El Salvador - Telephone Expansion Program Project

1 FTETUJRN TO l RESTRICTED ORTS DESK< Report No. TO-379a REPORSDS WITHIN ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accurocy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE TELEPHONE EXPANSION PROGRAM THE NATIONAL TELECOMMUNICATIONS ADMINISTRATION (ANTEL) EL SALVADOR September 13, 1963 Department of Technical Operations  CURRENCY EQUIVALENTS US $1 = 2. 5 Colones (Z 1 = US $0.40 US $1 million = , 2. 5 million 1 million Colones = US $400, 000  APPRAISAL OF THE TELEPHONE iiPANSION PROGRAM THE NATIONAL TELECONI'UNICATIONS ADMINISTRATION (ANTEL) EL SALVADCR TABLE OF CONTENTS Page No. SU'ARY i I. INTRODUCTION 1 II. THE BORROMER 1 Present Organization 2 III. EXISTING FACILITIES 2 Existing Facilities 2 IV. DEMJAND FOR TELEPHONE SERVICES 3 Local Service 3 Long Distance Service 4 V. THE PROJECT 4 Telephones 4 San Salvador 4 Santa Ana 4 San Miguel 5 Urban Outside Plant 5 Long Distance Facilities 5 Engineering and Construction 5 Procurement 5 Schedule of Construction 5 Cost Estimate 6 VI. FUTURE CONSTRUCTION 6 VII. ECONOMIC CONSIDERATIONS 7 VIII. FINANCIfL ASPECTS 7 General 7 Past Structure and Financial Results 8 Tariffs 8 Financial Plan 9 Estimated Future Earnings 12 Rate Covenant 12 Debt Service 12 Debt/Equity 12 Accounts and Auditors 13 IX. CONCLUSIONS 13  LIST OF ANNEXES 1. Principal Existing Tariffs 2, Sources and Applications of Funds (1963-1970) 3. Operating Statements (1961-1970) 4. Balance Sheets (1963-1970) Map of Proposed Telephone Systen  APPRAISAL OF THE TELEPHONE EXPANSION PROGRAM THE NATIONAL TEMECOPI4UIC,.i IONS AD1iNISTRATiON (ANTEL) EL SALVADOR SUTMThARY i. The Government of El Salvador has asked the Bank for a $9.5 million loan to finance the foreign exchange costs of a program to ex- pand and improve telephone and telegraph services in the country. The estimated total cost of the program is $13.6 million equivalent. ii. The project, to be completed by mid-1967, includes the first phase of a comprehensive long-range development of telecommunications facilities for San Salvador. It will provide automatic central office equipment for 26,000 telephone lines in the cities of San Salvador, Santa Ana and San Miguel plus toll dialing between these cities over an ade- quate microwave radio network. The project includes only the immediate and more essential telecommunication needs, thus holding local currency requirements to a sum that is practicable. The limitation will also provide time for the new operating organization to meet the test of experience before additional investments are undertaken. However, unit costs will in no way be prejudiced as basic design lpill from the start provide for subsequent expansion in later stages. iii. On August 27, 1963, the Congress of El Salvador approved an act creating the National Telecorm-unications Administration (ANTEL) for the purposes of providing national telecommunication service. Existing telephone and telegraph facilities, presently operated under the 1Hinistry of Interior, are to be transferred to this autonomous public agency. In accordance with the act creating ANTEL, its five- member Board of Directors is to have three members appointed by the Government and two members from business and financial circles. iv. The justification of the proposed expansion is well established by the pent-up demand alone. In addition, the serious inadequacies of the present system will be eliminated in the principal cities. v. Initial tariffs for ANTEL's services would be those charged at present by the Telecommunications Branch. These present tariffs have been used in the estimates. They would be reviewed by consultants engaged to recommend, among other things, desirable tariff modifications. Even at present rates, however, the estimates show that in the first years after completion of the project the earnings would result in rates of return on average net fixed assets in operation of about 9%.  - ii - vi. All equipment to be financed under the proposed Bank loan would be purchased through international competition and in accordance with plans and specifications prepared by competent consulting engi- neers. vii. The proposed project is technically sound and economically justified. It is suitable for a Bank loan of $.5 million equivalent for 20 years, including a grace period of 42i years.  APPRAISAL OF THE TELEPHONE EXPft!SION PROGRAM THE NATIONAL TELECO12i NICATIONS XDNINISTRATION (ANTEL) EL SALVADOR I. INTRODUCTION 1. The Government of El Salvador has asked the Bank for a loan of 19 5 million equivalent to cover the estimated foreign exchange cost of a program to expand and improve telephone and telegraph services in the country. The estimated total cost of the project is $13.6 million equivalent. The requirements of local currency financing will be met by the sale of bonds to applicants for telephone service and by internally generated funds. 2. The Borrower will be the National Telecommunications Admini- stration (ANTEL), an autonomous government agency now being established to own and operate the country's telecommunications facilities. Existing telecomrmunications operated by the Ministry of Interior are to be trans- ferred to this agency following an appraisal in accordance with existing legislation. 