Uganda - Second Telecommunications Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15871 IMPLEMENTATION COMPLETION REPORT UGANDA SECOND TELECOMMUNICATIONS REHABILITATION PROJECT CREDIT 1991-UG June 24, 1996 Public and Private Enterprise Division Eastern Africa Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: Uganda Shilling (Ush) US$1.00 = Ushs. 150 (January 21, 1989) US$1.00 = Ushs. 989 (February 19, 1996) FISCAL YEAR Government and UPTC: July I - June 30 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS EAC - East African Community EAPTC - East African Posts and Telecommunications Corporation GOU - Government of Uganda MoWTC - Ministry of Works, Transport and Communications UPTC - Uganda Posts and Telecommunications Corporation INTELSAT - International Satellite Organization FOR OFFICIAL USE ONLY UGANDA SECOND TELECOMMUNICATIONS REHABILITATION PROJECT IMPLEMENTATION COMPLETION REPORT (ICR) Table of Contents Page No. P reface .............................................................................................. iii Evaluation Sum m ar ............................................................................ iv A. Statement and Evaluation of Objectives-------------------------------------- 1 B. Achievement----------------------------------------------------- 2 Structural Set-Up and Policy Statement --------------------------------- 2 Physical and Operational Achievements ------------------------------------- 2 Completion Schedule ------------------------------------------------------- 2 Project Costs and Financing ----------------------------------------------- 2 Operational Performance--------------------------------------------------- 3 Institutional Achievements ----------------------------------------------------- 3 Institutional Development Program -------------------------------------- 3 Training----------------------------------------------------------------------- 4 Finance and Audit --------------------------------------------------------------- 4 Financial Performance------------------------------------------------------ 4 Billing------------------------------------------------------------------------- 5 Collection--------------------------------------------------------------------- 6 Tariffs ------------------------------------------------------------------------- 6 Accounts and Audits -------------------------------------------------------- 7 C. M jor-------------------------------------- 7 Factors Not Generally subject to Government Control ---------------- 7 Factors Generally subject to Government and UPTC's Control ----- 7 Management Conflicts------------------------------------------------------ 8 Procurement------------------------------------------------------------------ 8 Lack of Computer Facilities ----------------------------------------------- 9 Lack of sufficient Manpower ---------------------------------------------- 9 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -ii- Pagye No. D. nabiI ------------------------------------------------------------ 9 E. Bank Performance -----------------------------------------------------------L-- 9 F. Borrower Performance ---------------------------------------------------------- 10 G Asss me to O to e ----------------------10 -------- 1 H. FUtur Operation ----------------------------------------------------------------- 11I Operational Plan ------------------------------------------------------------- 1 1 Financial and Economic Rate of Return -------------------------------- 11 I. K ey Lessons Learerned------------------------------ J. Implementation of Sector Reforms 12 ANNEX A Statistical Tables Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Future Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions APPENDIXES Appendix 1: ICR Mission Aide Memoire of October 1994 Appendix 2: ICR Mission Aide Memoire of October 1995 Appendix 3: Borrower's Evaluation Map of Uganda -iii- Preface 1. This is the Implementation Completion Report (ICR) for the Telecommunications Project in Uganda for which Credit 1991-UG in the amount of SDR 38.3 million (US$ 52.3 million) was approved on March 14, 1989, signed on December 20, 1989, and made effective on June 5, 1990. 2. The Credit was closed on December 31, 1995, compared with the original closing date of December 31, 1993, after two extensions. Final disbursement took place on March 14, 1996, and a balance of SDR 1.9 million was canceled on April 24, 1996. 3. The ICR was prepared by Mr. Rogati Kayani, IENTI, and reviewed by Messrs. Luciano Borin, Acting Chief, Public and Private Enterprise Division; Mr. Aberra Zerabruk, Country Lawyer; Mr. Palitha Wijesinghe, Country Disbursement Officer; and Gerhard Tschannerl, Acting Project Adviser, Eastern Africa Department. 4. Preparation of the ICR was begun during the Bank's supervision mission of October 1994 and continued in the final supervision mission of October 1995. The borrower's own evaluation of the project's execution is attached as Appendix 3. -iv- EVALUATION SUMMARY Background 1. During the 1978-79 civil war in Uganda, postal and telecommunications facilities suffered extensive damage. At Government's request, under its 1982-87 Economic Recovery and Rehabilitation Program to overcome the ravages of the civil war in major sectors, a First Posts and Telecommunications Rehabilitation Project under Credit 1367-UG of SDR 20.4 million (US$ 22.0 million) was implemented from 1983 to 1987. Implementation was severely affected and delayed due to the resurgence of internal civil conflicts in 1985-86. Some completed components were destroyed or looted. The Project 2. The Second Telecommunications Rehabilitation Project (Credit 1991-UG of SDR 38.3 million (S$ 52.3 million), was identified in 1985 during implementation of the First Project. Appraisal took place in 1988 after substantial delays due to more civil unrest in the country. The main thrust of the project focused on: (a) rehabilitating or replacing/expanding telecommunications network, equipment and plant in the high priority areas; and (b) institutional development of Uganda Posts and Telecommunications Corporation (UPTC) to provide a sound basis for future development of the sector. 3. Two main components were included in the project to meet the above objectives: (a) physical component consisting of rehabilitation of the external cable networks for Kampala, Jinja and Entebbe (60% of total funds) and purchase of essential materials, transport facilities, and spare parts for installation of new subscribers and maintenance of the network; and (b) institutional component consisting of consultancy services for designing and implementing requisite management systems, twinning and training. Major Implementation Issue 4. Completion of the project was delayed for more than two years because of conflicts between the Board of Directors and the management of UPTC. This was the single most serious issue in the project. For three years (November 1990-November 1993) the project operated under very difficult conditions. The project was proceeding satisfactorily until November 1990 when a new Board was appointed. The new Board decided to run the Corporation on a day to day basis leading to severe conflicts between management and the Board. These conflicts led to long delays in processing of procurement documents and unsubstantiated dismissal of key project implementation personnel. In September 1992, a Commission of Inquiry was set up by the Minister of -v- Works, Transport and Communications (MoWTC) to investigate the problems at UPTC. The Commission's recommendations led to replacement of most of the Board members in November 1993 and dismissal, in March 1994, of those members of management who had aligned themselves with the Board. The key project personnel that had been dismissed were reinstated at the same time. The Government took almost three years to resolve this issue and on hindsight, IDA should have suspended disbursements as soon as the problem was identified early in 1991 to expedite resolution of this problem. Achievement 5. Overall, the project was satisfactory but there were a number of failures on the institution building aspects. The most significant achievement of the project was on the physical side. The following sub-components were successfully completed: (a) rehabilitation and expansion of the external cable networks at Kampala, Jinja and Entebbe - this involved the complete replacement of old fault-prone paper insulated copper cable by modern jelly filled copper cable and optical fiber cables; (b) rehabilitation of the Mpoma Earth Station for international services; (c) installation of Digital Multiple Access Radio rural systems; and (d) procurement of telephones, teleprinters, fax machines, vehicles, generators, cables and postal items (date stamps, mail bags, weighing scales, private letter boxes and safes). The completion of these sub- components led to operational improvements in the rate of subscriber connection and the quality of service. However, the quality of service performance targets set at appraisal could not be achieved essentially because these were too ambitious for the implementation capacity of UPTC. 6. Although the profitability and cash flow of UPTC improved continuously throughout the project, overall financial performance and management still leaves a lot to be desired. At the beginning of the project in FY89, UPTC was incurring operating losses but due to the implementation of requisite tariff increases recommended by the project, UPTC has since realized annual operating surplus. At the beginning, in FYs 89, 90 and 91, foreign exchange losses turned these surpluses to operating losses. In FYs 92, 93, 94 and 95, the UPTC made profits after taking into account foreign exchange losses/gains. The highest net profit was realized in FY94 following foreign exchange gains due to appreciation of the Uganda shilling relative to the dollar. 7. There were no major achievements on the institutional side as UPTC's management and staff remain weak. However, some modest improvements were achieved through the project including: (a) revision and implementation of a new commercially oriented organization structure including the creation of a new department responsible for Corporate Planning and Management Information Systems; (b) employment of three qualified accountants to fill senior financial management positions of Director Finance, Chief Accountant and Principal Accountant Finance and Revenue; (c) increase of salaries and benefits as incentives to improve productivity and -vi- efficiency, the UPTC is now in the process of introducing a performance related pay structure; (d) strengthening of the critical supplies management function; and (e) formulation of a human resource management strategy including manpower planning, training and development and performance appraisal. Substantial training was also undertaken through twinning and fellowships, although this was delayed by more than two years. Project Sustainability 8. As a result of the project, the telecommunications network more than doubled in size and the quality of service improved leading to increased benefits from telecommunications services to the overall economy. This will lead to more revenue for UPTC, not only due to the increased size of the network but also due to the enhanced quality of service which will result in more revenue per line being generated than before. The financial benefits to be accrued to the project will enable future expansion and further rehabilitation of the network. The institutional capacity that has been built during the project should lead to better management and efficient operation of the telecommunications network. The Government is committed to the development of the sector and is fully aware of the constraints that have hindered its operation and its rapid development. These constraints have mainly been the lack of capital and poor management. In order to overcome these constraints, the GOU has decided to privatize UPTC. The management of UPTC will therefore soon be handed to the private sector. This will enable maximum and efficient utilization of the newly installed assets. Sustainability of the benefits accrued from the project will therefore be secured if this policy decision is effectively implemented. Sector Reform 9. Although sector reform was not formally a part of this project, IDA supervision missions started, in 1990, to discuss the impending sector reform and liberalization of the telecommunications sector. It was emphasized at that time that a follow-on project would be conditional on GOU's willingness to reform the sector. Policy dialogue with the GOU started in late 1990 but was interrupted by the Board-Management conflicts which fully occupied supervision missions in 1991 and 1992. The Commission of Inquiry which went on between October 1992 and March 1993 exposed management weaknesses at UPTC and this partly contributed to the GOU's decision, in May 1993, to privatize the telecommunications part of the UPTC. IDA has assisted the GOU to formulate an appropriate policy and strategy for restructuring and privatizing the telecommunications sector. The policy include, inter alia, separation of UPTC into three entities for posts, telecommunications and regulatory affairs; full liberalization of all value added services; privatization of the telecommunications entity; and licensing of a second national operator to compete with the privatized telecommunications entity. IDA is now working with the GOU to implement this policy. The emergence and pursuit of this policy -vii- dialogue during implementation is an important project outcome which should provide for substantial benefits to Uganda in the future. UGANDA SECOND TELECOMMUNICATIONS REHABILITATION PROJECT IMPLEMENTATION COMPLETION REPORT A. Statement and Evaluation of Objectives Introduction 1. Public Telecommunications services in Uganda are provided by the Uganda Posts and Telecommunications Corporation (UPTC), a fully government owned entity operating as a monopoly under the UPTC Act of 1983. Before 1977, public telecommunications services in the three countries of the East African Community (EAC), consisting of Kenya, Tanzania and Uganda, were provided by a single entity, the East African Posts and Telecommunications Corporation (EAPTC). The Bank Group had supported telecommunications development in the EAC since 1967 through financing three projects, under Loans 493-EA, 675-EA and 914-EA totaling US$ 55.9 million. These projects were completed in 1974, 1975 and 1977, respectively, each including components located in Uganda. After the break-up of the EAC, in 1977, the Government of Uganda (GOU) established the UPTC. 2. During the 1978-79 civil war in Uganda, postal and telecommunications facilities suffered extensive damage. At Government's request, under its 1982-87 Economic Recovery and Rehabilitation Program to overcome the ravages of the civil war in major sectors, a First Posts and Telecommunications Rehabilitation Project under Credit 1367-UG of SDR 20.4 million (US$ 22.0 million) was implemented from 1983 to 1987. Implementation was severely affected and delayed due to the resurgence of internal civil conflicts in 1985-86. Some completed components were destroyed or looted. The Project Completion and Performance Audit Reports stress that the physical realization took place, but the operational and organizational objectives could not be fully met due to unforeseen effects of the civil disturbances on UPTC's staff, operations and finances. Objectives 3. The Second Telecommunications Rehabilitation Project, Credit 1991-UG of SDR 38.3 million (US$ 52.3 million), was identified in 1985 during implementation of the First Project. Appraisal took place in 1988 after substantial delays due to civil unrest in the country. The main objective of the project was to provide a sound basis for future development of the sector. The main thrust was focused towards: (a) rehabilitating or replacing/expanding telecommunications network, equipment and plant in the high priority areas; and (b) institutional development of UPTC. The main objective and thrust of the project were appropriate at the time the project was designed. At that time, the upcoming worldwide trends toward sector liberalization had not yet gathered momentum. Therefore, the institutional objectives were limited to the domain of the operating entity; including changes in UPTC's organization and improvements in its management and operations. The physical project components included: (a) rehabilitation of the local cable -2- networks and subscriber facilities in Kampala, Entebbe and Jinja; and (b) provision of equipment, vehicles, spare parts and materials for telecommunications and postal maintenance and operations. The technical assistance component of the project included: (a) consultancy services for project implementation and strengthening UPTC's planning, management and operational capacity; and (b) training through fellowships and twinning arrangements. B. Achievement of Objectives Structural Set-up and Policy Statement 4. Under its enabling legislation, the Posts and Telecommunications Act of 1983, the UPTC is required to provide all domestic and international public telecommunications services and to operate on sound commercial and technical principles, generating sufficient revenues to meet its expenditures and making a reasonable profit. When the second project was being prepared in 1988, GOU and UPTC adopted a Policy Statement to supplement the institutional roles and objectives in the Act to serve as a guide to the sector's operations. 5. During appraisal, it was considered that the Act and the Statement provided a sound basis for UPTC's ongoing operations and future development, with suitable autonomy and authority to satisfactorily manage its affairs. Drawing from experience under the First Project, GOU and UPTC were asked by IDA to prepare a comprehensive institutional development strategy and related plan of action to strengthen UPTC's institutional capability, and improve its management and overall performance. Agreement on such a program was a condition of credit effectiveness and the technical assistance required for its implementation was included in the project. The project's objectives in this field were only partially met mainly due to conflicts between UPTC's Board and the management (para 23). In addition, on hind sight, the institutional objectives were too ambitious for the implementation capacity of UPTC. Physical and Operational Achievements 6. Completion Schedule. The following sub-projects were successfully completed: (a) rehabilitation and expansion of the external cable networks at Kampala, Jinja and Entebbe - this involved the complete replacement of old fault-prone paper insulated copper cable by modem jelly filled copper cable and optical fiber cables; (b) rehabilitation of the Mpoma Earth Station; (c) installation of Digital Multiple Access Radio systems for rural areas; and (d) purchase of essential materials, transport facilities, and spare parts for installation of new subscribers and maintenance of the network including: telephones, teleprinters, fax machines, vehicles, generators, cables and postal items (date stamps, mail bags, weighing scale, and safes). There was one major component that was not completed and that is the installation of a computerized subscriber's record system and provision of microcomputers. This item was not completed due to procurement problems discussed in para 24. 