Nepal - Telecommunications Sector Reform Project

Document of The World Bank Report No: 22955-NEP PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR17.50 MILLION (US$22.56 MILLION EQUIVALENT) TO THE KINGDOM OF NEPAL FOR A TELECOMMUNICATIONS SECTOR REFORM PROJECT October 29, 2001 Policy Unit, Global Information and Communication Technologies Department South Asia Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective August 2001) Currency Unit = Nepalese Rupees (NRp) 1.0 NRp = US$0.01334 US$1.0 = 74.79 NRp FISCAL YEAR July 1 -- June 30 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy DANIDA Danish Agency for Intemational Development Assistance ERR Economic Rate of Return FCGO Financial Comptroller General's Office FMD Frequency Management Division GATS General Agreement on Trade in Services GSM Global System for Mobile Communications HMG Hlis Majesty's Government ICB International Competitive Bidding ICT Information and Communication Technologies IDA International Development Association MOF Ministry of Finance MOIC Ministry of Information and Communications NCB National Competitive Bidding NTA Nepal Telecommnunications Authority NTC Nepal Telecommunications Corporation PCU Project Coordination Unit PMR Project Management Report PMU Project Management Unit RFA Request for Application RFP Request for Proposals RFPDC Radio Frequency Policy Determination Committee RTS Rural Telecommunications Service SDR Special Drawing Rights SOE Statement of Expenditure TA Technical Assistance UNDB United Nations Development Business VDC Village Development Committee VSAT Very Small Aperture Terminal WLL Wireless Local Loop WTO World Trade Organization Vice President: Mieko Nishimizu Country Director: Kenichi Ohashi Sector Manager: Pierre A. Guislain Task Team Leader: Ritin Singh  NEPAL TELECOMMUNICATIONS SECTOR REFORM PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 7 C. Project Description Summary 1. Project components 8 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 10 4. Institutional and implementation arrangements 11 D. Project Rationale 1. Project altematives considered and reasons for rejection 12 2. Major related projects financed by the Bank and other development agencies 15 3. Lessons learned and reflected in the project design 15 4. Indications of borrower commitment and ownership 17 5. Value added of Bank support in this project 17 E. Summary Project Analysis I. Economic 17 2. Financial 19 3. Technical 20 4. Institutional 20 5. Environmental 21 6. Social 22 7. Safeguard Policies 23  F. Sustainability and Risks 1. Sustainability 23 2. Critical risks 24 3. Possible controversial aspects 26 G. Main Conditions 1. Effectiveness Condition 26 2. Other 26 H. Readiness for Implementation 27 I. Compliance with Bank Policies 27 Annexes Annex 1: Project Design Summary 28 Annex 2: Detailed Project Description 33 Annex 3: Estimated Project Costs 38 Annex 4: Economic and Financial Analysis Summary 39 Annex 5: Financial Sumnmary 42 Annex 6: Procurement and Disbursement Arrangements 43 Annex 7: Project Processing Schedule 54 Annex 8: Documents in the Project File 55 Annex 9: Statement of Loans and Credits 56 Annex 10: Country at a Glance 58 MAP(S) IBRD 26085  NEPAL Telecommunications Sector Reform Project Project Appraisal Document South Asia Regional Office Policy Unit, Global Information Communications Technology Department Date: October 29, 2001 Team Leader: Ritin Singh Country Manager/Director: Kenichi Ohashi Sector Manager: Pierre A. Guislain Project ID: P050671 Sector(s): CC - Telecomnmunications & Informatics Lending Instrument: Specific Investment Loan (SIL) Theme(s): Telecom & Informatics Poverty Targeted Intervention: Y Program Financing Data [ ] Loan [X] Credit [ ] Grant [ Guarantee [ Other: For LoanslCreditslOthers: Amount (US$m): 22.56 Proposed Terms (IDA): Standard Credit Financing Plan (US$m): Source Local Foreign Total BORROWER 1.99 0.00 1.99 IDA 0.53 22.03 22.56 Total: 2.52 22.03 24.55 Borrower: KINGDOM OF NEPAL Responsible agency: MOIC/NTA Ministry of Information and Communications Address: Singha Durbar, Kathmandu NEPAL Contact Person: The Secretary Tel: 977-1-220150/225556 Fax: 977-1-221729 Email: moicpl@ccsl.com.np, moicppme@ntc .np Other Agency(ies): Nepal Telecommunications Authority Address: Singha Durbar, Kathmandu, NEPAL Contact Person: The Chairman Tel: 977-1-221944 Fax: 977-1-260400 Email: ntra@mos.com.np Estimated disbursements ( Bank FYIUS$m): FY 2002 2003 2004 2005 2006 Annual 1.00 7.07 9.05 3.96 1.48 Cumulative 1.00 8.07 17.12 21.08 22.56 Project implementation period: 5 years Expected effectiveness date: 03/01/2002 Expected closing date: 09/01/2007 OCS F/AD Flm F F Mnrd,, 210  A. Project Development Objective 1. Project development objective: (see Annex 1) A1.1. After the adoption of a National Telecommunications Policy in September 1999, His Majesty's Government of Nepal (HMG) initiated the implementation of an ambitious telecommunications sector reform program. The primary focus of the reforms is to increase access by developing a competitive and liberalized market structure. The objective of this project is to support this ongoing reform process by: (a) assisting the Ministry of Information and Communications (MOIC) to develop its capacity to set policy and manage the radio spectrum; (b) assisting the Nepal Telecommunications Authority (NTA) to establish itself as an independent and effective regulator; and (c) enabling private provision of telecommunication infrastructure and services in rural areas. 2. Key performance indicators: (see Annex 1) (a) Telephone (fixed and mobile) penetration of 3 per 100 inhabitants by the end of 2005. (b) Private operator commences mobile cellular service by June 2002. (c) Full competition in all market segments through private sector operators from 2004. (d) Private rural telecommunications service (RTS) operator to provide a minimum of two public access lines to the 534 unserved village development committees (VDCs) in the Eastem Development Region by the end of 2004. (e) Radio frequency assigned within 15 days of application by end of 2005, for 90 percent of applications. (f) Pilot public Information and Communications Technologies (ICT) access center begins operations by October 2003. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 18578 Date of latest CAS discussion: 12/15/98. A CAS progress report will be prepared in the second half of FY02. B. 1.1. The project is fully consistent with and supports the CAS (1998), which specifically mentions the need to: (a) facilitate competition and private sector participation in the telecommunications sector; (b) strengthen the regulatory framework; and (c) increase access to adequate and efficient telecommunications services. The project supports HMG in key areas that are consistent with the World Bank Group's ICT Sector Strategy (August 6, 2001), that include broadening and deepening sector reform and increasing access to information infrastructure. Furtherrnore, the licensing of a rural telecommunications service provider under the project is designed on the principles of output-based aid. -2 -  2. Main sector issues and Government strategy: B.2. 1. An overview of the sector management/structure is summarized and shown in Table 1. Table 1: Existing Institutional Framework (May 2001) Category Description Ministry responsible for policy Ministry of Information and Communications. Regulatory and licensing authority Nepal Telecommunications Authority. Legislation Nepal Telecommunications Act 2053 (1997) establishing NTA; Amendment of January 2001 Basic services - Local services Nepal Telecommunications Corporation (NTC); In addition NTA has selected a private operator to provide basic services using wireless local loop (WLL); the license will be issued in November 2001. - National long distance services NTC: monopoly will end in 2003. However, until then, WLL operator may carry its own long distance traffic in its area of operation. - International services NTC: monopoly will end in 2003. Cellular service NTC: In addition NTA has selected a private operator to provide nationwide cellular services; the license will be issued in November 2001. Internet Liberalized (including access to international bandwidth). Paging/VSAT/Data Liberalized. Radio spectrum allocation Interministerial committee - Radio Frequency Policy Determination Committee (RFPDC). B.2.3. NTC, a wholly government-owned corporation, was until recently the monopoly provider of basic and cellular services. Prior to the approval of the National Teleconimunications Policy in 1999, NTC had exclusive rights to build telecommunications infrastructure and to provide all telecommunications services, including basic and cellular services. The private sector's role has been limited to retailing teleconmnunications equipment. Competition has begun with the entry of private sector operators in internet, very small aperture terminal (VSAT), data communications and pay phone services. In addition there are approximately 1,000 public call centers offering telephone, telex, and fax services. In line with the National Telecommunications Policy, NTA selected through a transparent competitive process, private operators for the provision of basic services using WLL and cellular global system for mobile communications [global system for mobile communication (GSM)] service. Under the project, NTA will also award a RTS license to a private operator selected through a market mechanism, to provide services in the Eastern Development Region. Key Sector Issues B.2.4. Low level of telecommunications service. Nepal has an overall low level of telephone density at approximately 1.13 lines per 100 inhabitants, compared to a world average of 10.5 lines; it is lower than in Indonesia (2.9), Pakistan (2.21), and Sri Lanka (3.64). Approximately two-thirds of the telephones are in the Kathmandu valley which accounts for less than 5 percent of the population. Kathmandu has a teledensity of 18.2 lines per 100 inhabitants compared with 1.13 for the country as a whole, and 0.06 in rural areas (including the Eastern Development Region). Low telephone density is coupled with a high level of unmet demand for basic telephone services. There is a current waiting list of more than 289,000 subscribers, which translates into a waiting period of more than five years for service connection. - 3 -  Furthermore, the expansion of the mobile market (currently with only about 14,700 customers compared to about 391,000 in Pakistan, and 390,000 in Sri Lanka) has been much slower than expected. This low level of teledensity for both fixed and cellular services reflects the need for bold reform initiatives to attract greater private investments in the sector to bridge the supply/demand gap. Table 2: Performance of the Nepal Telecommunications Sector, a Comparative Perspective Nepal Pakistan Sri Thailand Indonesia India Low Income Lanka Countries Main lines per 100 persons 1.13 2.21 3.64 8.57 2.90 2.65 2.54 (1999) Mobile subscribers per 100 0.01 0.18 1.48 4.58 1.15 0.19 - persons (2000) Internet hosts (1999) 290 4,740 1,210 40,200 21,100 23,400 - Waiting time for fixed 5.8 1.4 2.7 1.1 NA 0.8 0.3 telephones in years (1998) No. of lines per employee (1999) 54 51 61 154 135 63 63 Source: International Telecommunications Union B.2.5. Inadeguate access to telecommunications service in rural areas. As a result of resource and geographical constraints, access within the country is uneven and there are many large rural areas with virtually no telecommunication services. Approximately 80 percent of Nepal's population resides in rural areas, and out of 3,914 VDCs only about 1,761 (about 45 percent) have access to telecommunication services as indicated in Table 3 below. Table 3: Distribution of Telecommunications in Nepal Eastern Central Western Mid-Western Far-Western Region Region Region Region Region Population 4,842,407 6,20,039 4,160,968 2,763,767 1,838,939 Number of VDCs 893 1,199 864 575 383 VDCs with service 359 547 417 207 181 VDCs with no service 534 652 447 368 202 Source: Ministry of Information and Communications, 2001 Given recent advances in wireless and satellite technologies, the potential has increased for these populations to benefit from access to affordable communications as well as information for commerce, education, health, and other sectors. While HMG's objective, as stated in its policy, is to provide at a minimum two public access lines in each of the 2,163 unserved VDCs by 2004, ensuring this rural access shall be difficult and challenging since: (a) NTC has limited capacity to implement rollout of rural services in a timely and efficient manner; and (b) the level of public investments required are not within the financing capabilities of the Ministry of Finance (MOF). Moreover, the traditional approach of public investment in rural communications has not led to notable and timely increase in access. To address these issues, HMG has decided to allow the private sector to provide telecommunication and information services in rural areas as well. As a first step, NTA intends to license a private RTS operator for the Eastern Development Region which is also considered a commercially viable region. Initially, this RTS operator is - 4 -  expected to provide service in the 534 unserved VDCs. In addition, based on community demand and potential economic and social benefits, HMG plans on establishing public ICT access centers. B.2.6. The lack of an adequate separation of policy, and service provision functions. The sectoral responsibilities between MOIC and NTC are being changed and clarified. Presently, MOIC is responsible for policy-making, but the secretary of MOIC is also the chairman of the board of NTC, and MOIC is dependent on NTC for technical advice. HMG recognizes that the effective separation of these functions is key in a multioperator environment advocated under the National Telecommunications Policy. In line with the Bank's dialogue, HMG has initiated actions to convert NTC into a public limited company. In order to pernit NTC to compete in the emerging multioperator environment, NTA has issued licenses to NTC to provide mobile, internet, and fixed services. B.2.7. The lack of institutional capacity within MOIC to effectively carry out its policy function. MOIC lacks the institutional capacity to effectively formulate policy and execute sector liberalization. In the previous monopoly market structure, MOIC depended on NTC. With the adoption of the National Telecommunications Policy of 1999, it is imperative that MOIC's capacity is strengthened to formulate and implement policy, independent of operator biases. Hence, MOIC's Planning Section must be strengthened, and a change is needed for the transition from planning and managing operations to a role of policy review, formulation, and implementation to support the orderly development of a multioperator environment. B.2.8. The need to modernize NTA's regulatory practice. Since its establishment in 1998, NTA has done a remarkable job creating competition in the small but less complex value added services market by authorizing over 65 operators to provide various value added services. In addition, it will issue licenses to a second cellular mobile operator and a fixed line operator for basic services. NTA is also in the process of licensing a private operator for the provision of RTS in the Eastern Development Region. The International Development Association (IDA) has provided limited support to NTA through trust funds and grants. The Danish Agency for International Development Assistance (DANIDA) had also provided interim support on regulatory issues until September 2001. NTA's focus to date has been to contain anticompetitive behavior in a multioperator environment. NTA also recognizes the need to modernize its regulatory practices to address issues in line with international best practice. However, NTA staff lack the training in terms of ensuring effective interconnection between service providers, compliance with license conditions, establishing tariffs, monitoring the carrier's quality of service performance, reviewing the World Trade Organization (WTO)/General Agreement on Trade in Services (GATS) offer, and the type approvals for radio and telecommunications equipment to ensure interoperability of systems. Effectively addressing these and newly emerging regulatory issues is critical to the strengthening NTA's institutional capacity. B.2.9. Limited spectrum management and monitoring capabilitv. In MOIC, the Frequency Management Division (FMD) is a small unit with limited capacity and capability, which makes it difficult to efficiently manage and monitor the radio spectrum. In a monopoly environment there was little need to manage the spectrum, so this important function was not critical. However, in a competitive environment with the increased use of wireless technologies by new entrants, this has the potential to become a serious bottleneck. Procedures need to be put in place, supported by infrastructure and trained staff, to ensure that optimal use is made of the radio spectrum. The existing frequency management and monitoring infrastructure is outdated and needs to be modernized. As a result of FMD's limited capacity for spectrum monitoring and management, there has been growth in the illegal use of transmitters, and HMG has lost the opportunity to reap the fiscal benefits from the optimal use of this national resource. B.2. 