Senegal - Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4523 PROJECT PERFORMANCE AUDIT REPORT SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) May 31, 1983 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) TABLE OF CONTENTS Page No. Preface ..........................................................** i Basic Data Sheet ................................................... 1i Highlights ......................................................... iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT SUMMARY .......................................... 1 II. SUPPLEMENTARY COMMENTS AND ISSUES ........................ 4 Procurement Problems, Delays, Revisions and Cost Overruns ...................................... 4 The Institutional Targets, Achievements and Failures ..... 6 Costs of Service, Tariff Levels and Social/Economic Considerations ......................... 7 Supply and Demand ........................................ 9 Financial Performance and Considerations ................. 10 III. CONCLUSIONS .............................................. 13 APPENDIX: Comments from Caisse Centrale de Cooperation Economique .. 15 ANNEX 1 17 PROJECT COMPLETION REPORT I. Introduction ........ . ............................... 21 II. Project Preparation and Appraisal ........................ 21 III. Project Implementation ................................... 25 IV. Operating Performance .................................... 33 V. Financial Performance .................................... 34 VI. Institutional Performance and Development ................ 39 VII. Project Justification .................................... 42 VIII. Bank Performance ......................................... 43 IX. Conclusion ............................................... 44 Annexes: 1. Physical Project Achievements ............................ 46 2. Annual Investment Costs - Comparison between Appraisal Estimates and Actual Costs ................... 48 3. Income Statements ........................................ 49 4. Funds Flow Statements .................................... 50 5. Balance Sheets ........................................... 51 6. Return on Investment ..................................... 52 7. Compliance with Covenants ................................ 53 Map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. n - i - PROJECT PERFORMANCE AUDIT REPORT SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) PREFACE This report presents a performance audit of the First Telecommuni- cations Project in Senegal for which a credit of US$6.25 million was approved on November 28, 1972 for the Office des Postes et Telecommunications du Senegal (OPT). The loan was guaranteed by the Governmuent of Senegal and after some delays became effective on June 5, 1973. The loan was closed on April 1, 1981 and an undisbursed amount of US$344,000 was cancelled. The Project Performance Audit Report consists of a Project Perfor- mance Audit Memorandum (PPAM) prepared by the Operations Evaluation Depart- ment (OED) and a Project Completion Report (PCR) prepared by the Telecom- munications Project Staff, Transport, Water and Telecommunications Department (TWTTL), since transferred to the Industry Department (INDD5). A special field visit was not undertaken by OED staff but a project completion mission was carried out by Telecommunications Project Staff in October 1981 and the information gathered then has been taken into account in the PCR. OED has reviewed the PCR, the Appraisal and President's Reports, the loan documents and other information in the Bank's files. The project has also been dis- cussed with Bank staff and reviewed in relation to the proposals for a subsequent project. Following standard OED procedures, copies of the draft audit report were sent to OPT, the Government and Caisse Centrale de Cooperation Economique (CCCE) for comment. Comments were received only from CCCE. These have been taken into account in preparing the final report and also are re- produced in the Appendix to the PPAM. On the basis of its review, OED is generally in agreement with the principal analysis and the conclusions in the PCR. However, in addition to providing a summary of the main history, concept and results, the PPAM dis- cusses the major problems affecting the project, the delays in implementation, cost increases and the delay, and in some cases failure, to meet the insti- tutional targets. It comments on the problems of high capital costs and low plant utilization with consequently high tariff levels in a low income country. It also reviews the demand/supply position in so far as data are available, and it deals with OPT's financial situation and liquidity problems arising from the failure of other administrations to make prompt settlement in connection with the international money order service and the Government's overdue accounts receivable position.  - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 8.860 23.200 Overrun (%) 0 162 Loan Amount (US$ million) 6.250 6.250 Disbursed 6.250 5.906 Cancelled 0 0.344 Repaid 0.560 0.560 Outstanding 5.690 5,346 Date for Completion of Physical Components 6/76 12/8 p/a Proportion Completed by Appraisal Target Date (%) 100 58.La Proportion of Time Overrun (%) 0 75La Internal Economic Rate of Return (%) 13 29 Financial Performance - Satisfactory Institutional Performance Adequate CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ 000's) Fiscal Year: 1973 1974 1975 1976 1977 1978 1979 1980 1981 (i) Appraisal estimate 390 1,170 2,700 4,900 6,250 6,250 6,250 6,250 6,250 (ii) Actual 0 105 338 2,216 3,609 4,000 5,100 5,599 5,906 (iii) As % of (i) 0 9 13 45 58 64 82 90 95 PROJECT DATA Actual or Item Original Plan Revisions Estimated Actual First mention in files or timetable - - /b Government's application - - 7 - Negotiations - - 10/02/72 Board Approval - - 11/28/72 Loan Agreement Date - - 12/19/72 Effectiveness Date 04/09/73 - 06/05/73 Closing Date 12/31/76 Several (4) 04/01/81 Borrower Office des Postes et Telecommunications Executing Agency (beneficiary) Office des Postes et Telecommunications Fiscal Year of Borrower July 1 - June 30  - iii - MISSION DATA Month/ No. of No. of Man- Date of Item Year Days Persons weeks Report Identification 04/69 /b 2 /b /b Preappraisal 12/71 2 b b Appraisal 04/72 /b 4 /b 10/19/72 Supervision I 08/73 14 2 5.0 09/25/73 Supervision II 10/74 3 1 0.6 10/21/74 Supervision III 01/75 5 1 1.0 (cable) 1/18/75 Supervision IV 02/75 14 2 5.0 02/26/75 Supervision V 03/75 6 2 2.0 04/07/75 Supervision VI 10/75 5 1 2.5 10/28/75 Supervision VII 12/75 1 1 0.3 12/30/75 Supervision VIII 08/76 6 1 2.2 10/15/76 Supervision IX 02/77 13 2 5.0 03/15/77 Supervision X 07/77 10 2 5.0 09/19/77 Supervision XI 05/78 15 2 5.0 07/26/78 Supervision XII 02/79 3 1 2.5 03/26/79 Supervision XII; 06/79 13 1 3.0 07/13/79 Supervision XIVILc 03/80 4 1 1.0 05/27/80 Supervision XV/c 05/80 12 1 2.5 06/03/80 Supervision XVL7 12/80 6 2 3.5 01/19/81 Total Supervision 130 46.1 Completion 10/81 7 2 2.0 12/31/81 COUNTRY EXCHANGE RATES Name of Currency: CFA Franc (CFAF) Year: Appraisal Year Average - 1972 Exchange Rate: US$1 = CFAF 256 Intervening Years Average - 1974 - 1980 US$1 = CFAF 237 Completion Year Average - 1981 US$1 = CFAF 275 Notes: /a Project scope increased in 1975. /b No data available. Tc Combined supervision/project preparation missions, with emphasis on the latter.  - iv - PROJECT PERFORMANCE AUDIT REPORT SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) HIGHLIGHTS The First IDA Telecommunications Project in Senegal was designed to upgrade the existing very poor standards of service, rehabilitate and modernize the network and expand local and long distance facilities to meet priority demands for service in the country's capital, Dakar, and the Northern part of Senegal1/ with an emphasis on the regions and trade centers where the country's economic and administrative activities are concentrated. The project as originally conceived is still considered to have been technically and financially sound and economically justified. However, due to the small size of the orders and the local conditions, the project cost estimates used in the appraisal proved to be unrealistically low. Addi- tionally, due to the manufacturer discontinuing supply of spare parts for obsolescent equipment, it became necessary to replace additional exchange equipment; this had not been foreseen at the time of appraisal. In consequence it became necessary, after bids were received, to revise the project and obtain additional financing. The estimated cost of the revised project was US$20.3 million, including US$15.8 million foreign exchange, as against the appraisal estimate of US$8.9 million, including US$ 6.8 million foreign exchange. Actual cost of the project was US$23.2 million, with US$17.9 million foreign exchange. The additional foreign exchange financing was provided partly by the Caisse Centrale de Cooperation Economique (CCCE) (US$3.6 million), partly through suppliers credits (US$3.6 million) and partly from OPT's own resources (US$3.9 million). Over the extended period of project execution, OPT undertook some expansion to meet the growth in demand and serve new areas. This may have involved some short term overprovision of exchange facilities. Due to delays in appointing consultants, producing bid documents suitable for international competitive bidding and having to revise the project and financing plan after bids were received, the project only got underway some 18 months after its anticipated commencement and then, due to building and installation delays, took a further 6 years to complete against the appraisal estimate of 3 years. The revisions and delays in project execution are outlined in the PCR. However, the physical targets set at the time of revision of the proj- ect have been substantially achieved. In consequence, the project success- fully met the main technical and operational objective of improving the quality of service in and between the areas it was designed to service. It did not, however, fully meet the demand for local service due to a failure to 1/ A project covering the southern part of the country was nearing com- pletion. - v - plan and coordinate the provision of exchange and local cable network facili- ties. This also resulted in a failure to fully utilize revenue earning potential. The project expanded local exchange capacity by 62% and increased long distance circuits on the routes concerned by 170%. The projects institutional targets were met only in part. A new and improved organization was introduced, however, and further improvements, particularly in the accounts section, are now in hand. There is, however, a continuing need for further improvement which will involve both support and policy decisions on the part of Government. It is apparent, from both the assistance given in the past and the knowledge of the sector obtained, that the Bank could be of considerable assistance in the institution building process if a follow-up project can be agreed upon. Although based on combined accounts for both the Telecommunications and Postal Departments, and not subject to full audit, it appears that OPT's financial results were very satisfactory indeed with an average rate of return on net fixed assets of over 21% and a contribution from internal cash generation of 67% of the funds needed for the development program. This is despite very high investment costs per line and a failure to fully utilize available facilities. The recalculated internal financial rate of return for the revised program was 29% compared with the appraisal estimate of 13% for the original project. Telecommunications tariffs were increased by 30% during the project period with a further increase of 25% in 1981. Some concern is felt that tariffs, particularly the charge for local calls, may now be overhighl/ given the low per capita income and economic and social needs for satisfactory low cost telecommunications facilities. Major cash flow and potential liquidity problems continue to militate against efficient commercial operation of OPT. These are related to the continuing failure of Government, and Government agencies, to pay their bills promptly; additionally, increasing large amounts are overdue from other countries in connection with international money order settlements. These problems have been discussed at some length in the PCR and PPAM. The international settlement problem does not seem to lend itself to an easy solution in view of the social and political considerations. The Bank's performance at the time of appraisal can be criticized on the grounds of using equipment price estimates which were unrealistically low. Given the local conditions, the target for completion of the project in 3 years was probably overoptimistic as were the time frames for some of the institution building objectives. In other respects the proposals in the appraisal report, including demand forecasts, institutional aims, revenue forecasts, etc. were sound and well balanced. The Bank's performance during 1/ The tariffs are however comparable with those in other francophone West African countries. Industry Department has commented that they do not believe the tariffs are too high. - vi - supervision of the project, and bearing in mind the various problems affecting the sector, has been excellent. The main lesson to be learned from the project experience is the desirability of following the recommendations contained in "The Project Cycle" which provide for bidding for main project components prior to Board presentation when there may be any doubt regarding equipment prices and local conditions. It is to be expected that continued participation in development of the sector will facilitate the necessary further institutional improvements and the development of facilities in line with the needs of the economy. 10. The following topics raised in the audit are of special interest: - The special procurement problems which have applied in Senegal and other West African countries based on the results of IDA-s earlier special investigation (ANNEX 1)1/. The consequent major delays, and cost overruns with which this project was plagued due to unrealistic cost estimates and overoptimistic targets. The need for special consideration of "start up" projects in developing countries (PCR paras. 3.02-3.11, 9.01 and PPAM paras. 23-30). - The extent of and failure to meet the institutional targets (PCR paras. 2.01-2.05, 5.04-5.07 and 6.01-6.08 and PPAM paras. 31-33). - Costs of service, tariff levels and social/economic considerations (PCR para. 5.04, Annex 3 and PPAM paras. 34-37). - The supply and demand situation (file research and PPAM paras. 38-41). - The financial situation and the unsatisfactory overdue receivables position for Government and parastatal organizations and in respect of international money order settlements (PCR paras. 5.01 to 5.13 and Annex 3 and PPAM paras. 42-50). - The economic reevaluation of the project (PCR para. 7.05 and Annex 6). 1/ CCCE has commented that the conclusions of the 1975 study may have limited validity by the time of this audit (Appendix to PPAM).  - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) I. PROJECT SUMMARY 1. Public telecommunications services in Senegal are provided by two organizations: the Office des Postes et Telecommunications du Senegal (OPT) which provides domestic telephone, telegraph and telex services (as well as postal services) and the Societe des Telecommunications Internationales du Senegal (TELESENEGAL) which provides the international telecommunication facilities (PCR, para. 1.01). 2. Following an identification mission in April 1969, followed by preappraisal in December 1971, the project, which had been developed by consultants, was appraised in April 1972 and a Bank loan for US$6.25 million was approved in November 1972 (PCR, para. 1.02). 3. This was the Bank Group's first lending for telecommunications development in Senegal. The project was designed to upgrade standards of service; rehabilitate and modernize the network; and expand local and long distance facilities in and between Dakar and the Northern provinces, in order to meet priority demands for service with an emphasis on the regions and trade centers where the country's economic and administrative activities are concentrated. Proposals were also made, and included in the Loan and Guarantee Agreements, for major improvements in sector organization and operations. Engineering consultants were to be appointed, as a condition of effectiveness, for procurement and project execution (PCR, paras. 