7. Project Costs and Financing. A comparison of the estimated costs of the main project components, at appraisal and on completion, is shown in Annex A, Table 8A. At the end of the project, the committed amount was SDR 36.4 (95.1%) of total credit of SDR 38.3. SDR 1.9 million remain uncommitted; the full amount would have been committed if the computer billing system (para 15) had been procured. The uncommitted amount has been canceled. Generally, -3- due to favorable prices as a result of international competitive bidding, the unit costs were lower than those estimated at appraisal by about 7%. UPTC took advantage of this reduction in price by procuring additional equipment to meet the ever growing demand. 8. Operational Performance: The project has had substantial impact on the rate of subscriber connection and the quality of service. However, most of the operational targets set at appraisal (Table 5) for quality of service could not be achieved because they were highly optimistic. For instance, an average call completion rate (success rate) for local calls was set at 60% but only 49% could be achieved; and percentage of faults cleared within 24 hours was set at 60% but only 48% could be achieved. At the beginning of the project, the call completion rate was 30% and the percentage of faults cleared within 24 hours was only 20%. At the completion, in December 1993, of the external line plant rehabilitation and expansion of Kampala, Jinja and Entebbe, subscriber verification had to be made before connecting the new network. This was necessary because there were a lot of "ghost subscribers" in the network. All existing and prospective subscribers were requested to re-apply/apply for service. 9. At the beginning of the exercise records showed that there were about 32,000 working subscribers but after verification the number dropped to 22,000 (compared to 28,000 at the beginning of the project in 1989). Since this verification two years ago, 20,000 new subscribers (39% annual growth) have been connected compared to an appraisal target of 18,700 for the whole project. This high growth was purely a result of completing the external line plant component which also led to a staff ratio of 48 staff per 1000 lines as per appraisal target. In addition, there has also been drastic reduction in the number of faulty lines in these three cities. Before completion of this component, there was an average of 20% of the lines faulty at any time but this has dropped to an average of 2.1%. In Jinja, an average of 300 faults were carried over to the next day but after completion of the cable works only about 6 faults are carried forward - a real improvement. Progress in physical and operational performance of UPTC's network under the project, and for future operations in accordance with UPTC's operational plan, are shown in Tables 5 and 6 of Annex A. On the average, the physical and operational achievements were satisfactory. Institutional Achievements 10. The Institutional Development Program was focused on restoring discipline, accountability and efficiency of UPTC and building capacity through training and twinning. A number of actions were taken to satisfy the conditions of effectiveness including: (a) revision and implementation of new organization structure including the creation of a new department responsible for Corporate Planning and Management Information Systems; and (b) recruitment of three qualified accountants to fill the posts of Director Finance, Chief Accountant and Principal Accountant Finance and Revenue. Further actions were taken during the project including: (a) doubling of salaries and benefits and initiating a process of introducing a performance related pay structure; (b) strengthening of supplies management through the assistance of consultants; and (c) putting in place a human resource management strategy including manpower planning, training and development and performance appraisal. Despite these actions, which were delayed by more than two years, there was little improvement in the management of UPTC at the end of the project. This is one of the reasons that the GOU decided -4- to privatize the corporation (para 36). The status of implementation of the program's main aspects is detailed below. 11. Training. The short term objective of the training program was to meet present needs for the existing network and the newly installed network. The long term objective was oriented towards meeting future technological advancement in the sector. In order to fulfill these objectives studies were carried out, with the assistance of consultants to: (a) determine the staff needs - the study was completed in March 1994 and implementation of the recommendations was completed in 1995; and (b) training needs identification and training program design - the study was completed in December 1992. The recommendations were not implemented until 1994/95 because of conflicts between the Board of Directors and management of UPTC (para 23). Under this program training was undertaken overseas and locally under a fellowship scheme and twinning arrangement. The overseas training entailed attending specialized courses which could not be conducted by local institutions because of either lack of expertise or necessary equipment. Where a large number of staff had to be trained on the same subject, and training equipment was available in Uganda, training was conducted in Uganda by invited lecturers from outside the country. This was particularly true for non-technical courses. Most of the management courses were undertaken through this arrangement. Overall, a total of 144 UPTC staff benefited from the overseas fellowship program against a target of 50 staff set at appraisal. Training under twinning arrangements was also satisfactory with 21 staff being trained compared to a target of 24 staff. In addition, 265 staff were trained locally at UPTC Training Institute using experts from East and South African Management Institute (ESAMI) based in Arusha, Tanzania, and African High Level Training Institute (AFRALTI) based in Nairobi, Kenya. 12. Finance and Audit: Consultants to undertake a study of the financial and audit systems in UPTC were appointed at the beginning of the project. Their report extensively covered the areas of finance and accounts, internal audit and corporate planning, and Management Information Systems. It provided a comprehensive study of the organization's current situation, procedures and controls. As required by the terms of reference (TORs), a comprehensive set of recommendations and procedures were also presented in the report. UPTC is still implementing these recommendations, but given UPTC's lack of adequate capable manpower, implementation will be a lengthy and complex process unless consultants are employed to assist in the implementation. However, this will no longer be an issue after UPTC privatization. As regards audits, the report did a very good evaluation of needs, but did not produce documentation for the recommended systems and internal audit programs as required by the TORs. UPTC will have to prepare the documentation and programs themselves. UPTC has been advised to hire consultants for assistance. The implementation of the full report is one of the major outstanding items in this project. According to the report, for a successful implementation of recommended procedures and controls, all aspects of the accounts and finance need to be computerized therefore requiring computer training for all finance and accounts personnel. In hind sight, the implementation of the recommendations should have been part of the original consultancy contract. This forms part of UPTC's operational plan being undertaken in 1996. 13. Financial Performance. Although the profitability and cash flow of UPTC improved year after year, throughout the project, the overall financial performance still leaves a lot to be desired. The increase in profitability was mainly due to massive increases in tariffs at the beginning of the project and injection of qualified financial managers. Tariffs were well below -5- international rates at the beginning of the project. UPTC realized operating profits in FYs 89, 90 and 91, but foreign exchange losses turned these surpluses to operating losses. Operating profits in these three years were UShs 1.42 billion, UShs 3.06 billion and UShs 13.24 billion respectively. In FYs 92, 93 and 94, the UPTC made modest profits after taking into account foreign exchange losses/gains. Operating profits in these three years were UShs 16.32 billion, UShs 7.47 billion and UShs 21.41 respectively. The operating profits are normally adjusted downwards in the audited statements to take into account the fact that UPTC bears the foreign exchange losses on its foreign currency denominated debt (primarily from IDA). After taking into account these foreign exchange losses, the audited statements show that profits amounted to UShs 0.9 billion in FY92 and UShs 5.6 billion in FY93. UPTC enjoyed massive foreign exchange gain in FY94 leading to a net profit of UShs. 41.4 billion. However, there remains substantial scope for improving UPTC's financial status. There is a need for UPTC to improve efficiency, control expenditure and enhance revenue from the expanded and improved network due to the project. 14. The draft accounts for FY95 are being audited but preliminary review indicates that UPTC realized an operating profit of about UShs. 9.8 billion. The profit in FY95 was much lower than FY94 mainly because UPTC did not enjoy as much foreign exchange gains. Other reasons include: (a) Government's failure to pay for services rendered (para 16); (b) internal control weaknesses in revenue and collection; and (c) inadequate marketing for available services. Many would be customers are not coming forward to apply for service because they think that the service is either not available or too expensive. The UPTC has now established a marketing function. (d) Expenditures were much higher because UPTC is no longer exempted from import and corporation taxes. 15. Billing: Billing delays and inaccurate bills persisted throughout the project. There were two main problems: (a) cumbersome gathering of billing data from old analog exchanges; and (b) lack of adequate computer facilities. Digitalization and installation of a new computer billing system are the long term solutions to these problems. Computerization was part of the project but its implementation was delayed due to Board/Management conflicts (para 23). This item is being implemented under UPTC's own funding and is expected to be completed before the end of 1996. There have been a number of steps taken recently to improve billing performance. UPTC has introduced a weekly billing system for international services for high calling customers in Kampala such as hotels, oil companies, banks etc.. These customers make about 30% of the total billing volume. The outcome of this exercise has been very rewarding. Experience has shown that these customers have been paying their bills within one week of receiving them. An improvement in the accuracy of billing has also been realized due to the introduction of automatic receptors at the bill paying points in Kampala. Despite these improvements, average billing delays are poor at 8 weeks compared to an appraisal target of 2 weeks. -6- 16. Collection: Government indebtedness has been a problem throughout the project. This indebtedness grew by 29% during FY94. Although in a commercial environment telephone service would have been disconnected, there were two reasons why UPTC could not do it. Firstly, the accuracy of these bills were a suspect (para 15), and secondly, the UPTC was also indebted to the Government. A number of recommendations were made by various supervision missions including: (a) strengthening the in-house collection effort and employing external collection agencies on a commission basis; and (b) bringing to closure, as soon as possible, the ongoing discussions with the Treasury regarding the settlement of Government's bills. One possibility under discussion was to offset the loan servicing amounts (on account of IDA loans being serviced by Government on behalf of UPTC) against the outstanding receivables which the Government owes UPTC. This would also help to reduce the debt to debt plus equity ratio of 0.94 which was considerably higher than the 0.56 ratio set at appraisal; and (c) settling debts with other Posts and Telecommunications entities as soon as possible; at the end of June 1994 the net outstanding was UShs 7.2 billion. UPTC management was slow to take action on all these recommendations partly due to its weakness and partly due the conflicts with the Board. Management is now taking actions on all the recommendations. 17. Four reputable firms have been appointed to assist in the collection of outstanding bills. One important requirement for such collectors is to have a Fidelity Insurance Guarantee. A similar exercise had been initiated in 1993 but due to the absence of a Board of Directors, the recommendations were not implemented. As regards outstanding Government debt, the long awaited agreement to swap outstanding loan repayments by UPTC with Government telephone debts was finalized for accounts up to June 30, 1993 but the agreement has yet to be signed. At June 30, 1994, government indebtedness to UPTC was UShs 20.6 billion and UPTC indebtedness to GOU was UShs. 19.3 billion. Thus if the swap had been effected for the year ending June 30, 1994, the net payment to UPTC would have been UShs. 1.3 billion (US$ 1.3 million equivalent). GOU debt to UPTC had grown to about UShs. 23.9 billion at June 30, 1995, which is 90% of annual revenues compared to an appraisal target of 28%. UPTC has been urged to follow up closely with GOU so that the swap arrangements can be finalized as soon as possible. UPTC's performance in this regard has been poor. 18. Tariffs: Throughout the project, the Government and UPTC have been fully aware of the importance of regular adjustment of tariffs, especially international tariffs, to compensate for inflation, currency reform in 1987 and foreign exchange fluctuations. Tariff review became part of the budget process. In pursuit of this objective, tariffs were increased by 50-500% in July 1988, and again by 50-500% in December 1989. In September 1991 international tariffs were increased to compensate for exchange rate variations and at the same time these tariffs were pegged to the US$ so that the rates could automatically vary with the exchange rate of the US$ relative to the Uganda shilling. It is after this adjustment that a net inflow of traffic into Uganda started because tariffs for calls originating in Uganda became too high. The rationale proposed at that time was that the tariff increase would reverse a declining trend of incoming to outgoing calls (which stood at 0.77 at that time) and would result in reduction in debts of some $13 million owed in foreign currencies. The lack of convertibility of the USh to hard currencies was an important consideration at that time. While the declining trend in traffic has been completely turned around (it stood at 2.44 in April 1994), this has been achieved largely through depressing demand. However, given the ability to convert the USh to hard currencies, this is no longer an issue. -7- 19. In July 1993, IDA advised UPTC's management to review its tariff structure and the possibility of adjusting international tariffs. UPTC made a study of the demand and revenue estimation model that had been used by the Sultanate of Oman to reduce international tariffs from levels comparable to those existing in Uganda at that time, to much lower levels, while still increasing overall revenues. A study tour was made to develop in-depth knowledge of the Oman forecasting model. The visit resulted in new tariff proposals which were implemented in May 1994, with international tariffs being decreased by about 47% and a general increase in domestic tariffs being effected. In August 1995, international tariffs were further reduced by 25% and domestic tariffs increased. The financial impact of these tariff adjustments has not been fully assessed yet but international traffic has gone up. The new international rates could be considered as reasonable for the time being, pending analysis of their impact on total revenue. The impact of the new tariff structure and levels on service usage and revenue will be carefully analyzed by UPTC in 1996. 