Tanzania - Third Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY CLkk y 77w.'( Report No. 11539-TA STri APPRAISAL REPORT TUE UNITED REPUBLIC OF TANZANrIA TEMRD TELECONNNCATIONS PROJECT APRIL 2, 1993 z 1 ' '-; , ''i to.,(.. t Public and Private Enterprise Division Eastern Africa Department, Africa Region This document has a retsfid atbdisnd may be used by repin ony In the perfomance of Ihir offiW dutis Its contents may not dthwI,. be discld witt World Bank aauorIato  Curreacy Unit Tanzanan Shillg Tsh 1.0 = US$0.003 US$ 1.0 - Tsh 32S IdISCAL YER Jamn y I to December 31 ADB Africa Dovelopment Bank DANDA Danish Development Agc3y DDGT Deputy Director General Tdecom DEL Direct Exchang Line EAC Eas Africa Community EEC Commission of the Eurpean Communities ELP Exte:nl Line Plat ERP Economic Recovery Program - 1986 ERR Eoenomic Rat of Retum ESAP Economic and Social Action - 1989-1992 FRR Financial Rt of Retum GOR Gross ting Revenue GOT Govemment of the Republic of Tanzaia CB Intematonal Competitive Bidding IDA Internatil Developmet Association ItR itenal Rate of Return .'CA Japane Development A"ecy LAN Loca Area Network LCB Local Codmpitive Bidding MIS Management Information System MOC Ministty of Transport ana Comnicatio MOu Memorandum of Undetnding PANAFTEL Pan AfiicB Telecommunication Network PRY Project Implementation Unit PMU Proect Monioring Unit PPF Proect Prepaaion Facility PIT Post and Telecommunieions Organization SAP SRctural Adjustment Pgram - 1982 SIDA Swedish Development Coopation Office SOB Staement of Expenditure TDP Tjtal Demand Potential TPTC Talzania Pots and Telecommunications TRP Tdecoms Recovery Program MESRES Metric System This report is based on (1) preparaton and apprail missions in April and November 1991 and May and October 1992 and (2) a report prepared by a consulfing fim in 1991. The report was prepared by Mr. Markku Karisnen (Egn), Mr. Raja Bas# (Fnnial Analyst, Ms. Ann 1_ee (rask Manager), and Md. Miay Nash (Sff Assistan) in (AFTEI) and Mr. Ibge Vabo (exral consultant). The lead advisor for the project was Ms. Shaah Torabi and th peor reviws Mr. M&snunad Mustaf and Mr. David LImax (AFTlE) and the Tannian Couny Team. The Sector Division Chief is Mr. Robert Hindle, the Country Division Chief Mr. Michaol Carter and the Couny Director Mr. Francis Colaco.  FOR OMCIAL USE ONLY UND BEBLIM O TAMA THID TLJECOMWNCATJONS PRO JCT Page No. Credit and Project Summary ......................................... iv 1. TELECOMMUNICATIONS SECaOR DEVELOPMENT STRATEGY.. 2 A. INTRODUCTION .2 Role of Telecommunications in Economic Development. 2 Current Stams. 2 Sector Policy. 3 Secor Strategy. 3 Private Investment in the Sector. 6 A Regulatory Framework. 6 Institutional Resnuctung: Corporatiaon and Comerciaiation of TPTC ... 7 Rehabiitation and Expansion of the Basic Telecommnications Network. 7 Resource Mobilization and Cost Recovery in the Sector. 7 Previous World Bank Involvement in the Sector. 8 Rationale for World Bank Involvement. 9 n. THE TELECOMMUNICATIONS SECTOR . .11 A. INTRODUCTION .11 B. CUSTOMER REOUIREMENTS .......... .................... 11 Accessto Service ........................................ 11 Existing Facilities .............. ......................... 12 Quality of Service ....................................... 12 Demand for Service ...................................... 13 Ct. SECTOR ...................................... 13 D. THE OPERATING ENTIY .14 Tariff Policy .15 Billing and CoUection .16 Audit, Audit Controls, andFinancialAccounts .16 Management 17 Management Sse and Computizaon.17 Stffing, Traiing, an Compnsaon .18 Customer Orientation .19 m. THEPROGRAM AND. R.20 A. THEEQQA. PM.20 Steps Already Taken.20 B. THE PROJECT .20 Project Objectives .20 Project Description .21 Project Costs .25 Project Financing .27 This document has a estricted distibution and may be used by recipients only in the perforance of thoir offcial duties. Its contents may not otherarie be disclosed widhout World BIIk authozeOQ.|  C. PROCUREMENT AND IMPLEMENTATN . ................. 28 Procurement .28 Disbursemnent .3 Project Phasing ......................................... 31 TPTC Management .31 Performance Indicators .33 Regional Coordination .34 D. ENVIRONMENTAL AND HEALTH EFFECTS .34 IV. FENANCIAL AND ECONOMIC ANALYSIS . . 35 A. Financial. 35 Past Financial Performance 35 B. Finncial Pojections and Restruct.ring Stra..av 36 Financi Goals .36 Key Steps Necessary for Improvement of Financial Performance .36 C. Financial Projections .38 D. Financial and Economic Ra of Returns .39 Sensitivity Analysis .40 Benefits .40 Risks .41 Least Cost Solution .42 V. AGREE NTS REACHED AND RECOM.MENDATION 43 Agreements Reached at Negotiations .43 Conditions for Credit Effectiveness .44 Conditions for Disbursement. 45 Recommendation. 45  - iii ANNEXES AND CHARTS 1-1 Draft Sector Policy Statement 2-1 Existing Telecommunications Facilities 2-2 Demand Potential and Estimated Growth in Demand 2-3 Ministerial Directive and Memorandum of Understanding 2-4 Negotiations Performance Targets to be Agreed Upon at Negotiations 2-5 TPTC Organization Chart 2-6 Training Courses Offered by the Staff College 3-1 Investment Program (1992-1995) 3-2 Detailed Project Description 3-3 Project Financing Plan 3-4 Schedule of Disbursements 3-5 Implementation Schedule 3-6 Environmental Summary and Mitigation Plan 4-1 TPTC's Income Statements and Balance Sheets (Historic) 4-2 TPTC's Forecast Financial Statements 4-3 Financial Projections Including Equity infusion Map Number: 23747 Documents in Proiect File Donors Conference - Organization and Implementation of TRP - Plan for Split of Corporation Delegation of Authority Procuctivity Based Incentive Scheme Statement of Affairs Tanzania Telecom II Project Completion Report Tanzania Telecom II - Assessment of Consultants Technical Assistance - Terms of Reference  - iv - UNITED REPUBLIC OF TANZANIA TIDTELECOMMUNICATIONS PROJECT CRDIT AND PROJECT SUMARY Borrower: United Republic of Tanzania Beficiy: Tanzania Posts and Telecommunications Corporation Amoun&: SDR 53.6 Million (US$ 74.45 million equivalent) Ternis: Standard IDA Terms, with 40 years maturity Qjding The Goverment will lend US$ 74.45 million to the Government of Tanzania on Terms: standard IDA terms. Of this, US$20 million will be invested in TPTC as equity by GOT and US$ 53.50 mrillion will be on lent to TPTC at 8% interest rate for 20 years including 5 years of grace on repayment of principal. TPTC will bear the foreign exchange risk. Project To achieve its mission in the medium term the GOT has identified three key Qbi_ctives objectives for the sector. The first is to ensure that efficiency and finanja viabili drive sector development. The second is to eliminate the existing bottenecks in the availability of telecommunication services to business subscribers in key areas of economic imporance. The third is to optimze the availability and effectiveness of public and private resources invested in the sector. Three building blocks provide the base from which these objectives will be carried out: 1) establishment of a market-oriented regulatory and policy framework; legalizing and requiring a regulatory body to license private opeators to provide non-basic services in Tanzania; and developing an action plan to secure private investment in basic services in the medium term; 2) commercialization and corporatization in the state- owned monopoly provider of basic telecommunication services; and 3) rehabilitation and expansion of the basic local and long distance telecommunication network. Project The proposed project consists of: (a) the establishment of a market-oriented regulatory and policy frmework and creation of an appropriate environment for private sector participation; (b) a program to build TTC's institutional capacity through technical assistance for the purpose of improving project management, financial management and control, auditing procedures, materials management, and operations and maintenane; moderizing TPTC's accounting and financial systems and procedures as well as its billing and collection system, implementg priority computer systems and human resource development for TPTC; and to augment TPTC's implzmentation capacity through a performance contract with external consultant to implement new works; and  (c) a physical development program including rehabilitation of existing facilities; supply, installation and commissioning of new exchanges and matching external line plant in Dar-es-Salaam and major cities with priority given to business subscribers; expansion of 1o0.g distance transmission links; expansion of the junction network in Dar-Es-Salaam using radio link systems and optical fibre systems and supply small capaUity radio link systems in the rural areas; and provision of telephone instrwnents, vehicles and ancillary equipment. Project Investments are focussed on improving TPTC's financial and economic Benfits returns by creating a market-oriented envirownent within the sector, and Risks: commercializing TPTC, rehabilitating and improving utilization of existing assets and expanding services in high demand areas to maximize the utilization of TPTC's existing facilities and thereby by upgrading Tanzania's telecommunications facilities, the project will alleviate a major infrastructure constraint to the sustainability of the country's economic devilopment and adjustment. Furthermore, the institution building and strengthening of TPTC's management systems will result in improved financial performance and encourage private investment. The principal risks are the potentially slow pace of institutional development within sector and inadequate or tardy resolution of the current billing problems. These risks have been minimized by the Bank's requirement of upfront actions by the Government and TPTC (management performance contract, tariff increases, employee incentive scheme, delegation of authority, etc.) Risks during the project will be minimized by additional World Bank conditions on restructuring the sector and institutions and agreement on timely installation of a new billing system with appropriate controls. In addition, an annual review of TPTC's achievements by the Government and the Bank will be required and wiU provide a framework to ensure satisfactory implementation of the institutional and physical components of the proposed project. EFsimated Project Costs: Loca Foreign Total -IJS$ Million Equivalent- 1. Telephone Exchanges 2.04 27.43 29.47 2. Extemal Line Plant 5.93 55.35 61.28 3. Transmission 8.67 48.17 56.84 4. Upgrade Std. A Earth Sation 0.00 0.50 0.50 5. Telephones and Teleprinters 0.00 2.28 2.28 6. Power and A/C 0.50 3.50 4.00 7. Buildings 3.00 0.00 3.00 8. Vehicles 0.10 1.50 1.60 9.A. Training - MOC .00 .20 .20 9.B Traiing - TPTC 1.70 2.80 4.50 10. Consultancy - TPTC 2.76 14.02 16.78 11. Consultancy - MOC 0.75 0.75 12. Postal 1.70 2.80 4.50 13. Computers 0.00 5.72 5.72 Base Cost 26.39 165.04 191.42 Physical Cantin cy 1.32 8.23 9.56 Pioe Contingency 2.64 16.45 19.12 30.40 189.7, 220.10  - vi - PROJECT FINANCING PLAN: LOCal Foreign Total -US$ Million Equivalent- IDA 74.4 74.4 ADB 45.9 45.9 EEC 17.2 17.2 DANEDA 8.3 8.3 JICA 2.2 2.2 SIDA 41.7 41.7 TTrc 30.4 - 304 Total 2Q4 189.7 22u.1 EST4ATDi1 DISBURSEMT SCHEDULE BDA' FRY 19 1294 1995 1996 1227 1998 1999 2000 2001 Aniual .8* 4.2 11.2 14.7 14.3 11.6 8.5 4.6 3.7 Cumulative 1.6 5.8 17.0 31.7 46.0 57.6 66.1 70.7 74.4 'mcluding PMF Disbursem Rate of Return: Financial = 27% Economic = 48% MM 23747:  1. TELECOMMUNICATIONS SECTOR PEVEWPMEN STRATEGY A. INTRODUCTION 1.01 In 1967, Tanzania's leadership embarked on an era of socialism and introduced sweeping economic and social changes. They sought a path of self determination with the goal of making public sector activity the primary means of achieving economic development. By the end of the 1970's, however, the economy was faltering. A turing point was reached in 1984 when the Governmuent of Tanzania (GOT), faced with economic stagnation, introduced a new, more pragmatic economic plan. In 1986, the Government introduced a comprehensive Economic Recovery Program (ERP) followed by an Economic and Social Action Program (ESAP) in 1989. Tanzania's main economic development objectives under these programs are to achieve a 5% growth rate; lower the inflation rate; restore a sustainable balance of payments position; rebabilitate and improve the provision of social services; and improve the effectiveness of external assistance. Tanzania's strategy to fulfill these objectives is to shift from a centrally planned system to a dynamic, market-oriented economy. Role of Telecommunicatlois in Economic Develoneut 1.02 A reasonably reliable telecommunications sector is crucial to the sustained economic recovery of Tanzania. The main linkages between telecommunications and economic recovery are (a) the requirements of business and government in a market economy for timely, accurate, and reliable information to determine the state of play in the market, to identify potential customers and suppliers, and to determine competitive prices; (b) telecommunications as a prime medim for transmitting information quickly, cheaply, and easily; (c) the cost to the economy of foregone economic opportunities due to an inadequate and unreliable domestic and international telecommunication network; (d) the financial cost to the GOT of operating a loss-making telecommunications network; -and (e) the sector's importance as a major foreign exchange earner. Reliable communication capabilities are especially important for financial, tourism, ming, transport, service, and export-oriented business activities in Tanzania and are becoming increasingly important in the sale and distribution of agrcultural products. Cvm staS 1.03 The existing telecommunications infastmcture in Tanzania has grossly insufficient capacity and a very poor quality of service. In 1991, .3% of Tanzanians had telephones or 25% less than the average percentage of the population owning telephones in Sub-Saharan Africa. In addition, only 60-70% of the installed phones actually worked. Fault rates are 30 times higher than those in developed countries. The call completion rate for inter-urban and incoming international calls is below 20% versus an average of 60 - 70% in industrialized countries. The severe shortage of telephones in Tanzania and the poor service quality poses a major constaint to the growth of private businesses or more efficient operations and can thus compromise Tanna's economic recovery. The financial position of the sector is quite weak. The Tanzanian Posts and Telecommunications Corporation (TPTCI)/, the main operator, was insolvent by 1988 due to a I'rP>TC meaw Tanzania Posts and Teecommunicaions Corporation, established purwsam to te Tanzanian Posts and Telecommunications Act, No.15 of 1977. It also refes to any succesor entity or enies which may be established by the Government of Tanzana to cary out dte fuins an nsponsibiles of TPM. At the time of the split of posts and teecommunicaions, it is undemood that the new ta nd postl endties will enter into asmption agreemnts where the new endties agree to enter ito the obligations of bte old company.  -2- lack of tariff increases, substantial foreign exchange losses, and operational inefficiencies. The financial position has improved since 1991 with 300 - 500% increases in tariffs, conversion to equity of US$ 34 million of debt owed by TPTC to GOT; and improvements in operational efficiency. Sector Policy 1.04 In the long term, the GOT's vision for the development of the telecommunications sector is to provide universal access to telecommunications for all people in Tanzania whetrNer service can be supplied on a practical and economically justified basis. These services should satisfy all customer demand for all types of telecommunications with quality and secure services supplied at a fair price. Given the existing low level of development in the sector, to achieve their long term vision the GOT recognizes that in the medium term they must adopt a carefully formulated and focussed development strategy which provides telecommunications services to those subscribers with the highest demand and the greatest ability to pay for their services. A draft Sector Policy Statement of the GOT's intentions for ihe sector is outlined in Annex 1-1. Sedor Develoment Strategr 1.05 The GOT is committed in the medium term to ensuring that reasonably priced and satisfactory quality telecommunication services are available to satisfy business demand in terms of quantity and scope of services which will support the economic development of the country. The GOT has identified key principles for the sector's development which will achieve their vision. The first is to ensure that efficiency and financial and operational viabilitv drive sector development. The second is to eliminate the existing bottlenecks in the availability of telecommunication services to business subscribers in key areas of economic importance. The third is to optimize the availability and effectiveness of public and private resources invested in the sector. 1.06 The GOT has determined that the most effective means to achieve th ir development objectives is to establish a market oriented sector structure which allows for private as well as public sector participation and, where appropriate, competition. Taking into account existing macroeconomic and sectoral constraints, a phased approach to sector restructuring has been adopted. The building blocks of the GOT's plan to fulfill these objectives include: (a) establishing a market oriented regulators and policy environment, which includes introducing, private sector participation in non-basic services in the near term and developing an action plan to secure private investment in basic services in the medium term; (b) commercializing and corporatizing the national operator responsible for providing basic telecommunication services2/; (c) expanding capacity and improving service "uality for the national network. 2/ For purposes of this reporz. basic telecommunications services means local, long distance. and international tlephone, telex, and telegraph services. Non-basic telecomnmWnication services means all other services other than basic telecommunication services (i.e. including pay phones, private networks, celular tlephony, value added services, paging, vsat, etc.).  GOT's TiMETABLE FOR SECTOR DEVEPMENT (Mid Term) Component 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Expected Project 1ictiveness a) Establish Regltoy EIw roumt - Statemnd of Sector Policy - Draft New Tlecom Law _ (allovs prwiae investment) - Split Regulations from Oper. - Estabish Regulatory Capability *.. - Issue Lcense - Non Basic Serv. o Cellular o Other J2 - Action PIan on Private Invest. I b) haWtiod (Res&udr* - Split Post & Telecom 3 - Corporal*zel- .C - Det Non-Core Actvmes o Motor Voh., Print, Cont. - Create Pit & Cost Centers - Insa New Biiiing Syem -Fkinc Restructuring KEY Is c) Ezpad & hnae Nat Nehw : Coted ;Project MW-TeRm " I l _ - ERiuate 0 * - Project Condition MEMO. ... a On-Going Action 8 ' ~r~iwnt .15 Schdule 10 * 5 *1 0 Loan EHf. uTh Year  -4 - 1.07 Toward this end, the GOT has approved key action items with specific dates for completion that were agreed during negotiations (see above table). As indicated on the table, all of the actions are scheduled to be cot apleted prior to the Project Mid Tenn Review and are an integral part of the review. Commitment of contracts under Phase 11 of the project (US$ 25 million) are subject to satisfactory results in the Mid Term Review. (Funds being invested by SIDA will be tranched with similar perfonnance conditions as those of IDA). Priae Investment In tbe Sector 1.8 TPTC has authority to issue licenses for non-basic telecommunication services on behalf of the GOT. TPTC is currenly negotiating with several interested international cellular operators to provide cellular telephony in Tanzania. To enable such private investment in non- basic services, the GOT will require the regulator to take all steps necessary to issue a license for cellular operations by December 31, 1993 and for two other non-basic telecommunication services by December 31, 1995. Customer demand for services and the related interest of private firms to invest will determine in which market segments licenses will first be issued.3/ 1.9 Under the existing environment, there appears to be XLbest limited interest from experienced and reputable private firms to invest or operate basic telecormmunication services in Tanzania. To enhance private investor interest in TPTC, the GOT and IPTC have actively begun to commerciaize and corporatize TPTC and streamline its operations with the key goal of providing TPTC with sufficient autonomy to operate in a commercial manner. 1.10 The GOT will not seek immediate privatization of TPTC. The main reasons for this are a) the GOT has given higher priority to privatizing operations in other sectors which can be privatized without changes in Tanzanian law; are more easily privatized; and are of more interest to investors in their exisdng state; and b) 1 - 3 years are required to take legislative and regulatory actions to effectively privatize basic telecommunication services. A Re trv Framework 1.11 Currently, telecommunication regulation and operations are both carried out by a public monopoly, TPTC. The current legal structure does not, however, allow for private operators in basic services, nor is there a regulatory framework or body in place with experience in market oriented regulation. 1.12 To begin the process of establishing a market oriented regulatory and policy enviromnent, GOT has approved a measure that will separate the policy and regulatory fumctions from operations. Toward this end, the government has given approval for the establishment of the regulator to be responsible for, inter alia, licensing, establishment of technical standards, and rules for operators. The GOT will commission a consultant study to determine the detailed form and functions of a regulator and will draw upon the study's recommendaftons in their action plan to restructure the sector. TPTC will continue to be in charge of operations, with greater autonomy and flexibility to engage the private sector. yI M61ay, while she regulatot is buing its regulatoiy capabiies, key tems (service obg8ations, perfomtance targes, as wel as connecon a_m , fequn spectRum allocaton, et.) will be embodd to dte lice.  - 5 - Institutional Retrui: Cor2oatzadlo and Commerciaization of TPTC 1.13 Under the new teleconummunications law, TPTC will be established as a legally separate corporation; similarly posts would be established as a public company or a separate corporation. Effective conunercialization of TPTC requires substantially enhanced institutional, managerial, planning, technical, operational, and financial capacity. A pre-requisite to building TPTC's institutional capacity is provide TPTC with administrative and financial autonomy and accountability together with technical capacity for planning and day-to-day management of their operations. A Ministerial Directive (MD) and Memorandum of Understanding (MOU) were signed by the GOT and TPTC in March. 1992 which establishes a performance contract between the Ministry of Transport and Communications (MOC) and TPTC and provides this autonomy. In addition, in the past eighteen months, TPTC was restructured, domestic tariffs were increased 300-500% and international tariffs were reduced by approximately 15%, a plan for delegation of authority and accountability was instituted, and a productivity and cost cutting incentive program was introduced for staff and management. Initial results of the program indicate approximately 10-15% gain in productivity in the last six months of 1992. In the near term, TPTC will focus its efforts and will be accountable for managing its on- oin core business, i.c. the opetation of the telecommunications network. A technical assistance and training component is included in the project to build TPTC's managerial, planning, financial, and operational capabilities. Under the MOU, specific, quantifiable performance targets effectively track the improvement in TPTC's performance and progress in becoming financially profitable and self-reliant. 1.14 TPTC will contract out and establish a contract with a private firn who will be accountable for supervision of procurement and installation of the new works under the investment program. In addition, TPTC will divest of non-core activities, including printing, motor vehicle repair, building construction and maintenance, sale and installation of customer premise equipment, and equipment repair. Independent consultants will perform an Annual Efficienc Audit to assist MOC in evaluating TPTC's performance. As part of IDA's on-going supervision, IDA will monitor TPTC's performance through these annual audits and through the mid-term review in the 4th quarter 1995. Rehabilitation and Exoamnon of the Basic Telecommunications Network 1.15 The growing customer demand requires that the geographical coverage of the network be expanded to urban and rural areas, that the capacity within regions be increased to support business and residential customers more fully that the variety of services available be expanded, and that the quality of services be substantially improved. The Government, with assistance from consultants, defined a US$ 448 million program for expanding and rehabilitating the network over the next five years. This investment was subsequently downsized so that TPTC would have the technical, financial, and managerial capacity to implement the program. A contr with an external firm to manage the new works procurement and installation (see para. 1.14 ) and turn-key contracts with suppliers will be used to expand TPTC's absorptive capacity substantially and increase the rate with which telecommunication demand can be satisfied. The revised program of US$ 220.1 million provides capital investment to (i) expand telecommuication services to priority (primarily business) subscribers in urban and rural areas, particularly in Dar-es-Salaam, and (ii) rehabilitate the existing network to improve quality of service and thus improve the profitability of the network.  -6- Resource Mobilization and Cost Recovery in the Secor I .16 At the encouragement of IDA and as a result of GOT's clear commitment to reforming the sector, a number of donors have agreed to invest in the sector. Multi-lateral and bi-lateral donors and IDA will provide funds to cover US$189.7 million in foreign costs within the invesiment program. TPTC will fund local costs of approximately US$30.4 million. 1.17 From 1985 - 1990, TPTC's operating profit on telecommunication activities increased 250%. Due primarily to unhedged foreign exchange losses and non-increases in tariffs, however, their net income was negative. Extremely weak accounts receivable collection performance and poor operational performance also contributed to their losses. In preparation of this project, TPTC has taken several steps to re-establish their solvency. These include: (a) establishing a tariff policy consistent with cost recovery; (b) taking measures to begin to improve TPTC's operational efficiency; (c) determining specific quantifiable performance targets; (d) introducing an employee incentive program to increase productivity and to introduce a customer orientation. Quantifiable performance measures have been established to evaluate TPTC's and staff performance. 