2.02 and 3.01). 4. The project was designed to provide 8,300 lines of automatic tele- phone switching equipment (2,400 to replace obsolescent equipment); rehabili- tate and extend local cable networks; effect major improvement and expansion of long distance facilities, including a new high capacity microwave system from Dakar to Richard Toll; and provide subscriber trunk dialing. Due to the manufacturer being unable to supply spares for obsoloscent equipment it became necessary to include the replacement of an additional 5,000 lines of auto- matic exchange equipment in the project (PCR, paras. 2.02-2.03, 3.02 and Annex 1). 5. The project also provided for major institutional improvements including: provision of an OPT bank account; separation of postal and tele- communications accounts; reorganization of accounts, operations and staffing; review of tariffs; improvement of billing arrangements and settlement of overdue Government accounts; review of inventories and valuation of assets; and preparation and implementation of a training program. OPT were also required to produce a 9% rate of return on net fixed assets and submit audited financial statements to the Bank (PCR, paras. 2.01 to 2.05 and PPAM, paras. 31-33). - 2 - 6. The cost of the project was estimated at appraisal to be US$8.9 million with a foreign exchange component of US$6.8 million. The Bank loan was expected to provide 92% of the foreign exchange financing. Local costs would be met substantially from internal cash generation. It was expected that the project would be completed by June 1976 (Appraisal Report, PCR Basic Data Sheet and para. 3.06 and file research). 7. The loan took 6 months to become effective with a subsequent delay of 1 year in preparation of specifications suitable for ICB. When bids were finally received it was found that equipment prices greatly ex- ceeded appraisal estimates. Further cost increases resulted from the need to replace additional obsolescent equipment. It therefore became necessary to revise the project and obtain additional financing through CCCE and sup- pliers' credits. The revised estimated cost of the project was US$20.3 million with a foreign exchange component of US$15.8 million; the project finally got under way about 18 months later than expected (PCR, 3.01-3.02, 3.04-3.11, and PPAM, paras. 23-30). 8. Due to civil works, equipment supply and installation delays, the project was only fully completed in December 1980, 4-1/2 years later than expected. However, a number of major components were completed in 1978 and 1979. Cost of the project at completion was US$23.2 million with a foreign exchange component of US$17.9 million (PCR, paras. 3.03 and 3.12). 9. OPT undertook additional network expansion during the period of execution of the project in order to meet the increase in growth in demand over the extended period and also serve new areas. In the absence of finan- cial information on OPT's capacity to service the investment the Bank initial- ly questioned the wisdom of certain of these provisions. Following supply of adequate financial data the Bank withdrew its objections (PCR, paras. 3.13- 3.14). 10. Physical target objectives set in the project were satisfactorily met and major improvements in quality of service and availability were made. Unfortunately, due to inadequate planning and coordination, there has been a failure to provide for the necessary amount of local network expansion and rehabilitation to fully utilize the exchange facilities both provided under and undertaken outside of the project. This has resulted in a failure to fully utilize revenue earning potential (PCR, paras. 4.01-4.02, PPAM, paras. 35 and 41). 11. Other than for the high prices, no major problems were encountered in procurement. A study of procurement experience and problems in franco- phone countries was made in 1975 (PCR, paras. 3.04-3.05 and PPAM, paras. 23- 30 and Annex 1). 12. Performance by consultants was satisfactory after the initial problems of preparing specifications suitable for ICB had been resolved. The equipment suppliers also met their obligations and the required performance and service standards (PCR, paras. 3.17-3.19). - 3 - 13. Based on unaudited financial statements for the combined postal and telecommunications operations, the rate of return on net fixed assets averaged 21.3% against a covenanted annual rate of 9%. The operating ratio averaged a satisfactory 77%. Debt service coverage averaged a very high 18 times. Internally generated funds contributed a very satisfactory 67% of the funds needed for the investment program (PCR, paras. 5.02-5.03 and Annexes 3, 4 and 5 and PPAM, paras. 42-44). 14. OPT's billing and collection performance has improved but is still unsatisfactory. Further improvement could be greatly facilitated by provi- sion of in-house data processing facilities rather than relying on a central processing unit at the Ministry of Finance. Overdue receivables from Govern- ment remain a difficult problem and in 1980 were estimated to amount to about US$5.0 million or about 14 months billings. Additionally, OPT faces a parti- cularly difficult problem in its operation of the international money order service where the amount outstanding for settlement in 1981 was US$30 million. Solution of these problems is essential to successful commercial operation with satisfactory cash flow and liquidity (PCR paras. 5.07-5.09, 5.12-5.13 and PPAM paras. 47-50). 15. Government was required to set up a separate bank account to pro- vide counterpart funds for the project. This was done as a condition of effectiveness, but in practice, and partly due to the liquidity problems, payments have continued to be made directly by the Treasury. Considerable delays in the payment of counterpart funds to contractors have been reported (PCR paras. 5.06 and 5.14). 16. The tariff structure has been developed in conjunction with other francophone West African countries and was felt to be in need of review. A study by June 30, 1975 was required under the Loan Agreement. OPT met this requirement in December 1975, but, prior to that, increased telecommunications tariffs by 30%. Telecommunications tariffs were again increased by 25% in 1981. Some concern is felt by OED that tariffs, particularly the charge for local calls may now be overhigh given the low per capital income and economic and social needs for satisfactory low cost telecommunications facilities (PCR para. 5.04 and PPAM paras. 34-37). 17. OPT failed to meet the requirements that postal and telecommuni- cations accounts should be separated, that postal/financial operations should be reviewed and that accounts should be on an accrual basis and subject to. satisfactory audit. OPT was expected to produce satisfactory audited accounts for FY1981 with initial separation of postal and telecommunications accounts on a proforma basis. Also, the review of the postal/financial organization has not been completed (PCR paras. 6.01-6.02, 6.06 and PPAM paras. 31-33). 18. In all, 12 of 17 covenants contained in the Loan Agreement, relating to institutional and financial matters,were met. However, there were delays in setting up OPT's bank account and in appointment of the engineering con- sultants. These delayed the start of the project. Two other covenants, which were ultimately complied with, were not met within the prescribed timetable. While there were significant improvements in organization, manage- ment, productivity and replacement of expatriates, many of the expected institutional improvements have yet to be fully implemented. Other desirable improvements have been noted as a result of the project experience (PCR paras. 2.03, 6.01 to 6.08, 7.02, Annex 7 and PPAM paras. 31-33 and 42-50). 19. The project, as originally conceived, is still considered to have been technically and financially sound and economically justified. Review of demand data based on the original appraisal report shows a close relation between the original estimates and requirements at project completion. Service improvements have been significant both in quality and quantity. The project expanded local exchange capacity by 62% and increased long distance circuits on the routes concerned by 170% (PCR paras. 7.01-7.03 and PPAM paras. 38-41). 20. The recalculated internal financial rate of return for the revised program was 29% compared with the appraisal estimate of 13% for the original project, due to the increased tariffs and major increases in long distance traffic. In view of the additional benefits which will be obtained from a number of major program items, with relatively small additonal investment, the economic rate of return is likely to exceed the presently calculated IFRR by a substantial margin (PCR paras. 7.05 and Annex 6). 21. The Bank may be criticized on its performance at the time of ap- praisal for using unrealisticly low price estimates and for proposing physical and institutional targets which were unrealistic in the light of local con- ditions. The appraisal was otherwise very sound and performance and support given during execution of the project has been excellent. The relations with the Borrower have generally been good despite the problems experienced (PCR paras. 8.01-8.03 and PPAM paras. 23-26). 22. The project can be concluded as having been a successful one des- pite the delays and cost overruns. In view of the knowledge the Bank has gained of the sector, a second loan could greatly facilitate further deve- lopment and institutional improvements (PCR paras. 9.01-9.02). II. SUPPLEMENTARY COMMENTS AND ISSUES Procurement Problems, Delays, Revisions and Cost Overruns 23. There were initial delays in finalizing the engineering consultant's contract and producing specifications suitable for ICB. When bids were finally received, the very significantly exceeded (120%) the equipment prices used in the appraisal:Y report and it became necessary, well into the project cycle, 1/ With some justification Bank staff expected ICB to foster competition and produce lower prices, and used estimates based on ICB experience elsewhere, without regard for the special local conditions applying in West Africa. In practice these estimates proved to be unreasonably low. - 5 - to revise the project and obtain additional financing. The Director General of OPT, at that time, expressed his concern regarding the position and alleged that the appraisal mission reduced the project design consultants price estimates!! (PCR paras. 3.05 and 3.06, file research). 24. In fairness, it should be indicated that the Bank had no experience at the time of the problems of procurement in West Africa and the lack of interest of the major international suppliers in bidding for small instal- lations and quantities in a market requiring the use of the French language for preparation of bids and installation work. On the other hand, the insistence of the Bank that prices were over high led to negotiations and price reductions considerably below those which would otherwise have applied. 25. As a result of its concern regarding the limited extent to which non-French firms were bidding on ICB tenders issued by the francophone African countries, and the apparently high equipment prices which were being tendered, the Bank initiated a special study which was concluded in November 1975. An outline of the considerations and the conclusions reached in the study is given in Annex 1.2/ 26. The PCR outlines in some detail the reasons for the delay in execution of the project which overall took some 7-1/2 years to complete instead of a targeted 3 years. These included an initial delay of one year in finalizing the consultant's contract and preparation of specifica- tions suitable for ICB. When bid prices considerably exceeded the appraisal estimates, a subsequent delay of over six months resulted from the need to review project content and obtain additional financing. Effectively, the revised project only got underway 18 months after the commencement date anticipated at appraisal and then, due to building and installation delays, took 6 years to complete (PCR paras. 3.03 and 3.04). 27. The PCR provides a very comprehensive analysis of the project cost increases. Cost of the original project as a whole compared with the revised project, which allowed for completion in three phases increased by 161%. Foreign cost increased by 163% and local cost by 152%.3/ The cost of switching equipment increased by 218%. This, however, included a cost in- crease of about 60% for additional replacement of obsolescent equipment (which could not have been foreseen at appraisal) which became necessary due to the manufacturer discontinuing supply of spare parts. Local network costs in- creased by 83%, transmission network costs by 175% and buildings by 400%. While the low appraisal estimates were a major factor in the apparent increases, other factors have been escalation over the extended period of project execution, and currency parity changes (14%). After revision in 1975, when bid prices for the main components were known, project cost at completion increased by 14% (PCR paras. 3.06-3.09). 1/ Division Chiefs back to office and full report of October 24, 1974. 2/ CCCE has commented that the conclusions of the 1975 study may have limited validity by the time of this audit (Appendix to PPAM). 3/ These are the changes for the project as appraised to actual completion. - 6 - 28. In order to meet the increased foreign exchange cost of the project of US$9.0 million (132%), additional financing by CCCE (US$3.6 million) and through suppliers credits (US$3.6 million) was arranged in 1975. OPT provided the balance of foreign exchange financing (PCR paras. 3.10-3.12). 29. It is significant that it was only possible to finalize the finan- cing plan and phasing of the program after bids had been received (PCR para. 3.06 and file research). 30. The experience with this project illustrates once again that even greater care than usual should be taken by appraisal missions for "start-up" projects to examine in considerable detail the state of existing plant, the effects of local conditions on equipment price and installation costs, the size of the project and its components and their effects on prices, and the experience on similar projects in similar countries.-1l It would seem appropriate in start-up projects, where there is an above average degree of uncertainty about costs, to always follow the recommendations in "The Project Cycle" and require bids for the important components to be obtained and evaluated prior to Board presentation.2/ (PCR para. 3.06 and file research). The Institutional Targets, Achievements and Failures 31. The PCR (paras. 2.03, 6.01 to 6.08 and 7.02) comments on the pro- posals for institutional development and the degree of success achieved under the project; in all, 12 of 17 covenants relating to institutional and financial matters, contained in the Loan and Guarantee Agreements, were met. There were, however, delays in setting up OPT's bank account and in appointment of the engineering consultants which delayed the start of the project. Two other covenants which were utilimately complied with were not met within the prescribed timetable. While there were significant improvements in organization, management, productivity and replacement of expatriates.3/ many of the expected institutional and operational improvements have yet to be fully implemented. Other desirable improvements have been noted as a result of the project experience. The reasons given in the PCR on why the necessary institutional and operational improvements have not been fully implemented seem well founded and consist of: (a) frequent changes of senior management and top level staff (PCR para. 6.08); (b) failure to set up an adequate management information system (PCR para. 6.08); (c) failure to produce adequate (audited) financial statements on a timely basis (PCR para. 6.01), 1/ CCCE has commented that caution should be exercised in drawing conclu- sions from a comparison of costs of goods and services of a similar nature in different countries, as conditions never are identical (Ap- pendix to PPAM). 2/ Receipt of bids for critical components before Board presentation now appears to be the practice on many projects in West African countries. 