10. The need to rebalance NTC's tariff levels. NTA has adopted a progressive tariff regime conducive to private investment in the sector. New entrants are free to charge tariffs with the provision that - 5 -  the maximum ceiling on the rate of return is 25 percent. To ensure fair competition, NTA only regulates (in detail) the tariff levels and structure of the incumbent operator. The National Telecommunications Policy requires that NTC's tariffs be rebalanced to reflect costs by 2004. The tariff structure and levels need to be adjusted, as current tariffs are distorted with local and long distance rates generally low, and international rates very high. The tariff levels for each service need to be aligned towards the cost of providing services; and it is necessary to rebalance NTC's tariffs to ensure that revenues are not adversely affected by ongoing trends in the sector (i.e., a fall in revenues from international settlements), so that NTC remains competitive in a multioperator environment. NTC has submitted a draft tariff rebalancing strategy, and NTA is currently reviewing it. At present, a three-minute local call in Nepal costs $0.01, the maximum charge for a one-minute long distance national call is approximately $0.10, and the per minute cost of a call to the US is approximately $1.70. NTC's tariff rebalancing plan broadly proposes raising local and national long distance call charges while reducing international tariffs. Further, monthly rental charges are likely to be increased to a maximum of $3.00 (approximately) by 2004. Government Strategy B.2. 11. HMG recognizes the importance of telecommunications as a key factor for economic development, social inclusion, and enhancing the welfare of the population. HMG has taken a number of important actions to improve sector performance, such as: (a) Parliamentary approval of the Telecommunications Act in January 1997 which was enacted in November 1997, and amendments in January 2001, that established a modern framework to regulate the sector. This regulatory framework is aimed at creating a level playing field for all operators and increasing competition in the sector; (b) adopting a new and progressive National Telecommunications Policy in September 1999. The policy objective is to liberalize the sector by promoting private participation and competition in all market segments; (c) articulating a rural access strategy in its National Telecommunications Policy of providing at a minimum two public access lines per VDC by 2004; and (d) establishing the NTA as stipulated in the Act, and appointing its chairman and two board members. B.2.12. Progress has been made in the implementation of the policy as evidenced by the following key actions taken by the HMG and NTA: (a) authorizing over 65 new operators to provide value-added services (VSATs, radio paging, and internet service providers); (b) selecting a second private sector cellular GSM operator in March 2001; (c) selecting a private national operator to provide basic service based on WLL technology in May 2001; (d) deciding in December 2000, to convert NTC to a limited company under the Company Act. Subsequently NTA also issued a license to NTC for its fixed services in January 2001; and - 6 -  (e) deciding to use a market mechanism to involve the private sector in the provision of RTS by allocating a capital subsidy to the operator bidding the lowest subsidy amount. This mechanism is being tested with the assistance of the Bank for the 534 unserved VDCs of the Eastern Development Region. Based on the outcome, HMG expects to replicate this approach in other regions. HMG recognizes that in some areas of Nepal the provision of rural services might be associated with less attractive financial returns. Accordingly, HMG included an incentive framework whereby all rural operators: pay a notional license fee of $1,500; get a waiver on charges for the use of the radio spectrum; and postpone contributions to a rural development fund for five years. 3. Sector issues to be addressed by the project and strategic choices: Sector Issues to be Addressed by the Project B.3. 1. The project is designed to: address key sector reform issues necessary to create an environment that will facilitate private sector participation and competition in the telecommunications market; and assist HMG to bring timely and efficient telecommunication services to rural areas. The project specifically addresses the aforementioned sector issues through the following: (a) Strengthening MOIC's capacity to carry out its policy making function through technical assistance (TA) for institutional development; review and formulation of the policy agenda; and professional development and training for staff. (b) Strengthening spectrum monitoring and management. FMD will be strengthened through TA to effectively carry out the radio spectrum management functions, including: establishing radio regulations, a national frequency allocation plan, and spectrum pricing policies. TA will also be provided to improve frequency management procedures and processes, and to develop a suitable organization plan to strengthen FMD as a professional agency. FMD will be given assistance for procuring spectrum management and monitoring equipment. (c) Strengthening NTA 's capacity to regulate the sector in the emerging multioperator environment, and ensure a level playing fieldfor all operators. NTA will be strengthened through TA to carry out consultative studies on regulatory issues including, inter alia, sector liberalization, licensing, interconnection issues, tariffs, numbering, monitoring carrier performance, convergence, universal access and fostering fair competition, and training and professional development of NTA staff. In particular, TA will be provided to help NTA steer towards a more modem and simple regulatory regime. (d) Increasing rural access to telecommunications services through the licensing of a private ATS operator and establishing public ICT centers. IDA will support HMG in implementing its rural access strategy to provide services in the 534 unserved VDCs of the Eastern Development Region. HMG is using a market mechanism that catalyzes innovative and sustainable private provision of services in rural areas and ensures the efficient allocation of limited public resources. Under a grant-funded TA, NTA carried out an international competitive bidding (ICB) process for the award of the RTS license and capital subsidy. The response was satisfactory, with two out of three applicants submitting offers. NTA followed a transparent bidding process and selected an international consortium. However, the RTS license was not awarded as the selected bidder withdrew from the process in July 2001, citing political uncertainty. IDA has agreed to HMG/NTA's request for a new round of bidding - 7 -  based on an updated Request for Application (RFA). This new round is expected to be initiated in November 2001, and will take approximately six to nine months to conclude. To supplement the minimum of two public access lines per VDC, establishing public ICT centers is also planned for rural areas. Strategic Choices B.3.2. HMG's strategy for dealing with telecommunications sector issues is predicated on the expectation that the successful implementation of sector reform should trigger private investment flows in the sector. The proposed project, therefore, focuses on initiatives that: (a) enhance broad sector development; (b) position telecommunications as a major enabler of sustained economic growth, notably in the IT and service sectors; (c) facilitate equitable access of services to the rural poor; (d) command widespread support and HMG commitment; and (e) are clearly feasible in the next five years. B.3.3. Sequencing liberalization and privatization. IDA fully supports HMG's strategic approach to deal with the issues and constraints identified above. There is ample evidence that proper implementation of market liberalization, followed by transparent privatization transactions, have resulted in dynamic competition. This strategy is currently being followed by countries implementing telecommunications sector reforms with the assistance of the World Bank (Kenya, Malawi, Mauritania, Morocco, Sri Lanka, and Tanzania). The proposed project will assist HMG to implement a new sector structure in which private ownership, management, and capital become the principle drivers of investment and development. The emphasis is to open all segments of the telecommnunications market to competition, including rural operations. While privatizing NTC is important, it is less critical for sector development and reforms at this stage and so is not part of the project's primary focus. B.3.4. Choosing the appropriate rural access delivery vehicle. In the past, HMG has invested considerable public resources through NTC to provide telecommunication services in rural areas. HMG decided not to depend entirely on NTC for the delivery of rural access services but to license a private operator for the Eastem Development Region. This decision was based on the conclusion that NTC would find it difficult to implement its rural access strategy in a timely manner. Moreover, the operation and maintenance costs would also have to be bome by NTC/HMG. Based on intemational experience, it is expected that competition and private management of operations will stimulate network growth and increase coverage of previously unserved areas, which should give the poor access to telecommunications and information services. However, HMG recognized that creating the enabling conditions for opening the telecommunications sector to private investment may not provide the adequate incentives to attract new entrants in rural areas. HMG therefore decided to use a market mechanism to award a capital subsidy to the private operator for the provision of RTS. This approach will ensure the efficient allocation of public funds and will also provide a benchmark for the allocation of funds to other operators. Other than the capital subsidy payment there will be no public investment obligations by HMG. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): C. 1.1. A detailed description of the project components and estimates of detailed cost breakdown are provided in Annex 2 and 3 respectively; a summary of the project components, estimated costs and proposed Bank financing are provided in the following table. The total project cost is estimated at $24.55 million. -8 -  Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing A. MOIC Component (i) Strengthen MOIC's capacity Telecommunications 0.83 3.4 0.70 3.1 & Informatics (ii) Strengthen spectrum monitoring and 5.95 24.2 5.18 23.0 management (iii) Support to the project coordination 1.26 5.1 1.10 4.9 unit (PCU) B. NTA (i) Strengthen NTA's capacity 2.43 9.9 2.05 9.1 (ii) Rural access subsidy 10.00 40.7 10.00 44.3 (iii) Public ICT access centers 3.53 14.4 3.53 15.6 (iv) Support to the project management 0.55 2.2 0.00 0.0 unit (PMU) Total Project Costs 24.55 100.0 22.56 100.0 Total Financing Required 24.55 100.0 22.56 100.0 C. 1.2. The project includes two main components. The MOIC component will provide financing for local and international consultant services, training, studies and equipment to strengthen MOIC's policy and spectrum management functions by supporting: (a) the Planning Section to effectively carry out its policy functions; (b) FMD to effectively manage and monitor the radio spectrum; and (c) the Project Coordination Unit (PCU). The NTA component will finance local and international consultant services, studies and training to strengthen the NTA's capacity to respond in a timely manner to regulatory issues in a competitive sector. It also includes support to NTA to implement HMG's strategy for provision of telecommunications services in rural areas. C. 1.3. HMG recognizes that rural access service might be associated with less attractive financial returns. On the advice of HMG, NTA is using a market mechanism to finance a capital subsidy for a private RTS operator to provide services in 534 unserved VDCs. The operator will serve approximately 3.22 million people in the Eastern Development Region. This approach is expected to meet the dual objectives of extending access in rural areas and encouraging private participation in developing the sector. Details of the licensing process are in the draft RFA which was prepared in accordance with IDA's Procurement Guidelines. The key features of the rural licensing are summarized in Annex 2. In addition to the minimum rural access, the NTA component will also finance the establishment of public ICT access centers in rural areas. Initially, assistance will be provided to NTA to plan and implement a pilot phase. Subsequently, this will lead to evaluating and developing replicable models for sustainable public ICT access centers. Upon the successful implementation of the pilot phase, the program will be scaled-up to -9-  cover a larger geographical area. 2. Key policy and institutional reforms supported by the project: C.2. 1. The project supports key reforms in the telecommunications sector to increase private sector participation in the provision of infrastructure and services. Specific institution building goals will be achieved through capacity building within: (a) MOIC to independently define policy directions and particularly coordinate the strategies for liberalization and privatization; (b) NTA to manage regulatory issues; including making NTA fully functional to intervene on issues, such as facilitating new entry; NTC's tariff levels (noncompetitive services); anticompetitive practices (including settling interconnection conflicts); licensing, quality of service issues; and information collection and dissemination; (c) NTA in the RTS licensing process, and during certification and monitoring of the private RTS operator in the Eastern Development Region. This also includes the payment of the capital subsidy to the operator over a two-year period, upon NTA certification that the RTS operator is meeting its license obligations. Based on the success of this approach to rural service provision, NTA will consider licensing operators in other regions along the same principle; and (d) FMD to ensure effective allocation, monitoring and management of the radio spectrum. 3. Benefits and target population: C.3. 1. The project would benefit all of Nepal's telecommunications users by increasing the availability and quality of telecommunications services. Expanding and improving telecommunications services will create opportunities to enhance the lives of the people, and to contribute to economic development through the timely delivery of information. The rural access component specifically targets low-income, rural, and other disadvantaged populations; and is expected to improve equitable access to telecommunications and information services, often for the first time. This will give rural populations easier access to market and other information, and will facilitate the delivery of social services to rural areas. The RTS operator will initially provide a minimum of two public access lines in the 534 unserved VDCs of the Eastern Development Region. The total population expected to be covered is approximately 3.22 million. In addition, it is expected that the private RTS operator will create opportunities for local entrepreneurs to provide ICT services through franchises and other models. C.3.2. Businesses that increasingly depend on telecommunications services to be competitive will benefit from lower costs of international communications, and the availability of an increased variety of value-added services. Enterprise development will increase as a result of a wider array of telecommunications services being offered, and the investment opportunities in new telecommunications/information-related businesses. Nepal will be more attractive to foreign investors if it has a modem telecommunications sector with a well-established legal and regulatory framework. C.3.3. Supporting the regulator in effectively implementing reform initiatives will lead to more transparent and accountable governance of the sector. It will also reduce the risks to private investors (particularly foreign) and increase their interest, since operators will know the rules for licensing, tariff adjustments, interconnection, etc. MOIC will benefit from developing its capacity to manage radio - 1 0 -  spectrum and thereby ensuring the availability of frequencies and reducing radio interference problems. This will improve the quality of services offered to the public and will make private investment in wireless technologies more attractive. C.3.4. Supporting FMD will allow it to assign frequencies based on recommendations by the International Telecommunications Union. This will make private investment in the deployment of wireless technologies more attractive, cost effective, and will improve the quality of service. Improved licensing and monitoring of the frequency spectrum will enable HMG to collect license fees and royalties and efficiently use the scarce national resources. C.3.5. Supporting the establishment of public ICT access centers will provide the marginalized rural and peri-urban Nepalese population with: (a) access to affordable information and related services; (b) an enabling environment to create local information content; and (c) improved information exchange, dissemination, and opportunities in sectors such as health, education, and agriculture. 4. Institutional and implementation arrangements: C.4. 