Nepal - Fourth Telecommunications Project

Document of The World Bank FOR OMCIAL USE ONLY C 6? 'sz- A/SI Reprt No. P-4016-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 20.7 MILLION TO THE KINGDOM OF NEPAL FOR A FOURTH TELECOMMUNICATIONS PROJECT April 11, 1985 TIb dcument hs a restricted irldbteu ad may be used by recipients oly im the perfof sm of thir oficia due. us contents may n otherwise be dihaded wndhou Wodd Bnk adioriafioo.  CURRENCY EQUIVALENTS Currency Unit: Nepalese Rupees (NRM) US$1 - NRs 18.50 1/ NRs 1 - US$0.54056 1/ NRs 1,000,000 - US$54,054.05 1/ WEIGHTS AND MEASURES Metric System FISCAL YEAR (FY) JULY 1 TO JULY 15 LIST OF ABBREVIATIONS AIND ACRONYMS CIF - Cost, Insurance and Freight ERR - Economic Rate of Return FPU - Fundamental Planning Unit FRR - Financial Rate of Return HF - High Frequency HMG - His Majesty's Government of Nepal ICB - International Competitive Bidding IDA - International Development Association ITU - International Telecommunication Union J_CA - Japanese International Cooperation Agency NCC - National Computer Center NTC - Nepal Telecommunications Corporation ODA - Overseas Development Agency of United Kingdom PCO - Public Call Office SDR - Special Draving Rights STD - Subscriber Trunk Dialing TDN - Telecommunications Department of Nepal TTC - Telecommunications Training Center UEF - Ultra High Frequency UNDP - United Nations Development Progra mme VFT - Voice Frequency Telegraph VHF - Very High Frequency 1/ Exchange rate as of end January 1985.  NEPAL FOR OFFIClAL USE ONLY FOURTH TELECOMMUNICATIONS PROJECT Credit and Proiect Summar, Borrower K Kingdom of Nepal Beneficiary . Nepal Telecommunications Corporation (NTC) Amount . Special Drawing Rights (SDR) 20.7 million (US$22.0 million equivalent) Terms . Standard Relending Terms The Government of Nepal will relend the IDA credit to NTC at an annual interest rate of 12% to be repaid over 15 years including five years of grace with NTC assuming the foreign exchange risk. Proiect Obiectives and Description The project is designed to strengthen Nepal Telecom- munications Corporation (NTC) as an institution aud comprises a balanced package of high priority works to expand local telephone facilities in Kathmandu and other urban areas, provide telephone service for the first time to about 90 rural com- munities, expand facilities to cater to resultant additional domestic long distance and international telephone traffic, expand domestic and inter- national telex facilities and extend service to towns other than Kathmandu. The project includes (a) provision of management consultants, technical assistance and training fellowships, (b) installa- tion of (i) about 35,000 lines of local switching equipment with associated cable distribution network and subscriber plant to connect about 31,000 new subscribers and replace 1,370 lines of all reamining manual exchanges, (ii) about 2,500 additional circuit terminations in national/international trunk exchange, (iii) about 550 local and long distance public call offices in urban areas and 200 long distance connections and public call offices in about 90 rural areas, (iv) about 75 transmission systems in the long distance network, and (v) equipment for expansion of existing earth station and telex exchange; (c) provision of air conditioning and power equipment for telecommunications buildings, vehicles, computer equipment, teleprinters, office aids and training equipment, and (d) civil works for cable ducts, cable networks and buildings for telecommunications equipment and offices. 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.  Risk : The project faces no special risks beyond those commonly associated with telecommunication projects. Since the project comprises a number of partly independent activities, delay in completion of an individual component would not generally prevent use of other completed components. Further, costs and benefits of telecommunications projects tend to be delayed in roughly the same degree; hence, the impact of delay in any one component on the return on invest- ment may not be significant. Since there is a large unsatisfied demand, there is no significant risk of underutilization of assets installed under the project due to insufficient demand resulting from any reduction in national economic activity. Estimated Cost :US$ Million Equivalent Local 11 Foreian Total Switching equipment 1.5 21.0 22.5 Cables, ducts and accessories 0.8 10.1 10.9 Subscriber facilities 0.1 1.8 1.9 Transmission systems 0.5 8.8 9.3 Earth station 0.4 3.0 3.4 Telex exchange and teleprinters 0.1 0.6 0.7 Vehicles, computer equipment, 0.3 1.0 1.3 office aids and training equipment Consultancy and training 0.1 1.5 1.6 Civil works for cable network 3.5 3.4 J2 6.9 and buildings Total Base Costs 7.3 51.2 58.5 Physical contingencies 0.7 1.1 1.8 Price contingencies 1.5 3.5 5.0 Total Proiect Costs 9.5 55.8 65.3 Financing Plan IDA - 22.0 22.0 Government of Belgium and - 10.9 10.9 Belgian Commercial Banks Covernment of Denmark - 7.5 7.5 Gowvernment of Finland - 5.3 5.3 Government of France and - 10.1 10.1 French Commercial Banks NTC 9.5 - 9.5 9.5 55.8 65.3 /1 Local costs include US$1.0 million equivalent for custom duties. /2 Indirect foreign costs assessed at 50% of total costs of construction of cable networks and buildings.  