3/ OPT has continued to use consultancy assistance. - 7 - (d) the inability of OPT to attract staff of the calibre required within the civil service pay scales (this has now been partly corrected through the creation of new pay scales) (PCR para. 6.05); (e) failure to separate postal and telecommunications operations in order to be able to review the profitability and achievement of the separate services (PCR para. 6.06); (f) failure to introduce adequate manpower planning facilities (PCR para. 6.04); (g) the financial problems resulting from the operation of the inter- national money order service (PCR paras. 5.12 and 5.13); (h) the absence of adequate data processing facilities which would allow preparation of bills on a timely basis and improve inventory control, etc. (PCR para. 6.03); (i) delay in payment of Government accounts since the 1974 settlement (made in 1977) (PCR para. 5.09); and (j) poor coordination of planning and installation resulting in low plant utilization (PCR para. 3.20). 32. It is reasonable to conclude that the original aims for institu- tional improvement, and those that have since evolved as a result of project experience, are soundly based and would provide the tools for effective management, rationalization of sector operations and improvement of the efficiency and financial performance of OPT. 33. A number of the remaining problems (such as changes in senior staff, salary levels, delays in payment of Government accounts and operation of the international money order service) have political/social implications and are essentially for Government decision and action if the institution building process is to continue. Costs of Service, Tariff Levels and Social/Economic Considerations 34. While it is difficult to quantify the economic and social benefits of developing telecommunications facilities in countries such as Senegal, the impact is believed to be significant in lowering general communications costs and increasing the efficiency of administration and social services. Facilities are also important to increasing the effectiveness of commercial activities and agricultural production. They also result in optimization in use of available expertise, where higher level managerial professional and technical expertise is in short supply. While not directly productive the sector is of importance in reducing costs and increasing productivity in the productive sectors. 35. Assuming some price elasticity in demand, it is particularly important in developing countries having low GDP per capita levels that tariff levels should not be such as to encourage use of second best alternatives. -8- Overhigh charges will discourage usage and the economic value of the service and may well distort resource allocation. Where demand cannot be fully met, it may be desirable to use price rationing (usually by entry fees) to allocate available resources. Having accepted this constraint, however, it is important for both social and economic reasons to keep tariffs at reason- able levels. This requires that the investment needed on a per line basis to provide service should not be excessive, that there should be a reasonable level of utilization of available facilities and that the operating entities productivity (including staff levels) should be satisfactory. It is emphasized that these economic considerations are not specific to the Senegal case. However, within this context it is interesting to review the position in Senegal: (a) The overall investment per line for the project (assuming 75% plant utilization) was $3,700 or, for the local network only, $2,400. These figures are from 50% to 100% above those for most other developing countries and generally considerably exceed those for much more sophisticated networks in the developed countries. (b) Revenue per line in 1980, the first full year after completion of the project, was $1,500. This is amongst the highest revenues noted and exceeds by 2 to 4 times that in most developed countries. The high revenue per line is of course partly accounted for by the small percentage of residential lines. The delay in payment for Government subscribers is also probably a factor in lack of control of Government use. The use of pulse period metering instead of automatic message accounting probably also results in uncontrolled use of the long distance network. (c) An exchange plant utilization of 50% instead of a more normal 65% to 75% is a clear indication of failure to utilize revenue earning potential. (d) OPT's staff levels are not unduly high for a small administration in a developing country and given the palary levels applying oper- ating costs are probably satisfactory.. 36. Tariffs were increased by 30% in early 19752/ before a tariff study, required under the project, was completed in December 1975. There is no clear indication in files as to what consideration has been given to the study recommendations. 37. It is not considered that adequate data are available to pursue this matter further within the scope of this audit. The economic/social aspects of availability and charges for telecommunications services is im- portant, however, and should receive Government planners' and OPT's special consideration. 1/ A full analysis is not possible due to the fact that separate figures are not available for the Postal and Telecommunications Services. 2/ A further increase of 25% was made in 1981. -9- Supply and Demand 38. At the time of appraisal, the local networks had a capacity of 11,800 lines in Dakar and 5,900 lines in the rest of the country. The number of working exchange lines was 8,400 in Dakar and 3,400 elsewhere. Plant utilization was 71Y in Dakar and 57%1/ for the rest of the country. No waiting list data appears to have been available so it is impossible to establish total demand. Telephone density was 0.7 per 100 persons. Network growth was at about 4% per annum in Dakar and 2% per annum elsewhere. The consultants based the design of the project on expected growth rates (with improved service) increasing from 5% to 7% in Dakar and 6% elsewhere. The project provided for additional network capacity of 3,900 lines in Dakar and 2,000 in the provinces. These provisions could be expected (with a reasonable plant fill of 75%) to meet demand in Dakar through 1977 and in the provinces (with a 6571! fill), also through 1977 (file research and project data). 39. From the data given in the PCR, capacity of the Dakar Metropolitan network in 1981 was 26,000 lines with 13,000 working exchange lines; a plant utilization of 50%. The waiting list was 3,700 giving a total demand of 16,700. If demand were fully met plant utilization would be 64% which would still be on the low side. A calculation based on the project preparation consultants' projected growth rates shows an expected demand in 1981 of about 15,500. It would appear from this that the demand growth rate-2 in Dakar is now in the region of 8%-10% per annum (PCR Annex 1). 40. It has been impossible from either file research or discussions to establish present exchange capacities for the provincial areas so plant utilization cannot be calculated. Data are also not available on the waiting list position for provincial areas. A calculation based on the consultant's projections shows an expected requirement for provincial areas of 6,000 lines by 1981. This compares closely with the actual number of working lines of 6,200. 41. This study indicates that the consultants and appraisal forecasts of growth in demand at the time of appraisal were excellent. It also indi- cates that the increases in Dakar exchange capacity of 10,000 lines, outside of the project (PCR paras. 3.13-3.14), appears to have been on the high side and that based on a 75% plant utilization factor the exchan e capacity needed would be 23,300 as against the 26,000 actually available.. It is perhaps more a matter of concern that the local cable network has not been extended in 1/ Plant utilization is of necessity lower in smaller exchanges due to capital indivisability. 2/ The connection rate had by 1980 increased to 7.5% (PCR para. 4.02). 3/ In part, the additional capacity can be justified as a result of having to serve the new Thairoye industrial area. Growth in demand will also absorb the excess capacity within about two years if the necessary cable network is provided. - 10 - line with the expansion in exchange capacity (PCR para. 3.20) and that a considerable investment in expensive exchange equipment is not presently providing the optimum revenues. Financial Performance and Considerations 42. The point should be made at the outset that OPT did not, as required under a covenant to the loan agreement, separate its postal and telecommunica- tions accounts so that the following comments on financial results are based on the combined results for both services. (Fortunately, the postal service in Senegal appears to have been profitable or near profitable). Additionally, some accounts have not been approved by OPT's Board and only two years ac- counts have been audited (PCR para. 5.01). 43. The rate of return on net fixed assets for the period 1974-80 averaged 21.3% against a covenanted annual rate of 9%. The operating ratio averaged a satisfactory 77%. Debt service coverage averaged a very high 18 times. Internally generated funds contributed a very satisfactory 67% of the funds needed for working capital and the investment program. Based on the data available, OPT's financial performance appears very good. Major tariff increases for both postal and telecommunications services were made in 1975. Postal tariffs were also increased in 1976. Postal and telecommunica- tions tariffs were again increased in 1981 (PCR paras. 5.02-5.06, Annex 3 and file research). 44. Although recent data on telecommunications tariffs are not available in files, it would appear, based on the earlier data we have, and the per- centage increases which have been made, that the monthly telephone rental charge for automatic service is US$6.40 and the local call charge a high US$0.18.11 The installation charge would be about US$110 with a security deposit of from US$30 to US$120.f2 Long distance charges would range from US$0.40 for 50 kms to US$4.00 for 600 kms. Although the installation, rental and long distance charges are generally considered reasonable, the local charge appears to be high and may tend to to reduce economic efficiency and encourage use of second best alternatives. This matter has been further discussed in PPAM paras. 34 to 37. 43. The PCR has commented on certain major constraints affecting the operation of the accounting section and its proper functioning as an essential tool for effective management. The main problems consist of: (a) the shortage of adequate calibre staff and high staff turnover and the need for support and training (PCR paras. 6.01 and 6.04); 1/ Industry Department has commented in respect of paras. 16, 35-37 and this paragraph that in the Senegal situation where demand exceeds available supply they do not believe that tariffs are too high and there is no evidence that tariff levels have reduced economic efficiency or en- couraged use of second best alternatives. 2/ Based on rates of exchange at project completion. - 11 - (b) delay in introduction of satisfactory accounting procedures (PCR para. 6.01); (c) the failure to separate postal and telecommunications accounts and be able to assess financial results for the separate branches (PCR para. 5.01); (d) the problems of achieving satisfactory and timely billing and collection procedures and the need for in house data processing (PCR paras. 5.07 and 5.08); (e) the failure to obtain prompt settlement of Government accounts (PCR para. 5.09); (f) the increasingly large amounts overdue in connection with inter- national money order settlements (PCR paras. 5.12 and 5.13); and (g) the failure to provide adequate financial autonomy through the use of its separate bank account (PCR para. 5.06). This is linked with the cash flow/liquidity problem. 46. Due in no small part to the assistance given by the Bank through project supervision and through an IDA financed public sector technical assistance credit (746-SE) the problems outlined under items (a), (b) and (c) are in process of being resolved. It is hoped from FY81 to produce accounts suitable for audit with a separation (initially proforma) between the postal and telecommunications branches. A full analytical cost accounting system is to be introduced from FY82 (PCR paras. 6.01 and 6.02). 47. With the reduction in cost of computers, it would seem desirable in connection with item (d) to give urgent consideration to the provision of in-house data processing capability. This has been proven to be fully justified now for quite small administrations. OPT's telephone billings are now in the region of US$30 million a year; assuming an opportunity cost of capital of 12%, a saving of even one week in payment of accounts is worth some US$70,000 per annum. Major savings should also be possible in stores inven- tories and other accounting functions (PCR para. 5.07). 48. The problems outlined under items (e), (f) and (g) are inter- related. It is important that OPT, if it is to have adequate autonomy to operate on a commercial basis and exercise full accountability, should have its own trust account (a stage further than envisaged for the first project). However, any arrangements for operating through an OPT account must be prejudiced if OPT has to continuously call on the treasury to solve the cash and liquidity problems resulting from excessive accounts receivable and delays in international settlements (PCR paras.5.06-5.07, 5.12-5.13). 49. Although the initial requirement under the project that Government should settle outstanding accounts receivable through FY721/ was met, there have been continuing problems in settlement of subsequent bills. The amount 1/ Settlement was actually made through December 31, 1974. - 12 - outstanding at June 30, 1981 was about US$5 million, or about 14 months billing.!I This is an issue which should receive special attention in connection with any future lending for the sector. It is suggested that consideration might be given to requiring a covenant that interest at, say, 2% per month, would be raised on the overdue amounts outstanding. This might have a salutary effect as officials, who are accountable for payments, are unlikely to wish to face criticism regarding unnecessary and wasteful expenditures (PCR para. 5.09).2/ 50. The problem of delays in settlement for international money orders is a particularly difficult one, with an amount outstanding in FY81 of about US$30 million. Normally administrations would take action to suspend the service when they cannot obtain timely settlements. This would however have serious political and social implications in Senegal where the majority of remittances are from Senegalese workers abroad to their families in Senegal. The PCR (para. 5.13) suggests that settlement should be henceforth dealt with through the Government, with OPT fulfilling the role of intermediary only Should this not prove acceptable, OPT might continue to negotiate bilaterally or through the Universal Postal Union (UPU) for an improved basis of settle- ment with perhaps some advance to cover the period of processing (PCR paras. 5.12-5.13). 1/ Industry Department have indicated they consider this proposal un- realistic and feel a solution under consideration of extending loans to Government to eliminate arrears together with the introduction of automatic message accounting to more readily identify calls are more promising solutions. 2/ The problem of settlement of overdue Government accounts is a particular- ly difficult and prevalent one in developing countries. While in many cases Governments themselves face fiscal constraints, it is fundamental to successful commercial operation of the Telecommunications sector that bills should be prepared on a timely basis and paid promptly. Major delays in payment will inevitably result in cash flow and liquidity problems and may prejudice both the development of the network and the efficient operation of services. It may also involve increased costs of operation and a reduction in profitability. It is obviously undesir- able in the event of delays in payment to disconnect essential Government services and such action in the case of the less important lines is particularly difficult if, as is usually the case, the telecommunications entity is Government owned. Despite the frequently repeated assurances obtained from Governments and operating entities and representations, even at high level, any improvements which result are often only short term. - 13 - III. CONCLUSIONS 51. Despite the substantial delays and cost overruns, the project was successful in substantially meeting the physical targets and improving both the quantity and quality of service in the areas concerned. The Borrower also made some progress in improving the organization of the sector and the calibre and productivity of its staff; however, much remains to be done in order to achieve adequate autonomy and facilitate efficient commercial operation. 