China - Telecommunications Project

Document of The World Bank Report No. 13548-CH& STAFF APPRAISAL REPORT CHINA TELECOHOMNICATIONS PROJECT NOVEMBER 18. 1993 (Revised Version September 19 Industry and Energy Operations Division China and Mongolia Department East Asia & Pacific Regional Office  CURRENCY EOUIVALENTS (as of July 15, 1993) Currency Name Renminbi Currency Unit Yuan (Y) - 100 Fen US$ 1.00 = Y 5.8 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter = 3.28 feet 1 kilometer = 0.63 miles ABBREVIATIONS AND ACRONYMS AT&T - American Telephone and Telegraph BITS - Swedish Board for Investments and Technical Support CoCom - Co-ordinating Committee on Multilateral Export Control CTBSC - China Telecommunications Broadcasting Satellite Corp. DDD - Direct Distance Dialing E-Mail - Electronic Mail System ERR - Economic Rate of Return FAX - Facsimile Service FRR - Financial Rate of Return GDP - Gross Domestic Product ICB - International Competitive Bidding IDD - International Direct Dialing KDD - Kokusai Denshi Denwa Mb/s - Megabits per second MOF - Ministry of Finance MOFTEC - Ministry of Foreign Trade and Economic Cooperation MPT - Ministry of Posts and Telecommunications NPG - National People's Congress PBX - Private Branch Exchange P&T - Posts and Telecommunications Enterprise PTA - Posts and Telecommunications Administration ROR - Rate of Return SAA - State Audit Administration SOE - Statement of Expenses SPB - State Pricing Bureau SPC - State Planning Commission TOR - Terms of Reference VSAT - Very Small Aperture Terminal  i CHINA TELECOMMUNICATIONS PROJECT Loan and Project Summary Borrower: People's Republic of China Beneficiaries: Ministry of Posts and Telecommunications (MPT) and Posts and Telecommunications Administrations (PTAs) in Heilongjiang, Jiangsu and Liaoning Provinces. Amount: US$250.0 million equivalent Terms: 20 years, including five years of grace, at the Bank's standard variable interest rate On-lending Loan funds will be made available by the MOF to the MPT for Terms: the long distance and sector reform components, and directly to the three provincial PTAs for the local investments, under the same terms and conditions as the Bank's loan, the foreign exchange risk being borne by the MPT and the PTAs. Proiect The objective of the proposed project is to help develop a Obiectives: modern commercial telecommunications sector that will evolve increasingly towards allocation of resources on the basis of market forces. The project will include priority tasks that are part of an agreed Medium Term Policy Action Program of sector reform for 1994-97, thus helping develop conditions for increasing competition and private participation. The Government expects the reforms will enable sustained rapid sector development as needed to overcome widespread telecommunications shortages which result in high costs throughout the economy and impede effective implementation of development programs in other productive and social sectors. In the course of helping the Government achieve these objectives, the project will finance investments in modern technology for fiber optic long distance links connecting eleven provinces and local digital switching in three provinces.  ii Benefits: Accelerated reforms supported by the project will contribute to sustained telecommunications expansion and modernization, which will benefit all sectors of the economy countrywide. The project also directly supports development of the basic infrastructure in three provinces included in the local network expansion program and in 11 other provinces served by the long distance cables. This will benefit businesses and consumers in the rapidly growing market economy, improve delivery of social services and government administ,ration, and enhance the quality of life. Risks: There are two main risks regarding the reform component. First, there is some uncertainty regarding the pace of the reform program agreed with MPT. However, the Government's formal commitment to the Action Program for 1994-97 and MPT's interest in subsequent Bank loans which would be linked to further progress in sector reform, provide support for change. The second risk is that MPT may be unable to change as fast, as needed. Measures to contain this risk have included Bank assistance in legal and regulatory matters during project preparation