1. The project will be implemented over five years, from March 1, 2002, to February 28, 2007. C.4.2. The PCU in MOIC will be responsible for overall project coordination. The PCU will be headed by the project coordinator (chief of the Planning Division has been appointed from MOIC) who will report to the Secretary of MOIC, and will include a senior accounts officer and accountant, a procurement specialist and secretarial staff. To fulfill its responsibilities for project implementation, NTA will be supported by the recently established PMU, that will be headed by a project manager who will report to the Chairman, NTA. In addition, the PCU and PMU will be staffed by existing MOIC and NTA staff who will simultaneously carry out their policy and regulatory functions. C.4.3. The PCU will be responsible for overall reporting on the progress of the project's implementation, preparing consolidated project accounts and project management reports (PMRs). In terms of technical implementation of the project, MOIC and NTA will be completely responsible for their respective components. The PMU is independent of the PCU in its operations, and only provides the required reports to the PCU for compilation and submission to IDA. C.4.4. NTA and IDA have agreed to retain consultants to monitor and supervise the RTS rollout and service quality obligations as per license conditions. The consultants will also monitor expansion of services as dictated by demand. NTA will report to IDA on a quarterly basis, including certification of the RTS operator's compliance with the license. C.4.5. Financial management. The proposed financial management system in the implementing agencies was reviewed and these are considered to meet minimum financial management fiduciary requirements. In order to make the system more effective in terms of reporting project expenditures, the project will prepare a project financial management manual. The project will not be immediately ready to produce a full set of project monitoring reports, or apply PMR-based disbursement methods. In addition, the assessment concluded, in the context of the project supporting the institutional strengthening of NTA, that NTA should enhance its institutional financial management capacity. An action plan outlining steps to permit the project to produce a full set of PMRs and to build NTA's capacity was agreed between MOIC, NTA, and IDA. Detailed findings of the financial management review and the action plan are in Annex 6. C.4.6. Project accounting. The PCU and PMU will be responsible for maintaining records and - 11 -  accounts of the activities under their respective project components. The PMU in NTA will submit trimesterly PMRs to the PCU in MOIC based on agreed formats. The senior accounts officer in the PCU will review and compile the PMRs for transmission to IDA. The project's reporting, monitoring, and evaluation arrangements will include: (a) trimesterly PMRs; (b) biannual Bank supervision missions; (c) joint MOIC/NTA/Bank annual progress reviews, and a midtern review (about two years after the date of effectiveness of the credit); and (d) a completion report to be transmitted by the HMG to the Bank within six months of the project's closing date. C.4.7. Initially disbursements from the credit will not be made on the basis of PMRs, but rather on traditional transaction-based disbursement procedures. If the project makes good progress with the financial management action plans, IDA will assess (by January 31, 2003), the readiness of MOIC and NTA to migrate to PMR-based disbursements. C.4.8. Disbursements for the rural access component will be made in accordance with the license conditions in the RFA. NTA, with the assistance of consultants, will monitor, supervise, and certify the performance of the RTS operator. C.4.9. Planning and budgeting: The project will follow HMG's planning and budgeting system. MOIC and NTA will be responsible for preparing their respective budget plans and programs per their agreed work programs. The PCU will submit a consolidated budget request for MOIC and NTA components to the MOF. HMG will include this project in its list of core projects, and will commit to timely release of counterpart funds. C.4.I 0. A special account in US dollars with an initial authorized allocation of $500,000 will be established at the Nepal Rastra Bank (Central Bank) on terms and conditions satisfactory to IDA. The authorized allocation may be increased to $1,000,000 when the aggregate amount of withdrawals from the credit account, plus the total amount of all outstanding special commitments entered into by IDA is equal or exceeds the equivalent of special drawing rights (SDR) 2,500,000. This limit will be reviewed in the event that PMR-based disbursements is introduced. C.4. 11. Audit arrangements: The project, statements of expense (SOE), and special account audits will be conducted by the Auditor General of Nepal. The NTA fnancial statement audit will be conducted by the auditor general. The audit reports will be submitted to IDA within six months of the end of each fiscal year. D. Project Rationale 1. Project alternatives considered and reasons for rejection: D. 1.1. HMG is currently undertaking a credible reform program to liberalize the sector, which is expected to increase competition and private investments. The reform agenda is consistent with the Bank's strategy for the telecommunications sector, which calls for shifting the government's role from ownership and operations to policy making and regulation, promoting competition, efficiency, service quality, and increasing private sector participation. IDA has played a critical role in promoting this reform agenda in Nepal, and finds the commitment and ownership appropriate to support. Through ongoing dialogue and technical assistance both MOIC and NTA would focus on strengthening their policy and regulatory activities over the project implementation period. - 12 -  D. 1.2. IDA will play a catalytic role in Nepal by providing technical and investment assistance to extend private sector-led telecommunications service delivery to rural areas. NTA recently carried out an ICB process to issue a RTS license which demonstrated that private sector interest exists for the provision of telecommunication services in rural Nepal. However, commercial operators were not prepared to expand access to rural areas on their own and required financial support. This is the first time that IDA is substantially involved in rural telecommunications development and finance, in the context of policies that advocate a privately led competitive sector structure and the provision of capital subsidy. In addition to HMG's policy of ensuring a minimum of two public access lines in all VDCs by 2004, there is demand for ICT access in the rural community. This will be supported by public ICT access centers which will be first established on a pilot basis. Other Project Alternatives Considered D. 1.3. Using existing instruments. Implementation of Nepal's telecommunications sector reform was partially supported under limited TA from the Policy and Human Resource Development fund, and DANIDA. At this stage, both MOIC and NTA require continued support to effectively meet the challenges of an emerging multioperator environment. HMG has requested IDA assistance over a five-year period to plan, advise, and finance the implementation of its reform program. It is unlikely that reforms would stay on course if HMG was completely dependent on limited grant aid, without being given the opportunity to scale-up the implementation. IDA's impact will be in ensuring that HMG maintains a steady course of action, providing advice, and raising concerns during the challenging period of implementation of reforms. D. 1.4. Institutional location of frequency management. The institutional location of frequency management varies across countries. For example, in Sri Lanka it is located within the regulatory agency, but in India it is a separate agency within the Ministry of Communications. In Pakistan the agency is established outside of the ministry and independent of the regulator. One option considered was the upfront transfer of the frequency management function from MOIC to NTA. However, according to existing Nepalese law, the frequency management function has to remain within MOIC. NTA is responsible for the regulation of the telecommunications sector and can legally assign radio frequencies allocated to the telecommunications sector by MOIC. Given the large-scale reform agenda NTA is currently implementing and insufficient technical staff, the transfer of the radio spectrum management function would be overburdening its capacity. Because of this, an assessment will be carried out during the second year of project implementation to address institutional location issues. D. 1.5. Subcontracting frequency management and monitoring. Another project alternative considered was to subcontract the management and monitoring of radio frequencies to a private firm, rather than to have MOIC modernize the spectrum management and monitoring system. This alternative is not feasible as: (a) necessary monitoring equipment does not exist in Nepal, either in the public or in the private sector; (b) given Nepal's small size it would be hard to attract an interested firm; and (c) it would require a change in legislation. Further, for reasons of national sovereignty, HMG is unwilling to outsource the management and monitoring of a valuable national resource. D. 1.6. Modalities for Bank support. In light of the recent developments in Nepal [see Section B.3.1(d)] and HMG's decision to rebid the RTS license for the Eastern Development Region, two alternative modalities for Bank support were considered; specifically: (a) supporting HMG efforts through two separate operations: an initial TA project to assist MOIC and NTA in strengthening their policy and regulatory functions, followed by an investment project to improve rural access; and (b) supporting HMG's efforts through a single operation that combines the TA with assistance to improve rural access. Based on discussions with HMG, it was decided that the second alternative (i.e., a single operation) was the - 13-  preferable approach for the following reasons: (a) HMG's commitment to implement the sector reform program, including competition and private sector entry, has been demonstrated and is irreversible; (b) despite the withdrawal of the winning bidder to provide RTS, a number of private sector firms have already expressed interest in participating in the rebidding; (c) given the private sector perception of political uncertainty, the up front commitment of IDA will provide a clear signal to the private sector, and may in turn increase participation and improve the terms of the rebidding process; (d) the TA, especially for NTA, is urgently needed because of the rapid liberalization of the telecommunications market; and (e) packaging rural access with the TA will strengthen the project's acceptability within Nepal, and will help to halt any attempt to undermnine the necessary TA for strengthening sector institutions that are critical to implementing reforms. It is recognized that there are risks involved in the rebidding process, namely, there could be a failure to receive qualified bids and/or the quoted capital subsidy could be excessively high. Adequate risk mitigation measures have been incorporated in the project design to overcome this (Section F2 and Annex 2). In the event of market failure in the RTS licensing process, the project will assist in meeting HMG's development objectives of rural economic development through rural connectivity by placing emphasis on the public ICT access centers component, and using it as a vehicle to provide access. See Annex 2 for details on the public ICT access centers component. - 14 -  2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Expansion of local telephone exchanges First Telecommunications S S and of international and long distance Project (Credit No. 0166), communication facilities; installation of completed Sept. 30, 1976 telex facilities and the employment of consultants to assist in the reorganization of the National Telecommunications Board. Further modernization and expansion of Second Telecommunications S S telecommunications facilities. Project (Credit No. 0397), completed Dec. 31, 1982 Extension of existing facilities so as to Third Telecomnmunications S S enable about 70 percent of the demand Project (Credit No. 0799), for local telephone service to be met; completed June 30, 1985 extend the long distance network to areas presently without service. Strengthen NTC as an institution, and, Fourth Telecommunications S S through a balanced package of high Project (Credit No. 1588), priority works, expand urban and rural completed June 30, 1994 telephone service. Expansion of telecommunications Fifth Telecommunications HS HS facilities and provision of new services; Project (Credit No. 2364), improvement in the quality of existing completed June 30, 1999. services; strengthen the NTC and address major sector organization issues. Other development agencies DANIDA Technical assistance to NTA on regulatory issues. IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: D.3.1. The lessons drawn from the evaluations of the previously completed projects have been taken into account in the planning of this project, and are given below. - 15-  D.3.2. Importance of upfront project preparation. Agreement on key terms of reference (TORs) and bidding documents, as well as the establishment of a sound project implementation unit, should be completed early in the project cycle. To this end, several studies relevant to this project were completed prior to Board approval. TORs for TA assignments for the first two years of the project implementation period have already been prepared by MOIC and NTA and reviewed by IDA. D.3.3. Measurable performance indicators. Monitorable performance indicators measuring access, competition and transparency have been included in this project (Annex 1) and will be closely monitored during project implementation. Sector-specific Lessons D.3.4. The Bank has telecommunications operations in over 60 countries. For the planning of this project, the lessons from past projects, as well as from the Operations Evaluation Department's (OED's) study, "World Bank Lending for Telecommunications (1994) " and the OED/Operations Evaluation Group study, "Information Infrastructure: The World Bank Group's Experience (2001) ", were taken into consideration. These are: (a) Competition. Sector reform in other countries indicates that a procompetitive framework which supports a multioperator environment tends to improve service coverage and quality more rapidly and fosters more competitive prices than a state monopoly operator. The lesson is that a competitive environment promotes enhanced growth and expanded public access to services, encourages the incumbent operator to operate more efficiently and eventually leads to increased service coverage, improved quality, and reduced costs. (b) Regulation. The existence of an effective regulator within a stable regulatory environment encourages higher levels of investment, enables fair competition, and accelerates the rate at which services are opened to comprtition. HMG has established an independent and self-financed regulatory entity. However, it should be recognized that institutional and human capacity building take time, and intensive efforts are required to make a regulatory agency efficient and effective. Newly created regulatory agencies are frequently overwhelmed and have little expertise to draw upon-, therefore, providing consultant support during the initial start-up phase has proved to be very useful. There also is a need to constantly modernize a regulatory regime as new issues arise at different stages of the reform process. The lesson here is that technical assistance provided to a new regulator should contribute to the establishment of a clear and predictable regulatory framework--a prerequisite for attracting private investment in the sector (c) Rural access. Telecommunications, investments in rural areas can yield on average, adequate and even high economic and financial rates of return. However, servicing the remote areas represents higher costs per line, and greater risk, and therefore may require a subsidy. Universal access strategies have been successful in both industrialized and developing countries. In Chile, which is consilered a best practice example, the amount of the subsidies was quite low, but provided considerable leverage to generate much greater telecommunications development in rural areas. The subsidies were distributed competitively (ranging up to $10,000 per line), using a least-cost approach with a one-time capital subsidy, rather than for recurrent costs. - 16 -  4. Indications of borrower commitment and ownership: D.4.1. Since 1997, despite great political uncertainty, HMG has demonstrated its commitment to sector reform through the following actions: (a) Parliamentary approval of the new Telecommunications Act in April 1997; (b) prompt appointment of the NTA Chairman and its Members in 1998; (c) adoption of the National Telecommunications Policy in 1999; (d) participation in intensive reforn dialogue on rural access issues and decision to allow the private sector to participate in rural licensing initiatives; willingness to include financial incentives and a RTS capital subsidy to conclude the first rural transaction in a timely manner; (e) selection of new WLL/cellular GSM operators in 2001; and (f) ongoing licensing of competitive small networks and value-added services. 