1.18 In 1992, TPTC's operating profit again improved noticeably. As a result of large foreign exchange losses on existing debt, however, TPTC's net income remained negative. At negotiations, GOT and TPTC agreed to take the following measures to improve TPTC's fiancial position: (a) introduce more rigorous financial, cost cutting, and efficiency improving controls throughout the organization; (b) improve accounts receivable collections by agreed levels each year; (c) improve the quality of service and the number of working lines by agreed levels each year; (d) evaluate methods to charge large customers (embassies, etc.) in hard currency; and (e) convert $US 34 million of old TPTC debt to equity (effective as of February 1994) and invest $US 90 million of the credit into TPTC as equity to reestablish TPTC's capital adequacy and solvency, improve its liquidity position, and reduce its foreign exchange exposure. Previous World Bank Involvement in the Sector 1.19 IDA, in cooperation with other donors, has financed two previous telecommunications projects in Tanzania. While implementation of the first project was successful overall, a number of problems were encountered in the physical imlementation and institutional development of TPTC during the second project. These problems were interpreted in the light of experience gained in the supervision and project completion work done for this project as well as IDA and World Bank telecommunication projects worldwide. The following issues as related to TPTC have been identified: Sectoral  (a) a lack of clarity in the roles and responsibilities for regulation and policy operations between the concerned Ministries and TPTC; and (b) a lack of private sector involvement and competition to encourage sector efficiency, profitability, and customer responsiveness, to encourage investments in new technologies, and to maximize capital investments; (c) tariff policies based on social and political rather than economic considerations; (d) weak financial controls and audits particularly in billing and collections; (e) an unhedged foreign exchange position leading to accrued losses by 1991 of Tanzanian Shilling 7.8 billion; Operational (f) a lack of autonomy of TPTC's board and management to take critical decisions on tariffs, personnel policies, and financial policies necessary to achieve stated objectives; (g) a lack of accountability as a result of loosely defined operational (and financial) objectives and performance targets for TPTC management and staff; (h) operational inefficiency exacerbated by increasing numbers of staff with low productivity; (i) shortage of skiled staff and appropriate training courses in management, finance, planning, marketing, computers, and modem technologies; Proiect InMlementation/Procurement (j) limited leadership in TPTC to coordinate donor investments. Consequently a myriad of technologies were introduced resulting in an expensive, poorly configured network with a low quality of operation that required highly skilled staff to operate; and (k) poor donor coordination which resulted in exchanges being purchased for which there was no outside plant. Rationale for World Bank Involvemt 1.20 IDA has an important catalytic role. Several donors have indicated willingness to invest in this project provided IDA takes a lead role to a) coordinate donor funding to ensure a coheren investment program, and b) oversee institutional and sectoral reforms and monitor project implementation. Also, IDA has significant sectoral experience, particularly in Africa. Further, such involvement is based upon and will reinforce IDA's support to the overall adjustment process in Tanzania.  - 8- 1.21 Through advice and investments, IDA will assist the GOT in their efforts to a) establish a regulatory framework, b) restructre and commercialize TPTC, including promoting private sector participation, and c) assist TPTC in the urgently needed rehabilitation and expansion of the network. IDA conditionality is tied to GOT and TPTC fulfillment of these efforts. IDA is actively working with the GOT to a) coordinate donor investments, b) rationalize the network design, and c) encourage donors to allow competitive bidding for equipment and thus make prices competitive. Approximately 80% of the program will have some form of competitive bidding. The latter is important given the history in Tanzania of donors investing in the sector on an ad hoc basis and as a result a proliferation of equipment and a poorly designed network. The urgent requirements for telecommunications and the very real potential for other donors to invest in an uncoordinated fashion are the main reasons why investments in equipment are not being delayed until a regulatory framework is established and private sector investment is secured.  -9. II. THE TELECOMMUNICATIONS SECTOR A. INTRODUCTION 2.01 The strategic importance of the telecommunications sector rests on the growing importance of fast, easy, reliable, and cost effective communication capabilities to the competidve positioning of a firm and a country. The communication patterns of business and residential subscribers necessitate a quality local, national, and international network. Business customers (producers, distributors, and end users) depend on telecommunications as a method to communicate effectively and to receive information. B. CUSTOMER REOUIREMEN 2.02 In comparison with its neighbors in Sub-Saharan Africa, the state of Tanzania's network is poor. As of December 31, 1991, approximately .3 of every 100 people in the country had telephones. The average telephone density in industrialized countries is 120 times higher. The estimated fault rate in Tanzania is above 60% compared with a world average of less than one percent. For a residential subscriber, the waiting period for a telephone can exceed 20 years. The extremely limited capacity of the network and its dilapidated state results in a highly dissatisfied customer base. The main concerns that customers have relate to a) access to service, b) quality of service, c) costs of service, and d) the rapidly growing demand for services. 2.03 As of December 31, 1991 Tanzania had about 78,000 direct exchange lines (DEL) available for subscriber use. Approximately four times this number of people, however, would like to have telephone service (see para. 2.09 - customer demand). Business subscribers, who are typically given priority access, can wait more than one year for telephone service. Government subscribers wait a period of weeks for a phone while residential subscribers can wait more than 20 years. The existing facilities are not only inadequate, but there is an imbalance between urban and rural areas. Telephone service is concentrated in Dar-es-Salaam and in the other 25 regional capitals, which accounts for about 80% of the total lines, but only 15% of the population. These cities have an average telephone density of 1.4 lines per 100 inhabitants, compared to the national average of 0.3 lines per 100 inhabitants. The scarcity of telephones outside major cities inhibits the development of other sectors. The rural density is only about 0.05 lines per 100 inhabitants. As of December 31, 1991, there were 100 telegraph offices providing automatic telex service to approximately 2,300 subscribers. 2.04 Under the existing structure, customers have no choice in where they obtain telecommunication services. Service is provided exclusively by TPTC. Historically, however, TPTC has not had a customer service orientation, and customers must deal separately with the engineering, finance, and billing departments at the local office and Dar-es-Salaam to resolve a problem. Consequently customers are frequently frustrated in their efforts to obtain or retain adequate service and often give up without receiving a satisfactory response.  - 10- ExisWn Fadlities 2.05 As of December 31, 1991, TPTC operated 188 telephone exchanges consisting of 28 automatic exchanges and 160 mamal exchanges. The total installed exchange capacity reached 104,460 lines with 85,260 automatic lines and 19,200 manual lines (about 82% of the lines were served from automatic exchanges). The capacity utilization for telephone exchanges equalled 85%. There is a backbone transmission microwave system crossing the country from east to west and from north to south, with connections to neighboring countries of Malawi, Zambia, and Kenya. The north-south systems form part of the PANAFTEL network. Direct terrestrial connections to Uganda, Rwanda, and Burundi are operational. There is no domestic satellite network since it has not been cost-justified to do so. The majority of the international services are provided through a Standard B Earth station at Dar-es-Salaam which has been operating at full capacity since 1983, and via a terrestrial link to a leased satellite circuit on a Standard A Earth station (Atlantic Ocean Satellite) at Nairobi. A Standard A Earth station is in service close to Dar-es-Salaam and provides additional capacity. A new international exchange was installed in Dar-es-Salaam in 1991. Details of all existing facilities are given in Annex 2-1. The telex service is fully automatic and is provided through four exchanges located in Dar-es-Salaam, Arusha, and Dodoma. The total capacity of the exchanges is 4,350 lines, with 2,300 subscribers connected which is a capacity fill of 53 %. Other services provided by TPTC include leased circuits to a number of private and public institutions. ualitv of Service 2.06 The quality of service is very poor. Approximnately 35% of the subscribers have installed telephones which do not work. This is primarily due to line problems in the local network. These problems can take weeks or months to resolve. In general, the network is congested both at the local exchange and trunk levels throughout the day. In most exchanges, it takes several minutes before a dial tone is received. The completion rate for inter-urban calls is only 25 %, compared to an acceptable rate of about 60%. The main reason for the congestion in the network is a result of a much higher demand for services than the network was designed to handle. Faulty, obsolete equipment and deteriorated outside plant also contribute to the congestion. In addition, lack of spare parts, transportation, and experienced manpower compound the situation and lead to long repair times. On average, there are about 25 - 30 faults per 100 telephones per month, which is hign in comparison to world averages. Most of the faults are in the local cable distribution network and repairs take an average of 10 days which is unacceptable according to international standards. The operator assisted long distance telephone service is severely impaired by the shortage of long distance circuits, which is compounded by heavy congestion in the local networks. Service delays of over 4 hours on operator booked calls are frequent, leading to cancellation of more than 50% of the booked calls. In addition, about 70% of traffic is lost in the transmission network due to faulty or inadequate facilities. Outgoing international calls (semi-automatic) have an effective rate of 68% compared to a target of 80% but only 25% of the incoming international calls are successful. TPTC's management is fully aware of the problems that have contributed to the poor quality of service. 2.07 Customers have difficulty in ensuring that their telephone lines continue to operate. Of particular frustration is i) the frequency with which telephone lines are cut by technicians repairing the network, and ii) difficulties in receiving and paying customer bills. Bills are often sent out 1-2 months late, inaccuracies in the bills are frequent, and payments are often misposted. Customers can thus be disconnected even though they have actually paid their bill. These  - 11- problems have resulted in a collection rate of 65% of subscriber accounts versus a target of 85% in TPTC's performance agreement with the Ministry. In 1991, TPTC's subscriber accounts receivables reached 6.8 billion Tanzanian Shillings or approximately US$22 million. 2.08 In general, the prices for services historically have been quite low. The average price of a one minute national call is 0.02 cents. The average cost per minute in Europe or the United States is between 10 - 25 cents per minute. This low rate encourages subscribers to call more, thus further congesting the network and reducing service quality. International charges, however, are some of the highest in the world at approximately US$6.40 per minute. As part of the restructuring process, tariffs are being realigned to be more economically sound. Demand for Service 2.09 The total demand nationwide as of November 30, 1991 was about 153,000 potential subscribers, which is about 200% of the supply of about 78,000 DELs at that period. According to a demand assessment study funded under the PPF, the Total Demand Potential (TDP = connected subscribers, applicants, and unexpressed demand) in Tanzania in 1990 was 302,000 (see Annex 2-2). The unexpressed demand portion of the TDP includes many would-be applicants who have been discouraged from applying for telephone service because of: (i) the long average waiting time for connection (exceeding five years) due to lack of facilities; and (ii) the poor quality of service (para. 2.07). This is common in many countries in Sub-Saharan Africa. 