and would be followed up as part of the project. The main risk regarding the investment comPonent is delayed procurement of local switching equipment. However, MPT recognizes the urgent need to greatly expand the urban telephone network in developing industrial centers, and is likely to seek prompt action by the PTAs. Poverty Cateqory: Not Applicable  liii Local Foreign Total (US$ million) ESTIMATED COSTS: Equipment & Services 18.6 242.3 260.9 Construction and Installation 262.7 0.0 262.7 Training and Consultants' Services 0.0 1.6 1.6 Total Base Cost 281.3 243.9 525.2 Physical Contingencies 34.2 12.1 46.3 Price Contingencies 12.8 9.4 22.2 Total Project Cost /a 328.3 265.4 593.7 Interest During Construction /b 0.0 29.3 29.3 Total Financing Required 328.3 294.7 623.0 -----------------------------------------------------------------_ FINANCING PLAN: MPT and PTAs 328.3 43.4 371.7 Grant from BITS /c - 1.3 1.3 IBRD - 250.0 250.0 Total 328.3 294.7 623.0 DISBURSEMENT: Bank FY 1994 1995 1996 1997 1998 1999 (US$ million) ---------------------------------------------------------------__ Annual 5.8 170.2 64.7 7.3 1.0 1.0 Cumulative 5.8 176.0 240.7 248.0 249.0 250.0 Economic Rate of Return: 36t Mar-: IBRD No. 25093 /a Project-financed goods are exempt from import duties and taxes. /b Interest during Construction (IDC) is based on onlending rates for projected disbursement of loan proceeds. Foreign exchange portion of IDC is based on the Bank's standard variable interest rate. /c Co-financing from the Swedish Board for Investments and Technical Support (BITS).   iv PEOPLE'S REPUBLIC OF CHINA TELECOMMUNICATIONS PROJECT Staff Aprraisal Report Table of Contents Page No. LOAN AND PROJECT SUMMARY. . . . . . . . . . . . . . . . . . . . i I. THE TELECOMMUNICATIONS SECTOR . . . . . . . . . . . . . . 1 A. Sector Organization . . . . . . . . . . . . . . . . . . . B. Telecommunications Services and Networks . . . . . . . . 2 Local Telephone Services ... . . . . . . . . . . . . . 3 Long Distance Network ... . . . . . . . . . . . . . . 4 Nonvoice and Other Facilities . . . . . . . . . . . . . 4 C. Service Access and Quality . . . . . . . . . . . . . . . 5 Access to Service .5.. . . . . . . . . . . . . . . . . S Unmet Demand . . . . . . . . . . . . . . . . . . . . . . 6 Quality of Service ... . . . . . . . . . . . . . . . . 6 D. Manufacturing, Construction, and Procurement . . . . . . 7 E. Financial Performance ... . . . . . . . . . . . . . . 7 Accounting and Financial Management . . . . . . . . . . 7 Tariffs . . . . . . . . . . . . . . . . . . . . . . . . a F. Lessons from Previous Bank Involvement in the Sector . . 9 II. SECTOR REFORM . . . . . . . . . . . . . . . . . . . . . . . 10 A. Sector Strategy and the Beginnings of Reform (1988-91) 10 B. Sector Reforms Accelerate (1991-93) ... . . . . . . . 11 C. Next Stage of Reforms (1994-97) ............ . 11 This report is based on the findings of a June/July 1993 appraisal mission comprising Bjorn Wellenius (task manager), Alberto Cruzat, David Delgado, and Peter Wright. Alfred Kennefick, Natalie Lichtenstein, Naiqin Lu, Nicholas Miller (consultant), and R. Venkateswaran assisted in selected matters. The peer reviewers were Dinshaw Joshi (engineering), Selina Shum (finances), Peter Harrold (economics and country strategy), and Timothy Nulty (sector policy). The Division Chief is Richard Newfarmer and the Department Director is Shahid Javed Burki.  v Table of Contents (Cont'd) Page No. III. THE PROJECT ... . . . . . . . . . . . . ....... . 14 A. Project Objectives . . . . . . . . . . . . . . . . . . .14 B. Rationale for Bank Involvement . . . . . . . . . . . . . 14 C. Project Description ... . . . . . . . . . . . . . . . 14 D. Reform Components ... . . . . . . . . . . . . . . . . 15 Enterprise Accounting .5.. . . . . . . . . . . . . . . iS Tariffs ... . . . . . . . . . . . . . . . . . . . . . 17 Legal and Regulatory Framework . . . . . . . . . . . . . 18 E. Investment Components ... . . . . . . . . . . . . . . 19 Long Distance Investments . . . . . . . . . . . . . . . 19 Local Telephone Switching Investments . . . . . . . . . 19 Project Investments and the Overall Investment Program . 20 F. Status of Project Preparation . . . . . . . . . . . . . 21 G. Project Costs and Financing . . . . . . . . . . . . . . 21 H. Project Implementation . . . . . . . . . . . . . . . . 