20. Accounts and Audits: The UPTC has consistently been late in finalizing its accounts and audits due to inadequate qualified manpower and a completely manual accounting system. The manpower situation improved substantially due to efforts made during the project; there were only 6 staff with accounting qualifications at the beginning of the project compared to 20 now. The UPTC Act as well as the Audit Covenants stipulated in the Project Agreement require that UPTC accounts are audited within six months of the fiscal year end. Auditing of the FY94 accounts was completed in May 1995, five months behind schedule. Although the quality of the FY94 accounts has improved compared to those of FY92 and FY93, in the opinion of the Auditor General, the quality still requires improvements. The FY95 draft financial statements were completed in January 1996 and auditing was expected to be completed in April 1996 but this is still outstanding. These delays will be eliminated only after full computerization of the accounts function. C. Major Factors Affecting the Project Factors Not Generally Subject to Government Control 21. Devaluation. In the early period of the project when the Uganda shilling was very volatile, the UPTC suffered heavy foreign exchange losses due to devaluations and as a result, UPTC could not realize any operating profit in the first three years of the project. In addition, UPTC's foreign debt in Uganda shilling soared during this period leading to the unsustainable debt to equity ratio of 0.94. In FY94, the Uganda shilling appreciated relative to the US$ leading to higher operating profit (para 13-14). Factors Generally Subject to Government and UPTC's Control 22. This project was implemented under very trying conditions. The major problem was the conflicts between the Board of Directors and UPTC Management (para 23). The GOU took three years to resolve this issue, which was definitely too long. Other problems included: procurement; lack of sufficient qualified technical and financial staff; and lack of computer facilities. The modest success realized in this project has been due to full commitment of the -8- Ministry of Works Transport and Communications and some of UPTC's management. IDA's guidance, persistence and firmness during supervision also played a very important role. 23. Management Conflicts: For three years (November 1990-November 1993) the project operated under very difficult conditions. The project was proceeding satisfactorily until November 1990 when a new Board was appointed. The new Board decided to run the Corporation on a day to day basis leading to severe conflicts between management and the Board. These conflicts led to long delays in processing of procurement documents and unsubstantiated dismissal of key project implementation personnel. The contract for the rehabilitation of the external line plant for Kampala, Jinja and Entebbe (60% of the project) was affected most by these conflicts. The contract was supposed to have been completed 26 months after effectiveness, i.e. October 1992. Implementation of this contract encountered serious setbacks due to what was later found out to be deliberate frustration by the Board of Directors. The Board was appointed three months after contract effectiveness. Firstly, it refused to approve the revised drawings after detailed survey by the contractor because the survey led to an increase of 3% of the contract price. Although this increase was within the range allowed in the contract the Board rejected the revised plans. The Board also started to reject payment applications for work already done by the contractor. Some members of management aligned themselves with the Board and others with the Managing Director. These problems led to serious delays. In September 1992, a Commission of Inquiry was set up by the Minister of Works, Transport and Communications (MoWTC) to investigate the problems at UPTC. The Board was suspended shortly thereafter. The Minister then took direct control of UPTC management. The Commission's recommendations led to replacement of most of the Board members in November 1993 and dismissal, in March 1994, of those members of management who had aligned themselves with the Board. The conflicts led to more than one year delay in completing the external line plant contract. The contract was eventually completed in December 1993 and all associated benefits from the project were equally delayed. In addition, UPTC had to pay a penalty of about US$ 420,000, from internally generated funds, to compensate the contractor for the delays. Implementation of the institutional development program (twinning and training, improvement of financial management and audit) was also delayed by these conflicts. 24. Procurement: Besides the procurement problems caused by the Board of Directors there were procurement problems which delayed project completion. There were two main causes for these delays. Firstly a number of bids had to be re-issued because of controversies on bid evaluation reports. For instance bids for the external line plant cable network for Kampala, Entebbe and Jinja had to be re-issued because the original award recommendation was queried by IDA and the Government of Uganda. Almost a whole year was lost due to this controversy. During the time that key implementation staff were dismissed by the Board, the quality of procurement documents (bidding and evaluation reports) deteriorated so much that practically every document had to be re-done. For instance, the evaluation report for rural radio systems which were urgently required, had to be re-done, a process that took so long that the bids had to be re-issued a year later. The evaluation report for the computer billing system was also highly flawed. The tender for this system could not be re-issued because there was not sufficient time available for implementation before the closing date. The billing system could not therefore be procured under this project. -9- 25. Lack of Computer Facilities: The lack of computer facilities was the main cause of delayed accounts, audits, billing and collection. All these activities had to be done manually, leading to delays and inaccuracies. Although this problem was supposed to have been resolved during the project, this was not achieved due to delays in project implementation caused by management conflicts and procurement problems (paras 23 and 24). It is expected that this key sub-component for good financial management will be substantially implemented in 1996 using UPTC's own internal cash generation. 26. Lack of sufficient manpower: The lack of adequate trained manpower, especially on the finance side, was a major bottleneck to the full achievement of project objectives. The lack of manpower was partly responsible for delays in completion of annual accounts. D. Project Sustainability 27. As a result of the project, the network more than doubled and the quality of service substantially increased, leading to increased benefits from telecommunications services to the overall economy. This will lead to more revenue for UPTC, not only due to the increased size'of the network but also due to the enhanced quality of service which will result in more revenue per line being generated than before. The financial benefits to be accrued to the project will enable future expansion and further rehabilitation of the network. The institutional capacity that has been built during the project should lead to better management and more efficient operation of the telecommunications network. The Government is committed to the development of the sector and is fully aware of the constraints that have hindered its operation and its rapid development. These constraints have mainly been the lack of capital and weak management. In order to overcome these constraints, the GOU has decided to privatize UPTC (para 36). The management of UPTC will therefore soon be handed to the private sector. This will enable maximum and efficient utilization of the newly installed assets. Sustainability of the benefits accrued from the project will therefore be secured if this policy decision is effectively implemented. E. Bank Performance 28. IDA identified the project at a very difficult time (in 1985) when the security situation in Uganda was still very uncertain. Preparation and appraisal was completed when security was restored with the assumption of power by the new Government. IDA worked closely with the Government and UPTC to identify the main sector issues and constraints to project implementation. A number of actions were proposed as up-front conditionalities to ensure timely implementation of the project including: (i) employment of project management consultants under a Project Preparation Facility; (ii) award of the external line rehabilitation contract (60% of the project); and (iii) preparation of an institutional development plan, as conditions of effectiveness. These conditions were met with some delays, partly because of the procurement problems outlined above (para 24), and due to the lack of capacity in UPTC to prepare the necessary documents. After the above conditions were met, the Credit was effective on June 5, 1990. On hindsight, the lack of implementation capacity was underestimated and the targets (para 8) set were too ambitious. -10- 29. In the first six months the project took off very well. On appointment of the new Board (November 1990) delays started occurring in processing procurement documents. IDA quickly identified the cause of the problem as the Board and brought it to the attention of the Minister of Works, Transport and Communications. IDA also met the Board at the beginning of the conflicts and expressed its concerns about management complaints about the Board being the cause of delays in project implementation. The Board did nothing to correct the situation which continued until its resolution as per para 23. Fortunately most of the procurement had been done up-front, otherwise most of the components would not have been completed by now. IDA made regular supervision missions and provided the necessary advice during the conflicts and stood firm against elements that were delaying the project. At one time, IDA was considering suspending disbursement due to violation of legal covenants and unnecessary delays in processing procurement documents. However, due to the good working relationship between IDA and the MoWTC, this was avoided because the MoTWC moved quickly towards resolving these specific problems. IDA and MoWTC worked closely together to resolve the above conflicts. IDA management was kept fully aware of these problems that eventually led to the need to request for two extensions of closing date. On hindsight, IDA should have suspended disbursements shortly after identifying the problem; this might have speeded up its resolution by the GOU (para 31). 30. The above actions in project supervision were coordinated and combined with other Bank operations in Uganda involving the telecommunications sector, such as the Northern Reconstruction Project (NURP) and the IDA Enterprise Development Project (EDP). These two operations were used as instruments to implement some of the covenants in the Second Telecommunications Project. For instance, the submission of audited financial accounts was made a condition of disbursement for the NURP project. F. Borrower Performance 31. The GOU and UPTC worked very closely with IDA during project preparation and supervision. However, the performance of UPTC deteriorated in 1991 and 1992 due to Board/management conflicts. These conflicts were first highlighted in the April 1991 Supervision Mission Aide Memoire. IDA kept on highlighting this problem until September 1992 when the Board was suspended and the Minister of Works Transport and Communications took over direct control of UPTC management. The performance of UPTC then improved substantially. The matter was eventually put to rest in March 1994 when the new Board (appointed in November 1993) re-instated the project staff that had been dismissed and dismissing those members of management who had collaborated with the old Board. It therefore took three years from the time the matter was highlighted by IDA, which was far too long. The matter took so long because the problem was put in the hands of a Commission of Inquiry (headed by a high court judge) which applied court proceedings to conduct the investigations. G. Assessment of Outcome 32. On the average, the Project outcome is satisfactory, though its implementation was delayed and subject to multiple unforeseen circumstances. Most of the physical objectives had been achieved at closing, December 31, 1995. Modest achievements were also realized in institution building though implementation of a large part of this component was effectively -11- delayed by more than two years. The management studies that were carried out have assisted the GOU and UPTC to re-focus on efficiency improvement. Implementation of the recommendations of these studies have led to the reorganization of UPTC into a more customer oriented commercial entity. Recently, a new organization structure was put in place and senior positions were filled through competition within and outside the UPTC. H. Future Operations 33. Operational Plan. UPTC has prepared its Operational Plan for the period FY 96 to FY 2001 during which the benefits from the project would be maximized. The plan reflects the overall delay of about 2 years in completing the project and having the new assets in operation. The working line capacities of 47,000 subscribers initially appraised to be reached in 1994 will be realized in 1996/97. By then, the additional capacity of the local networks from the project, and using available and additional switching capacities, a yearly growth of 15% in the number of customers will be maintained On the revenue side, current turnover per line is about 5% higher than at project inception. No assumption has been made on the impact of the new tariffs but experience shows that improved tariff structure increases usage. Given the decision of the Government to privatize the UPTC, the operational plan prepared by UPTC is likely to 'be completely modified by the private management which is expected to be in place within the next one year. The management of the assets provided under this project will be undertaken by the new private owner who will provide the necessary expertise to maximize the benefits accrued from the project (para 36). 34. Financial and Economic Rate of Return. With the above assumptions in network growth and usage, the estimated Internal Rate of Return (IRR) is 14.9% compared to 10.6% estimated at appraisal. The higher figure is mainly due to delayed investments in the non- revenue generating items (training and twinning) and the implementation of higher tariffs than estimated at appraisal. The economic rate of return (ERR) is estimated at 18.1% compared to 14.3% estimated at appraisal. The ERR understates the benefits. It does not take into account consumer surplus and external benefits to non-users of the network. The ERR is higher than IRR because corporate and other applicable taxes have been excluded to determine benefits used in the calculation of the ERR. This is consistent with the methodology used in the Appraisal Report. The estimated rates of return are satisfactory though slightly lower than the average for telecommunications projects in general because a large part of the investments were for replacement rather than expansion. The expansion element was only about 50%. I. Key Lessons Learned 35. There are two lessons to be learnt from this project: (a) the sector investment programming approach is a failure if it does not adequately take into account the underlying implementation weaknesses (para 28). Even with the best investment, if the implementation entity does not have the right incentives to perform, the sustainability of the investments is questionable; and (b) the Board and Management of a public entity could have diverse objectives (para 23). In this project, most of the Management was committed to the successful completion of the project but the Board intentionally frustrated Management's efforts. IDA should have suspended disbursements soon after identifying the problem. This might have accelerated GOU's action in resolving the matter. -12- J. Implementation of Sector Reforms 36. Although sector reform was not specifically stated as an objective of this project, it was implicit in the main objective "to provide a sound basis for future development of the sector". IDA supervision missions started to discuss the impending sector reform and liberalization of the telecommunications sector since 1990. It was emphasized at that time that a follow-on project would be conditional on GOU's willingness to reform the sector. Policy dialogue with the GOU started in late 1990 but was interrupted by the Board-Management conflicts which fully occupied supervision missions in 1991 and 1992. The Commission of Inquiry which went on between October 1992 and March 1993 exposed management weakness at UPTC and this partly contributed to the GOU's decision, in May 1993, to privatize the telecommunications part of the UPTC. IDA has assisted the GOU to formulate an appropriate policy and strategy for restructuring the sector and privatizing the telecommunications part. The policy included, inter alia, separation of UPTC into three entities for posts, telecommunications, and regulatory affairs, full liberalization of all value added services, privatization of the telecommunications entity; and licensing of a second national operator to compete with the privatized telecommunications entity. IDA is now working with the GOU to implement this policy. IDA is exiting financing investments in the telecommunications sector in Uganda but sustainability of the investments already financed by IDA is assured because these will be managed by the private sector. Sustainability would not have been that certain if the GOU had not decided to privatize the telecommunications entity. 37. IDA is assisting the GOU in the sector reform process through the ongoing Enterprise Development Project (EDP). A number of short term consultancies are being funded under this arrangement. However, the longer term requirements such as building policy and regulatory capacity in GOU and commercialization of the postal entity, does not have funding. There might be a need for IDA to finance these important activities to ensure that the telecommunications liberalization process is successful and that the postal sector, which was dependent on the telecommunications sector for its development, would be able to stand on its own feet as soon as possible. WINWORI%AYANICOFFIERIUOANDA.DOC12/17/96] ANNEX A Page I of 16 UGANDA UGANDA POSTS AND TELECOMMUNICATIONS CORPORATION (UPTC) SECOND TELECOMMUNICATIONS REHABILITATION PROJECT IMPLEMENTATION COMPLETION REPORT ANNEX A Statistical Tables Page No. List of Tables 1--- Table 1: Summary of Assessments--- 2 Table 2: Related Bank Loans/Credits- 3 Table 3: Project Timetable 4 Table 4: Credit Disbursements: Cumulative Estimated and Actual - -- 5 Table 5: Key Indicators for Project Implementation--- 6 Table 6: Key Indicators for Future Project Operation- 7 Table 7: Studies Included in Project----- 9 Table 8A: Project Costs---- 10 Table 8B: Project Financing 10 Table 9: Economic Costs and Benefits 11 Table 10: Status of Legal Covenants - 12 T able 11: C om pliance w ith O perational M anual Statem ents - 14 Table 12: Bank Resources: Staff Inputs- 14 Table 13: Bank Resources: Missions --- --------- -- 15 M:\WORDWIN\Kayani\Scofcr:jp\ANX-A-PI.DOC[2\13/95] ANNEX A Page 2 of 16 [abi..1: Summary of Assessments A. Achievement of objectives Substanti anial N liaible Not applicable Macroeconomic policies O 0 0 a Sector policies O d O O Financial objectives 0 90 0 Institutional developments 0 0 0 Physical objectives 0 d 0 0 Poverty reduction 0 0 (' Gender concerns 0 0 0 Other social objectives 0 0 0 Environmental objectives 0 0 0 GI Public sector management o 0 0 Private sector development Other (specify) 0 0 0 B. Project sustainability Likal .Unlikely Uncertain 0 0 C. Bank performance satisfactory Satisfactory Deficient Identification Preparation assistance 0 0 Appraisal 0 O Supervision 0 O Hihlx D. Borrower performance satisfactory Satisfactory Deficient (4) (4) (4) Preparation 0 51 0 Implementation 0 0 Covenant compliance 0 0 2' Operation (if applicable) 0 Ed 0 E. Asessment of oUtm aisfa Satisfactor Deficient M:1WORDWIKAYANPScoffiurjplX-A-p2.DOC(1f23,951 0 0 ANNEX A Page 3 of 16 Table.2: Related Bank Loans/Credits Year of LC amount Loan/Credit Title Purpose Approval ($ millions) Status Preceding Operations 1. Loan 914-EA /a To extend 1973 32.5 The Ugandan portion of the Third Telecommunications telecommunication project was completed in Project to EAPTC services 1977. 