2.10 Demand forecasts indicate that the demand for telecommunication services is projected to grow by at least 10% per annum through the year 2000 and beyond. Growth will be fastest in urban areas. Tanga, Dodoma, and Mwanza are expected to grow at rates of 14.1%, 13.9%, and 13.8% respectively. Other areas of rapidly expanding demand include Arusha (13.2%), Mbeya (11.7%), Morogoro (11.4%), Iringa (11.1), Moshi (10.8%), and Dar-es-Salaam (10.1%). During the five year period covered by this project, the total demand is conservatively expected to grow at about 10% per annum reaching about 490,000 at the end of 1996. However, because of overall macro resource constraints and implementation capacity of TPTC, meeting demand is not a realistic policy option for the foreseeable future. C. SECTOR STRUCTURE AND REGULATORY FRAMEWORK 2.11 The MOC's mandate is to ensure that good quality, fairly priced telecommunications and postal services are available to meet demand at economic prices in Tanzania. Within the existing structure, MOC is responsible for setting policies. It has delegated responsibility to TPTC for carrying out regulatory functions such as licensing of private operators, setting equipment standards, and granting equipment type approvals. In addition, TPTC is responsible for providing all telecommunication services within Tanzania. Under this current structure, the role of the Ministry and the operating entity is blurred; the regulatory functions are quite limited and lack a commercial orientation; there is insufficient accountability to ensure sound financial performance; and there is virtually no possibility for private sector involvement. 2.12 The current sector structure and institutional environment is a result of the previous centrally planned economy and is inappropriate for market-oriented operations. As noted earlier, the Government recognizes the need establish a market-oriented regulatory framework to legalize and encourage private sector involvement and competition.  - 12 - 2.13 The MOC has drafted a policy statement of its intentions to restructure the sector. The statement indicates that the Ministry would be wholly responsible for policy matters. They would be responsible for incorporating the Government's economic and social objectives into telecommunication policy. The existing teleconmumications law will be revised by March 31, 1994 to allow for market oriented activities including private investment and competition. A specialized agency independent of TPTC will be established which will be responsible for regulating activities in the telecommunications sector under a market-oriented structure. An autonomous operating entity(ies) would be responsible for providing telecommunication services according to sound commercial principles. This entity(ies) would be regulated by the regulatory body. Private sector participation will be legalized and encouraged in basic and non-basic services. As part of a study on private sector participation, appropriate incentives to encourage private investment will be defined. 2.14 The Government recognizes the need to clarify and separate the roles of the Ministry and TPTC. In addition, the Government recognizes the need to comnercialize TPTC's operations. In March 1992, a Ministerial Directive (MD) and Memorandum of Understanding (MOU) were signed between the Ministry and TPTC. In addition to clarifying the roles of the Ministry and TPTC, these directives outlined elements for the commercialization of TPTC. The main goal of commercialization is to improve the efficiency, quality, financial viability, and customer responsiveness of TPTC's operations and ensure that TPTC becomes financially self- reliant in its operations. The directives give TPTC autonomy in personnel policies, salaries, procurement, and management of its financial affairs, etc., and in return, making it accountable for its performance. (Annexes 2-3 and 2-4). 2.15 Specific financial, technical, operational, and service quality objectives are outlined in the MOU and will be updated on an annual basis. Perfonnance targets agreed at negotiations are outlined in Annex 2-4. TPTC's compliance with these objectives will be monitored through efficiency audits done by independent consultants on an annual basis (para 3.38). These efficiency audits will be monitored by GOT and will be reviewed during IDA supervision). Outlined below are details on the current situation within TPTC. D. THE OPERATING ENTITY 2.16 TPTC is a monopolistic, government-owned insfitution responsible for planning, management, and development of domestic and international public telecommunications and postal services (see Annex 2-5 for an Organization Chart). Telecommunications services include local, long-distance, and international telephone, data transfer, fax, telex, and telegraph services for business, residential, and government subscribers. In addition to the public teleconummications services, dedicated networks exist to meet the specialized requirements of the police, military, railways, and civil aviation. Other private users also operate radio link services in areas inadequately served by the public network. Tanzania has no telecommunications manufacturing industry. 2.17 Though most telecommunication operating firms in the world are highly profitable, since 1986, TPTC has had a negative net income and in 1989 was insolvent. The main causes for this insolvency were: r  - 13- 1) inadequate tariff policies and massive devaluations of the Tanzanian Shilling, 2) poor billing and collections performance, 3) progressively deteriorated audit controls, and Management and Operational 4) inconsistencies in the lines of authority in the sector and weak management, 5) weak management systems and computeztion, 6) inadequate training, rising staff levels, and low worker compensation, 7) a lack of a customer orientation. Substantial progress has been achieved in 1990 -1991 in resolving these problems in preparation of the Third Telecom project. Tariff PoliCv 2.18 Historically, the tariff policy has been ad hoc and based primarily on political rather than economic considerations. The need to account for inflation within the economy and hedge liabilities against devaluation was not considered when deter_mng tariff levels. Tariffs for the 1985 - 1990 period increased an average 300% versus inflation of 1000% and devaluation of 1200%. Consequently, TPTC's net income declined from TSh 435 million in 1985 to ne,ative TSh 10,295 million in 1989 in current terms. This led to a lack of foreign exchange for spare prts and thus a deterioration of the operational performance of the telecommunications network. 2.19 Throughout the 1985 - 1991 period, local and long-distance tariffs have not compensated for the economic cost of providing service. In 1991, domestic tariffs were well below world averages while iternonal tariffs were some of the highest in the world. In 1991, the average cost of an international call was US$6.41. A negative imbalance of inpayments and outpayments to foreign administrations, however, resulted in an outflow of foreign exchange. In addition, the high international tariffs led to increased efforts by subscribers to avoid being charged for or paying for international calls. It is estimated that by 1991, over thirty percent of international traffic went umbilled. TPTC, however, is sdll required to pay for calls made through foreign adninistrntions. Thus TPTC's financial position is further worsened. 2.20 Given the importance of adequate tariffs in ensuring TPIC's financial viability, as part of TPTC's restructurin in 1991, it was agreed that TPTC would raise individual tariffs approximately 300-600% to cover the true economic cost of providing telecommunication service. In March 1991 local and long-distance tariffs were raised to the agreed upon levels. International tariffs were reduced approximately 25 %. In addition, in March, as part of the M!nisterial Directive (MD) and Memorandum of Understanding (MOU) signed by the Government, the Ministry, and TPTC, it was agreed that without furter authority, TPTC would raise tariffs on a  - 14 - semi-annual (or quarterly) basis to account for inflation and devaluation. TPTC raised tariffs in September, 1992 by 15%. BMlhin= and Collection 2.21 TPTC's billing system is antiquated and wholly inadequate to meet its evolving requirements. The current software was written in the 1970's. Work done under the second project to improve the system was moderately successful. Subsequent to this, TPTC has installed several exchanges with non-IDA funding, which for technical reasons, are not compatible with the existing system. To exacerbate the problem, previous TPTC management insisted that work done on the billing system be done by internal staff despite their acknowledged unfamiliarity with the new technology. A laborious process was established to produce international bills. Further, TPTC's transaction volume has outgrown the hardware capacity and rural bills in several areas are produced on unsecured PC's. The end result is that the existing billing system is wholly inadequate to support TPTC's billing and accounts receivable activities. 2.22 Under supervision from IDA under funds provided by SIDA, an interim solution to the billing problem was recently developed. In addition, consultants have begun preparation of the functional requirements for a new billing system and are evaluating pre-packaged billing systems available internationally. As a condition of effectiveness, a billing system will be selected. Successful implementation of the billing system by March 31, 1995 is a key performance target in the mid-term review. 2.23 TPTC has begun to enforce their disconnection policy which requires subscribers to clear their bills within 14 days of the billing date, otherwise service will be disconnected without any notice. TPTC's Statement of Affairs was recently completed and accepted by TPTC and the MOC who verified TPTC's financial position and analysed subscriber revenues. Under this project, technical assistance is being provided to a) introduce improved financial controls and processes, and b) reduce accounts receivables. Audit. Audit Controls, and Financial Accounts 2.24 TPTC's accounts are currently audited by the Tanzanian Audit Corporation. The auditors have been slow in actually producing the audited financial accounts. Under the MOU and MD, the Government confinned that TPTC would hire independent, certified auditors to audit the accounts. TPTC will utilize the services of private auditors if delays persist. TPTC has indicated a willingness to do this should it be necessary. 2.25 As part of the restructuring process, new organizational units were established and functions within departments were redistributed. New financial, management, and audit processes and controls need, therefore, to be established which more closely reflect the current organization structure. These controls will also need to be revised after the split of the postal and telecommunication activities through advice from consultants. 2.26 TPTC prepares accounts both on a cash and commercial basis. External consultants were employed under the second project to assist TPTC in the separation of the postal and telecommunication accounts and to implement a new accounting system. With the assistance of the consultants, the financial and accounting systems have improved and TPTC closed its annal financial accounts within four months of the end of the 1991 fiscal year. Iitial indications in the  - 15 - preparation of the 1992 accourts, however, indicate that TPTC may be encountering new problems in this area. Technical assistance will be provided to guide and train staff in the preparation of the accountL . Receipt by IDA of audited financial statements for TPTC for 1992 are a Condition of Effectiveness. Computer support will be provided in a project to complete the automation of the accounting system. Starting with the 1992 accounts, postal and telecomnmunication accounts will be presented separately. 2.27 The appointment, compensation, and retention of the Director General of TPTC has not been under the control of the Ministry of Communications nor the Board of TPTC. Consequently, in an attempt to ensure effective management of TPTC, the Ministry and TPTC's Board became involved in the planning and day-to-day implementation activities of TPTC. For example, financial expenditures, already approved in the annual budget, were subject to Board review. In addition hiring, compensation, and firing of staff were also subject to Board approval. This involvement resulted in substantial delays (as much as 6-12 months) in completing tasks and significantly reduced the accountability, effectiveness, and motivation of management. 2.28 As part of the overall parastatal reform within Tanzania, the GOT and the Ministry have delegated the responsibility of selecting the Director General of TPTC to TPTC's Board of Directors, subject to Ministerial approval. This delegation of authority and the change in tariff policy are clear moves on the part of the Government and the Ministry to commercialize TPTC and provide TPTC with significantly increased autonomy and accountability. TPTC recently introduced a memorandum delegating authority to line managers in the zones and regions as well as headquarters. The Ministry and Board are currently in the last stages of recruiting a new Director General with extensive international experience and a strong familiarity with the telecommunications sector in Tanzania. The appointment of a highly qualified Director General will be one of the primary contributing factors to the success of the project implementation. ManEmnt System and ComIuterization 2.29 TPTC lacks proper management systems and procedures essential to manage it as a commercial enterprise. In addition, TPTC's management reporting is fragmented and no formal and uniform structure for the flow of information exists. TPTC's performance is not closely monitored, and formulation of corrective actions and utilization of information processing capacities are inadequate. This has contributed to weaknesses in planming, operations and maintenance, financial management, billing and collection, procurement, and project management. TPTC will hire consultants to assist it in its efforts in these areas. 