23 I. Procurement ... . . . . . . . . . . . . . . . . . . . 24 J. Disbursement . . . . . . . . . . . . . . . . . . . . . 26 K. Audits ... . . . . . . . . . . . . . . . . . . . . . . 26 L. Environmental and Health Aspects . . . . . . . . . . . . 26 M. Monitoring, Reporting, and Supervision . . . . . . . . . 27 IV. FINANCIAL AND ECONOMIC ANALYSES . . . . . . . . . . . . . . 28 A. Past and Present Financial Performance . . . . . . . . 28 B. Projected Financial Performance and Targets . . . . . . 32 C. Tariffs ... . . . . . . . . . . . . . . . . . . . . . 35 D. Financial Covenants . . . . . . . . . . . . . . . . . . 35 E. Economic Benefits and Rate of Return . . . . . . . . . . 36 F. Project Risks ... . . . . . . . . . . . . . . . . . . 37 V. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . 38 A. Agreements . . . . . . . . . . . . . . . . . . . . . . . 38 B. Recommendation . . . . . . . . . . . . . . . . . . . . . 39  vi ANNEXES 1.1 Access to Telephone Services in Selected Countries . . . 43 1.2 Basic Statistics of Networks and Services . . . . . . . 44 1.3 Installed Local Exchange Capacity . . . . . . . . . . . 45 1.4 Long Distance Exchange Capacity . . . . . . . . . . . . 47 1.5 Telephone Lines and Service/100 Population . . . . . . 48 1.6 Telephone Demand and Supply in Urban Areas . . . . . . 49 1.7 Quality of Telephone Service . . . . . . . . . . . . . 50 2.1 Summary of Recommendations of Sector Study . . . . . . . 51 2.2 Outline of Sector Reforms in 1994-97 . . . . . . . . . . 53 2.3 Policy Letter from Vice-Minister of MPT . . . . . . . . 59 3.1 Accounting Systems Development & Training TOR . . . . . 67 3.2 Study of Telecommunications Tariffs Terms of Reference . 71 3.3 Long Distance Investment Component . . . . . . . . . . . 75 3.4 Fiber Optic Cable from Beijing to Lanzhou . . . . . . . 81 3.5 Fiber Optic Cable from Hangzhou/Fuzhou to Chengdu . . . 85 3.6 Heilongjiang Province . . . . . . . . . . . . . . . . . 89 3.7 Liaoning Province . . . . . . . . . . . . . . . . . . . 97 3.8 Jiangsu Province . . . . . . . . . . . . . . . . . . . . 105 3.9 Project Cost by Year . . . . . . . . . . . . . . . . . 113 3.10 Project Timetables . . . . . . . . . . . . . . . . . . . 115 3.11 Procurement . . . . . . . . . . . . . . . . . . . . . . 117 3.12 Schedule of Disbursements . . . . . . . . . . . . . . . 121 3.13 Environmental Protection . . . . . . . . . . . . . . . . 123 3.14 Performance Indicators . . . . . . . . . . . . . . . . . 125 3.15 Progress Reports and Supervision Plan . . . . . . . . . 127 4.1 Historical Financial Statements 1988-1992 . . . . . . . 131 4.2 Rate of Return by Service . . . . . . . . . . . . . . . 137 4.3 Financial Statements Projection Methodology . . . . . . 139 4.4 Projected Financial Statements 1993-2000 . . . . . . . . 145 4.5 Tariffs . . . . . . . . . . . . . . . . . . . . . . . . 151 4.6 Return on Investment . . . . . . . . . . . . . . . . . . 153 5.1 List of Documents in Project Files . . . . . . . . . . . 155 FIGURES AND TABLES IN THE TEXT 1.1 Telephone Lines In Service and Telephone Density . . . . 2 3.1 Estimated Project Costs . . . . . . . . . . . . . . . . 22 3.2 Project Financing Plan .23 3.3 Summary of Procurement Arrangements . . . . . . . . . . 25 3.4 Disbursement of Bank Loan . . . . . . . . . . . . . . . 26 4.1 Summary Historical Financial Statements, 1988-92 . . . . 29 4.2 Key Ratios and Historical Financial Indicators, 1988-92 30 4.3 Summary Projected Financial Statements, 1993-2000 . . . 33 4.2 Key Ratios and Projected Financial Indicators, 1993-2000 34 MAP IBRD Map No. 25093   I. THE TELECOMMUNICATIONS SECTOR 1.1 The Ministry of Posts and Telecommunications (MPT) is the functional organ of the State Council responsible for postal and telecommunications services throughout China. Its main responsibilities are: to formulate the policies, laws, plans, and reform programs related to these services and to supervise their implementation; to participate in international telecommunications organizations on behalf of the state; to set and enforce telecommunications standards; to coordinate the dedicated telecommunications networks of numerous ministries and state enterprises; to oversee and regulate the posts and telecommunications operating entities and administrative agencies throughout the country; and to engage directly in the operation and