52. Financial results were excellent but the costs of providing service and, in consequence, the tariffs are high and may have some adverse social and economic effects. 53. The Bank can be criticized for not taking full cognizance of local conditions in both the project cost estimates and the time frames for achiev- ing the physical and institutional targets. Subsequently, its performance in helping to resolve problems, and supervising the project, was excellent. In view of the knowledge the Bank has gained of the sector a second loan, if agreed, would greatly facilitate and provide impetus to further development and institutional improvements.  - 15 - APPENDIX COMMENTS FROM CAISSE CENTRALE DE COOPERATION ECONOMIQUE Translation of incoming telex Paris, May 19, 1983 Attn: Mr. Shiv Kapur Director Operations Evaluation Department Subject: Second Senegal Telecommunications Project (Loan 866-SE) Ref: Your letter of March 18, 1983 and your telex of May 13, 1983 Please excuse the delay in replying to your correspondence, occasioned by the absence on mission of the principal staff members involved. As far as we are concerned, we have no special comments on the content of the PPAR. Like you, we have been conscious of the cost overruns compared with the estimates made at the time of project appraisal. We do feel, however, that caution should be exercised in making use of any conclusions that can be drawn from a comparison of the cost of goods and services of a similar nature in different countries, as the conditions under which projects are executed are in practice never absolutely identical between one country and the next. A cursory examination of your report might leave the reader with the impression that the contractors selected were not competitive. In addition, we tend to think that the conclusions of the study on the awarding of telecommunications contracts in Western African countries prepared by your staff in 1975 cannot necessarily be applied to the current situation; as a result, attention should be drawn to the limited validity of those conclusions at the time of your audit. F. Gadat Division Chief CCCE  - 17 - ANNEX 1 Page 1 1975 STUDY OF TELECOMMUNICATIONS PROCUREMENT IN FRANCOPHONE WEST AFRICAN COUNTRIES The following is a precis of the main issues and conclusions con- tained in and resulting from the study1. General Issues 1. Bidding was adequately advertised in the press and embassies of the producing countries were informed. Adequate times were allowed for bids. The conditions set out in the specifications and bidding documents for micro- wave equipment followed the usual procedures and set normal international standards. In the case of automatic exchange equipment, although the documents again set normal standards, there was in some cases a special requirement that certain exchanges should be contained in cabinets. If sufficiently in- terested, however, the main equipment suppliers in all countries could have met this requirement. In the case of one country, cable specifications were based on the French national one and might have presented problems to some suppliers. (In this particular case, some justification existed for standardization in order to facilitate jointing). Extent of Bidding 2. In the case of cable supplies and switching equipment all bids were from French suppliers. In the case of microwave and multiplex equipment bids were received from French, Belgian, Italian and American suppliers. Reasons for Lack of Wider International Competitive Bidding. The main reasons for the limited bidding probably consisted of: (i) A lack of knowledge and experience by non-French firms of condi- tions in francophone African countries. Additionally, most suppliers have been required in their bids to include responsibility for complete installation services, even for relatively simple items, such as ducts and cable for which, in most other countries, instal- lation would be carried out by the entities concerned; (ii) The small size of the orders which discouraged non-French firms from committing their limited French speaking personnel to such orders or from establishing representation in the francophone African countries; and (iii) Many of the larger international suppliers have French subsidiaries and associates and will not bid separately. 1/ This precis has also been associated with the audit of the First Mali Telecommunications Project (Credit 321-MLI) where similar considerations applied. - 18 - ANNEX 1 Page 2 Levels of Bids 3. The bid prices for the main equipment items were assessed as follows: (i) Cable supplies. Bid prices for the cables themselves were substan- tially in line with contemporary prices bid elsewhere for similar quantities and sized cables. Where installation was also required, prices appeared generally high but useful comparisons were not possible as most other administrations use their own work force for installation or employ local contractors. (ii) Exchange switching equipment. Prices ranged from 32% to 68% higher than those bid internationally for similar installations. Also, main exchange prices bid by the French suppliers were consis- tently lower for the larger installations. (iii) Microwave systems. As systems design is to some extent related to distances between population centres, the analysis was carried out on a cost per station basis. This showed that prices in the francophone countries were reasonably in line with those bid else- where for similar systems. Conclusions 4. In the case of cable procurement even though prices were reasonably in line with those bid elsewhere, it was considered that where French stan- dards were proposed, the possible advantages of allowing other standards might be discussed with the borrowers taking into account any views they may have on needs for continued standardization. It should also be indicated that installation by the supplier is usually extremely costly when compared with the costs of the administration itself carrying out this not very tech- nical work. 5. The procurement of switching equipment obviously presented rather special problems in view of the lack of interest on the part of the other international suppliers and the high prices being bid by the French suppliers. Translation of documents might help the bidders to some extent, but still left a commitment to make available French speaking installation engineers and if quantities are small, it was not likely to result in appreciable widening of the competition. What might be done in the case of future pro- curement would be to go to bid for larger quantities11 designed to meet requirements for an extended period and thus increase the attractiveness of the market. 6. In the case of microwave systems, prices were not unreasonably high and there was evidence of suppliers outside of France becoming interested in the market; this was likely to increase in the future. 1/ Part of which might, based on a reasonable escalation formula, be ordered at a later date. - 19 - ANNEX 1 Page 3 7. Recent bids for cables, microwave systems and multiplex equipment have shown wider international interest in the francophone market. Unfortu- nately, we have no up-to-date information on switching equipment as this has, for the countries with which we are concerned, been supplied from France under French financing.  - 21 - SENEGAL PROJECT COMPLETION REPORT SENEGAL: FIRST TELECOMMUNICATIONS PROJECT (LOAN 866-SE) I. INTRODUCTION 1.01 Public telecommunications services in Senegal are provided by two autonomous organizations: the Office des Postes et Telecommunications du Senegal (OPT) and the Societe des Telecommunications Internationales du Senegal (TELESENEGAL). OPT is Government-owned and provides all domestic telephone, telegraph and telex services, as well as the postal services. In addition, it operates a nationwide checking account service and collects funds for the National Savings Bank. Carrier facilities for international telecommunications services are provided by TELESENEGAL, which is also wholly Government owned since 1979. 1.02 In November 1972, the Bank approved a loan of US$6.25 million equivalent to OPT (Loan 866-SE) to support a project which formed a major part of the 1972-1975 telecommunications development program. Besides the project, the program included remaining ongoing works of the 1969-1973 development program and small extension works in areas outside those covered by the project. The total cost of the program was estimated to be US$12.6 million equivalent with foreign expenditures amounting to USS$9.2 million. The estimated cost of the project was US$8.9 million, with a foreign currency component of US$6.8 million. Ninety-two percent of the estimated foreign exchange cost of the project was to be financed by the Bank's loan of US$6.25 million. The remaining foreign costs, together with local costs, were to be financed by OPT. The Bank loan was made to OPT and guaranteed by the Republic of Senegal. The loan had a 25 year maturity, including a five-year grace period, with an interest rate of 7 1/4 percent per annum. II. PROJECT PREPARATION AND APPRAISAL Preparation, Appraisal and Negotiations 2.01 Following project identification in April 1969, engineering studies financed by UNDP were carried out in 1971 by consultants in accordance with terms of reference prepared by the Bank which acted as executing agency. The project size and contents were finalized in December 1971 between the Government, the Bank, OPT and the consultants and the project was appraised in April 1972. Negotiations between the Senegalese Government and the Bank were concluded on October 6, 1972 and the loan was approved by the Bank's Board of Executive Directors on November 28, 1972. The loan became effective on June 5, 1973. Project's Objective 2.02 The project aimed at rehabilitating, modernizing and expanding the principal local telephone facilities in Dakar and in the northern provinces of the country, as well as the long distance network from Dakar to the north along the Senegal River, where several agricultural projects were under way. The project was specifically designed to eliminate the severe traffic congestion in the Dakar urban network, promote long distance traffic through - 22 - introduction of subscriber long distance dialing and meet the anticipated demand for new subscriber connections through 1978. In providing the planned facilities, the project also aimed at stimulating commerce, small scale industry and other agriculture related activities and at improving the efficiency of transport and administrative activities, thus contributing to the social and economic development and integration of the areas covered by the project. In addition to the physical plant, the project was also designed to help improve OPT's financial management and to implement a comprehensive training program in order to substitute Senegalese staff for expatriate advisors (see para. 7.02). Project Description 2.03 The project comprised the following: (a) provision of automatic telephone switching equipment for 8,300 lines, 6,300 of which were to be installed in the Dakar area (2,400 of the new lines planned were to replace obsolete switching equipment) and 2,000 in the eight northern provincial towns of St. Louis, Louga, Richard Toll, Dagana, Linguere, Kebemer, Podor and Matam; (b) rehabilitation and extension of the existing cable distribution networks in Dakar and in the provincial towns mentioned in under (a); (c) construction of a microwave link between Dakar, Thies, St. Louis and Richard Toll with associate multiplexing equipment, initially for 140 telephone channels and switching equipment to provide subscriber trunk dialing; (d) construction of a VHF/UHF link with ten spur links along the Senegal River from Richard Toll to Bakel; (e) rehabilitation of the open wire line and installation of new carrier equipment between Louga and Linguere; (f) the purchase of miscellaneous equipment, including vehicles and tools; (g) detailed engineering of the project; (h) employment of consultants for studies on tariffs and organization; and (i) implementation of a comprehensive training program. - 23 - Covenants 2.04 The loan agreement provides that OPT will: (a) employ consultants acceptable to the Bank to assist in the procurement of goods and services required to carry out the Project and in the supervision of the works [Section 3.02]; (b) prepare and implement a training program for its telecommunications staff in order that non-Senegalese technicians be replaced by Senegalese nationals as soon as practicable following completion of the Project [Section 4.04(a)]; (c) promptly review its current program of training of engineers and technicians to ensure the availability in each category of adequate numbers of trained personnel [Section 4.04(b)]; (d) on completion of the review of the operations, staffing and financing of its postal and financial services (see Section 5.06) and after an exchange of views with the Bank on the results thereof, and on the staffing requirements of the telecommunications services, establish and implement a staffing program for that service [Section 4.05]; (e) have by June 30, 1974, accounts and financial statements showing separately the operating results and financial position of the telecommunications service of OPT as from fiscal year 1972 - 1973 [Section 5.01]; (f) have its accounts and financial statements audited by independent auditors acceptable to the Bank and furnish the Bank with certified copies of the audited accounts no later than six months after the end of each fiscal year [Section 5.02]; (g) (1) by June 30, 1974, review and bring up-to-date inventories and valuation of assets and, where appropriate, apportion fixed assets between telecommunications and other services, as of July 1972; (2) by June 30, 1974, implement improvements in stores and cost accounting; and (3) by June 30, 1973, establish improved billing and collection procedures [Section 5.04]; - 24 - (h) complete by June 30, 1975, a study of its tariffs for telecommunications services. Prior to approval by the Bank of a course of action based on the results of this study, OPT shall make no change in its tariffs for telecommunications services without prior consultation with the Bank [Section 5.05]; (i) following the reorganization of accounts, review the operations, staffing and financing of its postal and financial services to ensure maximum efficiency [Section 5.06]; (j) maintain a special Bank account in its own name in which it will deposit the local funds for the project quarterly in advance [Section 5.07]; (k) restrict the incurrence of capital expenditures outside the 1973 - 1976 program in any one year to US$400,000, unless a financing plan has been agreed upon by the Bank [Section 5.08]; (1) commencing with fiscal year 1977 produce an annual rate of return of not less than 9 percent on its telecommunications operations [Section 5.091; (m) not incur any long term debt for telecommunications operations unless its net revenues from telecommunications operations for the preceding fiscal year or for a later 12 month period, whichever is the greater, are not less than 1.5 times the maximum debt service requirements for any succeeding year [Section 5.10]; and (n) not incur any short term debt for telecommunications operations which would exceed two months average operating expenses for the preceding fiscal year or during a later 12 month period, whichever is the greater [Section 5.11]. 