2. Credit 1367-UG To restore service 1983 22.0 Completed in December First Telecommunications in major centers 1987. following destruction by civil war and to improve UPTC's organization and operations Following Operation 1. Credit 2362-UG To replace and 1992 11.5 J2 Northern Uganda expand facilities Conditions of disbursements Reconstruction Project destroyed during were satisfied in May 1995. (NURP) the civil strife. The GOU has decided to replace IDA financing of part of the telecom component with Belgian bilateral assistance. The unutilized funds have been reallocated to other project __ components la Prior to 1977 Telecommunications services in the East African Community (EAC including Kenya, Tanzania and Uganda) were managed by the East Africa Posts and Telecommunications Corporation (EAPTC). Loan 914-EA was the third loan extended to EAPTC to extend services and improve operation of the corporation, with components in each country. The two previous loans to help finance expansion of telecommunications services with the EAC, Loan 483-EA (US$13.0 million in 1967) and Loan 675-EA (US$10.4 million in 1970), were completed in 1974 and 1975 respectively. The EAC broke up in January 1977. Telecommunications services in Uganda were then entrusted to a caretaker Government Department and to UPTC when it was created in 1984. L Telecommunications component only, or about 16% of the total credit amount of $71.2 million. ANNEX A Page 4 of 16 Iabi3: Project Timetable Steps in project cycle Date Planned Date Actual/Latest Estimate Identification La 5 & 7/84 Preparation Lh I & 7/85 Appraisal: initial Lr 9/85, 5&11/86, 7&11/87, 2/88 full Id 5/88 Negotiations 12/15-19/88 Policy statement (GOU/UPTC) 12/88 Board presentation 03/14/89 Signing 12/20/89 Effectiveness L 03/20/90 06/05/90 Project completion 06/30/93 12/31/95 Credit closing Lf 12/31/93 1)12/31/94; 2) 12/31/95 La The Second Telecoms Rehabilitation project was identified during supervision of the First Project under Credit 1367-UG, as a further phase of UPTC's ongoing longer term rehabilitation program (for 1985-90) and institutional development. Lh UPTC's second phase rehabilitation and institutional improvement programs were first proposed with assistance from consultants under the first project, and from ITU. LQ An initial appraisal was made in September 1985 but, due to political instability (coup in 1985) and critical security situation, project preparation was suspended. Project status was assessed and appraisal was updated twice each year in 1986 and 87. A PPF for detailed planning was agreed in May 1987 to enable early start-up of the procurement process and a pre-appraisal of the updated project was made in February 1988. Id Following appraisal, a second tranche of the PPF was agreed to complete progress in project planning and procurement. L, Two extensions of the date of effectiveness were required due to delays in: (i) ratifying and obtaining legal opinion on all documents; (ii) executing a subsidiary on-lending agreement between the Borrower and UPTC; (iii) awarding the major turn-key contract for the large outside plant component of the project (60% of its cost); and (iv) submitting to the Association an institutional development plan for UPTC. Lf Two extensions, by one year each, were required to enable completion and related disbursements of ongoing large physical items and twinning/training arrangements. ANNEX A Page 5 of 16 Iable..: Credit Disbursements: Cumulative Estimated and Actual (US$ millions) FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal estimate 2.0 14.0 26.0 40.0 48.0 52.3 52.3 52.3 Actual 0.0 1.3 16.1 27.4 39.5 45.2 48.2 51.1 Actual as % of estimate 0% 9% 62% 69% 82% 86% 92.2% 97.7% Date of final March disbursement '96 ANNEXA Page 6 of 16 Tab.5: Key Indicators for Project Implementation Actual Estimated Actual Key Implementation Indicators in SAR Performance Appraisal Performanc at Beginning Target Decemeber June 30, 1989 June 30, 31, 1995 1993/a (a) Operational: 1. Additional Telephone lines connected 18,700 20,000 /h 2. Telex lines connected 50 8 & 3. Telecommunications staff per 1,000 58 48 48 DELs 4. Maintenance targets (speed of fault- clearance) - of faults cleared within 24 hours 20 60 49 - % of faults cleared within 24 to 72 hours 20 25 36.0 - % of faults cleared after 72 hours 60 15 17.3 5. Average call completion rates - Local calls % 30 60 42 (b) Financial 6. Weeks of billing delay at year end: - Telephone 6 2 8 - Telex 6 2 8 7. Rate of return on net revalued assets 12.8% 12.9% -d 8. Receivables outstanding as % of annual revenues 114% 28% 90% 9. Annual investment ($ million) 11.2 25.0 5.0/" La Last SAR estimated targets. The whole Project/Development Program implementation was delayed by about three years. Zh A much higher rate of connections was realized in FY94 and FY95 due to the availability from the project of new outside plant networks in three main cities, which enabled a thorough reconnection/redistribution of the existing and new connected lines. Reconnection/redistribution of local line networks in 1993/94 enabled to clear out large numbers of "unregistered" subscribers which are being replaced by properly registered users. Total new connections at project completion (12/95) are estimated to be about 90% of SAR estimates. Full operation of all facilities from the project is expected by the end of 1997. LQ Declining use of telex due to increased use of fax. Ld The rate of return is meaningless without a proper evaluation of assets, a task which has yet to be done. /c. Only very urgent investments were being encouraged because of the impending privatization M:1WINWORDKAYANI\Scffir:jplANX-A-P6.DOC[2114/951 Annex A Page 7 of 16 [abled6: Key Indicators for Future Project Operation La Key operating indicators 1995 1996 1997 1998 1999 2000 2001 Actual <--------------- OP/ICR Estimated TargetsJb -----------> A. Operational ec. 31) Al. SAR indicators: 1. Telephone lines connected during year 6,939 2,000 3,000 1,500 4,500 5,000 2. Telex lines connected 8 0 0 60 60 60 3. Telecommunications staff per 1,000 DELs 48 48 45 65 55 48 45 4. Maintenance targets (speed of fault-clearance) - % of faults cleared within 24 hours 46.7 50 58 60 60 65 65 - % of faults cleared within 24 to 72 hours 36 35 27 25 25 25 25 - % of faults cleared after 72 hours 17.3 15 15 15 15 10 10 5. Average call completion rates Local calls % 49.8 50 50 55 60 65 70 A2. Add0iioandGiao: 6. Exchange capacity 59,850 59,850 59,850 62,000 62,000 65,000 65,000 7. Total direct exchange lines connected 42,000 44,000 47,000 48,000/& 48,000/r 48,000Lc 48,000 Ic 8. Telephone density (per/100 population) 0.18 0.21 0.21 0.22 0.24 0.25 0.25 La Data obtained from UPTC's Operational Plan (OP). Lb Figures are rounded up La Full operation of de rehabilitated and new lines from the project. M:IWORDWDNKAYANHScofferAjpNX-A-P7.DOC /M95 ANNEX A Page 8 of 16 ]abie.: Key Indicators for Future Project Operation (continued) La Key operating indicators 1995 1996 1997 1 1998 1 1999 2000 2001 Actual <- ------------ OP/ICR Estimated Targets ---------------> B. Financial (June 30/ea. yr.) Bl. SAR Indicators: 1. Weeks of billing delay at year end: - Telephone 8 6 4 4 3 2 2 - Telex 8 6 4 4 3 2 2 2. Rate of return on net revalued assets ir 3. Receivables outstanding are % of annual revenues 90% 80% 60% 48% 28% 28% 28% 4. Annual investment ($ million) 11.0 12.0 16.0 25.0 17.0 22.0 12.0 B. Additinnal Indicators: 5. Operational revenue 39.2 24.5 26.5 28.9 32.9 38.5 42.0 6. Operational expenditures 34.0 20.6 21.5 22.4 23.6 24.8 25.6 La Data obtained from UPTC's Operational Plan (OP). ICR estimate for project/program related data not included in UPTC's OP. Lb Figures are rounded up. *n The rate of return (RA) from current accounts is meaningless without proper revaluation of assets having not been done yet. The 1998 target RR is the appraisal target. M:1WORDWINKAYANIlScoffier:jpANX-A-PS.DOC1214/95I ANNEX A Page 9 of 16 Iabie 7: Studies Included in Project Study - Purpose as defined at appraisal Status Impact of study 1. Engineering of Local Cable Completed. Achievement of least Networks: To study/prepare plans/ cost and adequate basic design on engineering of each technical solutions for network, procurement process, cable networks and implementation supervision and outside plant under systems acceptance/commissioning. adequate standards and construction/operation methodology. Training of UPTC engineering teams and staff. 2. Staffing needs and training program: Completed with delays, Studies were made but To assess staffing situation and by end 1993 compared implementation was needs, determine staffing structure to expected 1991. impeded by managerial and prepare detailed Executed under a conflicts and changes. training programs. twinning arrangement Training program was implemented. 3. Institutional development program: Completed with delay Implementation and To study and prepare action plan impact delayed (see consistent with UPTC Act (1984) study 2 above). and Policy Statement (1988). 4. [ariffs: To evaluate the adequacy of Completed end 1993 In depth tariffs tariffs and recommend appropriate (compared to planned restructuring and structure and changes. 1990) changes were implemented in May 1994 and August 1995 M:lWOtDWN\KAYANI\Scoffirjp\ANX-A-P9.DOC(1/23195 ANNEX A Page 10 of 16 Table 8A: Project Costs Appraisal estimate (US$M) Actual (US$M) Local Foreign Local Foreign Item costs costs Total costs costs Total 1. Local network (turnkey contract) 4.2 32.4 35.6 1.2 31.5 32.7 2. Telecommunications equipment, spares, tools, vehicles and recurrent purchases 1.8 11.3 13.1 1.8 10.7 12.5 3. Consultants, training and PPF refinancing 0a 8L6 9.1 01 UL 2Q (engineering) Total 6.5 52.3 58.8 3.1 51.1 54.2 Table 83B: Project Financing Appraisal estimate (US$M) Actual (US$M) Local Foreign Local Foreign costs costs Total costs costs Total IDA 52.3 52.3 51.1 51.1 Domestic contribution 6.5 6.5 3.1 3.1 Other external sources Total 6.5 52.3 58.8 3.1 51.1 54.2 M:\WINWORD\KAYANIScoffier:jplANX-A-10. DOC[2114/951 ANNEX A Page 11 of 16 Tabie.9: Economic Costs and Benefits This table identifies the major costs and/or benefits that enter into the calculation of a re-estimated economic rate of return in achieving project objectives. These calculations understate the overall benefits to be derived from the investment program in as much as they did not take into account consumer surplus and external benefits to non users of the telecommunications services provided by UPTC. A. SAR Estimated Financial and Economic Rate of Return The internal financial rate of return of the program was estimated to be 10.6% and the projected economic rate of return is 14.3%. B. Re-estimated Internal Financial and Economic Rate of Return Incremental Costs and Benefits of the Program (in US$ million) Financial Return in Economic Return Id Incremental Incremental Incremental operating Program operating operating costs costs (ex-taxes) FY costs La revenues Lh and taxes Net benefits Net Benefits (ex-taxes) 1990 (8.0) - - (8.0) (8.0) 1991 (7.3) 1.30 (0.4) (6.4) (0.3) (6.3) 1992 (8.5) 3.1 (0.6) (6.0) (0.5) (5.9) 1993 (12.3) 6.7 (1.5) (7.1) (1.4) (7.0) 1994 (11.7) 9.4 (6.1) (8.4) (5.8) (8.1) 1995 (5.4) 16.5 (9.2) 1.90 (6.8) 4.3 1996 (1.0) 18.3 (9.6) 7.7 (7.1) 10.2 1997 (-0-) 20.0 (9.6) 10.4 (7.1) 12.9 1998 - 20.3 (9.6) 10.7 (7.1) 13.2 1999 - 20.4 (9.6) 10.8 (7.1) 13.3 2000 - 21.6 (7.5) 14.1 (5.6) 16.0 2001 - 21.6 (7.5) 14.1 (5.6) 16.0 2002 - 20.9 (6.6) 14.3 (5.0) 15.9 2003 - 20.9 (6.6) 14.3 (5.0) 15.9 2004 - 20.9 (6.6) 14.3 (5.0) 15.9 2005 - 20.9 (6.6) 14.3 (5.0) 15.9 2006 - 20.1 (5.6) 14.6 (4.5) 15.6 2007 - 20.1 (5.6) 14.6 (4.5) 15.6 2008 - 20.1 (5.6) 14.6 (4.5) 15.6 2009 - 20.1 (5.6) 14.6 (4.5) 15.6 Internal Financial Rate of Return A,Mg Economic Rate of Return i /a Custom duties, when applicable, have been excluded from investment program costs. /b Incremental revenues assigned to the program are based on the service usage by additional subscribers and traffic/income increase brought about by investment made during the period 1990 to 1995 and carried out until 2009. Moderate reductions of related revenues were assumed past the year 2000 to take account of the forecast world-wide decrease in telecommunications tariffs when facilities from the program would reach full operation. /c Incremental operating costs include cost of personnel, material, services and taxes necessary for the operation and increase in revenues from the program. They exclude depreciation and interest. /d Corporate and other applicable taxes have been excluded to determine benefits used in the calculation of the Economic Rate of Return. M:1WORDWIN\KAYANIoffier:jpANX-A-12. DOC 126/95 ANhEXA Page 12 of 16 UGANDA SECOND TELECONIMUNICATIONS PROJECT - CREDIT 1991-UG Table 10: STATUS OF LEGAL COVENANTS Agreement Section Covenant Status Original Revised Description of Covenant Comments Type Fulfillment Fulfillment Date Date A. Project - 4.01 (a) I C UPTC shall maintain proper records Complied General and accounts 4.01(b)(ii) I CD Furnish to the Association Audited Thee were delays financial statements not later than six every yew of the months after the end of FY project 4.02 (b) 4 C Consult with the Association on any Complied proposals for investments estimated to cost more than ten percent of the of the amount established in the program for any one year 4.03 (a) 2 June 30. UPTC to ean an annual rate of return Lack of ae 1990 on its fixed assets in operation of not revaluation dismsa less than 12% starting from the fiscal the data year ending on June 30, 1990 4.03 (b) 2 C Before January 1. in each of its fiscal Tariffs incrsedb years, UPTC to review whether it local tariff still would meet the requirements set in inadoquarc 4.03 (a) 4.03(c) 2 C If any such review shows that UPTC Complied would not meet the requirements set forth in para 4.03 (a), UPTC shall take all necessary measures (including adjustment of tariffs) in order to meet such requirements 4.04 3 C UPTC to take all measures to ensure Complied that funds from internal sources are adequate to cover the estimated local currency requirements for its investment program 4.05 (a) 2 C January . UPTC shall scmi-annually beginning Complied 1990 January 1. 1990. and thereafter on July 1, and January I, review the adequacy of tariffs to meet the requirements set forth in 4.03 and 4.04 above and furnish copies of such review to IDA 4.05 (b) 2 C UPTC shall take all necessary actions Complied to ensure that. within three months of the review date such adjustments in tariff levels shall be made, based on the findings of the review. 4.05 (c) 2 NC UPTC shall adopt a formula, Study at cari satisfactory to the Association to due to conaflicts enable it to make automatic interim between adjustments to its tariff levels to manaemenaa promptly cover sudden increases in its Boad of Diuaem operating costs 4.06 2 C December UPTC shall, by December 31, 1990. Compliedaohr 31, 1990 undertake a study, to evaluate the delas adequacy of tariffs and recommend any appropriate changes AnanA Paze 13 of 16 B. Schedule 1 5 CD December UPTC shall, by December 31, 1990, Complied after 2 -Project 31, 1990 carry out an assessment of its staffing delays Implementa needs and refrain from hiring staff to tion fill middle and low-level vacancies until such assessment is completed 2 5 C UPTC shall promptly prepare and Complied furnish to IDA an institutional development program, including an action plan for its implementation which shall be consistent with the UPTC Act and the policy statement 3 5 CD December UPTC to prepare a detailed training Complied after 31. 1990 program by December 31, 1990 delays 4 5 CD, CP September UPTC shall, by September 30, 1990, Delayed and only 30, 1990 complete a twinning arrangement with partially a suitable telecommunications agency implemented dueoe conflicts in the UPTC between management and Board 5. 5 CP June 30. UPTC shall till the positions of The manaacmew 1990 Finance Director. Chief Accountant accountant was ao financial Accountant. Management recruited due to Accountant, and Systems and/Data management Processing Manager by June 30. 1990 problems 6(a) 5 C UPTC shall engage a reputable Complied international accounting firm 7. 2 NC June 30. UPTC shall ensure that by June 30, Not Complied 1990 1990 the level of accounts receivable is reduced to no more than the equivalent of ninety (90) days of sale revenue Developme nt Credit 3.04 (a) 2 NC June 30. The Borrower to take all measures to Arrangements bein 1990 ensure that its ministries and parastatal made to write-off bodies shall pay. in full. all arrears for arrears against tow tclecommunications scrviccs by June term debt 30. 