5. Value added of Bank support in this project: D.5. 1. International experience in telecommunications sector reform. The Bank has considerable intemational experience in telecommunications sector reform and can contribute significantly in transferring the knowledge gained from within and outside the region. HMG has consistently noted the value added of the Bank's experience with restructuring the telecommunications sector. In neighboring South Asian countries, the Bank has assisted governments in creating new legal, policy, and regulatory frameworks; establishing new regulatory agencies; and advised on introducing competition and in the privatization of public telecommunications operators. By supporting a regulatory reform program, introducing competition and facilitating rural access, the Bank is assisting the HMG in attracting private investment to the most difficult part of the telecommunications market. Through the Bank's dialogue in such key regulatory areas as interconnection and tariff policies, private operators will be able to compete on a level playing field. This is the Bank's first involvement in supporting a market-based capital subsidy for promoting private provision of rural telecommunication access. This approach could provide valuable lessons for the use of similar instruments in the rollout of other rural infrastructure. D.5.2. Experience in radio spectrum modernization. The Bank has developed significant experience in supporting the international best practice approach to spectrum management and monitoring. The Bank is involved in supporting spectrum management and monitoring in several countries, such as India, Nigeria, Pakistan, and Sri Lanka. D. 5.3. The Bank's experience in ICB indicates significant cost savings, with respect to procurement of goods following World Bank procurement guidelines. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): o Cost benefit NPV=US$7.9 million; ERR = (Rural Access Component only) 32 % (see Annex 4) O Cost effectiveness * Other (specify) -17-  E. 1.1. The project supports the government's objectives for telecommunications sector reform. The nature of the project is to create regulatory and policy making capacity in the telecommunications sector, and to assist HMG in providing access to services in rural areas. A great number of the project's benefits are either not tangible or otherwise difficult to quantify. Greater competition in the sector will lead to improved services, thereby stimulating economic growth, resulting in a broader source of revenues to HMG from tax receipts. Network externalities and the use of ICT in health, education, and other social services, may imply social benefits which need to be taken into account when assessing the economic impact of telecommunications investment. Some of the benefits associated with the policy and regulatory component include: (a) Support to FMD/MOIC through institutional strengthening and establishing modemn spectrum monitoring and management systems would: (i) minimize radio interference and help improve the quality of service; (ii) accelerate the process of obtaining frequency licenses; (iii) reduce the investment risk for private wireless service operators; and (iv) enable HMG to make effective use of the radio spectrum, bringing benefits to all telecommunications service users. (h) Support to strengthen NTA's capacity will lead to the establishment of a credible, stable regulatory environment. This will encourage increased competition, higher levels of private investment, and development of services. E. 1.2. Rural access. Most of the rural Nepalese population has no access to basic communications. HMG's policy to address these needs is to provide a minimum of two public access lines in every VDC by 2004. However, rural operations are unlikely to be commercially viable and thus, alone, would not attract private operators. In the absence of a capital subsidy, the private (internal) rate of retumn of this project is significantly negative. This reflects the high costs of serving rural areas and the low revenues, partly resulting from low call charges and low incomes. However, from the broad development viewpoint, the rural project is highly desirable and therefore a capital subsidy is justified to ensure a positive internal rate of return that is closer to the economic rate of return. E. 1.3 . Under the first round of competitive bidding, the amount of capital subsidy needed to make the project attractive to private investors was determined through the market. An ICB process was followed and the winning bid was for $10 million. The bidding documents specified the minimum service requirements to be met, including a schedule of unserved VDCs to be connected and quality of service standards. E. 1.4. The economic rate of retumn (ERR) for the project was calculated using this lowest evaluated bid price of $10 million. The ERR on this public sector investment was calculated to be 32 percent. A detailed description of the calculation is in Annex 4. The methodology adopted was to calculate the change in consumer surplus and expenditures from expanded telephone access, minus the economic costs to Nepal of the private sector provider. Given the limited availability of data, the approach used relies on a number of assumptions--the most important of which involves the elasticity of demand for communications--this figure is varied as a robustness check. The cost of travel, the weighted cost of calling, number of calls and elasticity estimates are used to calculate the quantity of communications carried out prior to the project. In turn, these figures were used to calculate the change in consumer surplus and expenditure generated by the lower cost of communication as a result of the project. The estimated ERR of 32 percent is significantly above the hurdle rate of 10 percent (as are low-end robustness estimates), as would be predicted from international experience of other rural telecommunications access programs. The high ERR, matching previous return estimates in other countries, provides a significant margin of confidence in the economic - 18-  worth of the project. E. 1.5. This is a very conservative estimate and it looks over a short time horizon, and assumes that consumer surplus is based solely on travel costs. Other benefits of providing rural access to telecommunications which are not captured in this calculation include: (a) expansion of rural telephone services significantly increases off-farm employment and income generation across a number of countries, including Nepal; (b) Nepal's experience that access to telephony has a significant impact on stocks of social capital, increasing the number of noncommercial associations in villages; (c) access to telephony has been found to correlate with improvements in the quality of service delivery by the govemment; (d) access to telephony guarantees faster response to emergencies; (e) network extemalities suggest benefits to currently connected customers in Nepal from network expansion, not captured in ERR estimates that look only at benefits for new customers; (f) proximity to a telephone allows customers to easily receive unsolicited information not requested due to information asymmetries (for example, customers can receive information about imminent major storms that they would not know in advance to request); and (g) equalizing access to information infrastructure has a significant impact on reducing inequality within countries. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) E.2. 1. The total project cost is $24.55 million, of which IDA will finance the equivalent of $22.56 million, and HMG the balance of $1.99 million. Fiscal Impact: E.2.2. NTA's financial projections clearly indicate that NTA will be able to sustain itself (details are given in Annex 4). - 19-  E.2.3. NTA will continue to collect substantial revenues from license fees and royalty payments; and revenues in excess of NTA's required operational expenses are transferred to HMG. Further, NTA's financial administration regulations ensure accountability in the use of funds. HMG can benefit from the increased tax base and improved fiscal revenue mobilization as a result of an increased number of licensed operators, the introduction of a market-based approach to allocation and the use of the frequency spectrum. The reform process will open new avenues for generating levies, as well as possible auction revenues for new services and through the use of various parts of the frequency spectrum. Increased private investment in the telecommunications sector is likely to have a significant financial impact by transferring responsibilities for service provision from the govemment owned NTC to private enterprises, willing and able to take commercial risks in the telecommunications market. 3. Technical: E.3. 1. Technical viability is mostly a concem for the equipment required for radio spectrum monitoring and direction-finding. While this equipment is readily available, it is highly specialized. Portable monitoring and direction-finding equipment is required for compliance and interference resolution. To minimize technical risks associated with this project activity, the following requirements have been built into the component design: (a) a technical training program for MOIC personnel on radio spectrum management, monitoring, and measuring; and (b) procurement of the radio spectrum equipment will be on a turnkey basis, and it will include engineering, installation, commissioning, testing, systems training, one-year warranty, and one-year operational support. Consultants will assist MOIC in preparing the tender documents for this activity. 4. Institutional: 4.1 Executing agencies: E.4. 1.1 The executing agencies are the MOIC and the NTA. These two agencies face a challenge to successfully continue implementing the HMG's reform agenda. A project implementation plan was drafted by MOIC and NTA and discussed during appraisal. It defines the roles, responsibilities, and individual work programs, and includes a timetable to be closely followed for successful, and timely project execution. To strengthen their capacity, local and foreign TA, and training in financial management, procurement, and implementation will be provided to MOIC and NTA. 4.2 Project management: E.4.2. 1. The main responsibility for overall project management is with the PCU in MOIC. Since the project needs coordination at an appropriately high level, the PCU will be headed by a senior official of the MOIC. The PCU will be supported by senior officials from NTA, Planning Section, FMD, and a dedicated senior accounts officer and an accountant to manage and report on financial aspects; also included are senior staff with technical, procurement, and economic backgrounds. The PCU will be supported by adequate support staff and facilities. The operating costs of the PCU will be funded under the project on a declining cost basis only during the project implementation period. These operating costs include: commnunications, supplies, materials, and gasoline costs; staff salaries are excluded. - 20 -  E.4.2.2. At NTA the responsibility for project implementation is with the PMU. The PMU at NTA will be headed by a senior NTA official. The other members of the PMU will include a technical specialist, economist/lawyer, and will be supported by NTA's accounts and administrative staff. In order to strengthen the institutional financial management capacity NTA will, in the short-term, seek outsourced professional services from an accounting firm, and in the medium-term it will hire an in-house professional accountant. 4.3 Procurement issues: E.4.3. 1. MOIC has no prior experience in implementing an IDA project. NTA has limited experience with the Bank's procurement procedures. A procurement capacity assessment of the beneficiary agencies was conducted by a Bank procurement specialist during appiaisal. Given the weak procurement capacity in MOIC and NTA, it was agreed that when needed the PCU will retain a qualified procurement expert to assist both MOIC and NTA in preparing requests for proposals (RFPs), bidding documents, advertisements, and other procurement activities financed by the project. Technical assistance will be provided to the PCU and PMU under the project. E.4.3.2. For the rural access component, NTA has already gained considerable experience in managing the ICB process for the selection of the RTS operator during the first round of bidding. In addition, the Bank will provide technical assistance to NTA for the rebidding process. 4.4 Financial management issues: E.4.4. 1. The beneficiary agencies financial management capacity assessment was conducted by a Bank financial management specialist during appraisal. In order to mitigate potential financial management risks and to strengthen capabilities, MOIC will complete the transfer of a senior accounts officer from the Financial Comptroller General's Office (FGCO) to the PCU. MOIC will retain the existing accounts staff for the duration of the project. Further, a consultant will assist the PCU in preparing a project financial management manual, that describes the financial policies, procedures, and the implementation of proper intemal control procedures. During the assessment, an action plan to improve deficient areas was agreed upon between MOIC, NTA, and IDA. The implementation of the action plan during the project period will improve the quality of financial management. Given the weak financial management capacity, consultants will be engaged to assist MOIC and NTA to strengthen their financial management, the preparation of PMRs, and the financial management manual under the proposed project. 5. Environmental: Environmental Category: C (Not Required) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. E.5. 1.2. There are no major environmental issues in the project, as it is a telecommunications sector reform project, which primarily involves policy and institution building components. The radio spectrum monitoring equipment to be financed under the project for use by MOIC/FMD will be housed in existing buildings and does not involve construction, or other activities that affect the environment. The rural capital subsidy component was designed to have minimal efiect on the environment, as the rural operator is expected to use VSAT and other wireless technologies to deploy services. As a result of this choice of technology, there is no need to build access roads or large pcower-supply installations. Moreover, the installation of compact, modular VSAT equipment will not adversely affect the aesthetics of rural Nepal. In keeping with company registration requirements in Nepal, HMG will carry out an environmental impact assessment of the RTS operator. The project is rated "C" since it will not have a substantial impact on the - 21 -  environment. 5.2 What are the main features of the EMP and are they adequate? Not applicable 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: Not applicable 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Not applicable 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Not applicable 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. E.6. 1. A major focus of this project will be to support the expansion of telecommunications to rural areas. A study had been undertaken to assess the type of service and number of public access lines rural citizens require. During project implementation, rural demand studies will be conducted to ensure that private operators are delivering services. The PMU/NTA will oversee a public relations campaign to educate the public on the rationale and the benefits of the reform program. Specifically, the campaign will emphasize the development of rural telecommunications, the benefits that increased competition will yield (e.g., improved variety of services at lower costs); and the role of the regulator (e.g., responding to consumer complaints). 6.2 Participatory Approach: How are key slakeholders participating in the project? E.6.2. 1. At the outset MOIC, NTA, government agencies, and various stakeholders were fully involved during project design, and will continue to be closely consulted throughout the project to ensure effective implementation. During project preparation rural communities participated in a socioeconomic study and gave feedback on the type of services and number of access lines they required. The private sector was consulted extensively in the project's design, and their views will continue to be solicited during the implementation of reforms. Donors in the telecommunications sector have played an important part in the reform dialogue and will continue to be consulted during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? E.6.3.1 Nongovernmental and rural organizations will be consulted during the implementation of the rural access strategy. In addition, the design and implementation of the public ICT access centers will be undertaken with civil society's active involvement. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? - 22 -  Not applicable. 6.5 How will the project monitor performance in terms of social development outcomes? Not applicable. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the roject? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes * No Pest Management (OP 4.09) 0 Yes * No Cultural Property (OPN 11.03) 0 Yes * No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OD 4.30) 0 Yes * No Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7`50) 0 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Not applicable. F. Sustainability and Risks 1. Sustainability: F. 1. 1. By focusing on creating an enabling policy, legal, and regulatory framework the project will accelerate private sector investments and operations. The rights and obligations of the incumbent and new operators are codified in the legislation, policy, and licenses. Improved service coverage, quality, and competitive telecommunications prices will be sustained as investment and competition grows in teleconmunications infrastructure and services. Empowering the NTA to charge levies and fees on telecommunications operators will enable regulatory functions to be sustained without dependence on budgetary support. Unfulfilled demand for various services in remote and rural regions can be increasingly satisfied as markets are targeted through specific initiatives. In addition, the future establishment of a rural telecommunications development fund will complement ongoing rural service provision initiatives. F. 1.2. The capital subsidy payment will be made to the RTS operator upon submission of certificates by NTA to IDA that the rollout of services has taken place as per license conditions. The sustainability of rural services is ensured as: (a) the business plan of the RTS operator will indicate a positive cash flow and thus will have a business interest to continue providing services; (b) the RTS operator has to furnish a performance guarantee for five years; and (c) the RTS license will be designed with the assistance of international consultants which will spell out in detail, the tenms and conditions for the provision of continued service. - 23 -  2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective HMG's lack of commitment to implement M A number of irreversible actions are underway sector reform as articulated in its National to open the sector to competition. A competi- Telecommunications Policy of 1999. tive and transparent bidding process was used to select the WLL and cellular GSM operators, and NTA will issue the licenses in Nov 2001. HMG has also decided to issue a RTS license to a private operator for rural services in the Eastem Development Region. For this purpose, an ICB process will be carried out to select a RTS operator and for the capital subsidy. Nontransparent competitive bidding M The National Telecommunications Policy and process for awarding licenses. NTA's rules and regulations explicitly mention competitive bidding for new licenses. Moreover, NTA's track record to date has been to award licenses on a competitive basis. Lack of operator/investor interest in M Selection of licensees for provision of cellular cellular GSM/WLL opportunities. GSM and WLL has been concluded. Investor response to the ICB process was satisfactory. Lack of operator/investor interest in the M Two applicants submitted bids for the RTS rebid for the RTS license. license in the first round. This demonstrated private sector interest in the RTS license. During rebidding, NTA with the assistance of international consultants, will: (a) encourage increased competition by adopting a more vigorous standard to attract a wider set of bidders. In addition to following the Bank's ICB process, NTA will proactively market this opportunity through advertisements in international publications, such as The Financial Times, The Economist, technical magazines, and possibly holding an investors conference, and clarifications meeting in Kathmandu; (b) revise the RFA to build-in incentives such as flexible payments on rollout of service instead of annual payment arrangements. In the event that there is still a lack of interest in the RTS license, HMG with Bank assistance will implement other rural access options to meet its development objectives (e.g., public - 24 -  ICT access centers). Capital subsidy quoted for the RTS S HMG will be requested to either (a) meet the license exceeds the amount provided under financing gap if HMG agrees that the price is the project. economically justifiable; or (b) consider reallocation of funds under the project. RTS operator defaults on rural M Qualification requirements in the ICB process obligations. will clearly state the financial, technical, and operating experience for the RTS license bidders. License terms and conditions will specify rollout obligations and penalty clauses for the RTS operator. The licensee will also be required to provide a performance guarantee (see Annex 2 for details). NTA will closely monitor and certify rollout progress on a quarterly basis from the time the RTS license is issued, and payments to the operator will be in tranches, based on contractual performnance. In addition, since the licensed RTS operator will be registered under the Company's Act as a joint venture between qualified international and domestic partners, it is also under the purview of other government agencies. The security conditions worsen slowing S NTA and the Bank will carry out biannual down the rollout of service in the Eastern reviews on the progress and the security Development Region. situation and will adjust the rollout of service by the RTS operator accordingly. NTA makes arbitrary decisions in M Private operators have recourse to international regulating the newly licensed private arbitration. operators. NTA does not have sufficiently qualified M Levy from operators to provide funding for staff and adequate financial resources. NTA; project to support strengthening of institutional capacity. From Components to Outputs Low quality of technical outputs. M Bank oversight of terms of reference, selection and work of technical experts. HMG delays approval of license awards M Upfront comiitment and award of licenses to to private operators. private operators has already been made. This is an irreversible process. Moreover, NTA does not require HMG approvals for its licensing initiatives. Lack of adequate, qualified staff in MOIC M The Cabinet has approved additional staff to and NTA. strengthen MOIC. Technical assistance will be provided to upgrade staff skills in MOIC and - 25 -  NTA. Procurement of spectrum equipment and M Consultants will assist FMD to strengthen FMD's institutional development is not institutional capacity, and to prepare and implemented in a timely and effective evaluate bidding documents, and to supervise manner. installation and commissioning of equipment. In addition, the Bank will undertake regular assessments to ensure timely implementation. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: F.3.1. There are no controversial issues in the project's social and environmental aspects. G. Main Credit Conditions 1. Effectiveness Condition The Grant Agreement shall have been executed on behalf of the Borrower and NTA. 2. Other [classify according to covenant types used in the Legal Agreements.] Development Credit Agreement (DCA) (a) The Borrower shall amend, not later than March 31, 2002, NTA Regulations so as to clearly vest on NTA the power to make its own financial administration bylaws. (b) The Borrower shall make available to NTA the proceeds of the credit on a grant basis to enable it to carry out the activities under the project, in accordance with terms and conditions satisfactory to IDA. (c) The Borrower shall maintain fully staffed PCU at MOIC throughout the project implementation period and under terms of reference and with financial resources adequate to carry out its functions. (d) The Borrower shall submit audit of its project accounts within six months after the end of each fiscal year. (e) The Borrower shall submit a midterm review report one and a half months prior to the midterm review of the project on November 15, 2004. Project Agreement (PA) (a) NTA shall maintain fully staffed PMU at NTA throughout the project implementation period and under terms of reference and with financial resources adequate to carry out its functions. (b) NTA shall submit a midterm review report one and a half months prior to the midterm review of the project on November 15, 2004. - 26 -  (c) NTA shall submit audit of its financial statements within six months after the end of each fiscal year. (d) NTA shall certify to IDA on a quarterly basis the RTS operator's compliance with rollout obligations as set out in its license contract. H. Readiness for Implementation a 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable. Z 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 0 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. C 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. E 2. The following exceptions to Bank policies are recommnended for approval. The project complies with all other applicable Bank policies. Ritin Singh P rre A. Guislain KerachiOhashf Team Leader ector Manager Country Manager/Director - 27 -  Annex 1: Project Design Summary NEPAL: Telecommunications Sector Reform Project Key Performance Hfierarchy of Objectves IndIwators Monitoring4& Evaluation Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Increase competition and Competition in all market NTA, operators, and statistics HMG's continued private sector participation in segments through private and annual reports from the commitment to the telecommunications sector sector operators from 2004. International telecommunications sector and increase access to Telecommunications Union reform as per the adequate and efficient Telecommunications Policy of telecommunication services, 1999. specifically in rural areas Increase in total (fixed and mobile) telephone penetration from 1.13 per 100 inhabitants to 3.0 by end of 2005. 534 unserved VDCs in HMG's continued Eastern Development Region commitments to NTA's targeted under the rural independence. license will have a minimum of two public access lines by end of 2004. - 28 -  Key Performance 1 Hierarchy of Objectives - Indicators Monitoring & Evaluation | Critical Assumptions Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Strengthen the policy and Full competition in the NTA, NTC, other operators, HMG will maintain its regulatory environment in the provision of domestic long statistics and annual reports commitment to implement the telecommunications sector to distance and international from the International sector reform agenda as facilitate competition and services by 2004. Telecommunications Union articulated in its National private sector participation, Telecommunications Policy of and increase rural access to 1999. services by facilitating private investments and operations. Private RTS operator to start Issuance of licenses for GSM, NTA follows a transparent providing service in the rural, domestic long distance, process to issue licenses. Eastern Development Region and other value added by mid 2003. services. Transparent licensing and Sufficient domestic and regulatory regime and clear foreign private sector interest rules of business. for investment in the sector, especially rural service. NTC tariff rebalancing approved by NTA in 2001 and implemented by 2004. NTA has adequate funding to carry out its regulatory functions. Procompetitive interconnection regime in place by 2002. - 29 -  Keoy Performance Hierarchy of Objectives Indicators Monitoring & Evaluation_ Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: A. MOIC Component MOIC's policy making ability MOIC to have a fully staffed trimesterly PMRs Adequate capacity in PMUs. strengthened and working planning section HMG approves adequate as recommended by the staffing for the beneficiary consultants six months after agencies. end of assignment. Nepal's radio spectrum Assessment of FMD's relevant policy Timely HMG approvals. management strengthened. institutional capacity announcements completed before mid term review review of progress of studies to be undertaken by Publish national frequency consultants allocation plan by June 2003. Radio frequency assignmnents completed within 15 days of applications, starting January 1, 2005, for 90 percent of applications. B. NTA Component NTA's capacity to regulate the Define the rules of procedures trimesterly PMRs HMG approves adequate sector strengthened. in all areas that NTA staffing for the beneficiary regulates by June 2002.' agencies. Announce interconnection NTA annual reports and Position of NTA is not regime by December 2002. statistics. NTA to make undermined by the lack of publicly available its rules and institutional independence. procedures. copy of the interconnection regime and enforcement mechanism Adopt a transparent review of progress of studies consultative process in its to be undertaken by deliberation by June 2003. consultants Rural access capital subsidy Licensed private operator to rural license issued to private Sufficient private sector scheme implemented in a provide rural service in the operator interest in bidding for rural timely and effective manner. Eastem Development Region license. by the end of 2004. Effective implementation of Assess pilot public ICT access review of various studies to be ICT access and applications center for replicability by undertaken by consultants - 30 -  scheme. September 2003 Establish public access centers at the district and VDC levels by end 2005. Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) A. MOIC Component (i) TA to strengthen 0.20 trimesterly progress Adequate, qualified staff institutional capacity of management reports from available in MOIC, FMD, and MOIC Planning Section. PCU NTA. (ii) Advisory services to 0.45 consultants' deliverables and Quality consultant services MOIC's Planning Section. reports and pertinent, implementable reports. (iii) Capacity building of 0.185 supervision missions MOIC staff, including workshops, seminars, and training. (iv) Procurement of 0.30 Procurement of equipment is information technology carried out in a timely and equipment and vehicles for effective manner. Planning section and PCU. (v) Advisory services to FMD. 0.53 (vi) Capacity Building of 0.215 FMD staff, including workshops, seminars and training. (vii) Procurement of 5.20 frequency management and monitoring equipment. (viii) Support of MOIC's 0.97 PCU. Subtotal 8.04 B. NTA Component (i) Studies and advisory 2.18 progress monitoring reports NTA management effectively services on a range of carries out consultancies and regulatory issues including uses consultation papers. RTS licensing, interconnection, tariffs, carrier performance, licensing regime, WTO/GATS offer, and numbering plan, among others. (ii) Capacity building of NTA 0.19 - 31 -  staff, including workshops, seminars and training. (iii) Technical assistance to 0.04 monitor and supervise implementation of rural license. (iv) Capital subsidy to be 10.00 HMG approves license award provided to RTS operator to RTS operator. based on ICB process. (v) Public ICT access centers. 