Estimated Disbursements : US$ Million Equivalent IDA FY 1987 1988 1989 1990 1991 1992 Annual 0.2 0.8 3.5 8.0 6.5 3.0 Cumulative 0.2 1.0 4.5 12.5 19.0 22.0 Rate of Return : 161 Staff Appraisal Report No. 4915-NEP dated March 18, 1985 Kap : IBRD 17643R  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A FOURTH TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal in an amount of Special Drawing Rights (SDRs) 20.7 million (US$22.0 million equivalent) on standard IDA terms to help finance a Fourth Telecommunications Project. The proceeds of the Credit will be relent to the Nepal Teiecommunications Corporation (NTC) to be repaid over 10 years after five years of grace, with interest at 12% per annum. NTC will bear the foreign exchange risk. Cofinancing of US$33.8 million equivalent will be available. PART I - THE ECONOMY 1/ 2. The most recent economic report, Nepal: Recent Developments and Selected Issues in Trade Promotion (Report No. 4663-NEP), was distributed to the Executive Directors on October 19, 1983. The principal features and recent performance of the economy are described below. Country data are shown in Annex I. 3. Nepal is one of the least-developed countries in the world. Per capita income is estimated at US$170 (1983) and health and education standards are below the average for South Asia: life expectancy at birth is only about 46 years; infant mortality, about 145 per thoucand; and adult literacy, only 19%. The population, estimated to be 15.8 million (1983), grew at a rate of about 3.3% per year between FY75 and FY83. About 94% of the population live in rural areas. 4. Population density with respect to arable land (356 per sq km) has reached very high levels, and cultivation has been extended on to marginal lands and forests. Forests have been denuded further to meet the growing demand for fuelwood, on which Nepal depends for over 90Z of its energy consumption, mostly for household cooking and heating. Because of deforesta- tion and excessive grazing on the hills and mountains, with high rainfall, there is accelerated soil erosion leading to silting of rivers, downstream flooding and loss of agricultural productivity. 1/ Parts I and II of this report are substantially the same as in the President's Report (Report No. P-3982-NEP dated March 7, 1985) for the Agricultural Extension II Project.  -2- 5. Agriculture, largely rainfed, still accounts for nearly 60% of Nepal's GDP and 80% of merchandise exports, and provides the main source of livelihood to over 90% of the population. Crop production accounts for about 60% of agricultural output, livestock for 30%, and forestry for 10%. Paddy is the principal food crop (planted on about half of the total cropped area), followed by maize, wheat, millet and barley. Cash crops (oilseeds, jute, sugarcane and tobacco) are grown on about 10% of the cropped area. About 15% of total rural income arises from non-agricultural activities, of which the cottage industry sub-sector is one of the more important, generating employ- ment for over one million people on a part-time basis. 6. Apart from agricultural land, Nepal's only other important exploitable resources are hydropower and tourist attractions. The exploita- tion of the vast hydropower resources beyond that required to satisfy the country's own power demand, however, will depend crucially on Nepal's ability to enter complex financial, exploitation and export agreements with neighbor- ing countries. The tourism sector, based primarily on Nepal's mountain environment and its rich cultural heritage, has been dynamic, though it accounts for only about 1% of GDP. Tourism now provides about 20% of the country's foreign exchange earnings. About 60% of earnings from tourism are retained in Nepal. 7. Following centuries of self-imposed isolation, efforts to develop the economy of Nepal began in the mid-1950s against extremely heavy odds. The country had virtually no physical infrastructure, an ancient administrative system, and very limited educational and health services. The resource base is relatively narrow and its development hindered by the difficult topography and landlocked position. Against this background, Nepal's primary develop- ment objective for 20 years, between 1955 and 1975, was to build basic infrastructure and lay the groundwork for future economic growth. The country has made good progress in pursuit of that objective. It now has a basic road network linking many economic centers. Kathmandu and a few other towns have basic utilities and public transport. Schools have been built for almost half of the primary school age children and there are a number of secondary schools and a national university. A rudimentary hospital system, including rural health posts, has been built. Some progress has also been made in establishing the institutional framework for agricultural and industrial development, including extension and research activities, finan- cial institutions and industrial enterprises. Yet in all these areas, the country has a long way to go to achieve a level of development comparable to other developing countries; for example, public and private institutions in Nepal must continue to expand and upgrade essential physical facilities, acquire the necessary expertise in handling economic and financial affairs, build up adequate technical and managerial cadres, and establish merit-based systems of personnel management. 