2.05 The Guarantee Agreement provides that the Government will: (a) pay to OPT the amount outstanding as of July 1, 1972 for telecommunications services in four equal annual installments ending not later than June 30, 1977 [Section 2.04]; (b) ensure that all amounts owed to OPT are paid within sixty days of the billing dates [Section 2.05]; - 25 - (c) ensure that OPT maintains funds sufficient for its telecommunications operations (including investment and debt service) and for full application to any deficit resulting from postal/financial operations prior to any transfer of net profits to the Public Treasury [Section 2.06]; and (d) if OPT's profits are insufficient to cover the charges referred to in Section 2.06, take the necessary steps to cover the resulting deficit at the end of OPT's fiscal year [Section 2.07]. III. PROJECT IMPLEMENTATION Loan Effectiveness and Project Start-Up 3.01 The Loan and Guarantee Agreements were signed on December 19, 1972 but the loan became effective only as of June 5, 1973 because of delays in obtaining the legal opinion, OPT contracting the engineering consultants and creating a separate Bank account for OPT. Project preparation, however, started slightly before loan effectiveness with the preparation of bidding documents for the main items. Project Revision 3.02 No significant changes were made to the physical project composition before signature of the main contracts (para. 3.12). Subsequently, however, OPT negotiated 5,000 additional lines for Dakar's main local exchange (Medina I) to replace the existing 5,000 lines of obsolete R6 switching equipment because the suppliers of such equipment decided to stop manufacturing the parts required for maintenance, upgrading and adaptation. The original project provided only for the replacement of 2,400 lines of R6 equipment in Dakar Ponty and its satellites. A city ordinance prohibited OPT from erecting a metallic pylon to support the antenna of the Dakar Medina Terminal station of the microwave link and OPT decided instead to build a very expensive concrete tower. The Bank urged OPT to adopt a less expensive alternative solution but was unsuccessful. At appraisal the rehabilitation of overhead lines was limited to the route Louga-Linguere, but finally the rehabilitation works were extended along the entire transmission route Thies-Louga-Linguere. Implementation Schedule 3.03 The project, as appraised in 1972, was originally planned to be completed by the end of June 1976. Commissioning of the major part of the project, however, was delayed until the end of 1978. The telecommunications facilities along the northern axis Dakar-Thies-St. Louis-Richard Toll-Podor-Matam-Bakel were commissioned on November 15, 1978. - 26 - The new local telephone exchange of Dakar Medina (18,000 lines), including introduction of six-digit telephone numbers for the Dakar area, was commissioned on December 22, 1979. During 1979, the existing PENTACONTA switching equipment of Dakar Medina (3,000 lines and integrated trunk switching) was rehabilitated and relocated to complete: (i) Dakar's new main local exchange including satellites of up to 21,000 lines and (ii) the new national trunk exchange of up to 408 trunks (201 outgoing, 207 incoming). The project was fully completed at the end of 1980. 3.04 The bid documents, originally scheduled to be completed in September 1973, were delayed by one year due to a delay in finalizing the engineering consultant's contract and in obtaining technical specifications suitable for ICB. After award recommendations were approved by the Bank, the award of all contracts for telephone switching, transmission and cable networks was delayed by six months until a solution was agreed upon with the Government, the Bank and CCCE to solve the problems associated with the financing of a substantial cost overrun (see para. 3.06). During this period (1974-1975), the project was rated as a problem project by the Bank and required a large amount of Bank staff attention in order to assist the Government and OPT in reassessing the new situation and in making the necessary arrangements to get the project moving again. The manufacture, transport, installation and commissioning of new equipment required a very long 48 months which compares with the 36 month period estimated at appraisal. At least a six-month delay in starting up equipment installation was also due to the fact that the new exchange building was not ready on time, partly because the purchase of land required cumbersome expropriation procedures. The original implementation schedule did not provide time for the adaptation, rehabilitation and redeployment of the existing switching equipment which was not anticipated. These installation works, which were started in January 1979 after commissioning of the new equipment, were fully completed in 1980. Procurement 3.05 OPT supported Bank recommendations to have the technical specifications initially prepared by the consultant revised and based on internationally recognized standards (CCITT recommendations). Due to the relatively small size of the contracts and a lack of knowledge of the local conditions and environment by most of the potential international telecommunications suppliers, ICB had very limited success in attracting wide competition and in obtaining low prices. Cost Overrun 3.06 The engineering consultants prepared the cost estimates for the project on the basis of prices generally experienced in the region under limited competitive bidding procedures. The appraisal mission, however, substantially reduced the consultant's original estimates and based its estimates on competitive 1972 world market prices for similar equipment procured under ICB in other parts of the world. This assumption proved to be too optimistic in Senegal where conditions are similar to those in other - 27 - countries of Western Africa due to the combined effect of: (i) underestimation of the cost of transport, installation and risk; (ii) difficulties encountered with the adaptation and extension of the existing trunk switching equipment in Dakar and Thies; (iii) a one-year delay in procurement (para. 3.04); (iv) lack of effective international competition, particularly for telephone switching equipment and cables; and (v) unexpected high world inflation, as well as currency realignment between 1973 and 1974. Bid evaluation in December 1974 indicated that the cost overrun would be as high as 145 percent. In January 1975, a Bank supervision mission visited Dakar to assist OPT in the negotiations with the bidders of switching equipment (see para. 3.09). The contract negotiations resulted in a reduction in the total cost of the project from US$21.8 million to US$20.3 million which, compared with the US$8.9 million estimated at appraisal, brought the total cost overrun down from US$12.9 million to US$11.4 million. The increase of project costs (expressed in US$) due to currency realignement was about US$2.5 million. A detailed breakdown of project cost after contract negotiations and a comparison with appraisal figures is given below: --------- US$ Million * - - - - - - Revised Original Estimates Estimates (1975)** Item Local Foreign Total Local Foreign Total Telephone exchanges 0.2 2.0 2.2 0.2 6.8 7.0 Local networks 0.9 1.4 2.3 0.6 3.6 4.2 Transmission links 0.2 1.8 2.0 0.7 4.8 5.5 Buildings 0.5 0.1 0.6 3.0 - 3.0 Miscellaneous, tools, vehicles - 0.3 0.3 - - - Consultants and experts 0.1 0.4 0.5 - 0.5 0.5 Training - 0.2 0.2 - 0.1 0.1 Contingencies 0.2 0.6 0.8 -. -. Total 2.1 6.8 8.9 4.5 15.8 20.3 * Exchange rates: 1972 - US$1 = CFAF 255.8; 1975 - US$1 = 225. ** Revised estimates based on firm prices of negotiated contracts for switching and transmission equipment, cable material and installation; revised estimates for buildings and consultants. With exception of building construction, the above revised estimates are based on firm negotiated contract prices. 3.07 The largest cost overrun was experienced with the switching equipment. The total cost of US$7.0 million included supply and installation of new equipment at a cost of US$4.6 million and the extension and adaptation of existing exchanges (mainly trunk exchanges) in Dakar and Thies at a cost of US$2.4 million. The cost of new equipment included 7,500 lines for the main Dakar urban exchange, including new trunk switching equipment, a 1,000 - 28 - line satellite exchange in the Dakar suburban area, a 1,000 line exchange in St. Louis at a unit cost of about US$300 per line equivalent and small (100-300) line rural telephone exchanges at a unit cost of US$340 to $700 per line equivalent. These figures compare with the appraisal estimated average price at US$203 per line, including price and physical contingencies, and represents a 48 to 245 percent increase. About 50 percent of the very high cost of the small automatic rural exchanges installed along the Senegal River is due to the provision of engine generators because of the unavailability of electric power in the area. The actual cost for the extensions and adaptation of existing telephone exchanges, mostly in Dakar, was US$2.4 million. This is much higher than the appraisal provision of US$0.5 million. This large cost overrun is partly explained by the fact that, at appraisal, technical difficulties and high installation costs due to the need to transfer existing equipment during operations were not identified and trunk traffic requirements were underestimated. 3.08 The second largest cost overrun was experienced with the transmission component. The microwave route Dakar-Thies-St. Louis-Richard Toll cost US$2.4 million as compared to an appraisal estimate of US$0.8 million. Finally, the rehabilitation of the long distance overhead lines, which included additional works that were not appraised (para. 3.02), cost about US$1.3 million, as compared with a comparatively small appraisal provision of US$0.2 million. With the exception of the overhead lines, rehabilitation for which a meaningful comparision can no longer be made, cost overruns experienced with the transmission routes were about 100 - 125 percent. The revised costs (expressed in 1975 US dollars) include a 14 percent increase due to currency realignment and an increase of at least 25 percent due to the high rate of inflation experienced between 1972 and 1975. The original appraisal estimates provided for a very optimistic 4.5 percent price contingency over the expected four-year project execution period. 3.09 An internal Bank study made in July 1975 at the request of the Western Africa Region, confirmed that the prices obtained in Senegal for telecommunications equipment, supply and installation were substantially higher than those obtained in other parts of the world and reflected not only the relatively small size of the contracts and a significant lack of international competition, but also the fact that installation took place in a country where technical skills are scarce and need to be imported at high cost. This holds particularly for the Senegal River area, where transportation and living conditions are difficult. Financing of Cost Overrun 3.10 At the time of review of the bid evaluation and following discussions between a Bank supervision mission and OPT in October 1974, OPT and the Government approached the Caisse Centrale de Cooperation Economique (CCCE) which agreed to consider co-financing some of the original project components with the Bank. In February 1975, the project had to be reappraised by a Bank mission on the basis of the actual cost of the - 29 - contracts negotiated in January 1975 (para. 3.06). To facilitate financing the cost overrun, the project was divided into three phases : (a) the most urgent phase consisting of the extension of the Dakar telephone network and the microwave link Dakar-Thies (this first phase was the least affected by cost increases and was the most justified); (b) the second, less urgent, phase comprised telephone exchanges and local networks in provincial towns, rehabilitation of long distance overhead lines, and the microwave link along the route Thies, St. Louis, Richard Toll; and (c) the third phase, which was the most affected by cost increases consisted of the facilities to be installed along the Senegal River. 3.11 In March 1975 a proposal for co-financing arrangements was prepared in Paris between the Bank and CCCE and a subsequent joint Bank/CCCE mission visited Dakar to present this proposal to the Government and OPT. The Bank and CCCE agreed in Paris that phase III and the rehabilitation of the overhead lines would be excluded from co-financing and that OPT and its consultants should redesign these items to determine a more economical solution. However, the Government and OPT insisted on executing the whole project as originally designed. On the basis of revised financial forecasts following a tariff increase (para. 5.04), the Bank and CCCE were satisfied that OPT could meet the cost of phase III from its own resources. Additional financing was provided by both CCCE and suppliers' credits, guaranteed by the French export credit guarantee agency COFACE. The CCCE loan was for FF16.0 million (US$3.6 million) for 15 years including a 7-year grace period and an interest rate of 5.5 percent per year. An equal amount was provided by suppliers' credits for 7 years at 8 percent per year. The suppliers' credits were to be reimbursed in the 7 years corresponding to the grace period of the CCCE loan and equipment. This joint financing arrangement was applicable to new equipment and plant of phases I and II. The Bank financed the foreign exchange component of consulting services and training and one small contract for telephone instruments. CCCE and suppliers' credits financed the extension of and adaptation to existing automatic exchanges. OPT financed the remainder of the project phase III, buildings and rehabilitation of long distance overhead lines. Since major contracts were cofinanced and the full cost of phase III and some other items was met by OPT, the proceeds of the Bank loan were reallocated (see para. 3.16). Cost of the Project 3.12 The project cost, as estimated at appraisal in 1972, was US$ 8.9 million. However due to higher unit costs experienced for material, equipment and installation, as well as for civil works and building construction (paras. 3.06 - 3.09), the project was reappraised in 1975 (para. 3.10) and, at this time, the revised cost estimate made on the basis of finalized contracts was US$ 20.3 million. The following table compares the revised cost estimates made in 1975 and the actual cost on completion. The project cost, based on negotiated contracts or as estimated at the time of the joint Bank/CCCE mission and the actual cost on completion are indicated below: - 30 - - - - - - US$ Million * - - - - - - Revised Estimates (1975) Actual Cost Item Local Foreign Total Local Foreign Total Telephone exchanges 0.2 6.8 7.0 0.3 8.2 8.5 Local networks 0.6 3.6 4.2 0.6 3.9 4.5 Transmission links 0.7 4.8 5.5 0.9 5.2 6.1 Buildings 3.0 - 3.0 3.5 - 3.5 Consultants, training - 0.6 0.6 - 0.6 0.6 Total 4.5 15.8 20.3 5.3 17.9 23.2 * Exchange rates: 1975 - US$1 = 225; average during disbursement years 1974-80 - US$1 = 237. Expressed in US dollars the actual cost of the project(US$23.2 million equivalent) was 14 percent higher than the US$20.3 million estimated in February 1975 when the project was reappraised. The largest cost variation was in switching equipment due to the purchase of 5,000 replacement lines and 5,000 additional lines for Dakar's main telephone exchange; full rehabilitation of the primary cable in the Dakar urban network and in transmission due to the construction of a costly concrete tower instead of a pylon for Dakar's Medina telecommunications center (para. 3.02). Additional Investments 3.13 During the project implementation period (1974 - 1980) OPT made additional investments which, for the purpose of this report, are considered to be outside of the project framework; thus, their respective costs have not been included in the cost comparison above (para 3.12). The August 1976 Bank supervision mission noted that OPT had signed further contracts for: (i) the construction of a coaxial cable between Thies and Mbour, the beach resort where a Bank-financed tourism project was being implemented and (ii) supply and installation of additional switching equipment in the Dakar urban area. These additional investments of US$1.4 million were decided upon by OPT without prior consultation with the Bank, contrary to the provisions of Section 5.08 of the Loan Agreement. 