Colombia - Third Telecommunications Project

Report No. 605-CO F ILE I DC0 PV Appraisal of Third Telecommunications Project Colombia December 27, 1974 Regional Projects Department Latin America and the Caribbean Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Croup authorization. The Bank Group d(les not a(ccept responsibility for the accurary or completeness ot the report.  CURRENCY EQUIVALENTS US$ = Col$26.oo Col$1 = US$0.0385 Col$1,OOO,00 = US$38,500 FISCAL YEAR January 1 to December 31 LIST OF ABBREVIATIONS AND TITLES USED IN THE REPORT TELECOM - Empresa Nacional de Telecomunicaciones - an entity solely responsible for operating national telegraph, telex and long distance services and international teleoummunications services; and with 53 other entities responsible i:'or local telephone services. TELEX - telegraph exchange service for subscribers VFT - voice frequency telegraphs VHF/HF - very high frequency radio 30 - 300 mHz/high frequency radio up to 30 mHz GLOSSARY OF TECHNICAL TERMS USED IN THE REPORT CARRIER - a system of providing a number of circuits over one radio link, coaxial cable or a pair of wires FILL - percentage of installed capacity of a telephone exchange actually in service MICROWAVE - a system of communications using frequencies over 300 mHz and working on a line of sight propagation basis MULTIPLEX - part of the equipment in a carrier system - see above - which shifts and stacks the different circuits in the frequency spectrum appropriate to the particular carrier system TROPOSPHERIC SCATTER - a system of radio communication using very high or microwave frequencies capable of operating over distances beyond the line of sight by making use of the dispersion of radio waves in the troposphere  COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) APPRAISAL OF THE THIRD TELECOMMUNICATIONS PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS . .............................. i - ii 1. INTRODUCTION ................. .........*... 1 2. THE TELECOMMUNICATIONS SECTOR ......................... 2 3. THE PROGRAM AND THE PROJECT ........................... 4 The Program .................. . ......................... 4 The Project ..................................................... 5 Project Costs . ........................................ 5 Contingencies . ...................... ........... 7 Amount of the Proposed Loan ......... ........... 7 Procurement .......................................... . 8 Execution of the Project ...... ..................... 8 Disbursement ......................................... . 8 4. JUSTIFICATION OF THE PROJECT ..... ..................... 8 Local Facilities ....... ......................... 9 Rural Services ........................................ 10 Long Distance Facilities .............................. 10 Telex ................................................. 10 Least-Cost Solution ....... ............................ 10 Rate of Return ........................................ 11 5. THE BORROWER .......................................... 11 Organization .......................................... 11 Staff ................ .................................. 12 Recruitment and Training .............. .. .............. 12 Accounting and Audit .................................. 13 Billing and Collection ................................ 13 This report is based on information obtained from TELECOM, and on the findings of (i) a mission composed of Messrs. M. DeLima and M. Kohler which visited Colombia in November/December 1973 and February 1974; and (ii) an updating mission composed of Messrs. M. DeLima and B. Holmgren which visited Colombia in November 1974.  TABLE OF CONTENTS (Continued) Page No. Tariffs . .. .............. ....... ** 14 Insurance .*......*.. ..*.............**..... .*..** 15 Existing IFacilities .... ............................. ...... 15 6.FINANCES ...... ,...... .................... . 16 Past Financial Performance ..... ................. 16 Financing Plan .............17 Future Operating Results ........ 19 Forecast Financial Position .............20 7. AGREEMENTS REACHED AND RECOMMENDATIONS .............. 21  LIST OF ANNEXES 1. Telephone Entities Operating in Colombia as of December 31, 1973 2. International Statistical Data 3. Summary of Program Costs (197h-80) L. Physical Program (197L-80) 5. Schedule of Construction - Chart No. 9342 6. Schedule of Disbursement 7. Demand, Equipped Capacity and Connected Lines (1970-80) 8. Internal Financial Rate of Return Analysis 9. Organization Chart - No. 8341 10. Organization (Regional) Chart - No. 83h0 11. Staff Details 12. Summary of Tariffs 13. Basic Data as of December 31, 1973 and for 197lh-80 Program 14. Statistical Data on Exchanges as of December 31, 1973 15. Exchange Capacity, Connected Lines, and Telephone Stations - Actual (1968-73) and Forecast (1974-80) 16. Income Statements 17. Balance Sheets 18. Funds Flow Statement 19. Formula for Calculation of Financial Rate of Return 20. Program of Acquisition of Local Telephone Entities 21. Performance Indicators MAPS 1. Local Automatic Telephone Exchange Network 2. Long Distance Network   COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) APPRAISAL OF THE THIRD TELECOMMUNICATIONS PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project which includes a part of the works in Empresa Nacional de Telecomunicaciones (TELECOM) 1974-80 telecommunications development program scheduled to be started and completed during the first phase five-year period (1974-78). ii. The project is estimated to cost Col$ 1,609 million (US$52.1 million) with a foreign exchange component of US$33.5 million equivalent. The proposed