2.30 A comprehensive review of TPTC's current computer strategy is underway. Consultants are assisting in this process and will propose a computerization strategy, priority systems and an implementation plan. Acceptance of the consultant report by TPTC and IDA is a condition of effectiveness. Consultants will also assist in implementation, including actually purchasing pre-developed software, or if necessary, developing software. The purchase of a new billing program and a financial management system will be the highest priority systems purchased.  - 16 - M Training. and Competion 2.31 Inadequate training of key staff contributed to weak fiscal and operational performance and the degradation of financial, techmical, and audit systems, processes, and controls over time. TPTC has a training center in Dar-es-alaam which offers instruction and training programs in most of TPTC's operational activities. These in-house trining facilities are supplemented by established national training institutions and staff assignments with overseas telecommunications administration, universities, and manufacturers. The annual training volume is currently about 7,621 student weeks per year. However, this is still inadequate to meet TPTC's needs. TPTC plans to expand training to deliver 9200 weeks by 1992. The types of courses covered in the staff training college are contained in Annex 2-6. 2.32 TPTC has no regular program for managerial, administrative, financial, or computer training. Training in these areas is done on an ad-hoc basis using external institutions such as the multinational training institutions in Arusha and Nairobi. A detailed training plan and consultancy services required to train trainers has been developed. 2.33 Telecommunications administrations in developed countries employ 5 to 8 staff per 1,000 DELs. As of December 31, 1991, TPTC employed a total staff of about 8,620. The staff employed exclusively for telecommunications services was about 4,860 which is equivalent to a staffing ratio of 69 per 1,000 DELs, which is high. The staffing ratio would be 76 staff per 1,000 DELs if the common support service staff are included. The number of staff per 1,000 DELs over the past three years has been growing rather than falling as is the case in most developing countries where the Bank has been involved. Moreover the increase in staff has been in administrative areas. In the key areas of engineering and finance, where there is a shortage of trained staff, the growth has been very low or in some cases negative. In 1991, however, the number of authorized staff within the organization was frozen and has been adhered to for telecommunications staff. As part of the restructuring process areas requiring particular attention were identified and the level of technical assistance reqwired was estimated. This study was undertaken as part of a technical assistance program and the recommendations from the study will be substantially implemnented within the first two years of an investment program. Completion of this study will be an item in a mid-term review (para. 5.02). To improve staff efficiency, targets have been set for reducing the staff ratio and will be closely monitored in the annual efficiency audits. 2.34 As a result of limited working capital, staff salaries have not kept pace with inflation. Wages and salaries as a proportion of operating costs were decreased from 19% to 13.3% from 1985 - 1989, despite an increase in the number of staff employed. As a result of low wages, staff became increasingly demoralized and inefficient, thus further reducing operational effectiveness and the quality of service provided. This also led to increasing number of staff seeking alternative means - frequently to the detriment of TPTC - to augment their total compensation. As agreed in the Ministerial Directive and Memorandum of Understanding, staff salaries were almost doubled in early 1992. Further, in July 1992 TPTC introduced an employee incentive plan that rewards staff based upon measurable performance indicators. To meet the staff ratio targeted, TPTC will need to improve staff productivity by 12% annualiy. Early results from the incentive scheme indicate strong efficiency gains.  - 17- 2.35 TPTC currently lacks a customer orientation. In order to provide a higher quality, more individualized service to their customers and to maximize profits, TPTC needs to improve the services offered in the customer service department. This department should provide the single contact point in the operating entity to which customers direct their inquiries. The departm should ensure that customers have access to i) flexible blling serviks, ii) a customer code so that customers know what services they can expect, the price of the service, and mechanism available to them to comphin for unsatisfactory service, iii) fill account information, and iv) specialized services which they may reuire (particularly for high revenue generating subscribers). The customer service department would draw upon the skills of the technical, billing, and finance depattments as required to respond to subscriber inquires. In addition, the customer service department would be responsible for analyzing subscriber demand patterns and profiles to develop a coherent view of the customer base. In particular, they would identif high revenme generating subscribers and establish specific customer accoi. managers to more effectively service these customers and maximize the revenue they generate. Technical Assistance will be provided to help improve the services offered in the customer service department and to develop a subscriber profile.  - 18- m. THE PROGRAM AND PROJECT A. THE PROGRAM 3.01 TPTC and the MOC, with consultant assistance, identified a US$ 448 million telecommunication recovery program to be implemented between 1993 and 1997. The program's main objective was to meet the most urgent medium-term requirements of customers for telecommunication services. The program was subsequtnly downsized to US$ 220.1 million to take into account TPTC's managerial, financial, and technical absorptive capacity. TPC's implementation capacity has been maximized through the effective use of consultant support. The viability of this program is contingent on: (a) the new works procurement and implementation being maaged by external consultants and detailed implementation being undertaken on a turney basis; (b) appropriate tariff increases throughout the project; (c) the availability of foreign financing; and (d) restructuring of the existing Government debt to TPTC. Stens Alreadv Taken 3.02 To ensure the program's success, the GOT has worked actively with TPTC to improve its financial viability. The GOT converted US$34 million of TPTC's debt to equity to improve their debt servicing capacity. During negotiations, it was agreed that the Government will invest US$ 90 million of project funds into TPTC as equity to strengthen the balance sheet and that, without IDA approval, TPTC shall not incur any debt, if after incurring such debt the ratio of debt to equity shall be greater than 60 to 40. In addition, TPTC has authority to raise tariffs as required to cover inflation and devaluation and to retain 35% of its foreign exchange revenue to fund foreign costs (spare parts, equipment, etc.) During negotiations it was agreed that TPTC shall not undertake any investment with an estimated cost in excess of $2 million without prior approval of .the Association. 3.03 The total program for the period 1993-1997 consists of. i) almost completed ongoing works from IDA Credit 1810; and ii) the proposed project. The cost of the program is estimated US$ 220.1 million including foreign cost of about US$ 189.7 million (Annex 3.1). B. TE PROJECT Project Oblectives 3.04 To support the Government's development strategy in the sector (para. 1.05 and 1.06) and the overall economic recovery of the country, the project has the following physical and institutional development objectives:  - 19- (a) to establish a market oriented regulatory and policy framework; introduce private sector participation in non-basic services in the near term; and permit and develop an action plan to secure private investment in basic services and evaluate opportunities for competition in non-basic services in the medium term; (b) to support strengthening of the institutional framework and facilitate commercialization and corporatization of TPTC; to improve TPTC's financial performance; and maxiniize TPTC's absorptive capacity through effective use of consultants; and (c) to expand basic services, particularly to business subscribers, so as to satisfy the most urgent demand and remove a constraint to the economic development of other sectors; to rehabilitate the long-distance and national networks and existing, non- operational lines; to improve the quality of service and system efficiency through, inter alia better utilization of existing facilities, reducing faults and increasing call completion rates; and over time, increase availability of a range of high quality, value-added services to satisfy customer demand. Proiet Descipidon 3.05 The Telecommunication m project design is described in detail in Annex 3-2. It includes the following components: Part A - Reuulatorv and Policy Framework 3.06 The Government and the MOC are committed to establishing a market-oriented regulatory and policy framework. The Government's main policy aims are to ensure that: a) basic and non-basic services are extended to as many subscribers as is economically viable; b) service quality is improved; c) services are provided efficiently and cost effectively in part through competition; and d) resources available to the sector are maximized through private sector involvement. The Government has drafted a Telecommunication Policy Statement (see Annex 1- 1) which outlines their intention to: (a) limit Government's role to primarily policy formulation and representation with other Governments and international organizations; (b) establish a separate, independent regulatory body to regulate telecommunication activities in Tanzania by March 31, 1994; (c) draft a new teleconmmnications law which permits private sector participation and investment in basic and non-basic telecommunication services by March 31, 1994; (d) take all actions necessary to have a cellular operator license issued on the basis of competitive bidding procedures by December 31, 1993 and by December 31, 1995 ensure that licenses to private sector operators or investors are issued for two other non-basic services; (e) require that TPTC commercialize and corporatize its operations, split postal and telecommunication activities, and divest of non-core functions.  -20- Submission of the policy statement to IDA is a condition of Credit Effectiveness. 3.07 The regulatory body would be responsible for establishing overall telecom tariffs, defining and monitoring operator compliance with service standards, licensing selected services4/, monitoring spectrum frequency allocation, granting licensos to operate telecommunication services, authorizing interconnection and revenue sharing arrangements, and promoting the development of competition and private sector involvement. 3.08 In the Investment Program, US$ 950,000 of technical assistance will be made available to the Ministry of Communications and the Regulatory Body to a) conduct a review of the current strategy for establishing a regulatory framework, b) define an implemenation plan with clear milestones and assist in implementation to establish a regulatory body; and c) assist in the training of regulatory staff and transfer of knowledge (US$ 200,000 of the total $950,000) (see para. 1.12). In additon, the MOC will have external consultants perform an annual efficiency audit of TPTC to ensure that performance targets are met (25 staff montis over five years). The efficiency audit will review quantifiable financial, technical, and operational performance targets (see Annex 2-4). The technical assistance provided to the MOC will be coordinated with a Regional Telecommunications Policy Study. 3.09 Technical assistance wil be provided to a) identify options for private sector involvement and competition, b) identify a plan to catalyze that involvement; and c) assist in its implementation. The recommendations of the study on private sector involvement and an action plan, taking into account the Association's comments, wiUl be provided to IDA by the Mid Term Review. :art B - Institutional DeveoMe and ProLect Impleeaon 3.10 lnstitutional Development. To restructure TPTC effectively, build the institutional capacity of TPTC in a susainable manner, and maxuimzing TPTC's absorptive capacity wiUl require a comprehensive technical assistance package. Approximately US$ 14.02 million of foreign technical assistance (of which $2.1 million is for a performance contract - (see para. 3.14, 3.30(b)) and US$ 2.8 million of training will be provided. The institutional development portion of the program is intended to revise the institutional processes and procedures within the organization following the recent implementation of the first phase of the reorganization of TPTC along more commercial lines (see para. 1.13). TPTC management and staff will focus their efforts and be accountable for their on-aoing core ctivities. The technical assistance and training is intended to develop the staff capabilities within TPTC so that, over time, TPTC can become self-reliant. Staff training and development wiUl be done in conjunction with substantial increases in staff salaries (implemented in spring 1992), implementation of a performance based incentive program (July 1992), delegation of authority to line managers (spring, 1992), and clearer definition of roles and accountability of staff (first phase to be completed by 1994 and second phase, after split of posts and telecommunications, by 1995). 