8. The Fifth Plan (FY76-FY80) marked a shift in development objectives, with increased emphasis being placed on acceleration of economic growth, employment creation, and raising the living standards of the population. These objectives have been reiterated in the Sixth Plan (FY81-FY85). Moreover, the stated strategy of the Sixth Plan appropriately (a) accords  -3- high priority to developing agriculture, small-scale industries aDd Nepal's abundant water resources; (b) stresses soil conservation and population control; and (c) emphasizes full utilization of existing infrastructure and alleviation of absorptive capacity constraints, including human resource development. The development strategy also calls for increased involvement of the private sector in agriculture, manufacturing, trade, tourism, con- struction and transport operations. Investment expenditures, supported by growing foreign assistance, have increased rapidly over the last two Plans, from US$146 million (9% of CDP) in FY75 to US$481 million (192 of GDP) in FY84 and there have been substantial shifts in the composition of spending away from transport to agriculture, power and social services. GDP growth, however, has barely kept up with that of population. 9. Part of the explanation for this stagnation lies in factors beyond Nepal's control such as the difficult topography and the poor resource base. But factors within Nepal's control have also contributed. Severe project implementation problems have been encountered by Government and donors alike in most sectors of the economy, thereby lowering the rate of growth of capital formation. In addition, the expected returns on investments which took place often did not materialize largely because necessary complementary investments or current spending were lacking, and because of managerial deficiencies. A good example is the agriculture sector. In the past, insuf- ficient attention was paid to bringing water down to the farm level and this was compounded by inadequate support services such as extension and research, by the lack of timely supplies of improved seed, fertilizer and other inputs such as credit, by the lack of farm-to-market roads, and by low producer margins. Future development of irrigation and agriculture would therefore need to emphasize complementary investments, improvements in agricultural input supplies and adequate producer margins. 10. The shortage of funds for current spending needs to be addressed by further efforts at domestic resource mobilization. In recent years, Nepal's efforts to mobilize resources have focused on tightening income tax assess- ment and collection; on discretionary measures largely in the area of indirect taxes; and on reducing subsidies to public enterprises. While there has been, as a result, a steady increase in revenues, the tax structure remains inelastic. Some scope exists for increasing Nepal's tax elasticity by shifting items on the indirect tax schedules from a specific to an ad valorem basis. There also seems to be scope for incz2'asing yields from the land tax, urban property taxes and income taxes. 11. Over the past two years, several positive steps have been taken to strengthen public sector management. These steps have included increases in the traditionally low civil service salaries, establishment of public service training facilities, simplification of budgetary procedures accompanied by stricter enforcement of expenditure accounting, and granting of more autonomy to public enterprises in matters concerning personnel and pricing policies. The implementation of these administrative reforms would have to be pursued by high-level monitoring of important administrative issues such as appoint- ment of competent staff, job security and decision-making authority. Also, public enterprise reform needs to be pursued by measures aimed at reducing  -4- costs and increasing efficiency. In this regard, the Government has taken initial steps, subjecting public enterprises to increased competition from the private sector through liberalization of licensir.g in industry, transport and small-scale hydropower generation. At the sdne tine, the Government is encouraging private sector ownership and control of scne public enterprises through the sale of shares to private investors. 12. Because of slow economic growth, Nepal's balance of payments has been characterized by widening trade deficits, partly offset by surpluses from invisibles. The current account deficit (averagiig US$100 million annually during FY80-FY82) has traditionally been more than iratched by inflows of official grants and concessional loans (averaging US$128 nillion annually during FY80-FY82), leading to overall surpluses. How2ver, in FY83, the overall balance of payments turned negative, and since then, Nepal's gross resources have been falling rapidly from 3.8 months of import coverage in July 1983 -o 2.7 months ir July 1984 and to two months in December 1984. 