El Salvador - Telephone Expansion Program Project

RESTRICTED FILE COPY Report No. P-341 This report was prepared for use within the Bank ond its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ADMINISTRACION NACIONAL DE TELECOMUNICACIONES IN THE REPUBLIC OF EL SALVADOR September 16, 1963  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ADMINISTRACION NACIONAL DE TELECOMUNICACIONES IN THE REPUBLIC OF EL SALVADOR 1. I submit the following report and recommendations on a pro- posed loan in an amount in various currencies equivalent to $9.5 million to the "Administraci6n Nacional de Telecomunicaciones" to finance the foreign exchange cost of a telecommunication expansion program in El Sal- vador. PART I - HISTORICAL 2. The Government of El Salvador requested the Bank early in 1962 to consider financing its Drogram of expansion of telecommunications. A first Bank mission, visiting the country in March/April 1962, concluded that the administration then providing the telecommunication services, namely the Telecommunications Bureau of the IMinistry of Interior, needed to be completely reorganized, since it did not have the organization nor the staff required for building and operating a modern system of tele- communications. The Government agreed to this and undertook to establish a new autonomous Government agency, called rlAdministracicn Nacional de Telecomunicaciones" (ANTEL). A second Bank mission then visited El Sal- vador in February/March, 1963 to review the engineering aspects of the Project and the organization and financing plan of ATNTEL. 3. Final negotiations for the proposed loan took place from August 30 to September 4, 1963. El Salvador was reoresented by Dr. Francisco Lima, Vice-President of the Republic, and Dr. Armando Interiano, of the Salvadorean Embassy in Wlashington. 4. The proposed loan would increase the Bank's lending in El Sal- vador to $50.6 million equivalent. The previous Bank loans are:  -2- Year Amount 1/ of Borrower Purpose (equivalent in Toan US$ million) 1949 Comisi6n del Rio Lampa Electric power development 12.5 1954 Republic of El Salvador Coastal highway project 11.1 1959 Republic of El Salvador Highway construction 5.0 1959 Comisi6n del Rio Lempa Electric power development 3.0 1960 Comision del Rio Lempa Electric power development 3.8 1963 Comisidn del Rio Lempa Electric power development 6.o Total 41.4 Less cancellations .3 41.1 of which has been repaid 9.9 Total now outstanding 31.2 Amount sold 2/ 2.0 of which has been ronaid 1.4 .6 Net amount held by Bank at July 31, 1963 30.6 1/ Including $7.7 million not yet disbursed. 2/ Includes $0.4 million agreed tc be sold of' the 1963 CEL loan which is not yet effective. 5. IDA has extended one credit to El Salvador, in the amount of $8 million, signed in November 1962, to help finance road construction. The credit became effective in April 1963 and the project is now underway. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The proposed loan would have the following characteristics: Borrower: Administracion Nacional de Telecomunicaciones (ANTEL). Guarantor: Republic of El Salvador.  - 3 - Amount,: The equivalent in various currencies of $9.5 million. Purnose: To finance the foreign exchange cost of automatic ex- change equipment for 26,000 telenhone lines, cables, line networks and long distance facilities for inter- urban connections. Amortization: 32 equal semi-annual instalments from M;ay 1, 1968 through November 1, 1983. Interest rate: 5-1/2 percent per annum (including 1% commission). Commitment charges: 3/4 of 1 percent ner annum. Pavment dates: liay 1 and NTovember 1. PART III - LEGAL IWSTJRU,KtENTTS 7. Attached are a draft Loan Agreement between the Bank and AIYTEL (No. 1), a draft Guarantee Agreement between the Republic of El Salvador and the Bank (No. 2) and the report of the Committee provided for in Arti- cle III, Section 4 (iii) of the Articles of Agreement (No. 3). The draft Loan and Guarantee Agreements conform generally with the Bank's pattern of such agreements for utility orojects to be carried out by a public corporation. $. The following provisions of the draft Loan Agreement are of special interest: (i) Section 5.01, which provides that the Borrower shall em- ploy qualified and experienced consultants in the execution of the project and in the organization and initial conduct of its oDeraticns. (ii) Section 5.10, which provides that ANTEL will take all steps necessary to obtain revenues sufficient to cover operating expenses, debt service and to create a surplus for financing a reasonable portion of further expansion. Corresponding provision is contained in Section 3.06 of the Guarantee Agreement. (iii) Sections 6.01 and 6.02, which specify as an additional event of suspension and default any amendment of the law creating AFTEL which is enacted without the Bank's agree- ment and would materially affect ANTEL's powers, duties, functions and responsibilities. (iv) Section 7.01, which specifies as additional conditions of effectiveness that (a) the Borrower shall have engaged con- sultants, and (b) the property, equipment and installations  - 4 - of the Telecommunications Bureau of the Ministry of Interior of the Guarantor shall have been transferred to ANTEL on conditions satisfactory to the Bank. PART IV - APPRAISAL OF THE PROPOSED ILOAT 9. A detailed appraisal of the Project (TO Report No. 379) is at- tached (No. 4). The Project 10. The Project consists of installation of the following: (i) A total of 26,000 telephones in the cities of San Salvador, Santa hAna and San Higuel, and related automatic exchanges, and (ii) A microwave radio systen connecting these three cities and several smaller centers in the country. Assuming an annual rate of growth of demand for new services of 10%, this exnansion would meet such demand until about the end of 1967. 