critical to the overall success of the TELMSX privatization and the Government's efforts to develop competition in the sector. Further, it will improve sCTVs ability to monitor and control use of the radio spectrum and, thereby, expedite increased use of private user networks and improve the utilization of the limited radio spectrum. Finally, the technical assistance will contribute to the necessary rapid development of TELECONM's strategic business development, which in turn would contribute to the development of competition in the sector and spur TELMEX to improve its performance. 11. Risks. Project-related risks would be very limited, given its nature. However, the breadth of the policy reforms that are being undertaken does entail risks. First, it is important to ensure that the divestiture of the Government's controlling interest in TEU4EX is 'well" handled, since this is the largest parastatal to be privatized and all aspects of the operation will be particularly scrutinized by opponents of the Government's privatization policies. Errors in this respect could jeopardize attempts in other sectors. Second, the Government does not now have staff with adequate experience to regulate public utilities, and the gulatory framework is still in an inception stage. Third, there are practica_ and financial limits to the pace at which investments in telephone services may proceed, even under private ownership. These risks seem manageable. They are alleviated to some extent by this proposed technical assistance project and are outweighod by the potential benefit of the reform process Lhat is under way. Evidence of government commitment is strong and is reflected in the important policy decisions already undertaken under the secLor adjustment project. 11. Recommendation. I am satisfied that the proposed loan would o *ply with the Articles of Agreement of the Bank, and I recommend that the Exe ive Directors approve it. Barber B. Conable President Attachments May 3, 31990 Washington, D.C.  Schedulea - 5 - Page 1 TECHNICAL ASSISTANCE PROJECT Estimated Costs ($'000) Local Foreign Total I. SCT: Regulation of Networks and Service A. Short-term (February-April 1990) experts in the fields of: price regulation (3 wks, IDB) -- 15 15 Licensing regime (3 wks, IDB) -- 15 15 B. Consulting firm to prepare SCT's detailed strategic plan with detailed specifi- cations and costing of TA (4-6 mos) 40 400 440 C. Implementation (includeds regu- latory policy; price, costs & financial analysis; service qual- ity, investment program, techni- cal standards & terminal equip- ment; administrative, legal & information systems) Experts (330 months) 400 4,000 4,400 Training (138 staff-months) 160 570 730 Equipment 20 200 220 Subtotal A 620 5,200 5,820  - 6 - Sched,ule A Page 2 Local Foreign Total B. SuT: Regulartio_ of Radio SDectrum A. Short-term expert to assess the plan and write TOR (5 wks, 3-4/90, trust funds) -- 17 17 B. Consulting firm to prepare modernization plan & detailed system specifications, and to supervise implementation (67 expert-months) -- 1,000 1,000 C. Implementation Training (18 staff-months) 27 100 127 Equipment 1,240 11,530 12,770 Su"btotal B 1,267 12,647 13,914 C. TELOM: Business D'evelopmnt (15 man-months, mid-1990 to end 1991) -- 500 500 Total of A. B. and_ 1.887 18.347 20.234 Price and physical contingencies 350 3,700 4,050 Total 2,237 22.QA7 24.284  _ 7 Schedule B Page 1 MEXICO TECHNICAL ASSISTANCE PROJECT Financing Plan (S'000) Local Foreign Total Bank -- 22,000 22,000 Grant funds L& -- 47 47 Government 2,237 -- 2,237 Total 2.237 22.047 24.284 ,/A Bank's trust funds and IDB Technical Facility. Procurement Arrangements ($'000) Procurement method Project Element ICB LCB Other La N.A. Total Consultant services -- -- 7,643 -- 7,643 (7,074) f (7,074) Training -- -- -- 1,024 1,024 (802) (802) Equipment 13,110 2,007 500 fc -- 15,617 (12,110) (1,514) (500) (14,124) Total 13,110 2.007 7.643 1.024 24.284 (12,110) (1,514) (7,074) (802) (22,000) La Contracting of consultants in accordance with Bank guidelines. b Figures in parentheses correspond to IBRD financing. Xc Local or international shopping.  - 8 - Schedule Page 2 DLsbursements ($'000) Category Amount Percentage 1. Consultant services 6,500 100 percent 2. Training 700 100 percent 3. Equipment 12,800 100 percent foreLgn, 85 percent local 4. Unallocated 2,000 igal22OQQ Estimated IBRD Disbursements ($'000) 7Y2Ia FY1 Y2 ~ F