1990 3.04 (b) 2 NC Thereater, all charges incurred by its Problems of ministries and parastatal bodies to be inaccurate billing paid to UPTC within (30) days of the has made it diffcal billing date for UPTC to collec: outstanding debt ANNEX A Page 14 of 16 Table 11: Compliance with Operational Manual Statements No significant lack of compliance with applicable Bank Operational Manual Statements (OD or OP/BP) was observed under the project. Provisional unsatisfactory practices, in particular in the procurement process, were adequately adjusted or corrected during supervision. Statement number and title Describe and comment on lack of compliance Not Applicable Table 12: Bank Resources: Staff Inputs La Stage of project cycle Planned Actual Weeks Weeks Through appraisal 50 60 Appraisal-Board 20 35 Board-effectiveness 10 15 Supervision 70 80 Completion 15 20 Total 165 210 M:\WORDWIN\KAYANIlSwcner:jplANX-A- IS.DOC[1/23/951 ANNEXA Page 15 of 16 Iable13: Bank Resources: Missions Performance Rating Lb Number Days Specialized Stage of project cycle Month/ of in staff skills Year Persons field represented La Implemen- Develop- Types of problems tation/ ment overall status impact Tbrough appraisal - Preparation/pre-appraisal I 1/85Lr 3 6 Eng, Fin A, Econ - - - Appraisal I 9/85& 3 12 Eng, Fin A. Econ - - - Appraisal update 1 5186Lc 2 5 Eng, Fin A - - - Appraisal update 2 11/86& 2 5 Eng, Fin A - - - Update 3 (revision of project) 7/87/s 4 6 Eng, Fin A, Econ, - civil war and political unrest delayed Mant - ) implementation of first project and - Preparation, pre-appraisal II 2/88 2 10 Eng, Fin A - resulted in changes/revision of the proposed second project. Appraisal through Board Approval - Final Appraisal II - Negotiations 5/88 3 12 Eng, Fin A, Econ - - - Board approval 12/88 - - - - 3/89 - - - Review of effectiveness status 3/90 2 3 Econ, Leg - - Credit effective 6/90 - - - - Supervision/Completion Supervision 1 8/90 2 8 Eng, Fin A 2 - Project management to strengthen organization and financial management of UPTC to improve. Supervision 2 4/9ld 2 8 2 x Eng 2 - Slow procurement procedure and weak financial management. Supervision 3 9/91s 3 10 Eng, Fin A, Mngt 2 - Same as in previous visits . Sector reform/restructuring is recommended. Supervision 4 9/92 2 10 Eng, Fin A 2 - Conflicts between Board and management developed at UPTC adversely affecting project implementation. - M:\WORWIN\4KAYAN\SCOfFI:plANX-A-16.DOCI1\l3\951 ANNEXA Page 16 of 16 Iabief1: Bank Resources: Missions (cont) Performance Rating Lb Number Days Specialized Stage of project cycle Month/ of in staff skills Year Persons field represented La Implemen- Develop- Types of problems tation/ ment overall status impact Supervision 5 12/92 3 4 Eng, Fin A, Mngt 3 - Implementation performance continues to deteriorate Supervision 6 7/93 2 10 Eng, Fin A 2 - Board/management problems are being investigated. Implementation improves closing date to be extended to enable completion of ongoing items. Supervision 7/Completion 10/94 Lf 3 10 Eng, Fin A, Proct S Lg S Lg Board and management are being restructured/reorganized - Government has Supervision 8/Completion 10/95/h 1 7 Eng. 2 decided separating posts from telecommunications, organizing them in independent entities, and privatizing them. Project expected to be satisfactorily completed by end 1995. La Abbreviations: - Eng. Engineer; FinA, Financial Analyst; - Econ, Economist; - MmgtfProct, Management/Procurement Specialist; Leg. - Lawyer. & Keys to: - overall performance rating (before FY94) = I problem free; 2 - moderate; 3 - major problems - implementation/development impact status (from FY94 on) = HS - highly satisfactory; S - satisfactory; U - unsatisfactory; HU - highly unsatisfactory. I& These were combined missions for supervision/completion of the first project (credit 1367-UG) and preparation/revision of the proposed second project. Ld Combined mission for supervision of the second project (credit 1991-UG) and identification/preparation of a large telecommunications component for the proposed Northern Uganda Reconstruction Project (NURP). & Combined mission for project supervision, appraisal of NURP's telecoms component and identification of a possible third project to support the rehabilitation and sector/management reforms. Lf ICR mission. Project was expected to close on December 31, 1994. Lg New project performance rating is introduced (revised Form 590, see Lb above). /h ICR mission to revise draft ICR after extension of closing date to December 31, 1995. M\WINWORD\KAYAN[\Scoffer jplANX-A-17 DOC(l/23/951 Appendix I Page 1 of 10 SECOND TELECOMMUNICATIONS PROJECT -CREDIT 1991-UG FINAL SUPERVISION AND ICR PREPARATION AIDE-MEMOIRE To: Managing Director, UPTC 1. A World Bank Telecommunications Mission consisting of Messrs. Rogati Kayani, Senior Telecommunications Engineer, and Kashmira Daruwalla, Procurement Analyst, visited Uganda between October 2-24, 1994 to: (a) participate in the mid-term review of Northern Uganda Reconstruction project; and (b) to conduct the final supervision and collection of data for the Implementation Completion Report (ICR) of the Second Telecommunications Project. Mr. Gaiv Tata Financial Analyst also participated in the ICR mission. 2. The mission met with the Minister of Works, Transport and Communications and senior officials of the Uganda Posts and Telecommunications Corporation (UPTC). The mission wishes to thank the Government and UPTC for courtesies and cooperation extended to it throughout its stay in Uganda. The mission would also like to thank UPTC for the comprehensive preparation it had made for the mission. A separate Aide Memoire has been issued for item 1(a) above. A summary of the mission's findings and recommendations for the final supervision and ICR, which are subject to approval by IDA management, are presented below. New ICR Procedures 3. The mission explained the new procedures for preparing the Implementation Completion Report (ICR) and the expected contents of the ICR. The mission emphasized that the main purpose of the mission was to discuss the achievements and failures of the project and to identify reasons for the failures. The objective of this exercise is to: provide feedback from implementation experience and to improve country lending strategies and the design of any future operations; (b) help ensure greater development and sustainability of projects during the operational phase; (c) reinforce self evaluation, including development impact assessment by the Bank and borrower; (d) meet requirements for accountability and transparency in Bank activities; and (e) maintain a record of the implementation experience of Bank financed operations to facilitate assessment of development impact. The timetable for preparing the ICR by IDA and UPTC was agreed. UPTC would submit the draft ICR to IDA by January 31, 1995, and IDA would submit its evaluation to UPTC for comments by February 3, 1995. 4. The mission also explained and discussed the responsibilities of the Borrower including: (a) preparing its own final evaluation report of the project; (b) adopting a plan for the operational phase of the project, and defining, together with the mission, the performance indicators to be used to monitor operations and development impact; and (c) assisting the Bank in ICR preparation. The UPTC and the mission were satisfied that the discussions were sufficient for IDA and UPTC to prepare the ICR. However, it was the opinion of the UPTC and the Minister of Works Transport and 2 Appendix 1 Page 2 of 10 Communications that the closing date for the project needs to be extended for another twelve months to ensure that the core of the institutional building activities are completed. The Government has prepared a letter of appeal seeking an extension of closing date to December 31, 1995. The following paragraphs will summarize the present status of implementation of the project and discussions on the contents of the ICR. Summary of Overall Implementation 5. The Credit became effective on June 5, 1990 and commitments now stand at SDR34.8 million, 91% of the total credit of SDR38.3. Total disbursements are now SDR33.9 million (89% of total credit). The original closing date for the credit was December 31, 1993 but extension was granted to December 31, 1994. The Government requested for another extension but IDA could not grant it because the reasons advanced for another extension were not considered adequate. The Government has prepared an appeal and this is currently under consideration by IDA. Since only a few components of the project have yet to be completed, it was agreed preparation of ICR continues regardless of whether an extension of closing date is granted or not. The objectives, achievements and failures as discussed and agreed with UPTC are presented in the following paragraphs. Project Obiectives 6. The project's main objective as set out during appraisal was to support the 1988/89 - 1992/93 telecommunications investment program including: (a) rehabilitating telecommunications facilities damaged during the internal disturbances and run down due to lack of maintenance; and (b) rebuilding institutional capability within the sector. An important institutional strengthening component was to develop UPTC to operate effectively and sustain itself as a commercially viable utility including: designing and implementing corporate planning and a management information system; setting up sound and operating and accounting procedures and financial control and management practices; introducing guidelines for efficient maintenance and service standards; and implementing comprehensive human resource development and training programs. 7. These objectives were to be satisfied through the implementation of a number of physical and institutional activities as follows. (a) The rehabilitation of the local cable networks and subscriber facilities in Kampala, Entebbe, and Jinja. Due to its importance, the award of contract for this component (about 60% of the total credit) was made one of the conditions of effectiveness of the project; (b) equipment vehicles, spare parts and materials for telecommunications maintenance and operations; and (c) technical assistance, training and fellowships to further strengthen UPTC's management, planning and operational capabilities. Two conditions of effectiveness were set to ensure that sufficient up-front actions were taken to implement the institutional development aspect of the project: (i) submission of a comprehensive institutional development program satisfactory to IDA; and (ii) appointment of financial consultants, and recruitment of three key financial personnel; a financial director, chief accountant and financial and expenditure accountant. Achievement of Objectives 8. It was agreed that the physical objectives of the project were substantially satisfied but the institutional aspects left much to be desired. It is in the context of this that the Government is seeking a further extension of the closing date. 3 Appendix 1 Page 3 of 10 Physical Achievements 9. The following sub-projects were successfully completed: (a) rehabilitation and expansion of the external cable networks at Kampala, Jinja and Entebbe - this involved the complete replacement of old fault-prone paper insulated copper cable by modem jelly filled copper cable and optical fiber cables; (b) purchase of essential materials, transport facilities, and spare parts for installation of new subscribers and maintenance of the nd maintenance of the network including: telephones, teleprinters, fax machines, vehicles, generators, cables and postal items (date stamps, mail bags, weighing scale, and safes). Institutional Achievements 10. The Institutional Development Program was to be focused on restoring discipline, accountability and efficiency of UPTC and building capacity through training and twinning. A number of actions were taken to satisfy the conditions of effectiveness including: (a) revision and implementation of new organization structure including the creation of a new department responsible for Corporate Planning and MIS; (b) three qualified accountants were recruited to fill the posts of Director Finance, Chief accountant and Principal Accountant Finance and Revenue; (c) salaries and benefits have been more than doubled and the Corporation is in the process of introducing a performance related pay structure; (d) supplies management has been strengthened through the assistance of British Telecoms; and (e) formulation of a Human Resource Management Strategy including Manpower Planning, Training and development and Performance Appraisal. 11. Training: The short term objective of the training program was to meet present needs for the existing network and the newly installed network and the long term objective is oriented to meet future technological advancement in the sector. In order to fulfil these objectives studies were carried by TELECOM EIREANN to: (a) determine the staff needs - the study was completed in March 1994 and implementation of its recommendations is in progress; and (b) training needs identification and training program design - the study was completed in December 1992. The recommendations could not be implemented because of conflicts between the Board of Directors and management of UPTC (para 20). Under this program training was to have been undertaken overseas and locally under a fellowship scheme. The overseas training entailed attending specialized courses which could not be conducted by local institutions because of either lack of expertise or necessary equipment. Local training was to be conducted by invited lecturers from outside Uganda where a large number of staff have to be trained on the same subject and equipment is available for such training. This was particularly true for non-technical courses. A number of courses have been undertaken since the new Board was appointed in November 1993. 12. Finance and Audit : Consultants (Price Waterhouse) to undertake a study of the financial and audit systems in UPTC were appointed at the beginning of the project. The report by Price Waterhouse extensively covered the areas of finance and accounts, internal audit and corporate planning, and Management Information Systems. The report provided a comprehensive study of the organization's current situation, procedures and controls. As required by the TORs, a comprehensive set of recommendations and procedures were also presented in the report. UPTC is currently implementing some of the recommendations but given the current situation within UPTC especially the lack of manpower, implementation will be a lengthy and complex process unless consultants are employed to assist in the implementation. As regards audits, the report by Price Waterhouse did a 4 Appendix 1 Page 4 of 10 very good evaluation of needs but did not produce documentation for the recommended systems and internal audit programs as required by the TORs. UPTC may have to prepare the documentation and programs themselves. It is recommended that UPTC hires consultants for assistance. The implementation of the full report is one of the major outstanding items in this project. According to the report, for a successful implementation of recommended procedures and controls, all aspects of the accounts and finance need to be computerized therefore requiring computer training for all finance and accounts personnel. On hind site implementation of the recommendations should have been part of the contract. The implementation of these systems is considered very important. This will form part of UPTC's operational plan. 13. Financial Performance: The financial performance of UPTC has been improving year after year throughout the project. This was mainly due to massive increases in tariffs at the beginning of the project. UPTC realized an operating profit in FYs 89, 90 and 91 but foreign exchange losses turned these surpluses to operating losses. In FYs 92 and 93 the UPTC made modest profits after taking into account foreign exchange losses. In accordance with UPTC's 1992/93 audited accounts, UPTC's operating financial performance for the year ended June 30, 1993 improved over the previous two fiscal years: operating profits for 1992/93 amounted to UShs 7.4 billion compared to UShs 16.2 billion in 1991/92 and Ushs 13.2 billion in 1990/91. The operating profits are adjusted downwards in the audited statements to take into account the fact that UPTC bears the foreign exchange losses on its foreign currency denominated debt (primarily from IDA). After taking into account these foreign exchange losses, the audited statements show that profits amounted to UShs 5.6 billion in 1992/93 compared to UShs 0.9 billion in 1991/92. It is too early to estimate with reasonable accuracy the performance for the year ended June 30, 1994. Initial estimates indicate that the operational performance has remained strong and, excluding Government billings, collection performance has stabilized. However, there remains substantial scope for improving UPTC's financial status. There is a need for UPTC to improve efficiency, control expenditure and enhance revenue from the expanded and improved network due the project. The benefits of the project will be felt during FY95. Specific recommendations were made in the last mission and these are discussed in paras 14 - 16. The draft accounts for FY94 will not be ready until November 30. UPTC's management expect to realize an operating profit especially considering the fact that the Corporation enjoyed foreign exchange gains. However, the total revenue is likely to be lower and expenditure higher than forecasted in the budget because of a number of reasons. The revenue is expected to be lower because of following reasons: (a) Government's failure to pay for services rendered; (b) Over-estimation of revenues to be accrued from the completed external cable networks for Kampala, Jinja and Entebbe. The completion was delayed by 16 months and the connection rate has not been as high as expected due to UPTC's lack of capacity and lack of exchange of capacity - the exchanges at Jinja and Entebbe are full; (c) internal control weaknesses in revenue billing and collection: and (d) inadequate marketing for available services. Many would be customers are not coming forward to apply for service because they think that the service is either not available or too expensive. The UPTC has proposed, and the mission agrees that a market survey/research should be carried out in order for the corporation to keep abreast with 5 Appendix 1 Page 5 of 10 customer needs. Expenditures are expected to be higher because of: (a) UPTC is no longer exempted from import tax, about UShs 1.3 billion was paid for customs and Excise in FY94; and (b) payroll went up by about 100% due to salary increases. Payroll will likely make up more than 45% of total revenue which is high. Payroll as a percentage of total revenues should normally be less than 30%. 