3.11 A second phase of the restructuring will occur over the next two years with the split of posts and telecommunication activities. Subsequent work will need to be done in the areas of I/ nhe MOC, as an isue of policy, s likely to retain the audhority to isse licenses whkh will have a substhi-e impac on the sector. Mh reguaor would be expectd to monitor compliance with the license.  - 21 - management, finance, customer service, manpower, and operations to ensure the successful implementation of the second phase of the restructuring process. The size of the technical assistance package is, in part, due to the low emphasis of technical assistance in previous projects (see Previous World Bank Involvement (para. 1.19). 3.12 The institutional development component of the project provides for 745 staff months of consultants and experts to assist TPTC in the tasks specified below and staff months training for trainers as well as 280 staff months of fellowships for overseas training of TPI;C's personnel. The technical assistance under the project is as follows: (a) studies required to implement the institutional reforms. The main studies will be i) a manpower study to develop a comprehensive human resource and training strategy and an implementation plan, ii) a computerization strategy study and implementation, and iii) organizational structure study for the telecommunications firm after the split of posts and telecommunications (31 mm) (see paras 2.30, 2.33); (b) corporate planning activities related to the split of posts and telecommunications activities, establishment of profit centers in zones, development of management reporting capabilities, investment and resource planning, contract administration, and project accounting related to project implementation; (50 mm) (para. 2.32, 3.32); (c) network planning related to overall planning, optimization, and coordination of the national network, as well as traffic engineering, and materials standardization (90 mm) (para. 2.28, 2.33, 3.34); (d) operations and marketing related to subscriber services at headquarters and the zones, operation and maintenance control centers, and maintenance procedures (108 mm) (para. 2.35); (e) financial planning and controls related to design and implementation of financial management systems and procedures, including: installation of new financial systems and processes and introducing improved financial and audit controls; split of post and telecommunication accounts; and improvement of budgeting, forecasting, cost control. A full time financial controller will be retained to implement the financial reform of TPTC. A total of 156 staff months is required over four years, of which the financial controller would require 48 staff months (pans. 1.13, 2.24, 2.27, 2.29); (f) provision of experts in manpower and training to develop a human resource plan, a staff performance incentive scheme, a career development program based on the existing staff profiles, and a hulman resource data base (72 staff months over four years), (parm. 2.33); (g) instruction of trainers in the staff college, development of new courses, and teaching of initial courses in the following areas: management, end user computing, mnarketing and customer service, (4 staff months over four years), (para. 2.33); and (h) provision of training fellowships to TPIC staff primarily in local or regional training institutions for courses not available through the staff college, (para. 2.33).  - 22 - 3.13 In support of the technical assistance component of the program, TfTC will: a) identify and nominate counterpart personnel for each task and inform IDA prior to issuing the letter of invitation to consultant for proposals; and b) TPTC and IDA will each year review the impact of the technical assistance, including counterpart staff training, and agree on the implementation objectives for the following year. Appointment of consultants for project management, computer, and financial management consultants is a Condition of Credit Effectiveness. 3.14 Proiect Imnlementation. To increase TPTC's implementation capacity (thus speeding up the implementation process and eliminating technical bottlenecks more quickly), TPTC will retain an external firm to be accountable for procurement and installation of new works under the program (see para. 3.30). In addition, all equipment contracts will be implemented on a turnkey basis. All contractors will be evaluated and compensated on performance based, output oriented results. A US$ 2.1 million has been allocated for the performance contract. Part C - Rehabilition and Exuansion 3.15 This component comprises the new works in the revised investment program for 1993-1997, including: 1. rehabilitation of existing switching, transmission, power, and air conditioning equipment including the provision of spare parts, modules, tools, and test equipment to repair and refurbish them, (paras. 1.06, 2.06); 2. supply, installation and commissioning of (see para. 1.06, 1.15, 2.03): (a) 91,000 lines of switching equipment including 44,000 lines in the Dar-es- Salaam and 47,000 lines in the Regional Centers. Cities with a high growth in demand have been given priority. These include Tanga, Dodoma, Mwanza, Arusha, Mbeya, Morogoro, Iringa, and Moshi; (b) complementary external line plant to match item (a) above and extnal line plant for exchanges requiring additional cabling; (c) digital microwave radio systems and fibre optical systems to interconnect the exchanges included in item (a); and (d) power and air condidoning equipment for above mentioned switching and transmission. 3. provision of 20,000 telephone instruments and 500 pay phones for replacement of unserviceable instruments and connecting new subscribers; 200 teleprints and 500 fax machines; 4. provision of 50 motor vehicles for planning, construction, and maintenance works; 5. construction of buildings to accommodate equipment and for office and residential purposes;  - 23 - 6. acquisition of ancillary equipment, computer hardware and software; 7. acquisition of postal equipment and vehicles; and 8. rehabilitation and expansion of the telecommunications network to be financed by IDA, will be divided into two phases as follows: (a) Phase I - Spare parts for existing switching, external line plant and transmission - Upgrading of Earth station with digital IDR fauility - External line plant in Pugu Road and Wageni (both in DSM) to provide connection capacity for existing exchanges - Long distance transmission with digital microwave systems (spurs in Phase II): DSM-Dodoma and DSM-Zanzibar-Pemba-Tanga-Moshi - Power and air conditioning equipment for above mentioned transmission routes - Terminals: telephone sets, teleprinters, and fax machines. (b) Phase I * Switching in Arusha, Morogoro, Zanzibar, Chake Chake, Wete and Mkoani, and in 20 mral locations - External line plant in Arusha, Morogoro, Zanzibar, and in the above mentioned 20 rurl locations - Long distance transmission with digital microwave systems: Moshi-Arusha - Small radio transmission related to above mentioned rural locations - Spur links related to the long distance transmission routes DSM-Dodoma and DSM-Zanzibar-Pemba-Tanga-Moshi-Arusha - Power and A/C for above mentioned switching and transmission. Probet C9 3.16 The total cost of the project is estimated at US$ 220.1 million with a foreign exchange cost of about US$ 189.7 million (86% of the total cost). The costs of equipment and consul are based on TPTC's contracts for ongoing works and experience in other countries with adjustments up to June 1992. Project cost estimates are outlined in Annex 3-1.  - 24 - TANZANIA POSTS AMTQ1U.OMMLUNarICA1ONCOFMRAflO TELECMMUNMC IONS RESFRICUFRU WFLCC Investme t Pom (11- 1s5 in Mli us USOdi * Eac rate 300.00 T.S148. (AW wON L US# MILUO i1s9-i196 1o91 - oo Local Foreign Total LOC Foreign Total A. TELEPHONEEXCHANGES A.1 Local exchan 550.00 t729937 7.880. 1.64 24.33 2.17 A.2 Transit Exchange 60.00 130.00 690.00 0.20 2.10 2.30 A.3 Spare Parts 0.00 300.00 300.00 0.00 1.00 1.00 B. LOCAL CABLE NETWOK 9.1 ELP 1,778.40 16,005.60 17.764.00 5.93 53. 59.28 9.2 Spare Parts 0.00 60000 600.00 0.00 2.00 2.00 C. TRANSM4ISS1O C.1 Optcal Fibre 162.00 460.0 612.00 0.S4 1.50 2.04 C.2 Radio Systems 2,439.00 13,581.00 16,02.00 8.13 45.27 53.40 C.3 Upgrade S9d. A Earth 0.00 150.00 150.0 0.00 0.50 .50 C.4 Spae 0.00 420.00 420.00 0.00 1.40 1.40 D. TLHONEE& . 0.00 684.00 68.0 0.00 2.26 228 E POWE&AC 150.00 1,06.00 1,2000 0.50 30 4.00 F. BUILINQ 900.00 0.00 900.00 3.00 0.00 3.00 Q VEHIaES 30.00 45000 4Q00 0.10 1.50 1.60 H. COMPUTE1S 0.00 1,716.00 1,716.00 0.00 5.72 5.72 LA CONSULTANCY-TOTPTC 798.00 4,206.00 5,004.00 2.66 14.02 1.68 LB CONSULTANCY- TOMOC 30.00 22.00 25.00 0.10 0.75 0.8S J.A TPAINN-TO TPTC 510.00 84000 1,3500 1.70 2.80 4.50 J.0 TPAIM - TO MOC 0.00 60a.O 00 0.00 0.20 020 K MISC. & ANCILWIARY EOUIUE 510.00 84000 1.00 1.70 2.80 4.50 :- SE COT 7*18S30 49.506MO7 67,426?: 26.39 - 102 111.42 Physcal Contingency 395.91 2,475.36 2,871.26 1.32 8.26 9.57 Prie Coningency 791.83 4,9570 5.7425 2.64 16.50 1M14 1TAP~JCCS ,... 9,106.04......................... . 60,3.02 6,3.0 30* ae?s; 1i7# 201  - 25 - 3.17 Physical contingencies are 5 % on local and foreign costs for equipment and services. Price contingencies are based on amual domestic inflation rates for local costs at 17% in 1992, 14% in 1993, 12% in 1994, and 10% thereafter; and intemational inflation rates for foreign costs at 4.4% for 1992- 1996 and 4.1% thereafter. It is assumed that the exchange rates will vary during the period to adjust for the difference between local and foreign inflation. The average unit cost for switching equipment is $265 ($285 including local costs) and $360 ($400 with local costs) for external line plant. These estimates are based on actual contracts secured by TPTC and world-wide trends. Cost estimates for transmission are based on the costs consultants received from projects elsewhere since digital transmission equipment was not purchased in the previous telecom project in Tanzania. The cost estimates of $2000 per direct exchange line is in line with project cost estimates for other recently prepared projects in Africa and Asia (see Zimbabwe and Nepal). Pro3ect Financing 3.18 Donor contributions are detailed in Annex 3-3 and sunmarized in Table 3.1. IDA has taken the lead in coordinating donor funding. Specific atention was given to limiting the number of donors (10+ donors have fumded projects in the past several years). Donors are funding whole segments of the project (including switching and transmission equipment and external line plant [ELPI) on a geographical basis to a) ensure that compatible types of equipment are purchased in a particular region, b) that equipment is not purchased that cannot be used (switches that have no outside plant), and c) the level of training and maintenance required of TPTC staff is minimized. Donors were also encouraged to allow competitive bidding for equipment and technical assistance. Consequently, a large portion of the project wiUl be procured under International Competitive Bidding (ICB). Finally, in cases where aid is tied, donors were strongly encouraged to consider international pricing when costing their projects. 3.19 The IDA credit of US$ 74.45 million (US$ 73.5 million of which will be provided to TPTC) will meet about 40% of the foreign cost requirement. TPTC will be required to finance all the local cost requirements amounting to about US$ 30.4 miflion. Table 3. Protect Fnancng Local Porein Total SonScoUS$ Million Equivalent- IDA 74.4 74.4 Cofinanciers 115.4 115.4 TPTC 30 4 30.4 TOTAL 30.4 1. 22Q.1 3.20 The IDA credit of US$ 74.45 million equivalent would be made to the GOT. US$ 20 million would invested by GOT into TPTC as equity. US$ 53.5 million would be on-lent to TPTC at 8% interest rate for 20 years including a five year grace period. Approximately US$ 70 million of additional equity will be provided by co-financiers (see para. 4.06(i)). During negotiations it was agreed that the Government will invest a total of US$ 90 million into TPIC to achieve a debt equity ratio of 60:40 by the first year of the project and that the Government will  - 26 - take all steps necessary to maintain this ratio thereafter. Funds from co-financing sources not going in as equity are assumed to be on-lent by the Government to TPTC at 8% per annum for five years including five years grace on principal repayment. TPTC will bear the foreign exchange risk on the IDA credit and other funds that are invested into TPTC as debt. 3.21 TPTC has been meeting the local costs of their ongoing telecommunications development program. TPTC will be required to meet its local cost requirement for the investment program which is estimated at about 8.7 billion Tanzania Shilling through internal cash generation. C. PROCUREMENT AND IMPLEMENTATION Procarent 3.22 Procurement arrangements for the proposed project are summrized in Table 3.2. Contracts for about US$ 135 million for goods and services would be awarded according to ICB using IDA's or ADB's procurement guidelines. Goods and services for US$ 17 million to be financed by EEC will be procured according to limited international bidding from EEC member countries. Contracts for goods and services to be financed by DANIDA and JICA (about US$ 10 million) will comply with the guidelines of the individual donor country. Buildings (US$ 3.5 million) financed by TPTC will be procured through Local Competitive Bidding (LCB) in accordance with the government public procurement procedures. Selection of consultants financed by IDA and SIDA will be in accordance with their respective guidelines. 