3.53 (iv) Support of NTA's PMU. 0.55 Subtotal 16.51 Grand Total 24.55 1. Details of the MOIC, FMD and NTA technical assistance program (including terms of reference) and training plans are in the Borrower's Project Implementation Plan. - 32 -  Annex 2: Detailed Project Description NEPAL: Telecommunications Sector Reform Project The objective of the project is to strengthen and implement the policy, legal, and regulatory framework in the telecommunications sector to facilitate competition and private participation, including increasing rural access to services by encouraging private investment and operations. The project includes two main components, MOIC, and NTA. By Component: Project Component 1 - US$8.04 million The MOIC component will strengthen MOIC's policy and spectrum management functions by fnancing local and intemational consultants services, studies, training, and equipment. It focuses on support to: (a) the Planning Section to effectively carry out its policy function; (b) the FMD to efficiently manage and monitor the radio spectrum; and (c) support to the PCU. This component will include: I. Stren-thenin- MOIC's Plannin2 Section (a) Capacity building services: The project will provide support to the Planning Section for capacity building and will include the following consultancy services and professional development activities. (i) review and form a proposal for institutional changes to organizational structure, management procedures, and administration ifor the Planning Section; (ii) assist and advise the Planning Section in carrying out policy functions, including implementation of the policy agenda; (iii) assess and recommend options to accelerate the provision of rural communications connectivity, in particular, approaches to deliver new modes of service delivery and other government programs to the rural population; and (iv) advise on and implementation of the further liberalization of the sector; (v) technical cooperation arrangement with relevaLnt policy agencies in other countries, information sharing, and formal and informal contacts and advice; (vi) professional courses dealing with specialized policy issues offered on a periodic basis; (vii) university fellowships to study of policy and telecommunications issues; (vii) organization of seminars/workshops in Nepal to address key policy issues. II. Stren2thenine MOIC's FMD (a) Capacity building services. FMD will be strengthLened to effectively discharge all functions of radio spectrum management and regulatory process in line with international best practice. The project will provide support to FMD for capacity building and will include the following - 33 -  consultancy services and professional development activities: (i) prepare a national frequency allocation plan and relevant radio regulations; (ii) establish spectrum management and monitoring processes and procedures; (iii) establish an appropriate spectrum pricing policy; (iv) advise and assist in the implementation of institutional changes to organizational structure, management, procedures, and administration of FMD; and (v) assist in the procurement process and supervise the implementation of the spectrum management and monitoring system procured under the project; (vi) technical cooperation arrangement with foreign spectrum management agencies, for information sharing and advice; (vii) professional courses offered on a periodic basis; (viii) training in the operation and maintenance of the equipment for spectrum management and monitoring. (b) Install and commission a spectrum monitoring and management system. The project will fund the procurement, installation, and commissioning of state-of-the-art computerized spectrum management and monitoring facilities to facilitate efficient use of the radio spectrum. The spectrum management system will consist of an integrated system (software applications and hardware) which will automate, and make more efficient the spectrum management process for the FMD. Spectrum monitoring requirements have already been determined. The system will consist of both fixed and mobile monitoring stations. III. Support to PCU. Support will be provided to strengthen the PCU to enable it to successfully implement the MOIC and FMD components of the project and in the overall coordination of the project. Equipment (computer hardware and software) and vehicles will also be procured under this component. Project Component 2 - US$16.51 million This component will strengthen NTA's capacity to respond to regulatory issues in a competitive sector by financing local and intemational consultant services and providing resources for institutional capacity building through studies and training. It will also support the award of a rural license to a private RTS operator by financing a one-time, upfront capital subsidy to provide services in the Eastern Development Region. I. Strengtheningz NTA's Regulatorv CaPacity (a) Capacity building services. NTA will be strengthened to effectively discharge its regulatory duties in line with intemational best practice. The project will provide support to NTA for capacity building and will include the following consultancy services and professional development activities: - 34 -  (i) assist in the RTS licensing process; (ii) assist in the supervision of the implementation of the rural private licenses awarded under the project; (iii) consultative studies on NTA's rules of business, interconnection issues, numbering plan, monitoring carrier performance, tariffs, service quality, licensing regime, consumer protection and new/emerging regulatory issues in the sector (e.g. review of WTO/GATS offer); (iv) assist in monitoring and certifying the RTS operator; (v) technical cooperation arrangements, involving staff exchanges with relevant foreign regulatory agencies, information sharing and professional courses dealing with specialized regulatory issues and general regulatory methods as offered on a periodic basis, (vi) research fellowships in universities for the study of regulatory and telecommunications issues; (vii) in-house training with classroom facilities in Nepal; and (viii) organize seminars/workshops in Nepal to address key regulatory issues. II. Increased Rural Access The project will provide support to NTA to implement HIMG's strategy for expanding telecommunications services in rural areas. HMG recogwnizes that the provision of rural service in some areas of Nepal might be associated with less attractive financial returns. They will, therefore, use a market mechanism to finance a capital subsidy for a private RTS operator. Initially, the license is for the 534 unserved VDCs of the Eastern Development Region which will provide services to approximately 3.22 million people. After meeting the minimum rollout obligations of two public access lines per VDC, the RTS operator is allowed to expand services. This approach is expected to meet the objectives of HMG's National Telecommunications Policy of extending rural access and encouraging private participation in developing the sector. In particular, the market mechanism (following an ICB process in line with IDA procurement guidelines) for rural licensing will ensure the efficient allocation of limited resources and should provide a benchmark to assess other operator's performance. It is also expected to catalyze innovative and sustainable provision of rural service in a commercially viable region (namely, Eastern Development Region). Based on the success of the licensing process HMG and NTA may decide to issue additional licenses in other regions of Nepal. Some of the key features of NTA's approach which were incorporated during the first round of bidding are: (a) Key license terms and conditions: A single license will be issued for the provision of services in the Eastern Development Region. In accordance with the provisions the Telecommunications Act, the initial term of the license is 10 years. UJpon application by the RTS operator, the license can be renewed for successive terms of five years each, provided there are no material breaches of the license, until a full license term of 25 years, is reached. The RTS licensee is permitted to provide basic public access service plus other services such as internet access and information services, e-mail, voice-mail, fax, audio conferencing, prepaid calling cards, and - 35 -  data communication services. The RTS operator is allowed to carry long distance traffic between its licensed VDC's within the Eastern Development Region and to only carry originating international traffic out of its licensed VDCs through NTC's network. Broader rights to carry long distance and international traffic is, of course, granted in 2004, after NTC's monopoly expires, as per HMG's National Telecommunications Policy. The licensee is also obliged to comply with a rollout schedule. Proposed obligations are that the RTS operator will provide at a minimum two public access lines in 50 percent of the targeted VDCs in the first year and the remaining 50 percent access lines in the balance VDCs in the following year. More specifically, the RTS operator is expected to install and operate a minimum of one single public access line each in two separate wards within each VDC. NTC will not start rural service provision in the 534 unserved VDCs of the Eastern Development Region for at least five years after the license is issued to the RTS operator. (b) Capital subsidy program and disbursements: The RTS capital subsidy will be paid according to the licensing terms agreed at the time of the award. The key obligation by the RTS operator is the activation of a minimum of two public access lines in 534 unserved VDCs. NTA will monitor and certify the compliance with network roll out and service obligations. It is expected that the subsidy will be in two equal payments, with the first payment made on initiating service provision to the first 50 percent of the 534 VDCs within the first year, and the second payment made on initiating service provision to the remaining VDCs within the second year. For disbursement purposes, these will be direct payment requests, submitted by the PCU according to the license contract terms. (c) Risk mitigation: The following measures are being taken to mitigate the risks: (i) RTS operator defaults on license: The project will provide technical assistance to NTA to monitor and certify that the RTS operator is meeting its license rollout requirements and service obligations. Failure to meet these obligations will result in the following penalties: loss of eligibility for the RTS capital subsidy; forfeiture of the performance guarantee; termination of the license; and imposition of fines for breach of license conditions pursuant to the Telecommunications Act. In addition to meeting its roll out and service obligations, the RTS operator has to furnish a performance guarantee in the minimum amount of 10 percent of the proposed RTS capital subsidy, or $1 million. The performance guarantee will be valid for five years, within which the licensed RTS operator is expected to complete installation, commissioning, and rollout of the RTS service in accordance with the license conditions. This performance guarantee will be forfeited by the RTS operator in the event that the operator: fails to meet the rollout obligations stipulated in the license; and fails to implement a remedial plan acceptable to NTA in order to complete the roll out obligations within the additional period provided for in the remedial plan. The forfeiture will not apply if the rollout delay results from an event offorce majeure as defined in the license. (ii) Lack of operator/investor interest in RTS licensing: NTA with the assistance of international consultants, will encourage increased competition in the bidding process by adopting a more vigorous standard to attract a wider pool of qualified bidders. In addition to following the Bank's ICB process, NTA will proactively market this opportunity through advertisements in international publications such as The Financial Times, The Economist, technical magazines, possibly holding an investors conference, and clarifications meeting in Kathmandu. The revised RFA will build in incentives such as flexible payments on rollout of service instead of annual payment arrangements. In the event that there is still a lack of interest in the RTS license, - 36 -  HMG with Bank assistance will implement other rural access options to meet its development objectives (e.g., public ICT access centers). (iii) Capital subsidy quoted for the RTS license exceeds the amount provided under the rural access component. HMG will be requested to either meet the financing gap if HMG agrees that the price is economically justifiable; or consider reallocation of funds under the project. III. Public ICT Access Centers NTA will be assisted in implementing HMG's policy for expanding access to infonnation and telecommunications services. In addition to the minimum two public access lines for the 534 unserved VDCs of the Eastern Development Region, the project will also finance public ICT access centers. This will be initially established on a pilot basis at district headquarters and VDCs in rural areas. Pilot locations will be selected on the basis of community demand and those with a demonstrated potential to benefit economically and/or socially from ICT access. *These could include schools and hospitals, as well as cooperatives and small businesses. Given the limited experience with rural ICT access centers in Nepal, the initial objective is to support the creation of pilot centers to test alternative institutional models and evaluate the sustainability of the approach. During the first year of the project, NTA will be provided TA to plan the pilot phase so that the public access centers are modelled in line with international best practice, in terms of prices, service offerings and ownership models. The investment in the pilot phase is limited to $0.53 million. A comprehensive evaluation of the pilot phase will be conducted in the second year of project implementation and will provide the basis for scaling-up the rollout of public ICT access centers. Three million dollars has been earmarked to finance the scaled-up operation. In the event that the RTS licensing is not successful, HMG will consider reallocating project funds to implement the roll out of public ICT access centers on a national basis in order to meet its development objectives. IV. Support to PMU Support will be provided to strengthen the PMU to enable it to successfully implement the NTA components of the project. - 37 -  Annex 3: Estimated Project Costs NEPAL: Telecommunications Sector Reform Project Local Foreign Total Project Cost By Component US'$million US $million US $million Strengthen MOIC's capacity 0.12 0.64 0.76 Strengthen frequency management 0.70 4.71 5.41 Support to PCU 0.91 0.24 1.15 Strengthen NTA's capacity 0.35 1.86 2.21 Rural access subsidy 0.00 9.09 9.09 Public ICT access centers 0.00 3.21 3.21 Support to PMU 0.50 0.00 0.50 Total Baseline Cost 2.58 19.75 22.33 Physical Contingencies 0.15 0.96 1.11 Price Contingencies 0.14 0.97 1.11 Total Project Costs 2.87 21.68 24.55 Total Financing Required 2.87 21.68 24.55 Loalt Foreign Total Project Cost By Category US $mfillion US $million US $million Goods 0.65 18.37 19.02 Services 0.97 2.86 3.83 Training 0.14 0.45 0.59 Incremental Operating Costs 1.11 0.00 1.11 Total Project Costs 2.87 21.68 24.55 Total Financing Required 2.87 21.68 24.55 Identifiable taxes and duties are 0.5 (US$m) and the total project cost, net of taxes, is 24.06 (US$m). Therefore, the project cost sharing ratio is 93.79% of total project cost net of taxes. - 38 -  Annex 4: Economic and Financial Analysis Summary NEPAL: Telecommunications Sector Reform Project 1. The project supports three main elements of the government's telecommunications sector reforn agenda: (a) strengthening the institutional capacities of agencies (MOIC and NTA) responsible for formulating telecommunication sector policies and regulating telecommunication operations; (b) supporting the spectrum management unit (FMD) in developing and irmLplementing modem spectrum monitoring and management systems; and (c) supporting private entry in the provision of rural telecommunication services in the Eastern Development Region. NTA's Financial Sustainability 2. NTA's direct costs, and license and royalty revenues for five years have been projected in Table 1. These projections clearly indicate NTA's financial sustainability; with revenues in excess of NTA's required operational expenses are transferred to HMG. Further, NTA's financial administration regulations ensure accountability in the use of funds. Table 1. Financial Projections for NTA (Source: NTA, June 2001) 2001 2002 2003 2004 2005 Total cost of regulator (staff, equipment, 59,869 182,589 110,171 292,885 292,885 TA, etc., in_S) ._ Regulator revenues 156,743 393,738 886,354 903,451 903,451 Increased sector tax revenue due to reform 710,062 1,505,332 2,393,479 3,382,783 4,482,188 (Total sector revenue 1996: 37.9 million Assume sector revenue growth at 6 percent Torres (1997) estimates the impact of reform on telecommunications sector tax payments (above licences) equal to 13 percent of sector revenue. Conservatively assume 7 percent impact phased in over life of project.) _ Net revenues (regulator revenues only) 96,874 _ 211,149 776,182 610,566 610,566 Net revenues (regulator revenues plus tax) 806,936 1,716,481 3,169,661 3,993,349 5,092,754 Source: NTA, June 2001 Policy/Regulatory Component 3. Some of the financial and economic benefits from the policy and regulatory component of the project include: (a) In reform experiences around the world, the major impact on government revenues from telecommunication reform over the medium-term is not license payments but increased tax payments due to growing sector revenues and increased general revenues due to the economic activity supported by a stronger communications sector. (b) The largest impact of the project on government revenues will accrue as a result of increased tax revenues from the economy at large, due to faster economic growth fostered by a competitive telecommunication sector. (c) Establishing a credible, stable, and transparent telecommunications regulatory framework in - 39 -  Nepal will encourage higher levels of private investments in the sector and rapid development of telecommunication services in the country. (d) An improved range and quality of services to customers will be available at reduced prices as a result of increased competition in the sector. (e) Improved and efficient use of the radio spectrum will result in minimal interference and better quality of service; and an accelerated process of obtaining frequency clearances, increasing the scope for public and private wireless service operators. (f) A policy framework designed to stimulate investment and growth in the telecommunications sector should have a significant impact on other sectors, e.g., tourism, education, health, and financial services, that depend on information and communication infrastructure. (g) Increased availability of services will increase productivity and income opportunities in rural areas and improve access to government services. Rural Access Component ERR Calculation 4. The methodology adopted is to calculate the change in consumer surplus and expenditures from expanded telephone access, minus the economic costs to Nepal of the private sector provider. Given the limited amount of data available, the approach used relies on a number of assumptions (the most important of which involves the elasticity of demand for communications, a figure which is varied as a robustness check). The estimated ERR of 32 percent is significantly above the hurdle rate of 10 percent (as are low-end robustness estimates), as would be predicted from international experience of rural telephone access programs. This high ERR, matching previous return estimates in other countries, provides a significant margin of confidence in the economic worth of the project. 