14. Billing: Delays in producing bills and inaccurate bills has been a problem throughout the project. The situation had improved appreciably during the last mission but this seems to have deteriorated. The July bills should have been issued by August 15, but these were not issued until September 30. The June telex bills were issued at the end August 31. The July telex bills have not been issued yet because of lack of printing capacity. The long term solution for this problem is to install a new computer billing system. This item is part of the project but due to the impending closing date, there is insufficient time left to procure the system. The mission was pleased that there has been a number of steps taken to improve billing performance. UPTC has recently introduced a weekly billing system for international services for high calling customers in Kampala such as hotels, oil companies, banks etc.. These customers make about 30% of the total billing volume. The outcome of this exercise has been very rewarding. Experience has shown that these customers have been paying their bills within one week of receiving their bills. An improvement in the accuracy of billing has also been realized due to the introduction of automatic receptors at the bill paying points in Kampala. Recently a serious problem has been identified in some of the international bills. There seems to be a software problem in the international exchange. There appears to be a problem with data capturing equipment which leads to calls being charged to non-existent seven digit numbers. The mission was informed that in May the problem was reported to the exchange manufacturer, ALCATEL France, but so far nothing has been done. It is important that UPTC resolves this problem as soon as possible. It is recommended that UPTC employs an expert to look into this problem. It was agreed that this expert will be employed by December 31 1994. 15. Collection: Government indebtness has been a problem throughout the project. This indebtness grew by 29% during 1993/94. In the last mission the following recommendations were made. "(a) An aggressive debt collection effort should be initiated to recover outstanding sums from local non-Government debtors. The in-house collection effort should be strengthened and external collection agencies should be employed on a commission basis; (b) Ongoing discussions with the Treasury regarding the settlement of Government's bills should be brought to closure as soon as possible. One possibility under discussion was to offset the loan servicing amounts (on account of IDA loans being serviced by Government on behalf of UPTC) against the outstanding receivables which the Government owes UPTC. This would also help to reduce the debt to debt plus equity ratio of 0.94 in 1992/93 which is extremely high. (c) The debts with other PTTs should be settled soon; at the end of June 1993 the net outstanding was UShs 7.2 billion". The mission was pleased that UPTC has taken actions on all the three recommendations. A committee has been created to prepare tenders to invite private collectors. Four reputable firms have already registered their interest. One important requirement for such collectors is to have a Fidelity Insurance Guarantee. A similar 6 Appendix I Page 6 of 10 exercise was done immediately after last year's mission but due to the absence of a Board of Directors, the recommendations were not implemented. As regards outstanding Government debt, the mission was pleased that the long awaited agreement to swap outstanding loan repayments by UPTC with Government telephone debts has been finalized, at least until June 30, 1993. Verified accumulated Government indebtness to UPTC at June 30, 1993, was UShs 14.5 billion. At that date, UPTC owed the Government UShs 16.3 billion. With debt swap the UPTC owed the Government UShs 1.8 billion at June 30, 1993. The Government is ready to implement this swap and the Attorney General is drafting an agreement to this effect. However, during FY93/94, Governments indebtness to UPTC went up by UShs 4.7 billion and that of UPTC to the Government by UShs 2.9 billion. The net effect at June 30, 1994 was that the Government owed the UPTC UShs 1.2 billion. The Government is not prepared to settle on this account because the accounts for FY94 have not yet been audited. UPTC should continue with its efforts to extend the swap as at June 30, 1994. 16. Tariffs: Throughout the project, the Government and UPTC have been fully aware of the importance of regular adjustment of tariffs, especially international tariffs, to compensate for inflation and foreign exchange fluctuations. Tariff review became part of the budget process. In pursuit of this objective, tariffs were increased by 50-500% in July 1988, and again by 50-500% in December 1989. In September 1991 international tariffs were increased to compensate for exchange rate variations and at the same time these tariffs were pegged to the US$ so that the rates could automatically vary with the exchange rate of the US$ relative to the Uganda shilling. It is after this adjustment that a net inflow of traffic into Uganda started because the tariffs in Uganda became too high. The rationale proposed at that time was that the tariff increase would reverse a declining trend of incoming to outgoing calls (which stood at 0.77 at that time) and would result in reduction in debts of some $13 million owed in foreign currencies. The lack of convertibility of the USh to hard currencies was an important consideration at that time. While the declining trend in traffic has been completely turned around (it stood at 2.44 in April 1993), this has been achieved largely through depressing demand. However, given the ability to convert the USh to hard currencies this is no longer an issue. Therefore the July 1993 IDA mission proposed that UPTC's management should review its tariff structure and the possibility of reducing international tariffs. The mission recommended to UPTC that it should study the demand and revenue estimation model that has been used by Oman over the last three years to reduce international tariffs from levels comparable to those now existing in Uganda to much lower levels while still increasing overall revenues. The mission advised UPTC to send two senior staff, one technical and one financial, to undertake a brief study tour and develop in-depth knowledge of the Oman forecasting model. The visit was undertaken and as a result, international tariffs have been decreased by about 47% and a general increase in domestic tariffs was effected. The financial impact of these tariff increases have not been assessed but international traffic has gone up. Some of the revised tariff levels are presented in Table 1. 7 Appendix t Page 7 of 10 Table 1 - Comparison of Some Tariff Rates Tariff April 1994 Levels (US$ May 1994 Percentage Change equivalent per minute levels PTA Countries 3.00 2.00 -33.3 East African Countries (Tanzania, 3.00 1.00 -66.7 Burundi, Rwanda, Kenya) Africa and rest of the world except 5.00 4.00 -20.0 the countries below. USA, UK, Canada, Germany, 7.50 4.00 -46.7 India, Sweden, Italy, France. Switzerland Connection Charge 21.25 60.00 +182.3 Rental .80 1.50 +87.5 Unit Charge .05 .05 0 While the new international rates could be considered as reasonable for the time being, pending analysis of their impact on total revenue, the local tariffs are still low. For instance, the average rates for Africa are: Connection charge is US$92.3, rental is US$5.00 and Unit charge is US$0.08 equivalent. 17. Accounts and Audits: The UPTC has consistently been late in finalizing its accounts and audits due to the lack of qualified manpower and a completely manual accounting. Although the manpower situation has improved substantially during the project; there were only 6 staff with accounting qualifications at the beginning of the project compared to 20 now. The FY93 draft financial statements were submitted to the Auditor General in October 1993. The UPTC Act as well as the Audit Covenants stipulated in the Project Agreement require that UPTC accounts are audited within six months of the fiscal year end. Auditing of the FY93 accounts was completed in June 1994, six months behind schedule. Although the quality of the FY93 accounts have improved compared to those of FY92, in the opinion of the Auditor General, the quality still leaves a lot to be desired. The mission was informed that the FY94 draft accounts are about 75% done. The mission was informed that the draft accounts are expected to be completed by November 30. Auditing is expected to commence the first week of December and completed by January 31, 1994. With this timetable, the audited accounts are expected to be submitted to IDA by February 15, 1995, one and half months behind schedule. The mission urged the UPTC to ensure that additional resources are deployed to get the audits completed by December 31, 1994. 18. OPERATIONAL PERFORMANCE: The project has had substantial impact on the rate of subscriber connection and the quality of service. At the completion in December 1993, of the 8 Appendix 1 Page 8 of 10 external line plant rehabilitation and expansion of Kampala, Jinja and Entebbe subscriber verification had to be made before connecting the new network. This was necessary because there was a lot of "ghost subscribers" in the network. All existing and prospective subscribers were requested to re- apply/apply for service. At the beginning of the exercise records showed that there were about 32,000 working subscribers but after verification the number dropped to 22,000. Since this verification a year ago, 10,500 new subscribers have been connected which translates to an annual growth of about 48%. This high growth was a result of completing the external line plant component. Unfortunately, the external line capacity provided at Entebbe and Jinja cannot be utilized because the exchanges are old and completely full. These exchanges were expected to be financed from a French protocol but this did not materialize. The replacement and expansion of these exchanges is of highest priority. There has also been drastic reduction in the number of faulty lines. Before completion of this component, there was an average of 20% of the lines faulty at any time but this has dropped to an average of 3 % in the last three months. In Jinja, an average of 300 faults were carried over to the next day but after completion of the cable works only about 6 faults are carried forward - a real drastic improvement. Factors Affecting lmIementation 19. The successful implementation of those components that have been completed has beenR achieved under very trying conditions. The major problem was the conflicts between the Board of Directors and Management. Other factors included: procurement; lack of sufficient qualified technical and financial staff; and lack of computer facilities. It is only because of the Minister of Works Transport and Communications and UPTC's management resolve to successfully implement the project that so much has been achieved. 20. Management Conflicts: For three years (November 1990-November 1993) the project operated under very difficult conditions. The project was proceeding satisfactorily until November 1990 when a new Board was appointed. The new Board decided to run the corporation on a day to day basis leading to severe conflicts between management and the Board. These conflicts led to long delays in processing of procurement documents and unsubstantiated dismissal of key project implementation personnel. The contract for the rehabilitation of the external line plant for Kampala, Jinja and Entebbe (60% of the project) was affected most by these conflicts. The contract was supposed to have been completed 26 months after effectiveness, i.e. October 1992. Implementation of this contract encountered serious setbacks due to what was found out to be deliberate frustration by the Board of Directors. The Board was appointed three months after contract effectiveness. Firstly, it refused to approve the revised drawings after detailed survey by the contractor because the survey led to an increase of 3 % of the contract price. Although this increase was within the range allowed in the contract the Board rejected to approve the revised plans. The Board also started to reject payment applications for work already done by the contractor. These problems led to serious delays. In September 1992, a Commission of Inquiry was set up by the Minister of Works, Transport and Communications to investigate the problems at UJPTC. The Commission's recommendations led to replacement of most of the Board members in November 1993 and dismissal of some members of management in March 1994. The conflicts led to more than one year delay in completing the external line plant contract. The contract was eventually completed in December 1993 and all associated benefits from the project were equally delayed. In addition, UPTC has to pay a penalty of about US$420,000 to compensate the contractor (Marubeni) for the delays. Implementation of the institutional development program (twinning and training) was also delayed to the extent that it 9 Appendix 1 Page 9 of 10 became too late to implement due to the impending closing date. Most of the program has not been implemented. 21. Procurement: Besides the procurement problems caused by the Board of Directors there were procurement problems which delayed project completion. There were two main causes for these delays. Firstly a number of bids had to be re-issued because of controversies on the evaluation of reports for bids. For instance bids for the external line plant cable network for Kampala, Entebbe and Jinja had to be re-issued because the original award recommendation was queried by IDA and the Government of Uganda. Almost a whole year was lost due to this controversy. During the time key implementation staff were dismissed by the Board the quality of procurement documents (bidding and evaluation reports) deteriorated so much that practically every document had to be re-done. For instance the evaluation report for digital multiple access radio systems had to be re-evaluated, a process that took so long that by time the revised evaluation report was re-submitted, it was too close to the closing date therefore could not be cleared by IDA. 22. Lack of Computer Facilities: The lack of computer facilities was basically the main cause of delayed accounts and audits and billing and collection. All these had to be done manually leading to delays and inaccuracies. Although this problem was supposed to have been resolved during the project, this was not achieved due to delays in project implementation caused by management conflicts and procurement problems (paras 20 and 21). 23. Lack of sufficient manpower: The lack of adequate trained manpower especially on the finance side was a major bottleneck to the full achievement of project objectives. The lack of manpower was partly responsible for delays in completion of annual accounts. Project Sustainability 24. As a result the project, the network more than doubled and the quality of service substantially increased. This will lead to more revenues not only due to the increased size of the network but also due to the enhanced quality of service which will result in more revenue per line being generated than before. The financial benefits to be accrued to the project will enable future expansion and further rehabilitation of the network. The institutional capacity that has been built during the project will lead to better management and efficient operation of the telecommunications network. The Government is committed to the development of the sector and is fully aware of the constraints that have hindered its rapid development. These constraints have mainly been the lack of capital and poor management. In order to overcome these constraints, the GOU has decided to privatize UPTC. The management of UPTC will therefore soon be handed to the private sector. This will assure maximum utilization of the newly installed assets. Sustainability of the benefits accrued due the project are therefore assured. Bank Performance 25. IDA identified the project at a very difficult time (in 1985) when the security situation was still very uncertain. Preparation and appraisal was completed after liberation of the country by the NRA. IDA worked closely with Government and UPTC to identify the main sector issues and constraints to project implementation. A number of actions were proposed as up-front conditionalities to ensure timely implementation of the project including: employment of project 10 Appendix I Page 10 of 10 management consultants under PPF financing; and award of the external line rehabilitation contract (60% of the project) and preparation of an institutional development plan as conditions of effectiveness. These conditions were met with some delays partly because of the procurement problems outlined in para 21 and due to the lack of capacity in UPTC to prepare the necessary documents. After the above conditions were met the Credit was effective on June 5, 1990. in the first six months the project took-off very well. On appointment of the new Board (November 1990) delays started occurring in processing procurement documents. IDA quickly identified the cause of the problem as the Board and brought it to the attention of the Minister of Works, Transport and Communications. This problem continued until its resolution as per para 20. Fortunately most of the procurement had been done up-front otherwise most of the components would not have been completed by now. IDA made regular supervision missions and provided the necessary advice during the conflicts and stood firm against elements that were delaying the project. At one time IDA was considering suspending disbursement due to violation of legal covenants and unnecessary delays in processing procurement documents. However, due to the good working relationship between IDA and the MoWTC, this was avoided. IDA and MoWTC worked closely together to resolve the above conflicts. IDA management was kept fully aware of these problems that eventually led to the need to request for extension of closing date. Borrower Performance 26. The GOU and UPTC worked together very closely with IDA during project preparation and supervision. However, the performance of UPTC deteriorated in 1991 and 1992 due to Board/management conflicts. These conflicts were first highlighted in the April 1991 Supervision Aide Memoire. The matter was eventually put to rest in March 1994 when the new Board re- instated the project staff that had been unfairly dismissed and dismissing those members of management who had collaborated with the old Board. It therefore took three years from the time the matter was highlighted by IDA mission. The matter took so long because the problem was put in the hands of a Commission of Inquiry (headed by a high court judge) which applied court proceedings to make the investigations. Future Operation 27. The UPTC has not completed preparation of the operational plan yet. The operational plan is intended to provide a realistic picture of how the benefits of the project will be maximized during the operational phase of the project. Given the decision of the Government to privatize the UPTC, the operational plan prepared by UPTC is likely to be completely modified by the private management which is expected to be in place within the next two years. The management of the assets provided under this project will be undertaken by the new private owner who will provide the necessary expertise to maximize the benefits accrued from the project. UPTC has undertaken to finalize the operational plan and submit it to IDA by November 15, 1994. The plan will form part of the final version of this Aide Memoire. Rogati Kayani Draft/October 28, 1994 (Revised in Washington, on November 28, 1994) Appendix 2 Page 1 of 3 SECOND TELECOMMUNICATIONS PROJECT -CREDIT 1991-UG FINAL SUPERVISION AND ICR PREPARATION MISSION AIDE-MEMOIRE To: Managing Director, UPTC 1. A World Bank Telecommunications Mission consisting of Mr. Rogati Kayani, Senior Telecommunications Engineer, conducted a final supervision mission of the Second Telecommunications Project between October 24-28, 1995. The main objective of the mission was to collect information for revising the draft Implementation Completion Report (ICR) that was prepared following the October 94 supervision mission. The October 94 mission had been planned to be the final supervision mission because the project was scheduled to close on December 31, 1994. The closing date was extended to December 31, 1995 - hence the need for this mission. 