3. A feasibility study and expansion program was first irade in 1960 by a combination of two consulting engineering firms - Allen K. Hamilton Associates of Wioodstock, Illinois, and Preece, Cardew & Rider of London. Commencing in late 1962, a team of consultants from the French Telegraph and Telephone Department have been carrying out a regional telecommunications survey under a U.N. Special Fund grant ad- ministered by the Bank. The project as now presented comprises the provision of the telephone facilities recommended in the 1960 study, brought up to date and incorporating the recommendations of the French team of experts. II. THE BOFROU M 4. The National Telecommunications Administration (ANTEL)I/ is an autonomous public agency, entirely owned by the Government, established by an act approved August 27, 1963, by the Legislative Assembly of the Republic of El Salvador. Prior to enactment, the project of law was reviewed by the Bank and found acceptable. The act gives ANTEL the right to plan, acquire, construct and operate tele- comrunications. At its discretion, ANTEL may make arrangements with others, private or public, for the purpose of providing telecommunication service. ANTEL will also have authority, subject to the prior approval of the Government, to fix tariffs and other charges for telecommunication services. 1/ Administracion NTacional de Telecomunicaciones  - 2 - 5. ANTEL will be governed by a five-member Board of Directors, serving for four-year terms and designated as follows: (a) One regular full-time director to hold the office of Chairman, the appointment being made by the Executive Power acting through the Ministry of Interior; (b) Two regular directors and two alternates, appointed by the Execu- tive Power acting through the I.iinistry of Economic Affairs and the Mlinistry of Public Works; (c) One regular director and one alternate, elected by the private banks operating in El Salvador; (d) One regular director and one alternate, elected by the agri- cultural, industrial and commercial associations of El Salvador. 6. Administration of the day-to-day business of ANTEL is to be the responsibility of the Chairman of the Board of Directors and of a Manager, to whom the Chairman may delegate such administrative powers as he considers necessary. The Mianager is appointed by the Board and is to attend Board metings as Secretary with the right to speak but without vote. Present Organization 7. The existing staff and telecommunication facilities of the Telecommunications Bureau of the iiinistry of Interior, are to be trans- ferred to ANITEL under the provisionsof the law creating ANTEL. 8. The Telecommunications Bureau is inadequately organized and staffed. For example, there are no graduate engineers in the organiza- tion. The administration now depends upon suppliers for engineering. Top management has been subject to frequent changes. 9. Extensive reorganization is necessary before ANTEL can provide efficient and economically sound services. This will require for some time the help of qualified consultants to provide continuing management guid- ance, to establish training courses and to advise on organization and re- cruiting of personnel. Appropriate steps have been taken to obtain these consultant services. III. EXISTING FACILITIES Existing Facilities 10. The existing comrunications facilities to be taken over by ANTEL consist basically of about 16,000 local subscriber telephone lines and an extensive telegraph network. Of the telephone plant, 7,000 lines are automatic equipment located in the capital, San Salvador. This equip- ment is in good condition, 5,000 lines having been installed in 1951 and  2,000 lines having been added in 1958. Some existing cables in San Sal- vador can be continued in service but a large amount of the underground cable should be replaced as should the uncommonly large number of single pair wires strung along the streets. The rest of the telephone exchange equipment in the country is manual and in extrerely bad condition. 11. The bulk of the telegraph traffic is carried by a network of 32 simplex circuits superimposed on telephone toll lines. Outlying regions have telegraph connection by means of single wire lines with ground return and are in poor condition. 12. International communication is carried by seven radio-telephone and seven radio-telegraph channels. The El Salvador ends of four of the radio-telephone circuits are operated by the government-owned Radio Nacional, and the other three ends by the Tropical Radio Company, a sub- sidiary of United Fruit Company. The El Salvador terminals of all inter- national telegraph circuits are operated by Radio Nacional. IV. DEiPAND FOR TELEPHONE SERVICES Local Service 13. In El Salvador there are only about 6 telephones per 1,000 population, a little below average for the whole of Central America. It compares with 80 per 1,000 in Europe and 410 per 1,000 in the United States. By the end of 1967, upon completion of the first stage of the proposed expansion program, it is estimated that El Salvador will have about 11 telephones per 1,000 population. 14. The demand for telephones in El Salvador far exceeds availa- bility. For example, in the San Salvador area with 7,000 lines in service, the telephone administration held approximately 12,500 unfilled applications. These were accumulating at the rate of 25 per month in spite of the known non-availability of telephones. Although the standard installation charge is 040.00 (I1il6.00), it has been telephone admini- stration policy to require customers to pay the cost of poles, wire, and the telephone set necessary to connect them to the system; a cost that frequently exceeded 2,500 Colones. Under the proposed policy, whereby ANTEL would provide this connection at considerably lower total connection costs, additional applications can be expected. 