Guatemala - Second Telecommunications Project

FILE COPY Report No. 683-GU Appraisal of the Second Telecommunications Project Guatemala March 26, 1975 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 It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  C UIRENCY EQUIVALENTS Currency Unit = Quetzal US$1.00 = Q1.00 MEASURES EQUIVALENTS 1 kilometer (km) = 0.621 statute,mile FISCAL YEAR Calendar Year ABBVIATIONS, ACRONYMS AND DEFIITIONS Carrier - A system of providing several channels through one trannmission mode. Channel - Frequency band of a carrier system carrying telephone, telegraph or data signals. CABEI - Central American Bank for Economic Integration CACM - Central American Common Market COMTELCA - Central American Telecommunications Commission CONAPLAN - National Planning Council DEL - Direct ebcchange line DGT - Direcci6n General de Telecomunicaciones DGCT - Direcci6n General de Correos y Telegrafos GUATEL - Empresa Guatemalteca de Telecomunicaciones GUATEL INT - Empresa Guatemalteca de Telecomunicaciones Internacionales HF - High frequency (3 - 30 MHz) INCATEL - Instituto Centroamericano de Telecomunicaciones INTECAP - Instituto Tecnico de Capacitaci6n y Productividad ITU - International Telecommunications Union KHz - Kilohertz MHz - Megahertz STD - Subscribers trunk dialing TELEX - Teleprinter exchange service UHF - Ultra high frequency (300 - 3000 MHz) USA - United States of America VHF - Very high frequency (30 - 300 MHz)  APPRAISAL OF THE SECOND TELECOMMUNICATIONS PROJECT - GUATEMALA EMPRESA GUATEMALTECA DE TELECOMUNICACIONES (GUATEL) TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS i - ii 1. INTRODUCTION 1 2. THE TELECOMMUNICATIONS SECTOR 2 Sector Organization 2 Regulation and Tariffs 2 Fxisting Facilities 3 Quality of Service 3 Sector Objectives 4 3. THE BORROWJER 5 Organization, Management and Staff 5 Training 6 Audit 6 4. THE PROGRAM AND THE PROJECT 7 The Program 7 The Project 7 Cost Estimate 7 Project Financing 8 Procurement 9 Disbursement 10 Project Execution 10 5. JUSTIFICATION OF THE PROJECT 11 Project Objectives 11 Market Demand 11 Least-Cost Solution 12 Return on Project Investment 12 6. FINANCE 13 Introduction 13 Earnings Record and Financial Position 13 Government Receivables 13 External Auditors i4 Tariffs 14 Investment and Financing Plans 15 Future Earnings and Financial Position 17 Performance Indicators 18 7. AGREEMENTS REACHED AND RECOMMENDATIONS 19 This report has been prepared by Messrs. Nikola R. Holcer and Jaime Acevedo-Navas.   LIST OF ANNEXES 1 * International Statistical Data 2. Summary of Internal and External Telecomnunications Tariffs 3. Telecommunications Facilities in Guatemala 4. Existing Facilities - Ongoing Works - Project Service Targets 5. Important Features of the Law Establishing GUATEL 6. Organization Chart 7. Second Development Plan 8. Estimated Cost of Project 9. Estimated Schedule of Disbursements 10. Telecommunications Demand in Guatemala 11. Return on Project Investment 12. Actual and Forecast Income and Surplus Statements, 1972-1979 13. Actual and Forecast Balance Sheets, 1972-1979 1h. Selected Financial Indicators, 1973-1979 15. Forecast Sources and Applications of Funds, 1974-1979 16. Summary of, and Notes on, Forecast Assumptions 17. Selected Performance Indicators Map - IBRD-11224   APPRAISAL OF SECOND TELECa1MIICATIONS PROJECT - GUATEMALA EMPRESA GUATEMALTECA DE TELECOMUNICACIONES (GUATEL) SUMMARY AND CONCLUSIONS i. This report appraises the Second Telecommunications Project of the Empresa Guatemalteca de Telecomunicaciones (GUATEL), which has requested 3ank assistance in its financing. ii. In 1972, the Bank approved a loan to GUATEL of US$16.0 million equiv- alent (Loan 792-GU) to assibt in the financing of its First Telecommunications Project. Despite initial delays of about 18 months arising from procurement difficulties, the project is progressing satisfactorily. Minor cost overruns will be covered by internally generated funds. iii. GUATEL - a governnent-owned autonomous entity - was established in 1971 by the merger of two former telecommunications entities; this eliminated undesirable divisions of responsibility and resulted in better use of available resouces and facilities. GUATEL is responsible for the international and most of the domestic telecommunications services; the only exception is the domestic telegraph service, which continues to be operated by the government department in charge of the postal service. iv. Overall policy control of the telecommunications sector is the