management of various telecommunications and postal services. The MPT, including its reporting entities, has 15 headquarters departments and about 1,200,000 employees (of which 49% are attached to telecommunications) in the whole country. A number of other agencies, mainly the Ministry of Finance (MOF), the State Planning Commission (SPC), and the State Pricing Board (SPB), also have jurisdiction over certain telecommunications sector matters. A. Sector Organization 1.2 Public telecommunications networks and services are operated by MPT through some 2,500 Posts and Telecommunications Enterprises (P&Ts) at the municipal/city and county levels, organized in a hierarchical structure. Each of about 2,150 county P&Ts provides local service in the county capital and extensions to the county's rural areas. At the next higher level, each of some 350 municipal/city P&Ts provide local service in the respective urban and close rural areas, and coordinates development and operation of the long distance network with and among the subordinate county P&T enterprises. Thirty of these municipal/city P&Ts are in the provincial capitals. One further step up, coordination of long distance networks among municipal/city P&Ts is the responsi- bility of each of 30 provincial P&T Administrations (PTAs), which are distinct from the municipal/city P&Ts that provide local service in the provincial capitals. Paralleling the provincial PTAs, the central MPT is responsible for coordinating inter-provincial and international long distance services, investment planning, consolidated accounts, and other operational functions on a nation-wide basis. Administrative functions follow the same hierarchy. 1.3 Large industrial complexes (e.g., oil fields, mines) are allowed by MPT to provide public telecommunications services in their limited areas. Many other ministries and public enterprises (mainly the ministries of railways, water resources, electric power, petroleum, forestry, river and coastal navigation, and the armed forces and police) have their own dedicated networks to meet their specialized needs and overcome shortages in the public network. Likewise, small exchanges, financed and installed partially or wholly by rural communities, are allowed connection to the public network.  - 2 - B. Telecommunications Services and Networks 1.4 China has the largest public telecommunications system among developing countries, the third largest in Asia (after Japan and the Republic of Korea), and the twelfth largest worldwide (Annex 1.1). 1.5 In support of economic reforms taking place in the country, steps were taken as early as 1978 to accelerate telecommunications development. Targets under the Seventh Five-Year Plan (1986-90) were directed at (a) development in medium-size, coastal cities which are open to foreign joint venture investment, and (b) modernization and expansion of the long distance and international networks. During this period the telecommunications sector's growth rate began surpassing that of the national economy (twice the GDP), marking an important turning point. The Eighth Five-Year Plan (1991-95) targets continued expansion of the domestic long distance network, with 21 projects providing about 100,000 km of fiber optic cable and microwave radio facilities, and the installation of 20 million additional lines of local digital switching equipment (to a total of over 32 million lines installed). The Ninth Five-Year Plan (1996-2000) is yet to be fully formulated, but MPT expects to exceed 90 million installed telephone lines by the year 2000. 1.6 The number of telephone lines in service experienced an average annual growth rate of 15% for the period 1986 to 1990. This high rate of growth continues. In 1991, the number of lines in service grew to 9.3 million representing an increase of 21% over the previous year. In 1992 it grew to 12.2 million representing an increase of 32%. Over the first six months of 1993, more than 2.2 million telephones lines were installed in cities. This marks a record increase for a half year. MPT forecasts a sustained growth equivalent to at least 20% annually to the year 2000 (Figure 1.1) . These achievements and targets are well above what any other developing nation has ever experienced. 60 10 509 S Lines 6 .30 .E20 204 3 10 2~~~~~~~~~~~~~~~~~~~~~~~ 0 0 oo 4 co c- o2 go co g co co