Bank loan (US$15 million) would partially cover the foreign costs, while the balance (US$18.5 million) would be obtained through TELECOM's own resources. The project will provide: (a) about 18,000 additional lines of switching equipment; cables and subscribers plant to add about 16,000 new subscribers; (b) long distance equipment for 5,400 additional circuits; (c) telex equipment to connect 500 additional subscribers; and (d) telephone facilities to about 200 rural areas. iii. The proposed loan is the third lending operation for telecommunica- tions in Colombia. The first Loan 499-CO (US$16 million) was made in 1967 to finance the establishment of a basic long distance network and for the expansion and improvement of national and international telecommunications services. The loan has been fully disbursed and the physical work still outstanding would be completed by mid-1975. The second Loan 740-CO (US$15 million) approved in 1971 will assist in financing new local networks and extension of long distance facilities. The project will be completed by June 1976 except for installation of 9,900 local exchange equipment lines which could not be procured for lack of loan funds caused mainly by changes in exchange parities. The installation of these local lines has been provided for in the third project. iv. TELECOM, the proposed borrower, is an autonomous entity responsible for national telegraph, telex and long distance services and all international telecommunications services. TELECOM, which together with 53 other entities operates local services, is now consolidating the sector by acquiring gradually some of these entities. TELECOM's organization structure needs some changes, which TELECOM has put into effect. With the assistance of financial and technical consultants to be retained by TELECOM for the first two years of the project period, the entity would be able to carry out the proposed project.  - ii - v. All Bank financed goods would be procured by international competi- tive bidding in accordance with the Bank's Guidelines for Procurement, except some extensions (valued at US$2.6 million) to equipment earlier contracted for under Loan 740-CO, which is being obtained for reasons of standardization from the same contractors as the original equipment at unit prices quoted under the earlier bid adjusted for inflation. vi. TELECOM's liquidity has been tight during the past four years, caused in part by significant arrears in collections from the Public Sector and the connecting local telephone enterprises, and in part by its increasing debt service burden which is attributable to stepped up borrowings and the devalua- tion of the Colombian peso. TELECOM would improve its accounts receivable position during the project period. TELECOM would provide about 65 percent of the funds required during the project period from its own cash generation. TELECOM's liquidity would be satisfactory and the annual rate of return on net fixed assets in operation would meet the 11 percent minimum level. vii. The project is suitabLe for a Bank loan of US$15 million equivalent for a term of 20 years including3 a grace period of 5 years. The guarantor would be Republic of Colombia.  COLOMBIA EMPRESA NACIONAL DE TELECOMUNICACIONES (TELECOM) APPRAISAL OF THE THIRD TELECOMMUNICATIONS PROJECT 1. INTRODUCTION 1.01 The Government of Colombia has requested Bank assistance in financing Empresa Nacional de Telecomunicaciones (TELECOM) 1974-80 telecommunications development program which aims to extend and improve long distance national and international telecommunications facilities and to provide local telephone service in some areas of Colombia where service is limited or non-existent. The program's cost is estimated at Col$ 5,929 million (US$171.2 million) including a foreign exchange cost of US$106.5 million equivalent. 1.02 The proposed project, which would cover part of the works in TELECOM's program on which construction would be started and completed during 1974-78, provides for the installation of additional local exchange lines; the extension of long distance facilities; and telex equipment. The cost of the project is estimated at Col$ 1,609 million (US$52.1 million) including a foreign exchange component of US$33.5 million equivalent. The proposed Bank loan would provide US$15 million equivalent, while the balance of US$18.5 million equivalent would be financed through TELECOM's own resources. 1.03 This would be the Bank's third lending operation for telecommuni- cations in Colombia. In 1967, the Bank approved a US$16 million loan (499-CO) to TELECOM to help finance the establishment of a modern long distance network, and for the expansion and improvement of national and international telecom- munications services. The loan has been fully disbursed. Work on the project has been completed, except for four local exchange installations, which will be completed by mid-1975. The second loan (740-CO) for US$15 million approved in 1971, will assist in financing the installation of new local networks and the extension of long distance facilities. The project after initial delays is now progressing satisfactorily. About 9,900 lines of local exchange equip- ment provided in the project have been carried over to the third project due to shortage of loan funds mainly caused by changes in exchange parities. Except for this item, the project is expected to be completed by June 1976 - about a year behind schedule. 