responsibility of the Ministry of Communications and Public Works, and coor- dination of sector investment under the national economic plan rests with the National Planning Council (CONAPLAN). v. Guatemala has a very low telephone density of 0.77 telephones per 100 inhabitants. The local and long-distance facilities are poor in quality and do not meet the country's expanding requirements. Major improvements will result from the execution of the First Telecommunications Project which is scheduled to be completed in 1976. GUATEL's development program is designed to improve quality by expanding facilities to relieve congestion, extend service to new areas and within the resources available meet unsatisfied demand in existing areas. vi. The project consists of expanding the telephone network capacity by 82,900 exchange lines aisd the long-distance capacity by 722 trunk channels and corresponding trunk switching equipment; extending the rural telephone service to 86 additional communities; expanding the telex exchange network by 250 lines; and expanding telecommunications training facilities. The project is expected to be completed by the end of 1978. vii. The project is estimated to cost US$45.9 million, with a US$32.9 million foreign component. The proposed Bank loan of US$26.0 million equivalent would finance 79% of the foreign cost. Loans from the Central American Bank for Economic Integration (CABEI) totalling US$h.96 million would cover an additional 15% of the foreign cost. GUATEL would finance the remaining foreign cost of US$1.9 million and the local currency expenditures from its own cash generation viii. GUATEL has the basic planning, engineering and supervisory capacity to carry out the project. Its senior management is qualified and aedicated. GUATEL's staff will carry out cable laying, jointing and commissioning of dist-i-  - ii - bution cableis and transfers of existing switching equipment. Construction of larger insta:Llations will be carried out mainly by contractors under GUATEL's supervision. Expert assistance will be utilized in the design of the Guatema- la City multiexchange network and in the planning and operation of a training center. ix. Procurement of items financed by the proposed Bank loan would follow international competitive bidding in accordance with the Bank's guidelines, except forextensions to existing installations where direct compatibility is essential; the equipment involved, estimated to cost about US$2.0 million, would be purchased directly from suppliers with whom the original contracts were placed as a result of international competitive bidding under the previous Bank loan. Manufacturers from the Central American Common Market (CACM) countries, would be allowed a regional margin of preference of 15% of the t.i.f. price or 50% of the customs duty, whichever is lower. Because of long lead times involved in the manufacture of urgently needed equipment, GUATEL may enter into commit- ments to purchase goods with a value of about US$3.0 million before loan signing. No retroactive financing under the Bank loan is proposed. X. The project is technically sound. Its estimated cost a.ud the proposed construction schedule are reasonable. The return on project investment is estimated to be 18% at least. The facilities to be provided are needed to improve the quality of existing service and to reduce GUATEL's large unsatisfied demand for telephone service; together with the facilities provided under the ongoing project, they will reciuce the waiting list from about 60,000 in 1973 to an estimated 32,000 au the end of 1978. Continued Bank involvement would assist in the process of institution-building in the relatively new entity, and could be expected to result in price advantage benefits from international competitive bidding. xi. GUATEL is an acceptable borrower. Its Board and management are vested with sufficient authority to operate the entity efficiently, including the setting of tariff levels. It is reasonably well managed. Because of recent tariff action resulting in increased overall revanues and the agreements reached regarding net earnings and their distribution, including the maintenance of a reserve covering the service of its debt, GUATEL's prospective financial performance is good. Its return on average net assets in service is not expected to fall below 13% during the project period. This will permit it to cover 35% of its total expansion program from its own cash generation. xii. The project forms a suitable basis for a Bank loan.  AP