13. To sustain and further develop its economy, Nepal must mobilize additional free foreign exchange through export promotion Lnd efficient import substitution. Improving agricultural production, rural incomes and food distribution within the country is a major way of doing so, if only to avoid the need to import and distribute large quantities of foodgrains in the future. Agricultural development also remains the key to a gradual expansion of Nepal's traditional merchandise exports. In addition, development of energy resources is a major means to strengthening the balance of payments by reducing the need to import fuel and opening up an export potential. Recently, Nepal has legislated a wide range of fiscal and administrative incentives for industrial investors and exporters, particularly in the Private sector. The implementation of these incentives in a cost-effective manner, and the alleviation of the severe transport and transit constraints facing the country's trade sector, must conscitute essential elements of a trade promotion strategy for Nepal. 14. Nepal is faced with highly challenging prospects and tasks in addressing its multiple long-term development problems. While it attempts to mobilize domestic resources to finance about 40-50% of development expenditures, external assistance, at concessional terms, will continue to be a vital factor in financing investment and effecting economic growth. In the last three years, aid commitments to Nepal have averaged about US$250 million per year, almost entirely in the form of grants and concessional credits with grant elements in excess of 70%. Aid disbursements grew from about US$110 million in FY80 to an estimated US$220 million in FY84. Nearly 70Z of total aid disbursements have come from members of the Nepal Aid Group, formed in 1976 and now comprising eight DAC countries and four multilateral agencies. 15. At the end of FY84, Nepal's official foreign debt outstanding amounted to about US$350 million. As virtually aLl loans have been concessional. debt-service payments, including payments to the IMF, have remained small in relation to exports of goods and services. In FY84, debt- service payments amounted to about US$10 million, equivalent to 3% of exports  -5- of goods and services. Over the medium term, these payments are projected to remain at less than 5X of Nepal's exports of goods and services. PART II - BANK GROUP OPERATIONS 16. Bank Group operations in Nepal began in 1969 with an IDA credit of US$1.7 million equivalent for a telecommunications project. Since then, 36 additional credits have been approved, bringing total IDA assistance to Nepal to US$547.7 million equivalent, net of cancellations. In view of Nepal's many development needs, this assistance has been for projects in a wide variety of sectors. Six of these sectors account for about 90% of IDA credits by amount: irrigation/agriculture (US$173.0 million for 14 projects); water supply and sewerage (US$46.8 million for three projects); power and energy (US$168.0 million for four projects); telecommunications (US$21.7 million for three projects); highways (US$67.0 million for three projects); and rural development (US$19.0 million for two projects). The proposed credit would be the fourth approved in FY85. No Bank loans have been made to Nepal. IFC made its three investments in Nepal, the first in FY75 (US$3.1 million) for the expansion of the Soaltee Hotel project in Kathmandu, the second in FY82 (DM14.5 million) to Nepal Orind Magnesite Company for the mining and production of dead burnt magnesite, and a third approved in FY84, but not yet signed to Nepal Metal Company (DM7.8 million), a zinc/lead mining and concentrates project. Annex II contains a summary statement of IDA credits and IFC operations as of September 30, 1984. 17. Bank Group lending to Nepal so far has been modest compared to the country's need for external assistance. The international community has shown considerable interest in Nepal s economic development and, to date, a shortage of funds has not been a major bottleneck. The main constraint on the utilization of increased aid has been Nepal's limited absorptive capacity, affecting the pace of project preparation and implemei.tation. The Bank Group has provided assistance to the Government in project preparation through two Technical Assistance Credits (Cr. 659-NEP and 1379-NEP) and by acting as Executing Agency for a number of technical assistance projects financed by UNDP. Furthermore, the Resident Mission in Kathmandu has had a significant impact in improving project implementation performance. As a result, the rate of disbursements is improving: during FY82, FY83 and FY84, US$28.5, US$37.4 and US $26.0 million equivalent, respectively, was disbursed compared to an annual average disbursement of about US$17 million during the previous five fiscal years. Project completion reports have been prepared for six projects: First Telecommunications (Cr. 166-NEP), First Highways (Cr. 223-NEP), Tourism (Cr. 291-NEP), Birganj Irrigation (Cr. 373-NEP) and Settlement Project (Cr. 505-NEP) and Bhairawa-Lumbini (Cr. 654-NEP). 