2. The mission met with senior officials of the Uganda Posts and Telecommunications Corporation (UPTC). The mission wishes to thank the UPTC for courtesies and cooperation extended to it throughout its stay in Uganda. A summary of the areas of the draft ICR that need revision are presented below. Summary of Overall Implementation 3. The Credit became effective on June 5, 1990 and commitments now stand at SDR 36.8 million, 96.1% of the total credit of SDR38.3. At the end of the project the total undisbursed funds will be SDR 1.5 million which might have to be canceled. The GOU was at one time considering utilizing the remaining funds to assist in the restructuring and privatization of UPTC but so far no formal request has been submitted to IDA. Draft ICR Revision 4. During the October 94 mission there were three main components that had not been completed, for which the closing date extension was granted: rehabilitation of the Mpoma earth station; installation of digital multiple access radio systems (DMARS); and training. Rehabilitation of the Mpoma satellite earth station has now been completed and substantial improvement in its performance has already been realized. The DMARS equipment has already been delivered but installation has not started due to delays in clearing the equipment from customs. A tax of US$300,000 (originally unbudgeted for) is required to be paid on the equipment to satisfy a recent decision by the GOU to eliminate tax exemptions for telecommunications equipment. This amount is expected to be raised shortly and installation to 2 Appendix 2 Page 2 of 3 start by mid November, 1995 Completion is expected at the end of January 1996 and final payment in February 1996. 5. During the October 94 mission, implementation of most of the training program had not been realized. The training program was the most important element of the institutional development component and that that is the main reason that extension of the closing date was granted. Substantial training has been implemented over the past ten months and more is still to be implemented before the closing date. 144 UPTC staff have benefited from the fellowship program against a target of 50 staff specified in the appraisal report. A larger number of staff benefited from the program because the course duration varied from 2-12 weeks against a duration of 2-12 months proposed in the appraisal report. Local fellowship training at Nakawa Training Institute was also a success with a total of 265 UPTC staff (about 90 person-months) being trained. Training under twinning arrangements was also satisfactory with 21 staff (43 person-months) being trained compared to a target of 24 staff. Operational Plan 6. The components completed during the extension period are expected to have substantial impact on the operations of UPTC. The UPTC has agreed to revise the operational plan and furnish a copy to IDA by November 30, 1995. UPTC has also undertaken to provide the Borrower's evaluation of the project objectives and achievements by January 31, 1996. Accounts and Audits 7. Auditing of the FY94 was completed in March 1995, a delay of about three months. The draft accounts for FY95 are expected to be submitted to the auditors by December 31,1995 and audited by February 29, 1996. The Credit Agreement stipulates that auditing of financial accounts should be completed by December 31, that is six months after end of financial year. The UPTC will furnish copies of the draft and audited accounts to IDA by December 31, 1995 and March 15, 1996 respectively. Billing and Collection 8. The most pressing problem in the UPTC at the moment is the lack of a reliable billing system. There are wide spread complaints of lack of bills and over-billing by UPTC which has lead to serious problems in the collection of receivables. The receivable figures indicated in the UPTC books do not reflect the true situation because most of these receivables are under dispute. A billing system was supposed to be financed under this project but due to delays caused by the conflicts between management and the Board during 1991-1993, the system could not be procured. This is the only physical component that was not purchased under the project and the results have been devastating. The UPTC is now evaluating tenders for a billing system 3 Appendix 2 Page 3 of 3 to be financed under its own internally generated funds. The UPTC is urged to speed up this process. Future Operations 9. The GOU has decided to privatize the telecommunications part of the UPTC and to commercialize postal services, after separation of Posts and Telecommunications expected by June 1996. Postal services have benefited from the two telecommunications projects that have been extended to UPTC over the last 12 years. The development of postal services have relied heavily on IDA financing. With privatization of the telecommunications sector, the GOU is planning to approach IDA with a request to continue funding of the postal sector until such time that this sector can be privatized. A study to lay down a postal development strategy that will ensure GOU's exit from supporting the sector in the medium term will be carried out. The GOU will use the recommendations of the study to decide on the type of assistance the GOU would require from IDA to achieve its objectives. 10. With the liberalization of the posts and telecommunications sectors and the privatization of the telecommunications sector, the regulatory aspects of the UPTC will be vested on regulatory body which will include, inter alia, the frequency management section of the UPTC. The mission was informed that this section will require substantial technical assistance to build the capacity that is required to manage the frequency spectrum in a fully liberalized and dynamic environment. The requirements will be submitted to IDA together with other requirements for establishing the regulatory body. Next Steps 11. The plan is to finalize the ICR in the next three months. In order to do so, the UPTC and the mission have agreed to take the following actions: * UPTC to revise its operational plan and submit to IDA by November 30, 1995 * UPTC to complete the Borrowers evaluation of the project and submit a copy to IDA under the signature of the Minister of Finance and Economic Planning by January 31, 1996. * IDA to submit draft revised ICR to GOU for comments before January 15, 1996. Rogati Kayani October 30, 1995 cc: Minister of Works, Transport and Communications APPENDIX 3 BORROWER' S EVALUATION Appendix 3 Page 1 of Il Ttlephones: Minister; Ministry of Finance and Kampala 243054 & 232370 Economic Planning Office; Kampala 234700/9 (10 Unes) P.O. Box 8147, Telex: 61170 Kampala, Tielegrarns:"FINSEc.K m aa EC. 76/158 Uganda. i any corresponden onOF UGAND I* -Ae pis quote N.__li UCOUGC 18th January, 1996 Mr. L. Borin, Ag. Division Chief Public and Private Enterprises, The World Bank, 1818H Street N.W. Washington D.C. 20433 U.S.A. Dear Mr. Bonn, 'MWNamZij RE: THE SECOND TELECOM4UNICATION REHABILITATION PROJECT. IDA CR. NO. 1991 UG IMPLEMENTATION COMPLETION REPORT I am writing with reference to the Development Credit Agreement dated December 20, 1989 and concluded between IDA and the Government of the Republic of Uganda for SDR 38.3 million towards funding the Second Telecommunications Rehabilitation Project Credit under Uganda Posts and Telecommunications (UPTC). As you are aware, this credit which became effective on June 5, 1990 was initially set to close on December 31, 1993, but through various extensions, it eventually closed on December, 31, 1993. I am happy to report that this project has been satisfactorily completed, except for one component on the computerisation of subscriber records and consultancy services associated with it. The UPTC is proposed to meet this component by procuring a new computerised billing system and subscriber and weal network record computerisation using its won funds. Appendix 3 2 Pge 2 of 11 As required under the DCA, I am officially forwarding herewith the Implementation Completion Report(ICR) which has been prepared by the UPTC in liaison with the Government. I take this opportunity to express the Government sincere thanks to IDA for the assistance rendered to Government to successfully complete the project. Yours sincerely, E. Tumusiime-Mutebile PERMANENT SECRETARY/SECRETARY TO THE TREASURY c.c. The Permanent Secretary, Ministry of Works, Transport and Communication, ENTEBBE The Managing Director, Uganda Posts and Telecommunications KAMPALA Appendix 3 3 Page 3 of; I SECOND TELECOMMUNICATIONS REHABIMTATION PROJECT IMPLEMENTATION COMPLETION REPORT A. STATEMENT AND EVALUATION OF OBJECTIVES 1. Posts and Telecommunications services within Uganda and outside Uganda is provided by the Uganda Posts and Telecommunication Corporation (UPTC) which was established by UPTC Act of 1983 and which replaced the former East Africa Posts and Telecommunications Corporation(EAPTC). The EAPTC served the three countries of East Africa namely Kenya, Tanzania and Uganda . The World Bank supported Telecommunication development projects during the East Africa community days by giving Loans 493-EA, 675-EA and 914-EA which were completed 1974, 1975 and 1977. 2. Immediately after the 1978-9 civil war in Uganda, the Government embarked on the 1982-87 Economic Recovery and Rehabilitation program to overcome the ravages of the wars including postal and Telecommunication sectors. The first Posts and Telecommunications Rehabilitation project under IDA credit No. 1367- UG of SDR 20.4 million (US $ 22.0 millions) was implemented from 1983 to 1987. During the implementation more civil conflicts occurred during 1985 - 86 and a number of completed components were destroyed and/or looted. This caused losses and the operational and organizational objectives were not fully met. 3. The Second Telecommunications Rehabilitation Project under IDA Credit No. 1991-UG of SDR 38.3 millions (US $ 52.3 million) was identified in 1985 during the implementation of the first project but it could not be appraised until 1988 due to civil wars in the country. The project was approved by the Bank's Board of directors on 14th March, 1989, signed on 12th December, 1989 and became effective on 5th June, 1990. The original closing date of 31st Dec. 1993 was extended to 31st Dec. 1994 and then 31st Dec, 1995. 4. The main objectives of the project were:- (a) Develop UPTC along commercial lines through improvement in its management, fina ncial and operating performance, with emphasis on institutional development. (b) Rehabilitate the telecommunications network, equipment and improve quality of services, and (c) Enhance revenue generation from assets through improvement in operating efficiency, elimination of critical bottlenecks and appropriate tariff levels. B. ACHIEVEMENT OF OBJECTIVES Structural Set-up and Polley Statement 5. The UPTC Act of 1983, requires UPTC to provide all domestic and international public telecommunications services and to operate on sound commercial and technical principles, generate enough revenue to meet the expenditures and make a reasonable profit for future investment. During the project preparation Uganda Government and UPTC adopted a policy statement to supplement the institutional roles and objectives in the Act and to serve as a guide to the management. However, the monopoly given to UPTC has been lifted in certain service areas so as to allow liberation such that other agencies/companies can operate specified Postal and Telecommunications services. Appendix 3 4 Page 4 of 11 6. During the appraisal ,Government of Uganda (GOU) and UPTC prepared a comprehensive institutional development strategy and related plan of action to strengthen UPTC's institutional capability and improve its management. At that time the strategy did not anticipate the liberation policy which GOU later followed from 1993 and which has now created competition. The delay in achieving the project's aims were mainly due to the conflicts between UPTC Board of Directors and Management during the period Sept. 1991 to late 1992 , and this forced the project's closing date to be extended twice to 31st December, 1995 from the original date of 31st December, 1993. Institutional Achievements 7. The institutional Development Program was focused on restoring discipline, accountability and efficiency of UPTC and building capacity through training and twinning. UPTC organization structure was reorganized during the early project implementation and there was a complete restructuring of UPTC between 1994 and 1995. (a) The posts of Deputy Managing Director/Telecomms Services and Deputy Managing Director/Postal services were introduced and filled. (b) Qualified Accountants for the levels of Chief Accountants, Principal Accountants were recruited. (c) Supplies and stores management was strengthened through the assistance of British Telecoms. At the same time there has been significant improvement in Human Resources Management area through introduction of manpower planning, further staff training and development as well as introduction of performance appraisals. The status of implementation of the program and its main aspects is detailed below. 8. Training The short term objective of the training program was to meet present needs for the existing network and the newly installed network. The long term objective was oriented to meet future technological advancement in the sector. In order to fulfill these objectives studies were carried out by TELECOM EIREAN SERVICES INTERNATIONAL (TESI) to: (a) determine the necessary staffing levels. The study was completed in March 1994 and most of the recommendations have been implemented, and (b) identify training needs and carry out a training program design. The study was completed in December, 1992. The recommendations could not be implemented due to the conflicts between UPTC's Board of Directors and UPTC management. When the Board was replaced and a new Board put in place in November, 1993, the fellowship training programme was given a go ahead. Under the program, training was undertaken overseas and locally at UPTC Training Institute under a fellowship scheme. Overseas training was for specialized courses which could not be conducted locally because of either lack of expertise or the necessary equipment. The Eastern and Southern Africa Management Institute (ESAMI) conducted tailor made management development workshops for UPTC's top, upper and middle managers. AFRALTI conducted Advanced External plant for Managers, Total Quality Management in Telecomms, Marketing of Telecomms Appendix 3 5 Page 5 of 11 services and application of Market Research, Common Channel Signalling No. 7 and Telecomms Equipment Protection . In all, training was a success considering that 144 UPTC staff were sent for fellowship training for various courses ranging 2-12 weeks giving a total 220 person months compared to the original target of 50 UPTC staff for courses ranging from 2 to 12 months. I.cal training covered 265 UPTC staff i.e. 90 person months. Equally well, training under twinning was also a success with 21 UPTC staff (43 person months) being trained in the program, although this was less than the original target of 24. 9. Finance and Audit M/s Price Water House was appointed at the beginning of the project to undertake a study of the financial and audit systems in UPTC. They covered the areas of finance and accounts, internal audit, corporate planning and management information systems (MIS) and a comprehensive report covering the current situation ,and recommending new procedures and control was produced. UPTC was not completely satisfied with the report on the Internal Audit because they did not produce some of the documentation for the recommended systems and internal audit programs as required by the TORs. UPTC implemented most of the recommendations with the exception of the major recommendation of computerisation of all aspects of the accounts and finance. UPTC is in the process of acquiring a new billing system using its own resources. In the mean time some computers have been acquired and computer training for all finance and accounts personnel is going on. Unfortunately the consultancy service in the finance, audit and MIS Departments of UPTC which was to concentrate on: (a) implementation of Price Waterhouse recommendation. (b) Design and implementation of an integrated MIS to cover all departments, and (c) Provision of training for UPTC staff; was left out of the project because of the delays in awarding the contract. UPTC will cover it during the operational plan. 10 Financial Performance: The financial performance of UPTC improved year after year during the project. This is partly due to the proper revisions of tariffs at the beginning of the project and during the project and also due to the intensive efforts in collecting the receivables. UPTC realised an operating profit in Financial Years 89, 90, 91 but foreign exchange losses turned these profits to operating losses. In Financial Years 92,.93 and 94, UPTC made modest profits after taking into account foreign exchange losses/gains. The operating profits are adjusted in the audited statements to take into account the fact that UPTC bears the foreign exchange losses on its foreign currency denominated debts (mainly from IDA). After taking into account these foreign exchange losses, the audited statements show profits of Shs. 19.4 billions for Financial Year 94, Ug. Shs. 5.6 billion for Financial Year 93 and Ug. Sh. 0.9 billion for Financial Year 92. Appendix 3 6 Page 6 of 11 11. BUU1im' Before the project, bills were some times as late as five months but now bills come out within 6 weeks after the end of the billing period. The accuracy of bills has also improved due to the introduction of automatic receptors at the bill paying points in Kampala, and introduction of computer terminals in Sales Office/Kampala to enter proper subscriber particulars immediately the telephone connection is completed. Computerisation was part of the project but its implementation was delayed due to Board/Management conflicts. It is being implemented through use of UPTC' own funds and is expected to be completed in 1996 . UPTC has also introduced a weekly billing system for high users for international services in Kampala such as hotels, oil companies, banks, etc. These customers form about 30% of the total billing volume. The outcome of this exercise has been rewarding. 