3.14 In the action letter following the mission, the Bank requested that OPT discuss substantive changes of the investment program with the Bank prior to committing themselves. The Bank later accepted these additional investments despite the absence of satisfactory financial information, partly because OPT increased its telecommunications tariffs and the financial situation was estimated to be satisfactory (para. 5.10). However, in addition to this, the following supervision mission of January 1977 learned - 31 - that OPT intended to purchase a second slice of 5,000 lines for the Dakar Medina telephone exchange at a cost of US$2.4 million and also intended to remodel and expand the existing switching facilities in the provincial town of Kaolack to capacity of up to 2,000 lines and expand the associated local network for a total cost of US$2.1 million, as estimated by OPT's consultants. The project was expected to be financed by the West African Development Bank (BOAD). In the ensuing correspondence, the Bank pointed out that the cost of such a project was prohibitive and urged OPT not to proceed with these additional investments before project completion, unless a satisfactory assessment of OPT's financial situation and financing plan for these investments could be presented. The Bank alerted the Government and OPT that non-compliance with Section 5.08 of the Loan Agreement would lead to suspension of loan disbursements and the project was again listed inside the Bank as a problem project. Following this second letter, OPT complied with the investment limitation (para. 5.10) covenant and ultimately more reliable financial information was made available to the Bank. After assessment of OPT's financial situation, the Bank withdrew its objection to these additional investments in June 1978. Disbursements 3.15 The estimated and actual disbursements of the Bank loan were as follows: Accumulated Disbursements Fiscal Year (US$ Thousand) Appraisal Estimates Actual 1972 - 1973 390 - 1973 - 1974 1,170 105 1974 - 1975 2,700 388 1975 - 1976 4,900 2,216 1976 - 1977 6,250 3,609 1977 - 1978 - 4,000 1978 - 1979 5,100 1979 - 1980 5,599 1980 - 1981 5,906 Slippages in disbursements were due to problems as explained in paragraph 3.03. Following cofinancing arrangements made in March 1975 which excluded contracts for phase III, buildings and rehabilitation of long distance overhead lines (para. 3.10 and 3.11), the Bank agreed to disburse up to 53 percent of the total amount of each of the major contracts for telephone switching equipment, local networks and transmission links eligible for Bank financing. The balance was to be financed by CCCE (23.5 percent) and by suppliers credits (23.5 percent). The actual percentages disbursed in the same contracts and their related extensions by both the Bank and CCCE were 43.6 and 20.2 percent, respectively. Suppliers' credits and OPT actually - 32 - financed respectively 31.2 and 5.0 percent. The larger share of suppliers' credits was used to finance additions to existing contracts for local networks and transmission routes (para. 3.11). After urging OPT to speed up its disbursement requests, a final disbursement from the proceeds of the Bank loan against contracts eligible for Bank financing was made in March 1981. The remaining undisbursed amount of US$344,154 was cancelled. Credit Allocation 3.16 The original, the revised and the final allocation of the proceeds of the loan were as follows: Category Item Credit Allocation (US Dollars) Orig- Re- inal vised Original Revised 1975 Final I I Switching, networks 2,845,000 4,340,000 3,708,153 II II Microwave links, multiplex 1,150,000 1,260,000 1,607,773 III - UHF links Senegal River 672,000 - - IV - Overhead lines 137,000 - - V - Miscellaneous, tools 281,000 - - VI III Consultants 367,000 367,000 508,021 VII IV Studies 70,000 70,000 - VIII V Training 160,000 160,000 81,899 IX VI Unallocated 568,000 53,000 - 6,250,000 6,250,000 5,905,846 Cancelled - - 344,154 6,250,000 6,250,000 6,250,000 The revised loan allocation was approved by the Bank's senior management on July 8, 1975 and confirmed by Government on December 1, 1975. Operations 3.17 The equipment was supplied in accordance with specifications and its performance has met the specified requirements. OPT is satisfied with the quality and efficiency of plant obtained and installed by contractors. Physical operation of the equipment continues to be satisfactory. Performance of Consultants, Contractors, Suppliers and Beneficiary 3.18 The Loan Agreement required the employment of engineering consultants (Section 3.02). The engineering consultants assisted OPT in the preparation of bidding documents and evaluation of bids and performed factory tests of equipment and plant. During preparation of the bidding documents, OPT, with the Bank's concurrence, had to insist that the technical specifications, particularly those related to the trunk signalling system, be drafted in - 33 - accordance with internationally recognized standards (CCITT recommenda- tions). The final performance of the engineering consultants was generally satisfactory. 3.19 The contractors performed in accordance with their contractual obligations. 3.20 OPT's overall supervision of building construction and installation and commissioning of switching and transmission equipment was satisfactory. Annex 1 compares the actual physical achievements with appraisal objectives. In the Dakar metropolitan area the actual installed switching capacity now amounts to 26,000 lines, which includes the additional procurement of switching equipment made outside of project framework without prior Bank agreement (para. 3.13). Compared with the 13,000 DELs actually connected to the network in March 1981, there is an excess of local switching capacity (56 percent exchange fill) in Dakar although the waiting list, as a percentage of DEL's is still substantial (30 percent) (para. 4.02). The reason for this is that there is an imbalance between the installed switching capacity of the Dakar telephone exchanges and the number of cable pairs distributed in the urban network to connect new subscribers to the system. This imbalance is partly due to the fact that, in making additional investments (para. 3.13), OPT allocated most of the resources to high cost switching and not enough to local network extension. This highlights the ongoing problem of a lack of proper organization within OPT for local network planning, design and construction, lack-of skilled technicians and managers,slow procurement of installation material and poor inventory management. This problem has been raised by successive supervision missions and the August 1979 identification mission of the second project ranked the rehabilitation and extension of the Dakar local network as a first investment priority, and prepared terms of reference for the engineering study. The study has been carried out by consultants under FAC financing and CCCE agreed to finance a first "urgent" phase. This first phase is expected to be completed during the second telecommunications project, now scheduled for pre-appraisal in May 1982. IV. OPERATING PERFORMANCE 4.01 Commissioning of the new local and long distance facilities under the project in December 1978 resulted in a substantial improvement of telephone service in the Dakar metropolitan area and along the northern axis Thies-St. Louis-Richard Toll and the Senegal River. Delays in obtaining the dial tone, which were up to 10 minutes during peak hours in Dakar, have virtually disappeared. Long distance connections are clearer and obtained without delay due to the introduction of subscriber trunk dialing between the centers served by the new telecommunications facilities. 4.02 The total number of connected lines in operation by December 31, 1978 (16,334) was 22 percent above the appraisal target of 13,400. However for the Dakar metropolitan area, the number of connected lines was 11,145 or - 34 - 8 percent below appraisal target at the end of 1978 and only reached the appraisal target at the end of 1980. From December 1978 (completion date of the main project component) to December 1980, DELs increased at a 7.5 percent annual growth rate compared to a 7 percent average annual growth estimated at appraisal. In the Dakar area, the waiting list dropped from 4,077 or 35 percent of the connected lines at the end of 1979 to 3,700 or 30 percent at the end of 1980. The problem experienced by OPT in connecting more waiting subscribers (although there is plenty of local switching capacity available) is due to the fact that further extensions of the urban distribution network were not planned early enough (para. 3.07). 4.03 Following commissioning of the major project components in December 1978, bimonthly operating revenues in 1979 increased on the average by 61 percent, while during the same period DELs increased only by 6 percent. Consequently, about 55 percent of the increase in OPT's operating revenues was due to the introduction of subscriber trunk dialing in the project area. This demonstrates vividly the hidden traffic potential which surfaces as soon as the quality of service improves. V. FINANCIAL PERFORMANCE 5.01 OPT's consolidated financial performance during the period FY74-80 appears to have been satisfactory. However, it should be noted that the financial statements for FYs74 through 76 were not approved by OPT's Board of Directors and that only the FY77 and FY80 accounts were audited but could not be certified (para. 6.02). OPT did not introduce cost accounting systems during the period that would have permitted separation of the results of the Telecommunications and Postal branches (para. 6.01). Thus, the review of OPT's financial performance and position is based on the consolidated financial statements as shown in Annexes 3 through 5. 5.02 The Loan Agreement (Section 5.09) states that the Telecommunications Branch should achieve a 9 percent rate of return on average net fixed assets in operation starting in FY77. The consolidated income statements (Annex 3) indicate that OPT has amply met this target. This assessment takes into consideration that the postal service is believed to run operating deficits. Actual consolidated rates of return were 36 percent in 1977, 28 percent in 1978, and 18 percent in 1979 and in 1980. Forecast consolidated rates of return in the appraisal report were 8 percent in 1977 and 9 percent in 1978. Although the rates of return in the early years are certainly overstated due to inadequate bad debt provisions (para. 5.08) and other accounting shortcomings, the overall picture emerging from these consolidated statements is that the revenue covenant has been met and exceeded. - 35 - 5.03 A summary of sources and applications of funds during the 1974 - 1980 project period is shown below.1 Detailed annual funds flow statements are given in Annex 4. CFAF Mln % SOURCES Internal Cash Generation 11,416 82 Less: Debt Service 2,109 15 Net Internal Cash Generation 9,307 67 Borrowings: - FAC 372 3 - CCCE 847 6 - IBRD 866 1,328 10 - Suppliers 2,014 14 - BOAD 52 0 Subtotal 4,61333 TOTAL SOURCES 13,920 100 APPLICATIONS Construction Requirements: - IBRD/CCCE project 5,507 39 - Other Telecommunications projects 4,586 33 - Other 265 2 Subtotal 10,358 74 Changes in Working Capital 3,562 26 TOTAL APPLICATIONS 13,920 100 The summary shows that OPT contributed a very strong 67 percent of total applications from net internal cash generation, despite the sharp increase in investment costs and additional investments. OPT has therefore exceeded appraisal expectations (61 percent on a consolidated basis for the period 1973-78). This better-than-expected financial performance has been caused by tariff increases, substantial long distance traffic increases due to the introduction of subscriber trunk dialing, and the fact that more subscribers were connected to the network due to program expansion (paras. 4.02 and 4.03). 1/ This summary includes some small IBRD disbursements (CFAF 58 million) and construction requirements (CFAF 136 million) which slipped into FY81 due to administrative delays, but which properly belong to FY80. - 36 - 5.04 A tariff study should have been undertaken by June 30, 1975 and consultations should have taken place between OPT and the Bank prior to any tariff increase (Section 5.05 of the Loan Agreement). However, OPT increased its telecommunications tariffs by 30 percent effective January 1, 1975, prior to the completion of an ITU tariff study in December 1975. Although the Bank objected initially to the tariff increase as not necessary, subsequent increases in project costs and additional investments (paras 3.12 and 3.13) warranted, in retrospect, OPT's action. The present tariff structure is similar to that of other francophone West African countries and is generally acceptable. 5.05 Postal tariffs were increased in March 1975 (20 percent) and again in January 1976 (25 percent), which has contributed to the good financial performance of OPT. Both telecommunications and postal tariffs were increased further by an average of 25 percent effective July 1, 1981. Bank Account 5.06 As a condition of effectiveness of both the Loan and Guarantee Agreements, the Government was required to set up an independent bank account for OPT outside Treasury control Since OPT is required to deposit all its funds with the Treasury, the intention of this provision was to ensure that counterpart funds would be available for financing the project. The necessary amounts were to be transferred by the Treasury to that account quarterly and in advance. Delays in the fulfillment of this condition postponed the loan effectiveness date by two months, but an account was eventually set up with the Union Senegalaise des Banques. In practice, however, OPT counterpart funds have been disbursed directly by the Treasury throughout the project period. Considerable delays in the payment of counterpart funds to contractors have been reported. This matter is currently being discussed between OPT and the Treasury with a view to giving OPT greater financial autonomy (see also para. 5.13). Billing and Collections 5.07 OPT should have established by June 30, 1975, improved billing and collection procedures. This goal was not met. Billing was performed by a central data processing unit at the Ministry of Finance (para. 6.03) and OPT can justifiably claim that its work did not get sufficient priority. As a result, the bimonthly bills were routinely sent out with a delay of four months on the average, which has undoubtedly been a contributing factor to OPT's collection problem. Improvements in the billing situation started when OPT set up its own key-punching operation in 1977, which reduced the average billing delay to about two months. New problems surfaced in 1979 after the introduction of six-digit telephone numbers at the end of 1978 (para. 3.03) and delays of up to four months were again experienced. However, by the beginning of 1980, OPT was billing with a delay of only 45 days and this has reportedly been maintained throughout most of the period since then. OPT's objective is to deliver bills within 15 days after the end of each billing - 37 - period. However, it is considered that this target will be feasible only if OPT has a complete in-house data processing operation (para. 6.03). 