18. Over the next several years, our country assistance strategy will seek to address Nepal's critical budgetary and balance of payments problems while continuing our efforts to tackle longer-term developmental and institu- tional issues (such as public administration inefficiencies, poor project planning and implementation performance, and high population growth and  -6- scarcities of skilled manpower resources) through a combination of project lending, technical assistance and economic and sector work. 19. We intend to introduce a greater focus to our lending, attaching particular importance to (a) agriculture and forestry; (b) population control; and (c) education and training. Agriculture, a main source of livelihood to some 95% of the population, accounts for as much as 65% of GDP and 80% of exports. The primary objective of our lending in this sector is to increase production wiLh a view to maintaining self-sufficiency in foodgrains and achieving larger surpluses for exports. To that end, we will be emphasizing complementary investments aimed at improved supply of inputs and strengthening of support services to maximize benefits from existing infrastructure and equipment. In forestry, our principal concern will be to support reforestation efforts at the community level. These investments in agriculture and forestry would need to be supplemented by effective programs to control population growth particularly in the hill areas where a rapidly growing need for food, fuelwood and fodder is causing a serious environmental degradation. Our operation in population will seek to expand and improve the family planning service delivery systems. In education and training, our objectives wiLl be to improve the quality of primary education as well as increasing the supply of trained technical manpower for greater efficiency in public administration. Outside these three areas of primary emphasis, our involvement will be more selective. We intend to maintain an interest in the power sector which previously absorbed a significant portion of our lending, but we envisage our future role more as a provider of technical assistance and a catalyst for mobilizing additional external resources. In transport and communications, we plan to combine technical assistance through sector work with selected interventions designed to facilitate regional integration and improved rural access. 20. In allocating our resources, our basic approach will be to attempt to strike a proper balance between the necessary emphasis on quick-and-high yielding investments (such as in agriculture), which is dictated by Nepal's precarious budgetary and balance of payments position, and an equally impor- tant commitment to those sectors where impact cannot be felt immediately but which nevertheless are critical to the country's long-term development (e.g., population and human resource development). We also recognize the need to deliberately target some of our operations on the poorest and least developed parts of the country, for example, the hill areas. PART III - THE TELECOMMUNICATIONS SECTOR Telecommunications and Economy 21. Compared with alternative means of communication, telecommunications are more efficient in terms of capital, energy consumption and user time. With adequate telecommunications facilities, the level and variety of produc- tive activities can be increased considerably in areas where this would otherwise not be feasible. In terms of the specific constraints on Nepal's  -7- economic and social development, telecommunications can play a significant role, especially in connection with: (a) increasing the efficiency and reliability of transport and, through better use of available transport, energy savings and greater efficiency of productive interactions for a given level of energy consumption; (b) improving the working of the market mechanism by expediting and extending access to information; (c) providing essential domestic and international communications for tourism, an important source of foreign exchange; (d) facilitating communication between Kathmandu and provincial centers, as required for effective coordination and management of development activities; (e) facilitating the extension of social services, public works and Government administration to provincial and rural areas; and (f) increasing domestic savings obtained by transferring part of the incremental net income from telecommunications operations to government. Access to Service 22. Currently, the access to telecommunications services in Nepal is very poor. In mid 1984, Nepal had on average only about 0.12 telephones per 100 inhabitants. This density is one of the lowest in the world. About 57% of existing main telephone lines are concentrated in Kathmandu which has 2.7% of the country's population. The telephone density in Kathmandu is 2.06 telephones per 100 inhabitants. Of the 28 other areas designated as urban with