15. The experience of the present limited automatic office in San Salvador provides an indication of probable future demand. This office was installed in 1950 and an extension made in 1958. In that period the rate of growth was 10% annually and limited only by insufficiency of facilities. 16. Present service is far from satisfactory. Exchanges are overloaded and this, combined with the poor condition of the equipment, causes a disproportionately large percentage (over 20% during a typical week) of uncompleted calls. Improvement in service after the new plant is built and extended should increase the demand for new telephones.  - 4 - 17. The consultants estimate that when the present backlog of orders is satisfied (about three years after beginning wJork on the project) future telephone growth would be 10% per year. The facilities for 26,000 new telephones proposed under the project will all be uti- lized shortly after completion of the installation and extensions, which can readily be made, will then be needed to meet this e stimated 10% annual growth. Long Distance Service 18. The present long distance facilities are so inadequate and unreliable that actual traffic figures provide little basis for estima- ting future reauirements. Two teams of consultants, using such statisti- cal information as is available coupled with their observations in the field and judgment related to experience in countries having a level of development similar to El Salvador, have established the traffic that could reasonably be expected once an adequate grade of service is provided. From this they developed the facilities required and the related costs. It has been the experience throughout the world that when adequate facilities are provided, long distance services will have a higher rate of growth than urban telephone facilities; also, that the rate of net earnings on investrent in long distance facilities will exceed that of urban telephone facilities. V. THE PROJECT 19. The project consists of the purchase of land, construction of buildings and purchase of equipment, materials and services for the necessary engineering and installation as shown below. Telephones 20. Under this project provision is made for the installation of a total of 26,000 automatic telephones in the cities of San Salvador, Santa Ana and San Miguel. San Salvador 21. The project covers the installation of 20,C00 lines of automatic exchange equipment, distributed over 2 new main exchanges and 2 new satellite exchanges, plus modifications to the existing 7,000 line Centro exchange for its interconnection to the new exchanges and its conversion from four to six digit operation. 22. In the principal new main exchange to be called "Flor Blanca," would also be installed the equipment for long distance, information, repair and other special services. Santa Ana 23. A new automatic exchange of 4,000 lines initial capacity would be provided, replacing the existing worn-out inadequate common battery equipment.  -5- San Miguel 2h. A new automatic exchange of 2,000 lines initial capacity would be provided to replace the existing worn-out magneto equipment housed in a building one side of which is open to the weather. Urban Outside Plant 25. With the exception of some underground conduit and main under- ground cables in the central part of San Salvador that can be reused, practically the entire outside plant (cables, wires and poles) in the above cities is to be rebuilt under this project. Long Distance Facilities 26. A microwave radio system is to be constructed through the center of the country from Santa Ana in the northwest via San Salvador to San Miguel in the southeast. Subscriber dialing between these three cities will be provided; also, microwave connections to Sonsonate and to Usulatan and a VHF radio link to Santiago de hiaria. For a later stage, radio connections are planned to 13 other towns. No specific provision is made for additional telegraph circuits but, as a by-product of the telephone facilities proposed, improved telegraph service between the principal cities would result. Engineering and Construction 27. Engineering assistance is being provided by the team of con- sultants from the French PTT. This has included the preparation of specifications for the urban automatic exchanges as well as the long distance plant engineering. To assist in further detailed engineering, the review of tenders, supervision of installation work and the training of staff, ANTEL plans to make arrangements to continue with assistance from the French PTT. Should negotiations to this end not be successful, ANITEL will engage other qualified consultants. 28. The detailed plans for the long distance facilities will be prepared after the French PTT team has completed the plans for the Central Arerican regional telecorriunication network - so assuring co- ordination of these facilities. Procurement 29. All main contracts for this project will be awarded on the basis of international competition. Schedule of Construction 30. Assuming a loan will be made by the autumn of 1963 and allow- ing for completion of engineering, bid invitations, bid analysis,  30 months for equipment manufacturing, shipping, installation and test- ing, the first major automatic exchange is expected to be in service in the latter part of 1966 and construction completed by mid-1967. 31. Some sections of the microwave relay system can be expected to be in operation by the middle of 1966 and all sections by the end of 1966. The construction schedules are reasonable. Cost Estimate 32. The construction of this project is estimated to cost (in thousands): Foreign Cost Local Cost Total Costs in$ in in $ in