1.04 Because of the important role of exports in Colombia's economy and for the development of its national resources, rapid and reliable telecom- munications services are essential for providing a means of exchanging informa- tion between the producers and exporters of products such as coffee, petroleum and fuel oil, cotton and textiles, and bananas. Good telecommunication facili- ties are also extremely important for efficient administration of the country, particularly the inaccessible areas, and for improving transportation and distribution of goods within the country,. The proposed project aims at providing basic services in rural areas, and at extending and improving  -2- telecommunications services within the country. In addition, the Bank's participation in the project would assist in institution building including consolidation of the telecommunications sector (see paragraph 2.05) and the establishment of a reliable telecommunications network. 1.05 This report is based on information obtained from TELECOM, and on the findings of a mission compoi;ed of Messrs. M. DeLima and N. Kohler which visited Colombia in November/December 1973 and in February 1974: and an updating mission composed of Messrs. M. DeLima and B. Holmgren which visited Colombia in November 1974. 2. THE TELECOVMUNICATIONS SECTOR The Telecommunications Sector 2.01 The Ministry of Communications exercises governmental control of the sector. It is responsible for policy making, licensing and regulation of the various entities operating in the sector. By law, "the Ministry of Communications, in agreement wit'h the President of the Republic, is respon- sible to adopt national communications policy in harmony with the overall development policy." A planning office has been set up to make a broad study of the telecommunications sector and to recommend to the Ministry ways to improve, extend and economically provide telecommunication services within the country. As the licensing authority for all telecommunications services, the Ministry has issued licenses to various municipalities to operate local telephone services and to TELECOM. The Ministry exercises regulatory powers by approving investment plans of the various telephone entities, and recom- mending tariff proposals receivec from these entities to the National Tariff Board for final approval. 2.02 Responsibility for providing telecommunications services in Colombia is shared by 54 entities as set out in Annex 1. Operating as a Government owned entity, TELECOM has the exclusive license to provide national telegraph, telex and long distance services and all international telecommunications services. Local telephone services are provided by TELECOM and the 53 other entities. TELECOM is also permitted to provide local telephone services, with the approval of Ministry of Communications, in any area where the local municipality does not obtain a license to operate such services, and requests TELECOM to do so. With prior minLsterial approval, TELECOM is also allowed to acquire an existing entity. 2.03 At the end of December 1973, about 677,000 local telephone lines were in operation in Colombia (245,000 of these in Bogota), of which TELECOM operated 35,000 representing about: 5 percent of total telephone lines operating in the country. Annex 2 sets out statistical information on telephones in various countries of the world. IDetails of telecommunications facilities currently operated by TELECOM are set out in paragraphs 5.22-5.25.  -3- 2.04 The major problem of the telecommunication sector is the iragmented operation of local telephone service. Some large municipalities have created separate telephone entities to administer and operate the local telephone service. They provide reasonably good service. In smaller cities and towns, however the telephone service is operated in conjunction with other public utility services such as water supply and electric power. The quality of service in these areas is unsatisfactory due to the small scale of operation and the insufficient attention paid to the extension and improvement of the telecommunication service. The large number of entities (all except nine operate less than 10,000 equipment lines) complicates sector interworking with varying operating standards and often results in uncoordinated planning of facilities. Further each entity independently purchases costly imported plant and equipment, in small quantities, thereby paying high prices and causing an avoidable drain on the country's foreign exchange resources, and creating serious standardization problems. 2.05 The long-term solution lies in the consolidation of the several local operating entities into a single national telecommunication body. The large financially viable local municipal operating entities are reluctant to merge with other smaller similarly operated entities which are generally weak financially and technically and also local and regional political influences would defer or prevent voluntary mergers of entities in adjacent operating areas, or even compulsory mergers through legislation. For these reasons, when approving increases in TELECOM's long distance tariffs in 1971, the Government specified that a part of the expected additional revenue (see paragraph 6.14) should be set aside and used exclusively by TELECOM for local expansion including acquisition of local entities. Consolidation therefore can only be undertaken by TELECOM which is authorized to operate over the whole country. TELECOM has taken over some seven entities during the last three years and plans during 1975-78 to take over 19 more (see Annexes 1 and 20). By 1981 TELECOM proposes to acquire all local telephone entities, except the eight largest. 