12. Collection Due to the continued increase in Government indebtedness UPTC and the Government decided that the government indebtedness be offset by the debt swap through which UPTC loan from Government (IDA) is offset against outstanding telephone bills owed by government. Other efforts made to improve collection include:- (a) Strengthening the in-house collection efforts and use of external firms for debt collection as well as employing external legal agencies to take legal action for subscribers refusing to pay, (b) issuing bills on time, and (c) Intensive exercise of disconnection of subscribers in debt and a fine for reconnection 13. Tariffs Throughout the project, the Government and UPTC have been fully aware of the importance of regular adjustment of tariffs, to take account of inflation and foreign exchange fluctuations. In pursuit of this objective, tariffs were increased by 50 - 500% July 1988, and by a similar percentage in December 1989. In September 1991, the international tariffs were increased to compensate for exchange rate variations and at the same time these tariffs were pegged to the US dollar rates. It was after this adjustment that a net inflow of traffic into Uganda started and the ratio of incoming to outgoing calls which was 0.77 by then had reversed to 2.44 by April 1994. In July 1993,on the advice of IDA,UPTC made a study of the demand and revenue estimation model that had been used by the Sultanate of Oman to reduce international tariffs. After the study tour by 2 UPTC staff, the international tariffs were reduced by about 47% and a general increase in domestic tariffs was effected in May 1994. In August 1995, the international tariffs were again reduced by 25% but the domestic tariffs increased, especially the local calls. International traffic has in general been increasing and domestic traffic will be carefully analysed by UPTC in 1996. 14. Accounts and Audits: Prior to implementation of this project, UPTC used to be late in finalising its accounts and audit and the delays were in the range of 12 months behind schedule. This was due to lack of qualified manpower and a completely manual accounting system by then. The manpower position has greatly improved and now UPTC has 20 staff with accounting qualifications as compared to 6 at the beginning of the project. The FY93 draft financial statements were submitted to the Auditor General in October 1993 though the UPTC Act and Agreement require UPTC accounts to be audited within six months of the financial year end. The FY93 Appendix 3 7 Page7ofll accounts were completed in June 1994, six months behind schedule but that of FY94 were completed in March 1995, about 3 months behind schedule. There has been continuous improvement. Physical and Operational Achievements 15. Completion Schedule: The following sub-projects were successfully completed: (a) Rehabilitation and expansion of the Outside Cable Networks at Kampala, Entebbe and Jinja which involved the complete replacement of the old fault prone paper insulated copper cable by modem jelly filled copper cable, PCM cables and optical fibre cables. The total cable pairs was 84,000. (b) Purchase of essential materials, vehicle and spare parts for installation of new subscribers and maintenance of the network. These included teleprinters (200), fax machines (100), telephone sets (30,000) , payphones (200), modems (100), motor cycles (100), vehicles (118), bicycles (700), telephone cables and drop wire, cable jointing materials, tools and test equipment, generators , switchboards, training school equipment, postal items(Date stamps, private letter boxes, mail bags, weighing scales, unit safes, aerogrammes) Rehabilitation of the Mpoma Earth Station and the installation of Digital Multiple Access Radio Systems (DMARS) in the Central and South Western Uganda. 16. Project Costs and Financing A comparison of the estimated costs of the main project components, at appraisal and on completion, is shown in Annex A table 8A. At the closing date, the committed amount is US $ 5.1 million and the whole amount will be disburse by February 1996. There is a balance of US $ 2.0 million which will not be committed and disbursed. The balance is due to the cancellation of the sub project on consultancy services in the Finance, Audit and MIS Department of UPTC. Due to the fluctuation of the dollars to SDR, the total project comes to US $ 53.1 compared to the original amount of US $ 52.3. Generally the cost of the project at completion is about 7% lower than initially estimated due to favourable prices as result of international competitive bidding which was used on most of the components. 17. Operational Performance: The project has had substantial impact on the rate of subscriber connections and quality of service. At the completion in December 1993, of the outside plant rehabilitation and expansion of Kampala, Entebbe and Jinja, a verification exercise had to be carried out to get rid of "ghost subscribers". All existing and prospective subscribers were requested to verify/ apply for the services. At the beginning of the exercise, records showed that there were about 32,000 working subscribers but after the verification the number dropped to 22,000. Since then the number has grown to 41277 as at 30th Sept, 1995. This means an increase of 19,227 new subscribers in 21 months representing an annual growth of about 50%. Unfortunately this rate of gwoth will be affected because all the telephone exchanges such as Kampala Central, Nsambya, Makerere, Mbuya, Kyambogo, Mengo, Lubowa, Entebbe and Jinja are full to capacity. The replacement and expansion of these exchanges remains a matter of highest priority. There has also been drastic reduction in the number of faulty lines. Before completion of this component there was an average of 20% of lines faulty at any one Appendix 3 8 Page 8 of 1I time but this dropped to an average of 2.1% (September 95 figure). Progress in physical and operational performance of UPTC's network under the project and for the future operation in accordance with UPTC's operational plan are shown in tables 5 and 6 of Annex A as per available data and estimates. C MAJOR FACTORS WHICH AFFECTED THE PROJECT Factors Not Generally Subject to Government Control: 18 Devaluation: In the early period of the project when the Uganda Shilling was unstable, the UPTC suffered heavy foreign exchange losses due to devaluation and as a result UPTC could not realise any operating profit in the first three years of the project. In addition, UPTC's foreign debt soared during this period leading to the insustainable debt to equity ratio of 0.94. In FY 94 and FY 95 the Uganda Shilling appreciated relative to the US dollar and the Uganda Shilling is now fairly stable. Factors Generally Subject to Government and UPTC's Control 19 Management Conflicts: For three years (November 1990-November 1993) the project operated under very difficult conditions. The project started very well until in November 1990 when a new Board of Directors was appointed. The new Board decided to ran UPTC on a day to day basis which caused conflicts with UPTC management. Procurement of materials became a problem and was delayed. Eventually the Board suspended key project implementation staff in September 1991. The contract for the rehabilitation of the outside plant networks for Kampala, Entebbe and Jinja (60% of the project) suffered most. This Board which was appointed three months after effectiveness of the contract refused to approve the revised drawings after detailed survey by the contractor because the survey led to an increase of 3% of the contract price. The Board refused to pay for the local civil works for about 14 months. The contract was supposed to have been completed 26 months after effectiveness i.e October 1992 but it was not completed until December 1993 due to the Board bad attitude to this component of the project. In September 1992, a commission of inquiry was set up by the Minister of Works, Transport and Communications to investigate the problems at UPTC. The recommendations of the commission led to replacement of the Board in November 1993, dismissal of some members of management in March 1994, and reinstatement of the key project implementation staff who had been suspended. The conflict led to 14 months delay and in addition UPTC paid a penalty of US $ 420,000 to compensate the contractor for the delays. The same conflict delayed the implementation of twinning and fellowship training until 1994 and 1995. 20 Procurement: Besides the procurement problems caused by the Board, there were other procurement problems which delayed completion. The bids for the Outside Plant Networks for Kampala, Entebbe and Jinja had to be reissued because the original UPTC recommendation for award was queried by the bidders, IDA and Government and this caused a delay of about one year. Again during the period of over a year when the key project implementation staff were suspended by the Board the preparation of bidding documents and evaluation reports were not of the required standards and almost all documents had to be redone. Appendix 3 9 Page 9 of 11 21. Lack of Comouter Facilities: The lack of appropriate computer facilities was the main cause of delayed accounts, audit, billing and collection. All these activities had inaccuracies. The problem was not solved in the project because the computerisation and billing system was not implemented due to the Board/Management conflicts which caused the delay in procurement. UPTC has undertaken to finance this component and it will be completed in 1996. 22. Lack of sufficient Manpower: The lack of adequate trained manpower, especially on the finance side, was a major bottleneck at the beginning of the project to the full achievement of the project objectives. Through proper recruitment, fellowship training and other training, trained manpower is no longer a major problem to UPTC. D PROJECT SUSTAINABELITY As a result of the project, the network more than doubled, the telephone connections increased from 12,000 to 41,277 and the quality of service substantially improved from 20% to 2.1% faulty lines over total connections at any given time. This lead to increased benefits from telecommunication services to the overall economy and thus more revenue to UPTC. The financial benefits accruing from the project will enable future expansion and further rehabilitation of the network. The institutional capacity that has been built during the project will lead to better management and efficient operation of the telecommunication network. The Government is committed to the development of the sector and is aware of the constraints that have hindered its operation and its rapid development. These constraints have mainly been the lack of capital. In order to overcome this, the Government decided to privatise UPTC. The management of UPTC will therefore be handed to the private sector. This will enable maximum and efficient utilisation of the newly installed assets and ensure the sustainabilility of the project. E BANK PERFORMANCE 24 IDA's performance was satisfactory from the start of the project. Identification of the project was done when Uganda had a lot of insecurities due to civil wars, and preparation and appraisal were completed when Uganda was secure under NRM Government. IDA worked closely with GOU and UPTC to identify the components of the project. To ensure timely implementation a number of conditionalities were given to GOU and UPTC which were to be fulfilled before effectiveness of the credit. Some conditions were met with some delays but eventually the credit became effective on 5th June 1990. When the problems of conflicts between the UPTC Board of Directors and the Management surfaced IDA stood firm against elements that were delaying the project and discussed the issue with the Ministries concerned. Due to the IDA's good understanding, the project closing date was extended twice to ensure proper implementation and many World Bank Supervision missions to Uganda were made which greatly assisted GOU and UPTC to resolve several issues. F BORROWER PERFORMANCE 25. The GOU and UPTC worked very closely with IDA during the project identification, preparation and implementation. In the first six months, the project took off very well and procurement was fast but when new Board of Directors was appointed in November 1990 Appendix 3 10 Page 10 of 11 delays started occurring in processing of procurement document. The revised bills of quantity and drawings for the Outside Plant Networks for Kampala, Entebbe and Jinja were not approved until after 14 months. The conflicts between UPTC Board and Management continued until November 1993 when that Board was replaced by the a new one, the project staff reinstated and some UPTC staff on Management who had collaborated with the old Board dismissed/retired. From then on the GOU and UPTC continued to work closely until the project was completed in December 1995. G ASSESSMENT OF OUTCOME 26. The project outcome is satisfactory though its implementation was delayed by two years. The physical objectives were achieved except for the computerisation. Concrete progress has already been made in institution building in terms of consultancy services, fellowship training, local training and twinning of trainers. The Management studies that were carried out have assisted the GOU and UPTC to re-focus on efficiency improvement. Implementation of the recommendations of these studies have led to the reorganisation of UPTC into a more customer oriented commercial entity. A new organization structure is now in place and senior positions were filled through competition within and outside the UPTC. H. FUTURE OPERATIONS 27. Operational Plan. UPTC has prepared its Operational Plan for the period FY 96 to FY 2001 during which- the benefits from the project would be maximized. The plan reflects the overall delay of about 2 years in completing the project and having the new assets in operation. The working line capacities of 47, 000 subscribers initially appraised to be reached in 1994 will be realized in 1996/7. By then, the additional capacity of the local networks from the project, also using available and some additional switching capacities, will enable the establishment and maintenance of a yearly 15% growth of the number of customers. On the revenue side, current turnover per line is about 5% higher than at project inception. No assumption is made on the impact of the new tariffs but experience shows that improved tariffs structure increases usage. An improved and more efficient entity should then be ready for the proposed sector reforms, given the decision of the Government to privatize management is expected to be in place within the next two years. The management of the assets provided under this project will be undertaken by the new private owner who will provide the necessary expertise to maximize the benefits accrued from the project. 28. Financial and Economic Rate of Return. With the above assumptions in network growth and usage, the estimated internal rate of return (IRR) is 14.9% compared to 10.6% estimated at appraisal. This is mainly due to delayed investments in the non-revenue generating items (training and twinning) and the implementation of higher tariffs than estimated at appraisal. The economic rate of return (ERR) is estimated at 18.1% compared to 14.3% estimated at appraisal. The ERR understates the benefits. It does not take into account consumer surplus and external benefits to non-users of the network. The estimated rates of return are satisfactory though slightly lower than the average for telecommunications projects in general because the bulk of the investments were for replacement rather than expansion.The expansion element was only about 50%. Appendix 3 11 Page 11 of 11 I KEY LESSONS LEARNED 29. It is evident from the above that despite numerous implementation problems, with persistence and firmness it is possible to achieve satisfactory results. The implementation of both projects was slow and difficult but at the end all of the objectives were achieved. One major lesson of this project is that the Board and Management of a public entity could have diverse objectives. In this project, the Management was committed to the successful completion of the project but the previous Board intentionally frustrated Management's efforts. It is therefore essential that project objectives and targets are clearly defined during preparation and IDA has to ensure that the borrower remains on course during implementation to reduce domination by self interest. 30. Despite the achievements of this project, the available facilities are still far below the demand in terms of quantity and quality. The major problem remains to be lack of capital and management capacity. In order to solve these problems in the long term, the GOU has decided to privatize UPTC by selling 51% if its stake to a strategic investor. The GOU has also decided to license another operator to compete with the privatized UPTC. IDA and IFC are misting the GOU to implement these decisions. "a IBRD 28044 SUDAN ETIOPIA SUDAN ZAIRE K --.- -'' ------- KENYA KENYA TANZANIA - KiIgUm- UGANDA Gvu TELEPHONE NETWORK J EXISTING EXCHANGES AND TRUNKS SNATIONAL SWITCHING CENTER - Li- _ AREA SWITCHING CENTERS GROUP SWITCHING CENTERS - AUTOMATIC EXCANGS AP MANUAL EXCHANGES (DEPARTMENTAI) - UANUAL EXCHANGES (AGENCY) - TRUNK UNES K. -<- RIVERS Homao -.I > INTERNATIONAL BOCINDARIES Nooo -- - - - 0 10 20 30 S 50 6o wobu"nz Komli - 0 10 2-0 3o l0- Mubende ZAIRE K. - - KENYA - »Ma'ai- - a oo oo -M- -N- - 19 Ki-..-'--4.o x RWND 32- 3,' ojLurorOJUN 1996- L/C