5. Total call minutes and yearly call revenues are taken from supplier forecasts (to 2005, 2006 to 2010 figures are taken as equal to 2005). Total calls are estimated at one third of total call minutes (assuming an average call length of three minutes). Revenues and calls were forecast by the supplier at call charges of $0.1 per minute for national calls and $0.5 per minute for international calls. The national call cost is in line with rural charges elsewhere, including Chile-although these costs are high compared to local incomes. Recent estimates for the time and travel cost of communication in the absence of a local telephone in Nepal are available for over 100 sites across the country from No Frills Consulting. This allows us to calculate the cost of traveling to a local destination plus the cost of calling from that destination as a measure of the price of communication prior to the project. The average (without project) cost of travel is $3.74. 6. International experience suggests that the elasticity of demand for calls at about -0.7 for less developed countries In order to produce a robust and conservative estimate for the ERR, we estimate consumer surplus assuming an elasticity of -0.5. The cost of travel, the weighted cost of calling, number of calls and elasticity estimates are used to calculate the quantity of communications carried out prior to the project. In turn, these figures were used to calculate the change in consumer surplus and expenditure generated by the lower cost of communication as a result of the project. -40 -  7. From the proposal of the lowest bid that was received, there is data available on the projected capital costs, cost of revenues and expenses (to 2005, 2006 to 2010 figures are taken as equal to 2005). Import tariffs (assumed to cover 50 percent of capital costs and 20 percent of recurrent costs) and royalty payments were subtracted from these costs to provide an estimate of project costs to the economy. Shadow pricing figures for capital, labor and foreign exchange were: unavailable. 8. The project's ERR is estimated at 32 percent over 10 years, translating to an NPV of $7,915,577 at a 10 percent discount rate. Robustness checks suggest that, even using negative assumptions regarding telephone usage and benefits, the economic rate of return remains above the 10 percent hurdle level. Assuming a higher elasticity of demand (-0.7), the ERR rises to 46 percent. In order to reach an ERR of 10 percent, the average cost of travel without the project must drop from $3.74 to below $2.41, or capital costs must rise from $9.1 million to $19.1 million, or call volume must be 34 percent below expectations. 9. The capital subsidy is justified on economic grounds because it is the minimum amount of subsidy necessary to support an investment with a significantly positive ERR. The subsidy supports the capital cost of the project. The cost-benefit analysis is thus inclusive of the subsidy 'cost'. The reverse-auction market mechanism used to award the capital subsidy ensures that it is the lowest possible to induce a private operator to roll out the network. Benefits of the project accrue to rural users of telecomnunications. Worldwide evidence suggests that even the very poorest use telephony if it is available to them. They will therefore be direct beneficiaries of the project, as well as indirect beneficiaries through the project's impact on rural employment generation and improved service delivery. Table 2. Summary of Costs and Benefits ($000s_ ___________ =_________ 2001 2002 2003 2004 2005-2010 Benefits 419 3,091 4,315 5,178 5,178 Costs 6,031 5,124 1,900 1,480 1,493 Benefits minus costs (5,612) (2,032) 2,415 3,698 3,685 ERR 1 0.32 1. Information available in No-Frills Consultants Report, October 1998 "Rural Telecommunications in Nepal: A Socioeconomic Impact Study." 2. Saunders, Warford and Wellenius (1983) "Telecommunications and Economic Development" (op.cit.) note that elasticity of demand is frequently estimated at close to -1. 3. Detailed methodology, numbers and calculations are available in project files. - 41 -  Annex 5: Financial Summary NEPAL: Telecommunications Sector Reform Project Years Ending Year I Year 2 Year 3 Year 4 Year S | Year 6 | Year 7 Total Financing Required Project Costs Investment Costs 1.4 7.5 9.6 4.4 1.6 Recurrent Costs Total Project Costs 1.4 7.5 9.6 4.4 1.6 0.0 0.0 Total Financing 1.4 7.5 9.6 4.4 1.6 0.0 0.0 Financing IBRD/IDA 1.0 7.1 9.0 4.0 1.5 Government 0.4 0.4 0.6 0.5 0.1 Central Provincial Co-financiers User Fees/Beneficiaries Others Others Others Others Others Total Project Financing 1.4 7.5 9.6 4.5 1.6 0.0 0.0 Main assumptions: Physical contingencies: 5 percent for equipment and 5 percent for consultancy services and professional development components. -42 -  Annex 6: Procurement and Disbursement Arrangements NEPAL: Telecommunications Sector Reform Project Procurement Capacity to Implement Procurement Actions Procurement Capacity of the PCU and PMU at the Ministry of Information and Communications, and Nepal Telecommunications Authority 1. During appraisal, an assessment of the PCU in MOIC, and the PMU in NTA was conducted to evaluate their capacity and readiness to implement the proposed procurement plan for the project and their compliance with the Loan and Administration Change Initiative. Findings and actions required to be taken are summarized below: MOIC: Except for a small unit involved in small purchases, MOIC does not have a specialized unit, or experienced staff that are qualified to undertake procurement activities. Further, MOIC does not have experience in procurement cycle management in donor-funded projects. Taking this into account, it is necessary to hire an experienced consultant for the duration of the project, to guide and assist the PCU within the MOIC in all critical procurement actions including: procurement planning, document preparation, bid evaluation, and contract management. ][t is also required that one or two members of the PCU be given basic training in donor-funded procurement procedures, and to be assigned to work with the procurement consultant. NTA: NTA also lacks a specialized unit, and experienced staff dedicated to procurement activities. Although this agency has limited experience in carrying out three ICB contracts during the past year. It is necessary for the PMU within the NTA to also include a procurement consultant for the first two years of the project. Overall Procurement Risk Assessment 2. Assessment results show that the staff proposed to be assigned to the PCU and PMU have either none, or limited skills and experience in undertaking procurement in Bank financed projects. Along with the lack of internal codes and manuals, and lack of a dedicated procurement unit in the agencies concerned, the assessment rates that the project has an overall high procurement risk. 3. Because of the nature of this operation, almost all contracts will be above post review limits. It is expected that MOIC will have a major contract for the procurement (ICB) of goods estimated to cost about $4.8 million, and about six contracts for consulting services (including individual experts), for values ranging from $140,000 to $360,000--all above the post review limits. NTA is expected to procure a single, large-goods contract for the rural access component, at an estimated value of about $10 million; some consulting services contracts; and about four smaller consulting services contracts (including for individual experts), for values ranging from $140,000 to $220,000. There will be some contracts for goods, to procure the computers and vehicles that fall under the post review category. The Bank's standard requirement of ex-post review of one in five contracts for a high risk project, can be achieved in this project. Bank staff will conduct post award reviews during supervision missions, and reviews for the remaining contracts will be carried out through the consultant. - 43 -  Procurement Planning 4. Prior to issuing invitations to bid for contracts, the project's proposed procurement plan will be furnished to the Bank for its review and approval, in accordance with the provisions of the Guidelines (para I of Appendix 1). Procurement of all goods and services will be undertaken in accordance with procurement plan as will have been approved by the Bank and with the provisions (para 1). A procurement plan was discussed with MOIC and NTA during appraisal and was confirmed during negotiations. The procurement methods applicable to the various expenditure categories are summarized in Table A. Procurement 5. As part of project preparation actions: (a) consultants are assisting NTA in preparing the RFA for the RTS license for the Eastern Development Region. Through this procurement, a private operator for RTS service will be selected, and during project implementation a capital subsidy will be paid to the RTS operator out of the credit; (b) consultants are presently assisting MOIC to draw-up a policy agenda for the Planning Section; and (c) consultants assisted in drafting the bidding documents for the spectrum management and monitoring system for FMD. Goods, Equipment, and Services 6. The project supports the procurement of the spectrum management and monitoring equipment; computers (including hardware and software) and office equipment; vehicles under the MOIC component; and capital subsidy payment for the RTS operator under the NTA component. 7. Contracts for the purchase of goods and equipment valued at $200,000 or more will be procured through ICB procedures in accordance with the Bank's Procurement Guidelines (January 1995, revised January and August 1996, September 1997 and January 1999). 8. Contracts for the purchase of goods and equipment and other supplies valued less than $200,000 per contract up to an aggregate amount not to exceed $300,000 equivalent would be procured under contracts awarded on the basis of national competitive bidding (NCB) procedures in accordance with the provisions of paras 3.3 and 3.4 of the Guidelines. 9. Contracts for the purchase of goods and equipment and other supplies valued less than $25,000 per contract up to an aggregate amount not to exceed $50,000 equivalent would be procured under contracts awarded on the basis of national shopping procedures in accordance with paras 3.5 and 3.6 of the Guidelines. 10. Standard bidding documents as agreed with the Bank will be used for all ICB and NCB contracts. Award of contracts to supply goods and equipment will be the responsibility of the PCU and PMU, which will be duly assisted by the consultants under the project. Technical Assistance, Studies, and Training 11. TA and consultancy services would be contracted following procedures in accordance with the Bank's Guidelines for Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997 and January 1999). Consultants services estimated to cost more than $200,000 per contract must be advertised in the national newspapers and in "Development Business ", before preparing the shortlist. The shortlist may be comprised entirely of national consultants for contracts - 44 -  estimated to cost less than $200,000. It is envisaged that consultant services packages under the MOIC and NTA components will be procured through quality- and cost-based selection. The method of selection for consultants services for strengthening of the Planning Section and FMD and training estimated to cost less than $100,000 per contract, but $50,000 or more equivalent per contract will be based on the qualification of the consultant. 12. Training services and seminars for MOIC staff in th[e Planning Section, FMD, and NTA will be at selected institutions and universities. The method of procurement will be based on the qualifications of the consultants, on the basis of a training plan, and cost estimates satisfactory to the Bank. Domestic study tours will be arranged by the concemed implementing agencies. In December 2001, the Bank will begin its annual review of the training program with the names of candidates, costs estimates, courses, period of training, and institutions. 13. Services for tasks that meet the requirements set forth in paragraph 5.1 of the Consultant Guidelines shall be procured under contracts awarded to individual consultants in accordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines. Review by the Bank of Procurement Decisions (Table B) 14. All ICB packages, irrespective of value, will be subject to prior review by the Bank. Procurement of goods and equipment under national competitive bidding with an individual contract value of more than $50,000.00 will be subject to prior review. 15. The following will be subject to prior review by the Bank: (a) terms of reference for all consultancies; (b) contracts for the employment of consulting fimis estimated to cost more than $50,000; (c) contracts for the employment of individuals estimated to cost more than $10,000; (d) training; (e) amendments to contracts for the employment of consulting firms raising the contract value to $50,000 or above; (f) assignments of critical nature, as reasonably determined by the Association; and (g) amendments to contracts for the employment of individual consultants raising the contract value to $10,000 or above. 16. The contracts below the prior review threshold for goods and equipment will be subject to post review as per procedure in The Bank's Guidelines (para 4 of Appendix 1). 17. Contracts for the employment of consulting firms estimated to cost less than $50,000 and contracts for the employment of individuals estimated to cost less than $10,000 will be subject to post review provided that the TORs have been cleared with the Bank. Procurement Information 18. Procurement Information will be collected and recorded as follows: -45 -  (a) prompt reporting of contract award information by the PCU of MOIC; (b) comprehensive semiannual reporting by PCU; revised cost estimates for individual contracts and total costs; (c) revised timing of procurement actions including: advertising, bidding, contract award, and completion tirne for individual contracts; (d) compliance with aggregate limits on the specified methods of procurement. (e) completion report by the borrower within three months of the credit closing date. Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other 2 N.B.F. Total Cost 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 18.73 0.29 0.00 0.00 19.02 2. Goods (18.11) (0.26) (0.00) (0.00) (18.37) 3. Services 0.00 0.00 3.83 0.00 3.83 (0.00) (0.00) (3.25) (0.00) (3.25) 4. Training 0.00 0.00 0.59 0.00 0.59 (0.00) (0.00) (0.45) (0.00) (0.45) 5. Incremental Operating 0.00 0.00 1.10 0.00 1.10 Costs (0.00) (0.00) (0.49) (0.00) (0.49) Total 18.73 0.29 5.53 0.00 24.55 (18.11) (0.26) (4.19) (0.00) (22.56) " Figures in parenthesis are the amounts to be financed by the IDA credit. All costs include contingencies. 21 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to: managing the project, and relending project funds to local government units. The capital subsidy is an upfront payment to a competitively selected operator for the provision of rural services. This is according to Article 3.13 as stated in the Guidelines for Procurement under IBRD Loans and IDA Credits, January 1995, revised in January and August 1996, September 1997, and January 1999. -46 -  Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Selection Method Consultant Services Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total Cost A. Firms 3.37 0.00 0.00 0.00 1.05 0.00 0.00 4.42 (2.86) (0.00) (0.00) (0.00) (0.84) (0.00) (0.00) (3.70) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Total 3.37 0.00 0.00 0.00 1.05 0.00 0.00 4.42 (2.86) (0.00) (0.00) _(0.00) (0.84) (0.00) (0.00) (3.70) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Credit. - 47 -  Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review1 Contract Value ContractSubjectto Threshold Procurement Pnor Review Expenditure Category (US$) Method 1. Works NA NA NA 2. Goods $200,000 and above ICB all mandatory over $50,000 and less than NCB all mandatory $200,000 3. Services consulting firms: QCBS + short list all mandatory; issue $200,000 and above advertisement in national newspaper and UNDB to get expressions of interest; technical evaluation receives the Bank's "no objection" before opening financial proposals. between $100,000 and QCBS + short list $200,000 all mandatory; request expressions of interest; technical evaluation receives the Bank's "no objection" before opening between $50,000 and CQ + short list financial proposals. $100,000 prior review as per paras 1, 2 [other than the second subparagraph of para 2(a)] and 5 of Appendix I to the Consultant Guidelines; technical and financial based on consultants proposal to be reviewed by individual consultants more qualifications the Bank. than $10,000 all mandatory 4. Training training CQ all mandatory Total value of contracts subject to prior review: 95 percent - 48 -  Overall Procurement Risk Assessment High Frequency of procurement supervision missions proposed: One every six months (includes special procurement supervision for post-review/audits) Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. -49-  Disbursement Allocation of credit proceeds (Table C) Expenditure Category Amount in US$ Financing Percentage (million) Goods 100 percent of foreign expenditures, * Component A 4.40 100 percent of local expenditures (ex-factory * Component B 12.30 cost) and 70 percent of local expenditures for other items procured locally Consultants Services 85 percent * Component A 1.22 * Component B 1.73 Training 100 percent * Component A 0.27 * Component B 0.14 Incremental Operating Costs 80 percent of expenditures in the first and second * Component A 0.45 year; 60 percent of expenditures in the third and fourth year; 40 percent thereafter Unallocated 2.05 TOTAL 22.56 Use of statements of expenditures (SOEs): 19. At least initially, withdrawals from the credit account will be made using traditional disbursement procedures which include full documentation of expenses and SOEs. SOEs will be used for the following expenditures: (a) for goods under contracts costing less than $50,000 equivalent each, (b) for consultants' services contracts costing less than $50,000 in case of firms, and less than $10,000 or equivalent in case of individuals, and (c) for all incremental operating costs. A decision on moving the project to PMR-based disbursements may be made once the capacity of the implementing agencies to meet all PMR requirements is fully established. Special account: 20. A special account in US dollars will be established, on terms and conditions satisfactory to IDA. The authorized allocation will be initially limited to $500,000 until the aggregate amount of withdrawals from the credit account, plus the total amount of all outstanding special commitments entered into by IDA is equal to, or exceeds the equivalent of SDR 2,500,000. The authorized allocation may then be increased to $1,000,000. If the project moves to PMR-based disbursements, the authorized allocation may go up to 20 percent of the credit amount. 