Papua New Guinea - Telecommunication Project

RESTRICTED ILE COPY Report No.P-613 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TERRITORY OF PAPUA AND NEW GUINEA FOR A TELECOMMUNICATION PROJECT June 12, 1968  REPORT AND RECOIvkEDATION OF THE PRESID ENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TERRITORY OF PAPUA AND NEW GUflEA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $7 million to the Administration of the Territory of Papua and New Guinea. PART I - HISTORICAL 2. The Government of the Commonwealth of Australia and the Ad- ministration of the Territory of Papua and New Guinea have asked the Bank for a loan of $7 million to expand and improve the telecommunica- tion facilities in the Territory. The proposed loan would finance part of a long-term expansion program and will be used for the purchase of equipment, consultants services and interest during construction. This would be the first lending by the Bank Group in the Territory. Since the Territory is eligible for assistance by virtue of Australia's membership, the guarantee of the Commonwealth of Australia is required. 3. In 1963, the Australian Government asked the Bank to assist the development of the Territory by sending a general survey mission. The mission completed its report in 1964, making a number of recommenda- tions in the field of transport, agriculture, power and others. In 1966, the Australian Government specifically requested the Bank Group to con- sider a program of lending to the Territory, in response to which an economic mission visited the area in March 1967. The project which is presently under consideration, and the others to follow, stem from the findings of these two missions. 4. In 1966, the President of the Bank informed the Commonwealth Government that the Territory was considered eligible for assistance, but that any Bank Group financing should be additional to and not in place of assistance to the Territory by Australia, which the Bank expected would be continued. In fact, Australia's contribution to the Territory's budget is increasing. As this project is revenue earning, and would not impose a burden on the Te4rritory's budget, I am recommending a Bank loan in this case. The loan will be guaranteed by Australia. The Bank made seven loans to Australia between 1950 and 1962, all of which are fully disbursed. The sum- mary position of these loans as of May 31, 1968 was as follows: Amount (US$ million) Total (less cancellation) 417.7 of which has been repaid to the Bank and others 221.1 Total now outstanding 196.6 Amount sold 218.5 of which has been repaid 203.3 15.2 Total now held by Bank 181.4 Total undisbursed -0-  5. Negotiations were conducted in Washington from May 22 to June 3. The Government of the Commonwealth of Australia, the Guarantor, was represented by Mr. Gordon Low, Financial Minister of the Australian Embassy and Mr. A.C.C. Menzies, Senior Assistant Secretary Advising, Attorney General's Department. The Administration of the Territory of Papua and New Guinea, which is the Borrower, was represented by Mr. W. Carter, Director of Posts and Telegraphs, and Mr. K. Detto, Investigating Officer of the Treasury Department. 6. Within the next few months, subject to IDA replenishment, I expect to present to the Executive Directors an IDA credit of about $6.5 million for an agricultural development project. The Bank has agreed to act as Executing Agency for a comprehensive survey of trans- portation in the Territory, financed by the UNDP, which is now under way. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: The Administration of the Territory of Papua and New Guinea. Guarantor: Commonwealth of Australia. Amount: The equivalent in various currencies of $7 million. Purpose: To finance part of the foreign exchange cost of the four-year investment program for the expansion and improvement of telecommunication facilities in the Territory. Amortization: Twenty years, including a five-year grace period, payable in 31 semi-annual instalments beginning November 15, 1973 and ending November 15, 1988. Interest Rate: 64 percent per annum. PART III - THE PROJECT 8. A report entitled "Appraisal of the Telecommunication Project - Territory of Papua and New Guinea Department of Posts and Telegraphs" (TO-627) is attached. 