5.08 Collection problems have accompanied the billing delays as people move, contest bills that reflect calls made up to six months earlier,etc. Thus, accounts receivable from the private sector were equivalent to six to eight months of billing in the earlier project years. It has been estimated that in some years collections were only 90 percent of billings; this is not accurately reflected in the financial statements of the earlier years and explains the increase in bad debt provisions in FY's 79 and 80 as the entity sought to write off its bad debts. Accurate accounts receivable aging schedules could not be obtained but, as of June 30, 1981, accounts receivable from the private sector were reportedly equivalent to about three months of billing, which is generally acceptable in view of the bimonthly cycle. OPT does not yet have an automatic system to produce statements of unpaid invoices for the past which would be sent to the customers together with the current bimonthly bills. However, enforcement of disconnection policies appears to have recently improved. Government Arrears 5.09 The Government undertook in the Guarantee Agreement: (a) to settle its bills outstanding as of July 1, 1972, in four equal annual installments by June 30, 1977; and (b) to pay its current bills within sixty days of the billing dates. (Sections 2.04 and 2.05). The fulfillment of the first undertaking was complicated by the Government's inability to comply with the second covenant, although partial payments were being made. Thus Government arrears increased although the exact amounts were being contested. In 1974 the Government claimed that its arrears as of December, 1972, stood at CFAF 88 million, whereas OPT claimed that the correct figure was CFAF 404 million. In 1976, a working group finally determined that Government arrears as of December 31, 1974, were CFAF 417 million. The Government made a special Treasury advance of CFAF 200 million to OPT in February, 1976 and budgeted payment of the CFAF 417 million for FY77. Settlement of the CFAF 417 million took place in April 1977, upon receipt of which OPT refunded the Treasury advance. Thus, the Government complied in essence with Section 2.04, but not with Section 2.05. Due to continuing Treasury problems, arrears on bills from 1975 on have been increasing and stood at CFAF 1,427 million (14 months of billing) as of June 30, 1981. Only an improved Treasury position and introduction of measures designed to reduce telephone usage (e.g. by introduction of central automatic message accounting equipment) will provide a permanent solution to this problem. Introduction of such equipment should be envisaged under a proposed second Bank project. Investment Limitation 5.10 The Borrower did not always observe the investment limitation covenant (US$400,000 annually in addition to to the project). However, difficulties caused by the additional investments in Dakar and Kaolack - 38 - (para. 3.13) were eventually overcome, partly because the Borrower had taken timely tariff action. The Bank was justifiably prudent in all cases however, because the poor state of OPT's accounts made a sound judgment on a suitable financing plan all but impossible. Debt Limitation 5.11 The consolidated financial statements indicate that OPT has met both the long and short-term debt limitation covenants (Sections 5.10 and 5.11 of the Loan Agreement, respectively). The debt service coverage ratio was good during the project implementation period and stood at 4.6 in 1980. OPT did not incur any short term debt for its telecommunications operations during the project implementation period. International Money Orders and Transfers 5.12 Increasingly large amounts of money have been tied up in international money orders and transfers, which are handled by the Postal/financial branch. Part of the problem is the time needed by postal organizations to process transactions and to agree on the amounts to be paid by each national postal organization. More significant, however, has been the inability of several West African countries to pay amounts owed to OPT. Senegal's position vis-a-vis these countries is weak because the funds are often paid by Senegalese workers abroad, to be transmitted to their families in Senegal. The problem has received - partly at the Bank's urging - attention at the highest level of Government and efforts have been made along diplomatic channels to solve this problem. In addition, OPT sent staff abroad to help settle disputed amounts and smooth procedures. Although these efforts have paid off with regard to some countries, the total amount receivable has increased steadily and stood at about CFAF 8 billion (US$30 million) net as of the end of FY81. This amount is financed partly by drawings on the Treasury (currently about CFAF 6 billion), with the remainder being covered by OPT. 5.13 The situation described in paragraph 5.12 is highly unsatisfactory. The problem is political in nature and cannot be handled by an entity with a commercial character like OPT. It causes an artificial dependency on Treasury funds which hampers OPT in the efficient execution of its own tasks and creates, erroneously, a negative image of the entity's financial performance which has been, overall, quite good. A solution to this problem could be found by transferring the responsibility for international money orders and transfers from OPT to a Government ministry, e.g., the Ministry of Finance. OPT would continue to provide intermediary services (collecting and disbursing), but the assets and liabilities would be taken out of its balance sheet and transferred to Government, thus ending OPT's dependence on Treasury funds. - 39 - Other 5.14 The Government adhered to Sections 2.06 and 2.07 of the Guarantee Agreement (para 2.05, sub (c) and (d)). Net profits were not transferred to the public Treasury because the entity needed all its money for telecommunications operations and for covering postal/financial deficits, including part of the receivables for international money orders and transfers. On the other hand, the Government did take the steps necessary to alleviate the cash flow problem caused by receivables for international money orders and transfers by advancing Treasury funds (para. 5.12). VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT Accounting 6.01 Throughout the project period, OPT's accounts have not accurately reflected its financial performance and position, primarily due to managerial inattention, a shortage of qualified staff, and high staff turnover. There are no published financial statements for the period FY74 - FY76. Financial statements for the period FY77 - FY80 do exist but were either not audited (FY78 and FY79) or not certified by the external auditors (FY77 and FY80). External audits were not carried out after the FY77 audit because it was concluded that further audits would not be useful until OPT's accounting staff received adequate support and training and had adequate time to correct the shortcomings signalled in the FY77 audit report (published in December 1978). This support and training was provided under an IDA-financed para-public sector technical assistance credit (764-SE). The credit allocated US$200,000 to OPT for this purpose. Two consultants started work on improving OPT's accounts and financial management in July, 1979. Significant improvements have been made since then. Accrual accounting was introduced in FY80 and the financial statements for that year were ready by December 1981. Although the external auditors could not certify the FY80 accounts, steady progress is being made on improving OPT's accounts and, at this stage, it is expected that the external auditors will be able to certify the FY81 accounts. A pro forma separation of accounts between the Telecommunications branch and the Postal/financial branch will be introduced for the first time in the FY81 accounts, while a full-fledged analytical cost accounting system has been introduced effective FY82. Thus, although OPT was unable to meet the loan covenants relating to its accounting systems during the project implementation period, progress is currently being made towards implementation of these covenants (Sections 5.01 and 5.04). External Audits 6.02 The external auditing arrangements were unsatisfactory until 1980. OPT rejected in the early stages of the project several bids from qualified - 40 - auditing firms because it claimed the cost was too high. A first and very limited external audit of OPT's accounts was undertaken in 1975 by the Commission de Verification des Comptes et de Controle des Etablissements Publics (CVCCEP).2 The report is dated June 30, 1975, and contains primarily a survey of some of the principal shortcomings of OPT's telecommunications accounts. Financial statements were not available and thus not audited. CVCCEP subsequently decided that, in view of the poor state of OPT's accounts and its own shortage of manpower, other external auditing firms would have to perform the audits under close supervision of CVCCEP to ensure acceptable standards. The first full-scale audit of OPT's accounts took place in 1978 regarding the FY76/77 accounts. It was performed by a partnership firm. When the partnership broke up in January, 1980, bids were called and a new contract was awarded to a new firm which performed the FY80 audit. The current external auditing arrangements appear to be satisfactory. Data Processing 6.03 Inadequate data processing facilities and service have been a major bottleneck in providing OPT with a satisfactory billing and collection system (para. 5.07), and in producing up-to-date and reliable financial data. Computer services have been provided by the DTAI (Direction de Traitement Automatique de l'Information). DTAI is part of the Ministry of Finance and handles all DP requirements for the public sector. OPT has consistently complained about DTAI's lack of programming capacity and slow service, and this complaint appears to be justified. OPT has requested permission from the Government to set up its own internal data processing service. This solution may well be the best one and has the further merit that it would be OPT's own responsibility to correct any future shortcomings. At this time it appears likely that OPT will get permission to set up an in-house data processing service. Staffing 6.04 Under the Loan Agreement (Section 4.05), OPT should have carried out formal reviews of the staffing requirements for both the postal/financial and telecommunications services and exchanged views thereon with the Bank. Neither the formal review nor the required consultation took place, however, and OPT did not develop a coherent staffing program for its services. Nevertheless, OPT avoided the excessive recruitment practices that have plagued so many other West African countries and lowered relative staff levels over the project period. The estimated ratio of staff per 1,000 DELs 2/ CVCCEP is an agency of Senegal's Supreme Court. It has ultimate responsibility for the external auditing arrangements in the public sector. - 41 - in service was about 77 by the end of FY81 as compared to 119 as of December 31, 1971. This ratio remains very high but is somewhat lower than the ratios found in neighboring countries. 6.05 OPT made strenous efforts to attract better qualified (and better paid) staff by offering contract recruitment outside the civil service context starting in 1978. As a result of this policy, there has been recruitment of more qualified personnel in recent years. However, their number remains relatively small, possibly due to the fact that salaries are not yet fully competitive with those paid in the private sector. As of the end of FY81, a sizeable 78 percent of the staff worked on non-civil service contracts. Postal/Financial Services Study 6.06 Following the reorganization of its accounting system (expected by June 30, 1974), OPT should have reviewed operations, staffing and finances of the postal/financial branch in order to maximize efficiency and reduce postal deficits. Although there was no progress on the reorganization of the accounting system (para. 6.01), the study was completed in 1976 because increasing postal deficits were believed to have serious financial implications for OPT and the Government. Unfortunately, OPT management paid little heed to the recommendations of this study. While there can be little doubt that this attitude of benign neglect towards postal/financial services has contributed to a deteriorating financial performance of the postal services, the exact magnitude can be determined only when the FY81 financial statements become available (para. 6.01). Organization and Management 6.07 OPT underwent a reorganization by Government decree of April 23, 1977; the corresponding by-laws (Reglement d'Etablissement) were approved in February 7, 1978, by the Public Enterprise Commission. Under the decree a Direction Generale was created, covering the following "Directions Operationelles": (a) telecommunications; (b) postal services; (c) financial services (postal checking accounts and savings accounts); and (d) administration and finance. In addition, the by-laws set out the detailed structure of the new organization and established the rules for personnel who might elect to give up their civil servant status to become contract employees (para. 6.05). This reorganization was satisfactory. 6.08 Overall management of OPT was unsatisfactory throughout most of the project period, although in recent years improvements have taken place. One of the primary reasons for poor management performance was high staff turnover at the top management level (4 general managers and 3 directors of telecommunications in 9 years) and among chief accountants (5 in 9 years). Combined with an inadequately trained accounting staff (para 6.01), none of the general managers was able to set up a management information system that could come to grasp with the existing situation and the future planning and development of OPT. However, since 1979 some progress has been made in this - 42 - regard and, if current efforts continue, an acceptable management information system might be in place by the end of FY82. VII PROJECT JUSTIFICATION Project Achievements 7.01 The principal objective of improving the quality of telephone service in the capital city of Dakar and in the important areas of northern Senegal has been largely achieved. The main centers of economic and administrative activity along the northern axis Thies-St. Louis-Richard Toll and the Senegal River are now linked to the capital by a reliable telecommunications network. In this respect, the project also opened up some remote rural areas to telecommunications and thus helped to overcome their isolation and major communications problems. The achievements in terms of planning for subscriber connections however, could have been far better considering the unsatisfied demand and the large switching capacity still available (para. 4.02). 7.02 During execution of the project, problems relating to the financing of the cost overrun were satisfactorily resolved. OPT also managed to recruit and train some Senegalese telecommunications engineers and technicians, thus reducing its dependence on expatriates from 45 in 1972 to 2 in 1981. On the other hand, institutional improvements have been very slow, possibly because they were too ambitious given the numerous management changes in OPT and the sociopolitical environment. Project Spin-Off 7.03 The construction of the technical buildings and civil works for the expansion of the local network, the construction of the microwave links and the rehabilitation of the long distance overhead lines provided local employment. The project has no known negative effects on the environment. Least Cost Solution 7.04 Planning, design, dimensioning and timing of the local and long distance telecommunications network expansion included in the project were based on consultants' studies, carried out in principle to achieve the least cost solution for providing and improving the services. The concrete tower (para 3.02) is an exception to this. Planning and timing had to be made on the basis of expected demand, the forecasting of which is always hazardous in areas where little or no service exists in the early stages of economic development. For this reason, but also because of delays in project implementation, OPT had to meet a larger demand than expected, particularly in Dakar, and decided to order 10,000 additional lines of local switching equipment (para. 3.13). However, as pointed out during the course of several - 43 - supervision missions, this additional investment was not properly timed or planned, nor did OPT provide the urban network extensions necessary to connect new subscribers to the system (para. 3.20). Although there is a large unmet demand, a substantial part of this investment made outside the project framework is still underutilized. This additional investment could have represented the least cost solution to meet demand if it had been accompanied by the corresponding extensions of the urban network. Such extensions are expected to be financed under the proposed second Bank telecommunications project. Internal Rate of Return 7.05 The internal financial rate of return on the FY74 - 80 telecommunications investment program, of which the project is an integral part, has been recalculated at 28.6 percent. This compares favorably with the appraisal estimate of about 13 percent for the program. The higher rate of return is due to a 30 percent tariff increase in 1975, a higher than forecast increase in long distance traffic and the undertaking of additional investments not anticipated at the time of appraisal (para. 3.13), resulting in a larger number of DELs in service outside