3.23 Goods (equipment, installation, specialized training by suppliers) worth about US$ 62 million to be financed by IDA will be procured through ICB in accordance with IDA's procurement guidelines. It was agreed at negotiations that the Bank's standard bidding documents will be used under the Project. IDA financed investment component wiUl be divided in 10-15 bid packages based on equipment category: switching, transmission, external line plant, terminals (telephones, fax machines and teleprinters), power and air conditioning equipment (see Annex 3-2 for details on the program). Proprietary items totalling US$ 6 million covering spares, rehabilitation and upgrading of existing equipment (spare parts for switching and transmission and upgrading of a Standard A Earth station) will be financed by IDA and procured by direct negotiations with the original suppliers. Negotiated prices for these items will be based on the ICB prices from bids received under the earlier IDA financed telecommunications projects taking into account a reasonable adjustment. Small quantities of postal equipment totalling US$ 2 million will be financed by IDA and procured by direct negotiations. Selection of IDA financed consultants (about US$ 4.1 million equivalent) will be in accordance with IDA guidelines. Conas for consultants employed under PPF advance (US$ 0.8 million), or 6 % of total consultancy contracts under the project, have already been or are being executed in accordance with IDA guidelines. TPTC is the principal implementing agency responsible for carrying out the project, including all procurement. This is the third similar project in the sector, and the staff of TPTC have acquired experience from earlier projects. Consultants are and will continue to assist TPTC in the preparation of bidding documents, evaluation of tenders, contract negotiations, and supervision of the project implementation. 3.24 All IDA financed conracts for goods for more than US$ 250,000 equivalent each will be subject to IDA's prior review as well as contracts for consultants for more than US$ 100,000 each. This is expected to involve about 85% of the total value of IDA financed contracts. The smaller IDA financed contracts will be subject to post-award review in accordance with Appendix 1 of IDA proment guidelines.  - 27 - Table 3.2 PROCUREMENT ARRANGEMENTS (US$ tmilion) Negotiated Prolect Item ICB Purchase NBF Other Total Switching 26.0 1.2 4.4 2.3 33.9 (5.5) (1.2) (6.7) Ext.Line Plant 45.3 - 18.3 6.9 70.5 (13.2) (13.2) Transmission 49.2 2.2 4.6 10.0 66.0 (32.5) (2.2) (34.7) Terminals 1.7 0.6 0.3 - 2.6 (1.7) (0.6) (2.3) Power & A/C 4.0 - - 0.6 4.6 (4.0) (4.0) Buildings - - 3.5 - 3.5 vehicles 1.7 - - 0.1 1.7 (1.2) (1.2) Computers 6.6 - - - 6.6 (3.8) (3.8) Consultancy-TPTC - - - 18.45 18.45 (2.45) (2.45) Consultancy-MOC - - - .75 .75 (.75) (.75) Training - TPTC - - - 5.2 5.2 (1.0) (1.0) Training - MOC - - - .2 .2 (.2) (.2) Postal - Equipment - 2.0 - 1.5 3.5 (2.0) (2.0) Postal-Construction - - - 1.7 1.7 (1.2) (1.2) PPF - - - .88 .88 (.88) (.88) TOTAL 134.5 6.0 31.1 48.6 220.1 (61.9) (6.0) (6.5) (74.4) NOTE: Figures in parentheses are amounts to be financed by the IDA Credit. ICB = International Competitive Bidding NBF = Not Bank Financed Negotiated Purchase - e.g. purchase of spare parts from original suppliers Other = e.g. TPTC's local cost, selection of consultants.  - 28 - Pb1mnt 3.25 The IDA credit of US$ 74.45 million would be disbursed against 100% of foreign expenditures for equipment, vehicles, training and consultancy services, as shown in Table 3.3. Table 3.3: Disbursement of Proposed Credit Amount % Financed by Category (US$ Million) IDA 1. Equipment under: 100% foreign expenditure (a) Phase I of 28,000,000. Part C.8 of the Project (b) Phase II of 25,000,000. Part C.8 of the Project 2. Vehicles, computers 100% foreign and office equip- expenditure ment: (a) Computer & 3,300,000. office equipment (b) Vehicles 1,000,000. 3. Training 100% foreign expenditure (a) For Part A 200,000. of the Project (b) For Part B 900,000. of the Project 4. Consultant's 100% foreign Services expenditure (a) For Part A 750,000. of the Project (b) For Part B 1,920,000. of the Project 5.(a) Postal equipment 1,800,000. 100% foreign and vehicles for expenditures Part C.7 of the Project (b) Consultant's 1,000,000. 100t foreign services and training expenditures for Part B.7 of the Project 6. Refunding of 880,000. 100* foreign Project Preparation expenditure Advance 6. Unallocated (Contingency) 9,700.000. Total 74.450,000.  - 29 - 3.26 The estimated disbursement schedule is shown in Annex 34 and includes disbursement in FY93 for the PPF. The disbursement profile is based on IDA's standard disbursement profile for Telecom projects worldwide. Steps are being taken, however, to speed up the disbursement process. TPrC will establish a petfc-mance contract with consultants to be responsible for project implementation and all equipmevt contracts will be executed on a turnkey basis to accelerate project implementation. It is expected 'Sia- aiplementation and disbursements would be completed by December 30, 1997. A special foreign rurrency account of US$ 4 million equivalent will be established by TPTC in a commercial bank on termis and conditions acceptable to IDA. This amount represents four mondts of estimated payments to contractors and consultants directly by TPTC during the peak implementation period of 1994 - 1996 from the IDA credit. The special account would be used for disbursements against all eligible expenditures and it would be replenished by IDA on application by TPTC. For large contracts, TPTC will apply for direct payments to the suppliers or for letters of credit. All disbursement applications would be fully documented with the exception of applications relating to expenditures under contract valued less than US$ 250,000 equivalent, which would be disbursed on the basis of a Statement of Expenditures (SOE). 3.27 TPTC will maintain separate accounts in accordance with accepted accounting principles to maintain records of all expenditures specific to the IDA project, comnmitments, reimbursements and the status of project funds. Staff in the project monitoring/donor coordination unit in the corporate planning department will be responsible for managing the accounts and for supplying reports to IDA. With respect to the amount withdrawn on the basis of Statements of Expenses, TPIC will prepare and maitain records such as contracts, invoices, and evidence of payments readily available for inspection. During Negotiations it was agreed that Special Accounts, Project Accounts and SOE's will be audited by independent auditors acceptable to IDA and the reports will be submitted to IDA with audited finaneial accounts for each fiscal year. 3.28 Disbursement for the equipment portions of the IDA component of the project will be done in two phases. Disbursement under Phase I of the Project (approximately US$ 28 million + 15% contingency - see Category (1)(a) in Table 3-3) will be carried out after TPTC has employed a consulting firm with qualifications and experience satisfactory to IDA to be responsible for the supervision of the procurement and implementation of capital construction activities under the Project. Payments under Phase II of the project (approximately US$ 25 million + 15% contingency - see Category (1)(b) in Table 3-3) can be made subject to nodfication from IDA once TPTC has gained sufficient impementation capacity to successfully implement the second phase. The specific items to be included in each phase were agreed at negodations and are outlined in Annex 3-5. TPTC Mnagement and Project Implementation 3.29 Implementation of the project will be a complex undertaking. Approximately six or seven donors are expected to contribute to the program and the execution of the program will involve a nber of different suppliers. The investments will be spread over the entire country and will involve all of the fimctional areas witiin TPIC. 3.30 A key goal of the program is to build the institutional capacity of TPTC staff to manage and operate their core business activities effecdvely over time, and to maximize the  - 30 - implementation capacity within the organization. Consequently, during negotiation, it was agreed that: (a) TPTC would focus their efforts and would be accountable for managing TPTC's o- going core business, i.e. operation of the teleconmnunications network; (b) TPTC will contract out with a private firm (independent of suppliers) who will be to be responsible for supervision of procurement and installation of the new works under the investment program. This firn will be responsible for new works procurement and will oversee the implementation of the turn-key contracts. All firms will be evaluated on output oriented quantiflable performanc taryets. Where appropriate TPTC will "farm out" or release staff to work for contractors. The firm overseeing the project implementation will be accountable to the Deputy Director General, Telecommunication; (c) TPTC will establish a "financial review" contract with a private firm to (i) establish new finance and accounting, audit, and logistics systems procedures and controls, and (') install new information systems (including billing and collections, accounting and financial management, and payroll); (d) When seeking private sector participation TPTC will attempt to commit the investor(s) to providing relevant "know how"; (e) TPITC will divest of non-core activities. Functions to be divested include printing, motor vehicle repair, building construction and maintenance, sale and installation of customer premise equipment, and equipment repair; (f) TPTC will contract out some services which are non core but on-going in nature. The specific services to be contracted out will be determined as part of the institutional restructuring plan. These services will include maintenance of hardware and software of the information systems (inter alia billing, accounting, and payroll) and customer collections/accounts receivable as separate contracts. 3.31 The letters of invitation for the supervision consultants and financial Review consultants under (b) and (c) above will be floated as soon as possible and the tender documents will be evaluated and contracts negotiated by Credit Effectiveness. 3.32 A Project Monitoring Unit (PMU) in the Corporate Planning Department will be responsible for the overall coordination of the project. Draft Terms of Reference for technical assistance are available in the project files. The key responsibilities of the team will be to a) consolidate reports from the Deputy Director General Telecom and the Department Directors on the progress of the project; b) coordinate technical assistance across functional areas; c) oversee and participate in contract administration; d) maintain the financial accounts for the project; e) ensure that documentation required by the donor community is prepared in an accurate and timely manner; and f) monitor the transfer of know-how in the technical assistance. The size of the team in the Corporate Planning Departnent will need to be expanded. Two consultants will be retained to work with counterpart staff within the PMUJ. These consultants will assist the Director in reviewing all procurement documents prepared by the consulting firm responsible for supervision of project implementation and ensure compliance with donor requirements.  - 31 - 3.33 The physical and institutional comnponents of the project will be managed by the Deputy Director General Telecommunications (Project Director). The firm responsible for supervision of project implementation will be accountable to him or his designate. Where appropriate and rnutually agreeable, TPTC staff will be employed by the contractors for the actual project impletmentation. See Annex 3-5 for a summary description of the project implementation plans. A detailed implementation plan is contained in the project f;les. 3.34 The Deputy Director General Telecommunications and his senior staff managing a) network design and project engineering; b) building design and supervision; c) major works construction; d) customer services; and e) planning and resource scheduling as w0.! as the heads of finance, audit, human resources, and computers will be responsible for the management of on-going activities. In addition, the appropriate departments will be responsible for acceptance testing and confirming commissioning of equipment installed by contractors. 3.35 The Deputy Director General Telecommunications will have monthly reports prepared on the progress of the project implementation for both technical assistance and capital investment construction and will convene regular monthly meetings to discuss these reports. The Project Director (DDGT), assisted by the Project Management Teamn Leader (Director Corporate Planning) will prepare and issue consolidated quarterly progress reports for the Director General. The quarterly reports, including executive summaries, will be submitted to IDA and other donors. 3.36 A project review group will also be established that will be composed of the heads of the finctional departments involved in the implementation of either the technical assistance or capital construction and will be chaired by the Director General. The group will meet regularly to resolve outstanding issues. 