2.06 On completion of projects financed under Bank Loans 499-CO and 740-CO, TELECOM would have a reliable long distance network and good financial and technical management. The third project would extend telecommunications services to rural areas and increase long distance circuits. While TELECOM's long distance service development is progressing satisfactorily, local tele- phone service planning and development by other entities is not able to keep up with demands. The local entities do not have adequate financial resources for planned development. Two large entities (Bogota and Cali) would have serious problems in financing future development beyond 1975 and 1976 on the completion of their present plans and have requested Government for financial assistance from various sources including the World Bank. Supplier credits were considered unsatisfactory by these entities because of the higier prices of equipment to be paid (compared to prices under international bids) and short repayment periods. The position of the other smaller entities is no better, and their future development plans are based not on need, but on the quantum and timing of supplier credits which they hope to obtain. The un- certain availability of finance has caused even the larger entities to plan  -4- on a short term basis and has stopped development altogether in some smaller entities for which long term bank credits are not available. TELECOM's long distance development plans aft:er the end of the third project period (1978) will depend largely on the local service development achievement of the eight largest entities. Close coorclination of sector development and investment is therefore essential for a balanced development of telecommunications in the country. The Government is aware of these problems and has requested the Bank to undertake a sector study and to assist the Government to assess the requirements of each entity over the next 5-10 years, fix relative pri- orities for investment, and cc,nsider possible sources of funds. A Bank sector mission visited Colombia in August-September 1974 and is preparing a report. 3. THE PROGRAM AND THE PROJECT The Program 3.01 Government has approved TELECOM's third telecommunications develop- ment program for the period 1974 through 1980. TELECOM proposes to complete the program in two phases: from 1974 through 1978 and from 1977 through 1980. The program comprises mainly the following: (a) Installation of 119 new local automatic exchanges with a total capacity of 63,250 lines; additions of a total of 3,675 lines to 21 lo,al automatic exchanges; and associated cable network to connect about 54,000 additional subscribers; (b) installation of HF radio equipment; VHF/UHF radio equipment and microwave equipment with associated multiplex equipment to provide about 9,100 additional circuits; (c) installation of 3 new long distance automatic exchanges (total of about 2,600 terminations) and extension of existing long distance exchanges to provide a total of 18,000 additional terminations; (d) installation of 6 new teleprinter exchanges with a total of 2,450 subscriber lines and 1,350 channel terminations; 1,440 VFT channels and 2,500 teleprinters; (e) construction of buildings for housing equipment and stores; (f) extension of the international telephone exchange by 400 lines and the international telex exchange by 300 lines; and (g) purchase of testing equipment, tools and transport.  -5- 3.02 The program cost (including Col$ 942.1 million with a foreign exchange component of US$19.6 million equivalent of preinvestments for the program after 1980) is estimated at Col$ 5,929 million (US$171.2 million) including a foreign exchange component of US$106.5 million equivalent. Details of the estimated cost of the program are given in Annex 3 and the physical content of the program and project with completion dates of each item is given in Annex 4. The Project 3.03 The project for Bank financing would cover part of the works in phase one of TELECOM's telecommunications development program and would be carried out during the five-year period (1974-78). It consists of the follow- ing: (a) Installation of 43 new local automatic exchanges with 14,150 lines and 3,675 additional lines in 21 existing exchanges; (b) installation of local distribution cables and subscribers equipment to connect about 16,000 additional subscribers; (c) installation of microwave, UHF/VHF radio terminals and multiplex equipment to provide about 5,400 additional long distance circuits; and 10 HF radio systems; and 30 VHF radio systems to provide telephone services in about 200 rural towns; (d) installation of 3 new long distance automatic exchanges and additions to existing exchanges, with a total of about 17,600 additional terminations; (e) installation of 6 new teleprinter exchanges with a total of 2,150 subscriber lines and 1,350 channel terminations; VFT equipment for 1,440 channels and 500 teleprinters; and (f) acquisition of land and construction of buildings to house equipment. Project Costs 3.04 The cost of the project is estimated at Col$ 1,609 million (US$52.1 million) with a foreign exchange component of US$33.5 million equivalent. A summary of costs is given below:  -6- Col$ Million us$ Million. Local Foreign Total Local Foreign Total 1. Local Facilities Switching (new) 13.0 129.7 142.7 0.4 4.2 4.6 Switching (extension) j4.0 33.6 37.6 0.1 1.2 1.3 Standby Power Plant 0.3 6.5 6.8 - 0.2 0.2 Cables 6'2.5 - 62.5 2.2 - 2.2 Telephones *3.2 10.7 13.9 0.1 0.4 0.5 Coin Boxes -3.6 9.6 13.2 0.1 0.3 0.4 Subtotal 86.6 190.1 276.7 2.9 6.3 9.2 2. Long Distance Facilities Switching (new) 9>.5 52.0 61.5 0.3 1.7 2.0 Switching (extension) 12.4 73.8 86.2 0.4 2.6 3.0 Switching (additions) 37.5 142.0 179.5 1.1 4.5 5.6 Manual Boards (5 -3.7 4.2 - 0.1 0.1 Subtotal 5