9. An economic mission visited the Territory in March 1967 to review the economic situation and identify possible projects for Bank Group financing. The mission regarded an improvement in telecommunica- tions as being essential to the efficient administration of the Territory and the further development of its small but rapidly growing market econ- omy. The Department's investment program had been inadequate to keep up  - 3 - with the essential demands for new connections, and its long distance network, which had become hopelessly overloaded, had reached the stage where large expenditures were needed to overhaul the system. The pro- posed project is intended to overcome these deficiencies at a rate within the Department's capabilities. The benefits to be derived from the pro- ject will be substantial since physical communication within the Terri- tory is extremely difficult because of rugged terrain, scattered islands, and great distances between centers of economic activity. The delays and unreliability of the present long-distance telecommunication network limit its use to fulfilling only the most urgent requirements. Aidequate telecommunication links will be essential for further development in the various fields of economic activity in the Territory. 10. The four-year expansion program of the Department of Posts and Telegraphs, beginning mid-1968 and ending mid-1972, includes the expansion of the local telephone exchange service by 10,000 lines of automatic tele- phone exchange equipment at 35 existing or new exchanges and provides for the necessary increase in associated subscribers plant, telephones and radio outstations. The most important part of the project and the main area of financing is the substantial replacement of the long-distance toll and telegraph network with one of several times the present capacity. This consists of establishing on the main island of the Territory a microwave backbone route with a basic capacity of 300 channels, equipped with speech and telegraph channels, linking Port Moresby, Lae, Madang, Goroka and Mount Hagen, with appropriate spur links to other centers and offshore islands. 11. The total requirements of the program period 1969-72 of US$16 million including the necessary increase in working capital, would be financed about 43% by the proposed Bank loan, about 26% from internal cash generation, and the remaining 31% through Government advances. 12. All contracts for goods and services to be fLnanced under the loan would be procured on the basis of international competitive bidding. Out of the total investment in the program of US$16 million, about US$9 million would be procured from sources outside the Territory. Of this latter amount, it is estimated that at least US$3 million and possibly more will be procured from Australia. However, as in other cases of Bank Group financing in dependent territories, it is proposed to regard goods and services procured from Australia as being eligible for financing under the loan, notwithstanding the fact that Australian dollars are the "local currency" of the Territory. 13. The Department of Posts and Telegraphs is well organized and operated efficiently. However, because of the difficult physical con- ditions in the Territory and the small scale of current operations, operating costs are high, the long distance service is of poor quality and the telecommunications section of the Department is worked at a loss. Forthcoming improvements in the system and proposed tariff increases should improve the financial position and enable the Depart- ment to earn a return of 8 percent on its investment after the project is completed. PART IV - LEGAL INSTRUMENTS AND AUTHORITY :1t. The draft Lean Agrczement between the Bank ind the Administratiut' of the Territory, tbhe draft 2aarantee AgriaertJ bt'wemn the Iomrz.vA.t4;  of Australia and the Bank and the Report of the Committee provided for under Article III, Section 4(iii) of the Articles of Agreement are being distrib- uted to the Executive Directors separately. 15. The Loan Agreement would conform to the customary form for loans of this type when the Borrower is a Government department. It sets a rate of return of 8 percent as an objective of the Borrower which it would pro- pose to achieve as soon as practicable after the completion of the project through an increase of rates and charges. One such increase to agreed levels is made a condition of effectiveness of the loan. PART V - THE ECONOMY 16. A report "Current Economic Position and Prospects of the Territory of Papua and New Guinea"., in two volumes (AS-129b) was circulated to the Executive Directors on August 31, 1967. Attached is a memorandum updating that report and giving a general picture of the current economic position. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 17. I am satisfied that the proposed loan complies with the require- ments of the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 18. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Administration of the Territory of Papua and New Guinea in an amount equivalent to US$7,000,000 to be guaranteed by Commonwealth of Australia RESOLVED: THAT the Bank shall grant a loan to the Administration of the Territory of Papua and New Guinea to be guaranteed by the Common- wealth of Australia, in an amount in various currencies equivalent to seven million United States dollars (US$7,000,000), to mature on and prior to November 15, 1988, to bear interest at the rate of six and one-fourth percent (6