a total population of about 0.7 million, 18 have telephone exchange service, with an average density of 0.05 telephones per 100 inhabitants. The remaining 10 urban areas are served only by public call offices (PGOs) for long-distance calls. In urban areas with telephone exchanges, the non- subscribing general public has very littLe access to telephone service. There are about 25 local PCOs in Kathmandu (averaging one PCO for about 15,000 people) and another 21 local PCOs in other towns. For the rural population, there are 15 long distance PCOs (that is, about one per million inhabitants). Of Nepal's 75 administrative headquarters towns, 49 have no telephone service. Overall, about 941 of the country's population had no access to telephone service and no available means of communications, espe- cially in the winter season when surface and air transportation are unreliable. Telegraph service is available in only 82 urban and rural cen- ters (out of total 4,025) and telex service only in Kathmandu. Usage of Service 23. In mid 1984, about 69% of all telephone lines in Nepal were connected to business (including professionals and business units registered under personal names) and Government subscribers, and the balance 31% to residen- tial subscribers. Most of the non-residential lines were in communication intensive tertiary sectors of the economy, especially commerce (34%) and Government (27%). These figures understate the extent to which telecom- munications are used in connection with economic production and distribution. A survey in 1980 indicated that, on average, about 4,000 calls per year originated from each telephone line. Intensive telephone users were those in tourism (12,500 calls per year per line), banking (8,300) and Government (7,900). Residences and small economic units with telephones listed under personal names averaged about 2,400 calls per year of which a significant  -8- number were for work related purposes. It is estimated that, in 1983, over 80% of telephone calls and revenues were generated in connection with busi- ness and Government activities. Existing Facilities and Service Quality 24. As of July 15, 1984, automatic local telephone service was available in three towns with about 16,000 lines and manual (operator-assisted) local service in 16 other towns with about 4,500 lines. In general, local service is congested, unreliable and inadequate. On an average, about 75% of the daily local call attempts are successful; during the peak business hours, the proportion of successful calls is much lower. Proper equipment maintenance procedures and service standards are not prescribed and clearance of faults is unsatisfactory. On an average, there are about 25-30 faults per 100 telephones per month which is high. The faults are mainly in the local cable distribution network. The average time for fault clearance is also high, varying from about one day in respect of telephone instrument faults to five days or more for Eaults in the cable distribution networks. 25. The operator-assisted long distance telephone service is severely impaired by heavy shortage of circuits and operating positions. Provincial long distance traffic, of which 60% is directed to Kathmandu, normally suf- fers heavy delays. Service delays of 4-5 hours are normal. This leads to cancellation of over 30% of booked calls. Telegrams are accepted in 82 centers but only five centers are equipped with teleprinters. The remaining 77 centers transmit messages by morse code or as phonograms. Telex facility is available in Kathmandu only and hence used for international calls. 26. Upgrading the quality of the telecommunications services was a major consideration in the design of the IDA financed projects currently under implementation (para 33). When completed, these projects will make a sig- nificant contribution towards alleviating the current service problems. The availability and the quality of international services have already improved significantly with the commissioning of the earth station and the interna- tional telex exchange in October 1982. Demand for Service 27. Given the current embryonic status of telecommunications facilities in Nepal, lack of access to service in large areas of the country, and the very poor quality of both local and long distance services which inhibits expression of demand, it is difficult to forecast accurately the future requirements for telecommunications services in different parts of the country. Available data on demand is limited to the number of applications registered for new telephone connections. This does not reflect the real demand because, in urban areas, many potential subscribers are discouraged from applying by the current heavy delays in obtaining connections and, in rural areas where the telephones are mainly used for long distance calls, by the poor quality of long distance service. Also, telephone demand is not registered in areas where currently there is no service, and demand from Government and its agencies is not registered on the waiting list as such  -9- connections are given on a priority basis. Hence, the historic demand figures reflect