3.37 The efficient implementation of the management consultancy services is critical to the success of the project. To ensure timely appointment of these consultants, the selection of the project management and financial consultants will be a Condition of Credit Effectiveness. Performance Idicators 3.38 TPTC will prepare annually for IDA's review a comparative analysis of its actual performance against the target indicators as agreed to by GOT and TPTC in the MOU signed in March 1992 and the additional targets agreed to between TPTC and IDA at Negotiations (see Annex 24). These indicators relate to technical, operational, and financial performance, subscriber connections, service quality, and staffing. While targets for later years are indicative, those for 1993 have been agreed upon as representing desirable and feasible levels of attainment. The target for subsequent years will be agreed jointly between TPTC and IDA by October 31 of the preceding year, together with any corrective actions necessary. In addition, all firms responsible for capital construction, including the consulting firm selected to supervise the overall implementation and those implementing turnkey projects, will be evaluated on out_ut oriented, quantifiable performance targets. An Efficiency Audit carried out by independent consultants will evaluate TPTC's performance and is intended to assist TPTC in improving its management and allow timely corrective actions to be taken when necessary. TPTC will report progress against technical and operational indicators in the quarterly progress reports to be submitted to IDA within six weeks of the end of each quarter, and against financial indicators in annual financial statements. A Mid Term Review of the project will be conducted in the 4th quarter of 1995. The review wi1l be based primarily on the results of the Efficiency Audits.  - 32 - Re2on Cood, aton 3.39 From a regulatory and policy perspective, the current project is being carefully integrated with a World Bank sponsored African Telecommunications Policy Study. Lessons learned from other countries will be incorporated into the implementation of a regulatory framework and vice versa. From a technical standpoint, under the IDA II project, regional and international telecommunication linis had been inproved and expanded to satisfy existing demand. The current project builds the domestic capacity to access regional and international destinations. D. ENVIRNMENTAL AND HEALTH EECTS 3.40 The proposed project is expected to have no major adverse environmental and health effects. On the contrary, more efficient use of telecommunications will substitute for personal transporation and correspondingly reduce environmental pollution and promote energy conservation. In addition, improved telecommunication services would facilitate dispersion of health services and emergency care. 3.41 Outlined below are specific issues which may arise. Air Pollution - In some project buildings, air conditioning is necessary. Some CFC gases could be leaked to fte atmosphere Land Loss - It will be necessary to construct microwave towers in the rural areas and thirty new buildings will be constructed. Wildlife - Tanzania has rich and abundant wildlife populations in numerous national parks and wildlife reserves. The towers could increase the number of bird deaths from collisions with the new towers. Sail Eros - Towers will be constructed on hills and the construction of access on the steep slopes could create soil erosion hazards. Landscape Values - The microwave towers on high hills are not aesthetically appealing. Specific mn-asures to mitigate and manage these issues are outlined in an environmental mitigation plan (see Annex 3-6).  - 33 - IV. EINANCIA AND ECONOMIC ANALYSIS A. Fundal ast Fiaca Peronnanee 4.01 During the peniod between FY8S-89 the financial performance of TPTC has been poor both in terms of cash flows and profitability. TPTC's deterioration in performance is highlighted by the change in earnings during this period. From a net profit of Tsh 435 million in 1985, profitability declined to a net loss of Tsh 10,295 million in 1989. Outlined below is a summary of TPTC's income for the period. See Annex 4-2 for historic financial statmens. Income Statements (TShs Million) 1985 1986 1987 1988 1989 Telephone 1,148 1,343 2,420 3,536 4,909 Telex 170 276 560 1,019 1,934 Telegraph 27 87 53 77 78 Other Revenue 8 301 101 224 227 Teleca Opuat Revenue 1,353 2,007 3,134 4,855 7,148 Telecoms Operatg Expenses 631 1,624 2,453 3,701 5,173 Net Telecoms Opera_ng Income 722 383 681 1,155 1,975 Net Postal Operating Income (Loss) 26 (34) 7 10 (37) Less: Interest on Loans 14 56 309 255 3,615 Foreign Exchange Gain (Loss) (48) (2,328) (3,705) (2,650) (5,269) Net Profit (Loss) 435 (2,146) (4,666) (6,272) (10,295) The main reasons for TPTC's poor performance were: First, the continual devaluation of the Tanzanian Shilling resulting in massive foreign exchange losses. Given tht large (almost 80%) foreign currency component of their capital expendime this has been the most bidg ecternal constaint to TPTC's financial deterioration. in TPTC, foreign exchange losses as a result of currency devaluation increased from TSh 48 million in 1985 to a staggering TSh 5,269 million in 1989. Due to TPTC's high foreign currency debt burden, which is revalued annually to adjust for currency devaluation, debt servicing costs in local currency terms increased substantially. Scn_d, the lack of appropriate tariff adjustment measures to overcome the high rate of inflation and the devaluation of the Tanzanian Shilling reslting in declining profitability. Whereas inflation over the 6 year period 1985-90 was around 1000% and the Tanzania Shilling devalued from an exchange rate of Tsh 16.50 = US$1 in 1985 to TSh 196.6 = US$1  - 34 - in 1990, tariff increases resulted in an increase of only 300% during the same period. Similarly, as a result of the high inflationary trends, operation and maintenance expenses increased from 14% of gross operating revenues (GOR) in 1985 to around 40% in 1989. Third, high bills receivables as a result of the poor collection performance have been a major bottleneck to the liquidity position of the organization. in 1987, bills receivables amounted to the equivalent of 569 days of revenues, resulting in a negative intenmal cash generation situation of TSh 3,064 nmillion. The shortage of liquidity and short term financing led to negative working capital during the period 1988-90, which has in turn impeded maintenance and routine operations. The shortfall in working capital is reflected by the declining current ratio from 2.3 in 1985 to 0.6 in 1989. In addition, there is a high level of non-billing. It appears that at least 30% of the traffic goes unbilled. As one of the objectives of this project, technical assistance will be provided to institute stringent controls on the billing and collections process. In addition, a new billing system will be instal[ed to resolve this issue. 4.02 In addition to currency devaluatioai, a negative balance in foreign exchange flows between TPTC and Foreign Administrations, coupled with increasing costs (in local terms) of imported spare parts further exacerbated the foreign exchange losses. In 1991, with changes in operating procedures and tariff structures, a positive balance in foreign exchange flows was achieved. Through technical assistance additional measures will be taken to improve this. 4.03 It is worth noting that though operating expenses increased, expenses on salaries and wages actually declined from 19% of gross operating revenue in 1985 to 13.3% in 1989. Interestingly the size of the work force has increased during this period. The failure to increase staff compensation in the face of hyperinflation led to a demoralized work-force and therefore substantial inefficiencies crept into the organization which further affected the organization's performance. Revenues were also affected by low capacity utilization, low call completion rates, and a high fault rate resulting from poor maintenance of facilities, lack of availability of spares, and inefficient inventory controls. 4.04 The fmancial situation of TPTC reached its lowest ebb in 1989, when it was technically bankupt. The Organization had a net negative equity of TSh 19,456 million comprised primarily of accumulated losses amounting to TSh 22,734 million. B. Financial Projections and Restrcturin Strategy Fiaca Gol 4.05 The paramount financial aim of this project is to create a sound financial base for the sector, especially for TPITC. The GOT has, on the advice of IDA, embarked on a restructuring effort for the sector. The goal of the strategy for the sector is primarily for TPTC to achieve financial self sufficiency on a sustainable basis. K Steps Necessary for Imurovement of Flnancial Performance 4.06 Implementation of the financial and restructuring strategy will involve concerted actions in the following key areas:  - 35 - (a) Capital Restructrin: As a first step of the restructuring process, the Government in 1990 absorbed a major portion of TPTC's foreign currency debts. By doing so, it has assumed both debt servicing and foreign exchange liabilities from TPTC. However, TPTC still retains about US$55-60 million equivalent of long Term debts which will require US$10-12 million of servicing (including repayment) annually. In addition, it has to bear losses due to currency devaluation which is expected to continue, at a decreasing rate. For this reason, the GOT has agreed to invest a portion of the IDA loan in TPTC as Equity. The injection of funds in TPTC in the form of Equity will have two major implications on the entity. First, it will provide TTPTC with the much needed funding to overcome its current financial situation of near bankruptcy. In addition, TPTC will not have to pay debt service charges or bear foreign exchanges losses due to currency devaluation, which here to fore have been the two most binding constraints to TPTC's profitability. Second, investment in the form of equity will create a satisfactory capital base for the organization. A sizeable capital base is an essential step towards privatization, as it will provide for an effective dispersion and exchange of shares. It was agreed in negotiations that the equity investment would be such that the Debt to Equity ratio is maintained at least a 60:40 level. 5/ To nmaitain this 60:40 Debt to Equity ratio, the likely distribution of loan and equity investments is: Loans Equrui US$ million Tsh million US$ million Tsh million 1993 - - 11.46 4,583 1994 23.11 10,168 53.92 23,727 1995 49.32 23,873 26.56 12,854 1996 22.36 11,907 2.49 1,323 Total 94.79 45,948 94.43 42,487 The consequential Debt to Equity Ratios would be: 1994 1995 1996 1997 D/E ratio 61:39 60:40 61:39 59:41 The precise figures for injections of equity by GOT into TPTC will need to be determined annually based on the actual project disbursements. Funds provided by EEC (approximately US$ 30 million) and SIDA (approximately US$ 40 million) will be invested as equity. It was The original Disbursement schedule was as folows: Loans US$ million TSh millions 1993 11.46 4,583 1994 77.03 33,895 1995 75.88 36,727 1996 24.85 13,230 Total 189.70 88,435  -36 - therefore agreed at negotiations that US$ 20 million of IDA funds would be passed to TPIC as equity. (b) Tarff increases: In order to achieve the expected growth and expansion on a sustinable basis it is imperative that tariffs are adjusted in accordance with the nwcro- economic changes. It was agreed in negodations that tariffs will be adjusted according to inflation/devaluation on a semi-annal basis. (c) Reduction in Operational costs: It is expected that there will be a substantial but gradual decline in operational costs relative to increase in revenues. At the current time TPTC is overstaffed and inefficient. The target for increasing efficiency is to cut operating costs gradually from 65% (of total revemnes) to 45% in 1995 to around 40% in 1999. The IDA m project will provide for sufficient manpower and managerial trainig to increase labor efficiency thereby reducing the staffing ratio considerably. In accordance with the performance targets agreed to in the MOU and MD, the ratio between staff to DELs will decline given the planned expansion under the project. (d) Fixed Assets Revaluation and Statement of Affairs: TPTC has had prepared by an external accounting firm, a Statement of Affairs for the entity for the year ended 1991 which is currently being reviewed. In addition, a fixed assets revaluation exercise was completed in July 1992. The purpose of this exercise was to ascertain the financial position of the company with a reasonably high level of accuracy, given that the audit report for the past two years have had qualified remarks from the external auditors of the company. A key goal of the Statement of Affairs was to accurately determine the level of debtors of the company. (e) Financial Performance: As agreed at negotiations, TPrC will maintain at a minimum a rate of return on revalued net fixed assets of 15% and a liquidity ratio of not less than one. Tariff and traffic engieing policies will be adjusted to ensure an inpayment/outpayment ratio of not less than one each year. TPTC will generate sufficient cash to fund all local costs for capital investments. A new comprehensive billing and accounts receivable system will be installed within 18 months of project effectiveness. Accounts receivable (days in billing) will be reduced from more than 120 days in the first year of the project to 45 by the fifth year. Financial controls will be introduced and collection staff appropriately trained to ensure that a collection rate of 80% is achieved by 1994, 90% by 1995 and maintained thereafter. C. F Proji 4.07 The financial implications of the project are included as Annex 4-2 (assumptions are also included)f/. The impact of the restructuring exercise is evident from the second year of the project. As a result of the collections effort and improvement in the billing systems it is expected that there will be a considerable recovery in the liquidity of the organization. The strong cash flow situation is characterized by the internal cash generation ratio of 35% in the second year which