11. The suitability of the Project has been reviewed by a team of experts of the French M1inistry of Posts and Telecommunications which the Bank retained to carry out the UN Special Fund study of the needs for tele- communications facilities in the region of Central America and Panama as a whole. The same team of experts has also ascertained that the Project would organically fit into the regional development plan, the study of which is now in its final stage. Justification of the Project 12. An adequate system of telecommunications is important to the economic development of El Salvador. The country is densely populated and the prospects for increasing agricultural production are limited. Snecial emuhasis is being placed, therefore, on expanding industrial production in the most populated areas, both for the local market and for the Central American Common Market, in which El Salvador already has a dominant trading position. The present telecommunications service is far from satisfactory, both in its capacity and in its quality. The total number of telephones is 16,000, of which only 7,000 are in good condition, and there is at present a very large back-log of applications for new connections. The quality of the present services is also far from satisfactory; for instance a disproportionately large percentage of the local calls are never com- pleted -- more than 20% during a tynical week. The long distance facili- ties are still mcre inadequate and unreliable. This has led some 40 com- mercial and industrial enterprises to install their own private radio links in order to carry on their business, which is technically unsatisfactory and uneconomical from the viewpoint of the country.  -5- The Borrower 13. The lrAdministraci6n 1Tacional de Telecomunicacionest" (ANTEL) was created by a law of August 27, 1963. It is a public corporation, entirely owned by the Government, responsible for providing telecommunications serv- ices in El Salvador. It will take over the existing assets of the Telecom- munications Bureau of the i4inistry of Interior as of January 1, 1964. The Board includes five directors serving for four year terms. Three of them, including the Chairman, are designated by the Executive Power; of the two others, one is to be nominated by the private banks operating in El Salva- dor, and the other by the agricultural, industrial and commercial associ- ations of the country. The Board of Directors has authority to conduct APTTEL's operations, to appoint ANTEL's personnel and, subject to prior ap- proval by the Executive Power, to decide on tariffs and other charges for telecommunicaticns services and to borrow from local and external markets. Administration of the day to day business of AhTTEL is the responsibility of the Chairman of the Board of Directors and of a Mlanager to be appointed by the Board, to whom the Chairman may delegate such powers as he considers necessary. Financing Arrangements 14. The total cost of the proposed project is estimated at the equiva- lent of $S13.6 million. The foreign component, including interest during construction, is $9.5 million and would be covered by the pronosed loan. The cash generated from operation of the existing facilities (about 41 mil- lion per year), together with the proceeds of a local bond issue of 47.5 million ("3.0 million), already autlhorized by the Legislative Assembly, would provide for the local currency requirements of the Project. 15. Agreement has been reached during negotiations that upon com- pletion of the Project rates will be set at such levels as to provide a rate of return of 9% on net fixed assets in operation and that the result- ing surplus will be used for financing the expansion of the facilities. Execution of the Project and Procurement 16. For the detailed planning, specifications, comnarison of bids and supervision of construction, ANTEL will retain qualified consultants. In addition, these consultants will assist in training personnel, and in organ- izing and operating the various services during the first years. 17. Contracts for the supply of equipment and construction of the Project will be awarded on the basis of international competitive bidding. Economic Situation 18. A report on "The Current Economic Position and Prospects of El Salvador" (Sec M 62-71) was distributed in April 1962. The information that has since become available for 1962 indicates that economic conditions have considerably improved. In 1962 the country's exports rose to $136  - 6 - million, which was just short of the all-time high of 1957, when coffee prices were close to record levels. This sharp increase in exnorts took place despite a $6 million drop in coffee sales, which was more than made up by increases in the export of cotton, shrimp and other items. Foreign exchange reserves rose by $10 million during 1962, and this trend has con- tinued in the first half of 1963. This imorovement is due largely to an increase in the capital account, as the rise in exnorts was matched by a growth in imports. The reduction in capital outflow and a significant capi- tal inflow reflect the restoration of political stability and the success of the stabilization program. 19. Industrial production increased by about 14.% in 1962, and nlans are going forward for further expanding industrial canacity. A number of projects are being jointly financed by local and private foreign canital. The favorable trends in the economy are expected to continue in the years ahead. 20. El Salvador's external public debt totalled $51.3 million equiva- lent at the end of 1962. Since then the Bank made a loan of $6 million to Comisi6n del Ric Lempa for electric power development. Also under the Al- liance for Progress El Salvador received recently several loans totalling $15.6 million, but these loans are all on soft terms and will not appreci- ably increase debt service in the next decade. Service nayments on the ex- ternal debt will reach a peak of $6.7 million in 1964, 1965 and 1966, or about 5% of 1962 exports receipts, and thereafter, including service on the proposed loan, will fall well below that amount. In view of the relatively moderate projected debt service burden and the generally favorable economic trends, the servicing of the proposed loan should be within El Salvador's capacity. Prospects of Fulfillment of Obligations 21. The Project has been soundly planned with the assistance of compe- tent consultants, and arrangements regarding construction, financing and operation of the Project are such as to assure that it will be properly carried out. The commitments received and the financial and tariffs cove- nants contained in the proposed loan documents provide assurance that funds will be available to comnlete the Project and that AITEL earnings will en- able it to service the proposed loan. The Salvadorean economy should be able to provide the foreign exchange needed to service this loan as well as its other external obligations. PART V - C014PLIAJCE WITH THE ARTICLES OF AGREniENT 22. I am satisfied that the proposed loan would comply with the Arti- cles of Agreement of the Bank.  -7- PART VIT- RBCO_ }I