21. The IDA special account will be managed under the joint signature of the project coordinator and the senior accounts officer in the PCU. As per government requirements, the special account will be maintained at the Kathmandu Banking Office of the Nepal Rastra Bank (Central Bank). The project will follow the prescribed accounting procedures as per the HMG's financial administration rules. The PCU will ensure that the bank/cash books are reconciled with bank statements regularly every month. The PCU will submit replenishment applications for the special account on a monthly basis, or when 25 percent of the authorized allocation has been used, whichever occurs first. Replenishment applications will be - 50 -  accompanied by reconciled statements from the bank in which the account is maintained, showing all transactions in the special account. Supporting documentation will be maintained by the PCU for at least one fiscal year after the year in which the last disbursement from the credit took place, and will be available to be reviewed by IDA staff, and independent auditors. 22. The MOF will designate the PCU project coordinator (jointly with the senior accounts officer) and the chairman NTA (with the senior accounts officer of NTA.) as the signatories for withdrawing funds from the credit for the implementation of respective components. Financial Management Project Budgeting 23. Project planning and budgeting will follow HMG's planning and budgeting system. The PCU and the PMU will be responsible for preparation of their respective budget plans as per their agreed work programs. The PMU will send its budget request to the PClJ, and the PCU will prepare a consolidated budget request for MOIC and NTA components which will be discussed and submitted to the National Planning Commission and MOF. MOF will assign separate budget codes in the Red Book for MOIC and NTA components of the project, to facilitate budgeting and accounting of expenditures. Fund Flow Arrangements 24. Large payments including the RTS capital subsidy, exceeding the special account threshold, will be made through direct payments request to IDA. Other payments within the special account threshold will be made directly through a special account managed by the PCU. The PMU will submit a request to the PCU with supporting documents requesting payments to be made from the special account. Local expenditures such as, local training and operating costs, will be prefinanced by MOIC or NTA's own resources and later will be reimbursed from IDA. Record of special accounts transactions will be maintained at the PCU. 25. The RTS capital subsidy will be paid according to the licensing terms agreed at the time of the award. It is expected that this will be in two equal payments, with the first payment made on initiating service provision to the first 50 percent of the 534 VDCs w:ithin the first year, and the second payment made on initiating service provision to the remaining unserved VDCs within the second year. For disbursement purposes, these will be direct payment requests, submitted by the PCU according to the license/contract terms. Financial Management Staffing 26. HMG has sanctioned a senior accounts officer position for the PCU at MOIC. The FCGO will transfer to the PCU a competent and qualified senior accounts officer with adequate experience in handling IDA funded projects. In addition MOIC has already assigned an accounts officer to support the PCU as required by IDA. NTA has assigned an accounts officer to the PMU to coordinate with the PCU on project accounts. NTA will need to build its institutional capacity in the medium-term for both entity and project accounting, and will contract with a local accounting firmn to provide financial advisory services until such time as it can recruit an in-house accounting professional. These arrangements will ensure that from the start of the project, there is sufficient financial management. capacity. - 51 -  Project Financial Accounting, Reporting, and Internal Controls 27. Project expenditures will follow the government cash-based accounting system. The PCU will supplement manual records required to be kept under government regulations with simple spreadsheet based subsidiary records, regularly reconciled to the official accounts, to facilitate the timely compilation of additional information required for disbursements and PMR preparation. 28. The PCU will produce from the outset the following PMR components: Sources and Uses of Funds (Report IA) and Procurement Management Report (Report 3), in formats that were agreed upon at negotiations. Over an 18-month period, other PMR components (in formats to be agreed upon) will be developed. After 18 months of the project's start, the desirability and feasibility of switching to PMR-based disbursement will be assessed. To match the government planning and reporting cycle, the PMRs will be produced trimesterly and submitted within 45 days from the end of the preceding trimester. 29. The PCU and PMU will adhere to the general financial internal controls established by the government and NTA respectively. Activities of the PCU will be subject to internal audit from the FCGO. The creation of an internal audit section in NTA is envisaged in its bylaws. This has not yet been established but NTA will arrange to recruit a qualified local audit firm to conduct an internal audit of the project accounts. Internal audit reports will be made available to IDA on request. External Audit 30. The following audit requirements will be tracked through ARCS: * MOIC: annual project financial statements, SOE schedule, and special account statement will be audited by the Office of the Auditor General of Nepal, which is considered acceptable by IDA for this purpose, and submitted to IDA within six months after the end of the fiscal year. A draft TOR acceptable to the IDA was discussed with the Auditor General. * NTA: entity financial statements will be audited by the Auditor General and submitted to IDA within six months after the end of the fiscal year. 31. In order to promote timely audits, it has been agreed that the unaudited financial statements will be prepared within three months after the end of the fiscal year for submission to the auditors, and copied to IDA. Financial Management Action Plan 32. Action plans to strengthen the financial management capacity of the PCU and NTA were agreed between HMG and IDA and are summarized in the following tables: - 52 -  Table D.: Financial Management Action Plan for MOIC I Actions Deadline Actions Required for Adequate Financial Management During Project Pre aration I. MOIC to complete the transfer of the Senior Accounts Officer March 31 , 2002 from the FCGO to the PCU. The other accounts staff required for the PCU have already been assigned. Actions Required for Enhancing Financial Management During Project Im lementation 1. PCU to implement project financial management April 30, 2002 manual and supplementary (computerized) accounting records to support PMR and withdrawal application preparation, with assistance from consultants. 2. Assess financial management system and ]PMRs for readiness and January 31, 2003 capacity to migrate to PMR-based disbursements. Table E.: Financial Management Action Plan for NTA l Actions Deadline Actions Required for Adequate Financial Management During Project Preparation 1. NTA to engage professional accounting firm to provide March 31, 2002 outsourced financial manager service unti [ an in house financial manager can be recruited 2. NTA will coordinate with MOIC to initiate HMG's approval of the March 31, 2002 amendment to the Telecommunications Regulations 1997 to authorize NTA to approve its Financial Administration bylaws Actions Required for Enhancing Financial Management During Project Implementation 1. NTA to carry out intemal audit as required in its bylaws by March 31, 2002 recruiting a qualified local audit firm (until NTA decides in the medium term to create a separate internal audit section). 2. NTA to complete a needs assessment and plan to upgrade its April 30, 2002 institutional financial management capabilities, so that it can prepare its institutional accounts in accordance with international accounting standards. 3. NTA to complete implementation of its institutional financial December 31, 2002 management capacity strengthening plan 4. NTA to assess the need for the recruitment of a suitably qualified December 31, 2002 in house finance manager and to take appropriate action. 5. NTA and IDA to review/assess the need to create a separate during the midterm review Intemal Audit Section in NTA as per the provisions of its Financial Administration bylaws. A decision to either establish the Internal Audit Section or to continue to outsource the internal audit function to a local auditing fim_ will be made. - 53 -  Annex 7: Project Processing Schedule NEPAL: Telecommunications Sector Reform Project Project Schedule Planned Actual Time taken to prepare the project (months) 24 42 First Bank mission (identification) 04/12/1998 04/12/1998 Appraisal mission departure 04/09/2001 04/12/2001 Negotiations 10/03/2001 10/03/2001 Planned Date of Effectiveness 03/01/2002 03/01/2002 Prepared by: The Ministry of Information and Communications and the Nepal Teleconmuunications Authority Preparation assistance: PHRD grant and consultant trust funds Bank staff who worked on the project included: Name Speciality Ritin Singh Task Team Leader, Senior Telecommunications Specialist Kashmira Daruwalla Procurement Analyst Charles Kenny Infrastructure Economist Ivonna Kratynski Senior Financial Management Specialist Gareth Locksley Senior Telecommunications Specialist Tenzin Dolma Norbu Young Professional, Telecommunications Specialist Claudia Pardinas Ocana Senior Counsel Bigyan Pradhan Senior Financial Management Specialist Rajesh Pradhan Lead Financial Analyst Andrea Ruiz-Esparza Copyeditor, Program Assistant David Satola Senior Counsel, Peer Reviewer A. Shanmugarajah Consultant Narayan D. Sharma Procurement Specialist Peter L. Smith Lead Telecommunications Specialist, Peer Reviewer - 54 -  Annex 8: Documents in the Project File* NEPAL: Telecommunications Sector Reform Project A. Project Implementation Plan 1. Borrower's Project Implementation Plan B. Bank Staff Assessments 1. Financial Management System Capacity Assessment 2. Procurement Capacity Assessment C. Other 1. Intelecon Report on Rural Telecommunications in Nepal 2. No Frills Consulting Report on Socio-Economic Analysis (on rural telecommunications) 3. Application for Rural Telecommunications Service License in Eastern Development Region (December 26, 2000) *Including electronic files - 55 -  Annex 9: Statement of Loans and Credits NEPAL: Telecommunications Sector Reform Project Difference between expected and actual Onginal Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd P045052 2000 ROAD MAINTENANCE AND DEVELOPMENT 0.00 54.50 0.00 43.99 29.19 0.22 P040612 1999 BASIC&PRIM. ED. II 0.00 12.50 0.00 9.34 5.82 0.00 P045053 1999 RURAL INFRA LIL 0.00 5.00 0.00 3.62 2.27 0.00 P048026 1998 AGRI RES & EXTENSION 0.00 24.30 5.32 6.44 10.5B -1.91 P010530 1998 IRRIG SECTOR DEVT 0.00 79.77 9.01 30.56 25.84 -1.90 P010509 1998 MULTIMODALTRANSIT 0.00 23.50 0.00 5.37 5.59 0.00 P010516 1997 RURAL WS& SANITATION 0.00 18.30 1.55 4.91 6.97 2.09 P010454 1994 HIGHER EDUCATION 0.00 20.00 1.66 2.43 5.21 1.20 Total: 0.00 237.87 16.54 106.67 91.46 -0.30 - 56 -  NEPAL STATEMENT OF IFC's Held and Disbursed Portfolio May-2001 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1996 BhoteKoshi 21.00 3.00 0.00 36.00 18.49 2.60 0.00 31.68 1994 Himal Power 28.00 0.00 4.50 0.00 28.00 0.00 4.05 0.00 1998 Jomsom Resort 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 1975/93 Soaltee Hotel 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 Total Portfolio: 53.00 3.02 4.50 36.00 50.49 2.62 4.05 31.68 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 ILFC - Nepal 0.00 0.00 0.31 0.00 Total Pending Commitment: 0.00 0.00 0.31 0.00 - 57 -  Annex 10: Country at a Glance NEPAL: Telecommunications Sector Reform Project POVERTY and SOCIAL South Low- Nepal Asia Income OIWPntl damond 2000 Popuhation. mid-year (nmilions) 23.9 1,355 Z459 Life expectancy GNI per capita (Alas meod. USS) 230 460 420 GNI (Atlas melho ,USSbillions) 5.4 617 1,030 Ave ra nnumi growth 1994-00 Populabon (%) 2.4 1.9 1.9 Labor foro6 (%) 2.4 2.4 2.4 GNI GrowG per 1S e p T Povery (% ofpulationbelowrnatlapoveay/ine) 42 - Urban population (% of total popAat/on) 12 28 32 UtLexpectncy at brh (yes) 58 63 59 Infant mortality (per 1,000 live births) 75 74 77 Child malnuXton (X of diiren under 5) 47 47 Access to improved water source Access to an improved water source (% of population) 81 87 76 Illiteracy (% of population age 15+) 59 45 38 Gross pnmary enroliment (% of school-age population) 113 100 98 Nepal -- - Lowvncomegxoup Male 129 110 102 Female 96 90 86 _ KEY ECONOMIC RATIOS and LONG-TERM TRENDS 19f0 1990 1999 2000 GOP (US$ billonis) 1.9 3.8 5.0 5.5 Econc rados Gross dometiclnvbnerntGDP 18.3 18.1 25.1 25.1 Exports ot goods and setviceVGDP 1 1.5 10.5 23.9 23.5 Trade Gross domesfe savings/GOP 11.1 7.9 13.2 9.5 Gross nationai savinp/GDP 13.2 10.5 20.4 18.9 r Current aowunt baknoe/GDP -5.1 -82 0.5 1.3 Domee Zr Interest paymertGDP 0.1 0.7 0.6 0.5 TotW debt/GDP 10.5 45.2 59.0 51.4 savings TotW debt sevic/expols 2.9 14.8 6.4 4.9 Present value of debVGDP 32.8 Present value of debVexports 99.4 Irdebtedness 190.90 1990-00 1999 2000 2000-04 (average a-unw grmvth) GOP 4.6 4.9 4.4 6.4 6.0Nea -LoinmegW GDP per caprta 1.9 2.4 2.1 4 3.6 Nepa/ - Lowincome group Exports ot goods and services 3.9 13.9 4.9 22.9 8.0 STRUCTURE of the ECONOMY 1980 1990 1999 2000 Growth of Invesutent and GOP (%) (% of GOP) 20~ AgricAuture 61.8 51.6 40.1 39.1 Industry I .9 16.2 21.2 21.7 !0 Manufactunng 4.3 6.1 9.2 9.7 o - - Services 26.3 32.1 38.7 39.2 9 + 9s 97 98- 99 00 Private consumption 82.2 83.5 76.3 80.3 201 General government consumption 6.7 8.7 10.7 10.2 GDI -0-GDP Imports of goods and services 18.7 21.1 36.0 39.1 ! 1980-90 1990-00 1999 2000 Growth of exports and Imports(%) (average annual growthJ) Agricuture 4.0 2.5 2.7 5.0 so I Industry 8.7 7.2 6.0 8.7 -o. Manutacturing 93 9.2 5.3 13.0 SeMces 39 7.1 5.5 6.6 20 Private consumption 4.5 4.1 4.0 6.5 o, -9o General govemment consumption 7 2 5.9 9.2 3-2 201 Gross domestic investment 650 6.2 -15.4 9.8 Exors SImp?orts Imports of goods and services 5.8 9.7 -8.2 22.0 Note: 2000 data are preliminary estimates- The diamonds show four key indicators in the country (in bold) compared with its income-group average. tf data are missing, the diamond wilt be incomplete. - 58 -  Nepal PRICES and GOVERNMENT FINANCE Domestic pns 1t980 1990 1999 2000 Inflation(%) (% change) 15 Consumerprices 9.8 9.7 11.3 3.3 1D,_ _ _ __ _ Imptidt GDP deflator 7.6 10.7 8.9 4.2 . & N Government finance t (% of GOP, indudes curent grants) o , Current revenue 9.0 115 12.2 95 95 97 99 99 00 Current bidget baLance -1.6 2 -0.3 4-GDp defiator _CP Overail surplusideficit -10.0 -5.2 -4.8 TRADE (US$ millions) 198 199 1999 2000 Export and Import levels (USS mill) Total exports (fob) ,, 181 525 748 2.000 Food 81 144 142 Pulses 22 64 80 1,500 Manufactures 12 156 320 Totai imports (ci) 641 1,389 1,692 1,0 * Food 81 64 169 soo- li* * i Fuel and energy , 53 129 132 Capital goods 132 263 293 o Export price index (1995-100) 694 95 9 97 98 99 W Import price index (1995-100) 88 a Expons * Ir4o^rts Terms of trade (1995-100) 97 BALANCE of PAYMENTS 1980 1990 1999 2000 Current account balance to GDP (%) (US$ millions)I Exports of goods and services 224 381 1,257 1,459 12 Imports of goods and services 365 774 1,595 1,902 __, ,_ _ _ , , n, Resource balance -141 -393 -337 -443 s 99