Dakar. Details of the internal financial rate of return calculation are given in Annex 6. The economic rate of return should be considerably higher than 28.6 percent since: (a) no increase in incremental revenues due to project components has been considered from FY81 onwards, despite existing spare capacity on certain facilities installed under the 1974 - 1980 program; (b) no indirect external benefits to non-telecommunications users, such as increased efficiency and better administration in other sectors (transport, health, agriculture, public service, etc.) from expanded and improved telcommunications services have been included; and (c) no portion of the consumer surplus has been estimated despite a large waiting list (para. 4.02). VIII. BANK PERFORMANCE 8.01 In general, the Bank's role and performance has been satisfactory. The Bank gave valuable advice and support in project preparation and implementation, pricing of equipment and plant, as well as in procurement of goods under ICB procedures. The Bank was supportive in adjusting to the revision of the project and the program, to cost increases and to alternative technical solutions, but attempted to insist in all cases on adequate justification and financing plans. This approach was appropriate under the - 44 - circumstances. The project was somewhat over-optimistic, not only because costs were much higher than anticipated by the Bank, but also because institutional improvements were expected to occur too quickly. The Bank pursued questions of least cost design and of budgeting, accounting procedures and auditing arrangements particularly vigorously starting in 1977 and special arrangements were made to provide assistance to OPT in these areas, financed by a para-public sector technical assistance credit. These efforts are beginning to bear fruit and should be continued. Further Bank involvement in the sector should concentrate on optimization of existing resources, maintenance, management, management information systems and staff training. Supervision 8.02 The total number of supervision missions appears to have been sufficient but their timing was not always adequate to monitor project implementation and to anticipate potential problem areas. Fourteen supervision missions were sent out between August, 1973 and March, 1980, during which period the project was essentially completed. On the average, this amounted to one supervision mission every seven months. However, out of this total, seven missions took place during the period August 1973 - December 1975 (project start up and reappraisal - see para. 3.06), while the other seven missions were spread over a period of five years, or one mission every 8.5 months. For an entity such as OPT, with considerable problems regarding its investment program and its financial reporting system, this may have been insufficient. Working Relationship 8.03 The working relationship between the Bank and OPT has generally been good, although there was some friction in 1977 due primarily to problems related to the increased investment program and to poor financial reporting. However, these difficulties were successfully overcome (paras. 3.06 and 3.13). Covenants 8.04 A statement spelling out OPT's compliance with the Loan Agreement covenants is shown in Annex 7. IX. CONCLUSION 9.01 The project was among the first Bank operations in the telecommunications sector in West Africa. In retrospect it appears that: (a) the sector constraints were not sufficiently identified at the time of appraisal; (b) the institutional capacity of the Borrower was overestimated; (c) the purpose of the major covenants was not well understood by successive - 45 - OPT managers; and (d) the social and political environment did not support institutional change as rapidly as hoped. However, on the whole, despite delays in project implementation and slow institutional improvements, the project has generally been successful. Positive institutional change is now slowly taking place, the number of subscriber lines connected to the system reached agreed targets and, in the provinces, these targets were exceeded. The level of service, for the limited population which has lines, is relatively good; long delays in obtaining the dial tone have virtually disappeared. Due to service improvement and introduction of subscriber trunk dialing, long distance traffic increased substantially, thus generating more operating revenues than originally expected. 9.02 Assuming the Bank participates in financing a second telecommunications operation, efforts at institutional improvement should take on a different dimension. A substantial technical assistance component should be incorporated in such a project and specific target dates should be set for the completion of the various tasks. By setting specific and attainable objectives, it should be possible to deal more effectively with the sector's institutional problems. - 46 - ANNEX 1 Page 1 SENEGAL OFFICE DES POSTES ET TELECOMMUNICATIONS DU SENEGAL (OPTS) First Telecommunications Project Physical Achievements in the Project Area (Dakar and Northern Senegal) Compared to Appraisal Objectives 1. Local Telephone Exchanges (Total installed capacity in local lines and trunks) Appraisal Achievement Exchanges Local Trunk** Local Trunk Dakar Medina 15,700 N.A. *21,000 408 St. Louis 1,000 1,000 85 Richard Toll 300 200 16 Louga 200 400 52 Dagana 100 100 5 Kebemer 100 100 12 Linguere 100 100 12 Matam 100 100 8 Podor 100 100 8 17,700 23,100 606 The above telephone exchanges installation include building construction, supply and installation of local and trunk switching equipment, and power supply. * Total capacity of the telephone exchange in the Dakar area, replacement of Medina 1 R6 and including additional lines not included in the project (para 3.11). ** No information available in the appraisal report. 2. Rehabilitation and Extension of Local Networks (Connected Direct Exchange Lines) 1975 1978 1979 1980 1981* Obj. Ach. Obj. Ach. Ach. Ach. Ach. Dakar 9,940 11,000 12,060 11,145 11,672 12,718 12,976 Provinces 950 4,187 1,350 5,189 5,637 6,102 6,165 Total TO77 TT= T3 T= T,7T 17Tu TTy6 9 TT1T * March 1981. - 47 - ANNEX 1 Page 2 3. Long Distance Circuits (automatic trunk + manual + telex) Objective Achievement total auto- manual telex matic Dakar-Thies - 92 34+41* 16 1 Dakar-St. Louis 24 40 12+17 9 2 Dakar-Louga 6 11 4+4 3 - Thies-Louga 6 8 4+4 - - Thies-St. Louis 18 11 4+3 4 - St. Louis-Richard Toll 20 19 8+8 2 1 St. Louis-Dagana 10 8 4+4 - - St. Louis-Podor 10 10 4+3 2 1 St. Louis Matam 10 9 4+4 - 1 St. Louis-Louga - 10 4+4 2 - 104 218 82+92 38 6 4. VHF Links to remote rural areas along Senegal River (Small Manual Exchanges and Public Telephones) Objective Achievement Podor-Guede 1 1 Podor-N'Dioum 1 1 Podor-Salde 1 1 Podor-Cascas 1 1 Podor-Aere 1 1 Podor-Thille 1 1 Matam-Dembakane -1 Matam-Diawara 1 Matam-Diorbival 1 1 Matam-Gabou -1 Matam-Hamady Ounare 1 Matam-Sinthiou Bamambe 1 Matam-Kanel 1 1 * Outgoing and incoming SENEGAL OFFICE DES POSTES ET TELECCMUNICATIONS DU SENEGAL (OPTS) Annual Investment Costs (Appraisal Estimates and Actual) (in millions of CFA francs) 1973 1974 1975 1976 1977 1978 1979 1980 1981 Total Project E* A* E A E A E A E A E A E A E A E A E A Telephone ecchanges 54.4 - 60.8 - 285.8 102.7 155.0 334.6 - 170.4 - 388.7 - 820.0 - 171.7 - 14.4 556.0 2,002.5 Local networks 68.4 - 216.0 - 175.0 243.5 126.6 210.4 - 474.7 - 1.5 - - - 141.5 - - 586.0 1,071.6 Buildings 15.0 - 79.0 - 57.0 - - - - 79.6 - 271.7 - 322.8 - 82.8 - 75.1 151.0 832.2 Transmission links 52.6 - 11.0 - 306.0 - 142.4 248.8 - 425.6 - 256.7 - 250.7 - 257.5 - 1.7 512.0 1,441.0 g Miscellaneous** 23.0 - 23.0 - 18.0 - 23.0 - - - - - - - - - - - 87.0 Consultants 32.0 - 27.0 28.5 36.0 6.9 34.0 1.6 - 1.2 - 20.1 - 53.5 - - - 44.2 129.0 156.0 Training - - 13.0 - 13.0 - 15.0 19.2 - - - - - - - - - 41.0 19.2 Contingencies 24.6 - 43.4 - 89.0 - 49.0 - - - - - - - - - - - 206.0 - Total Project 270.0 - 473.2 28.5 979.8 353.1 545.0 814.6 - 1,151.5 - 938.7 - 1,447.0 - 653.5 - 135.6 2,268.0 5,522.5 * E: Appraisal estimates made in 1972 (paragraph 3.06). A: Actual costs including changes in project (paragraph 3.02), but without other additional investments (paragraph 3.13). ** For the actual figures, miscellaneous items have been included in the major contracts for equipment and plant. ANNEX 3 - 49 - SENEGAL OFFICE DES POSTES ET TELECOMMUNICATIONS (OPT) Consolidated Income Statements (CFAF million) 1974 1975 1976 1977 1978 1979 1980 FY ENDING JUNE 30 FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL ACTUAL ACTUAL OPERATING REVENUES TELECOMMUNICATIONS TELEPHONE 1272 1364 1348 1730 1446 2169 1559 2745 1679 3441 5136 7481 TELEGR/TELEX 422 453 458 522 499 647 547 738 603 691 978 1562 OTHER i5 161 65 168 65 53 65 84 65 90 103 346 SUBTOTAL 1759 1978 1871 2420 2010 2869 2170 3567 2347 4222 6217 9389 POSTAL/FINANCIAL POSTAL 654 628 663 701 668 999 733 1059 733 1108 1092 1281 FINANCIAL 182 110 184 140 186 206 188 223 190 225 95 108 OTHER 30 16 30 31 30 44 30 119 30 60 195 15 SUBTOTAL 866 754 877 872 884 1249 951 1401 953 1393 1382 1404 TOTAL 2625 2732 2748 3292 2894 4118 3121 4968 3300 5615 7599 10793 OPERATING EXPENSES PERSONNEL 1391 1419 1448 1758 1507 1910 1552 1972 1598 2714 2262 3231 DEPRECIATION 278 288 312 592 354 463 393 402 409 526 703 814 OTHER 496 316 537 602 583 735 632 861 684 817 3219 4995 TOTAL 2165 2023 2297 2952 2444 3108 2577 3235 2691 4057 o184 9040 OPERATING INCOME 460 709 451 340 450 1010 544 1733 609 1558 1415 1753 OTHER INCOME (NET) 0 39 0 424 0 105 0 7 0 -58 -782 -625 NET INCOME BEF INT 460 748 451 764 450 1115 544 1740 609 1500 633 1128 INTEREST 47 32 67 24 94 35 136 110 153 90 86 224 NET INCOME 413 716 384 740 356 1080 408 1630 456 1410 547 904 TRANSFER TO GOUT 241 0 252 0 211 0 233 0 261 0 0 0 NET SURPLUS 172 716. 132 740 145 1080 175 1630 195 1410 547 904 RATE OF RETURN (%) TELECOM BRANCH 15 - 14 - 12 - 12 - 14 - - - PIT CONSOLIDATED 10 16 9 8 7 22 8 36 9 28 18 18 OPERATING RATIO (CONSOLIDATED) 82 74 84 90 84 75 83 65 82 72 81 84 - 50 - ANNEX 4 SENEGAL OFFICE DES POSTES ET TELECOMMUNICATIONS (OPT) Consolidated Funds Flow Statements (CFAF million) 1974 1975 1976 1977 1978 1979 1980 FY ENDING JUNE 30 FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL ACTUAL ACTUAL INTERNAL SOURCES NET INC BEF INT 460 748 451 764 450 1115 544 1740 609 1500 633 1128 DEPRECIATION 278 288 312 592 354 463 393 402 409 526 703 814 TOTAL 738 1036 763 1356 804 1578 937 2142 1018 2026 1336 1942 OPERATIONAL REG. WORKING CAPITAL -46 665 22 397 20 623 75 1121 74 676 -363 282 DEBT SERVICE 79 54 99 24 149 89 179 434 233 467 618 423 OTHER (NET) 241 -29 252 346 211 193 233 0 261 0 -127 -144 TOTAL 274 690 373 767 380 905 487 1555 568 1143 128 561 NET AVAIL. FR OPER 464 346 390 589 424 673 450 587 450 883 1208 1381 CONSTRUCTION RED. IBRD PROJECT 8 635 29 1120 353 685 815 0 1152 0 939 1447 636 OTHER TELEC PROJ 0 414 0 233 150 418 600 192 600 617 1791 921 POSTAL 50 9 50 3 50 32 50 15 50 55 59 92 TOTAL 685 452 1170 589 885 1265 650 1359 650 1611 3297 1649 TO BE FINANCED BY! FAC 0 106 0 0 0 0 0 222 0 22 22 0 CCCE 0 0 0 0 0 124 0 273 0 260 102 88 IBRD 202 0 761 0 457 468 0 277 0 196 185 144 SUPP. CREDITS 0 0 0 0 0 0 0 0 0 250 1764 0 OTHER 0 0 0 0 0 0 200 0 200 0 16 36 SUBTOTAL 202 106 761 0 457 592 200 772 200 728 2089 268 GRANTS 19 0 19 0 4 0 0 0 0 0 0 0 TOTAL 221 106 780 0 461 592 200 772 200 728 2089 268 DEBT SERVICE COVER 9,3 19.2 7.7 56.5 5.4 17.7 5.2 4.9 4.4 4.3 2.2 4.6 8 THE FORECAST EXPECTED IMPLEMENTATION OF THE PROJECT TO START IN FY73 (CFAF 788 H) WHEREAS, IN FACT, IMPLEMENTATION DID NOT START UNTIL FY74. THE SAKE APPLIES TO DRAWINGS ON THE IBRD LOAN, WHICH WERE EXPECTED TO START IN FY73 (CFAF 180 M)p AS NELL AS FOR THE FAC (32 M) AND CCCE (150 N) LOANS, - 51 - ANNEX 5 SENEGAL OFFICE DES POSTES ET TELECOMMUNICATIONS (OPT) Consolidated Balance Sheets (CFAF million) 1974 1975 1976 1977 1970 1979 1980 FY ENDING JUNE 30 FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL FORECAST ACTUAL ACTUAL ACTUAL ASSETS GR FIXED ASSETS 7908 7113 8436 7681 10056 8168 10406 8672 10856 10532 14490 15642 DEPRECIATION 2737 2738 3049 3329 3403 3414 3796 3816 4204 4342 4753 5719 NET FIXED ASSETS 5171 4375 5387 4352 6653 4754 6610 4856 6652 6190 9737 9924 MORK IN PROGRESS 364 238 1006 210 271 900 571 1755 771 1506 259 712 OTHER ASSETS 0 72 0 70 0 70 0 69 0 69 6 15 CURRENT ASSETS CASH I TRE.DEP 3401 4435 3521 5145 3506 4465 3709 5149 3777 7350 8145 8928 TELECOMS REC. 875 1065 790 1528 800 1865 685 2922 715 3051 6094 6631 PDST/FIN. REC. 230 923 235 2344 235 2998 240 8911 240 12612 10322 15124 INVENTORIES 312 270 334 310 394 562 406 476 416 543 838 681 OTHER 7 1076 4 1351 0 0 0 178 0 1212 853 67 SUBTOTAL 4825 7769 4884 10678 4935 9890 5040 17636 5148 24768 26252 31431 TOTAL ASSETS 10360 12454 11277 15310 11859 15614 12221 24316 12571 32533 36254 4202 EQUITY I LIABILITI CAPITAL 2658 2658 2658 2658 2658 2658 2658 2658 2658 2658 2912 2912 EQUIP SUBSIDIES 571 484 586 484 586 484 586 484 586 484 0 0 SURPLUS I RESERY 2589 3554 2722 3898 2867 5075 3042 6704 3238 8114 8661 9585 --------------------------------------------------- - - -- ---------------------------- SUBTOTAL 5818 6696 5966 7040 6111 8217 6286 9846 6482 11256 11573 12497 LONG-TERH DEBT 982 502 1711 502 2113 1040 2270 1688 2389 2039 3596 3602 CURRENT LIABILIT PUBLIC CHECK ACCOUNT SYS 3000 3623 3000 6025 3000 5479 3000 5699 3000 6458 6510 7768 OTHER 560 1633 600 1743 635 878 665 7083 700 12780 14575 18215 --------------------------------------------------------------------------------- SUBTOTAL 3560 5256 3600 7768 3635 6357 3665 12782 3700 19238 21085 25983 ---------------------------------------------------------------------------- ---------------- TOTAL LIABILITIES 10360 12454 11277 15310 11859 15614 12221 24316 12571 32533 36254 42082 CURRENT RATIO 1.4 1.5 1.4 1.4 1.4 1.6 1.4 1.4 1.4 1.3 1.2 1.2 DEBT/EQUITY RATIO 14/86 7/93 22/78 7/93 26/74 11/89 27/73 15/85 27/73 15/85 23/77 22/78 - 52 - ANNEX 6 SENEGAL OFFICE DES POSTES ET TELECOMMUNICATIONS (OPT) LOAN 866-SE Return on Investment Benefit Period 1. The first telecommunications project financed under loan 866-SE extended over the period 1974 - 1980. The internal rate of return has been calculated on the basis of the total telecommunications investment program cost. The period of net benefits of the program is assumed to extend from FY81 to FY 97, which corresponds to the assumed mean life of 20 years of the various items of plant making up the program. Expenditures and Benefits 2. All costs and benefits have been adjusted to reflect 1974 values. Telecommunications capital costs and operating revenues are recorded as per the financial statements. Telecommunications operating costs are assumed to have increased gradually from 50 percent of total OPT operating costs in 1974 to 70 percent in 1980. This assumption is conservative. Net Benefits 3. A summary of the cost and benefit streams in CFAF million is as follows: Incremental Year Construction Operating Operating Net Costs Costs Benefits Benefits 1974 443 0 0 (443) 1975 528 259 398 (389) 1976 1,054 398 762 (690) 1977 1,120 524 1,324 (320) 1978 1,223 842 1,753 (312) 1979 2,399 1,772 3,141 (1,030) 1980 1,168 3,105 5,114 841 1981-1997 0 3,105 5,114 009 4. The internal rate of return, defined as the discount rate which equalizes cost and benefit streams as shown above, is 28.6 percent. - 53 - ANNEX 7 SENEGAL OFFICE DES POSTES ET TELECOMMUNICATIONS (OPT) LOAN 866 - SE - FIRST TELECOMMUNICATIONS PROJECT Compliance with Covenants Guarantee (G) / Loan (L) Agreement Section Compliance Report Para. G - 2.04 Payment of 1972 arrears Yes + 5.09 2.05 Bill payment (60 days) No 5.09 2.06 Funds transfer to Treasury Yes 5.14 2.07 Deficit coverage Yes 5.14 L - 3.02 Consultants Yes 3.15 4.04 Training Yes 7.02 4.05 Staffing Program No 6.04 5.01 Separate Accounts P & T No * 6.01 5.02 External Audits No * 6.02 5.04 Improved Accounting Procedures No * 6.01 5.05 Tariff Study Yes + 5.04 5.06 Review Postal/Financial Operations Yes + 6.06 5.07 Separate Bank Account Yes 5.06 5.08 Investment Limitation Yes 5.10 5.09 Rate of Return Yes 5.02 5.10 L/T Debt Limitation Yes 5.11 5.11 S/T Debt Limitation Yes 5.11 * Improvements starting in FY80. + Delayed compliance.  M A U R l T A N l A SENEGAL EXISTING TELECOMMUNICATION SENEGA LR CDA h,, le out, Nun NETWORK AS OF DEC. 31, 1971 & TELECOMMUNICATION PROJECT 1973-1976 Garlal M. Pa, G. ", r E X IST ING K-,nd u éee igTG __. . 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