a supply constraint rather than the real demand and, therefore, tend to underestimate the rate at which demand will grow. 28. In mid-1984, the unmet demand in Kathmandu twas 19,380 against 9,121 working lines. In other areas of the country currently serviced, the unmet demand was 13,757 against 6,843 working lines. NTC has projected the future demand at average growth rates of 15% per annum for Kathmandu and 20% per annum for the rest of the country. These are considered reasonable. Sector Organization 29. Authority for the telecommunications sector in Nepal is vested in the Ministry of Communications. Under the Ministry, NTC is responsible for all public telecommunications services in Nepal. NTC was established as a wholly government-owned statutory corporation in June 1975 (para 34) and is admninistered by a seven-member Board of Directors under the chairmanship of the Secretary, Ministry of Communications. NTC's General Manager and Financial Controller are members of the Board. The remaining four members are appointed by the Government from other government agencies and state enterprises. NTC's annual budget and telecommunications tariffs are approved by the Planning Commission and the Ministries of Communications and Finance. Personnel policies, staff recruitment, emoluments, benefits and promotions are regulated by the Public Service Commission. NTC's organization structure is generally similar to that of telecommunications entities in many develop- ing countries. Individually, the senior and middle level technical and managerial staff are well qualified, experienced and competent. However, there are several general institutional deficiencies in NTC which constrain rapid sector development and need to be corrected. Appropriate measures are planned under the proposed project to overcome the present shortcomings (paras 46-49). Sector Constraints 30. Currently, the two main constraints on development of telecommunica- tions facilities in Nepal are: (a) the availability of foreign funds on acceptable terms to finance the foreign costs of equipment; and (b) NTC's capacity to undertake a large development program and to manage the expanded facilities. In the absence of any existing or foreseeable domestic telecom- munications equipment manufacturing facilities, Nepal will depend on imports for expansion of its telecommunications facilities in the foreseeable future. Consequently, an important constraint on the rate of future development of the telecomnunications services is the availability of foreign funds which, in view of the country's limited ability to service foreign debt, need to be mainly in the form of grants-in-aid or loans/credits on concessionary terms. IDA has assisted HMG and NTC in attracting foreign funds for the sector. The proposed level of the FY86-90 investment program can therefore be realized because of the grant-in-aid by the Japanese International Cooperation Agency (JICA), a blend of grant and commercial credit from the Belgian and French Governments and grants from the Governments of Denmark and Finland.  -10- 31. The other constraint is NTC's new project implementation capacity. So far, NTC has managed the operation and development of the relatively limited assets of the sector reasonably well and its technical staff have proved capable of operating adequately modern sophisticated equipment as demonstrated with the satellite earth station and computerized digital telex exchange commissioned in 1982. However, for undertaking a large development program, and operating and managing efficiently the expanded facilities, NTC's planning, financing, technical and general management capabilities need to be enhanced. Management consultants, technical experts and fellowships for NTC staff for foreign training are proposed under the project to improve NTC's developmental, operational and managerial capabilities (paras 46-48). Sector Goals 32. HMG attaches considerabLe importance to the development of teLecom- munications facilities. However, the limited foreign exchange available for the sector has made it difficult to estabLish an adequate long term sector development strategy. In the medium term, the partial objectives of the sixth national development plan to be attained in FY81-85 were to establish reLiable communication within and among towns, district headquarters and commercial/service centers in rural areas and strengthen NTC's management and organization. These objectives are reflected in NTC's FY86-90 development program approved by HMG. The following elements are highlighted: (a) major increase in the rate of development. The annual invest- ments under the FY86-90 program will average about US$23 million per year, compared with US$4 million per year in FY80-82 and US$1 million per year in FY75-79; (b) priority in expanding and improving services in the provincial urban and rural areas while continuing to develop services in the capital to reduce communication bottlenecks at the center. About 672 of the FY86-90 investments will be for facilities in and between provincial urban and rural centers, and between these centers and Kathmandu; (c) emphasis on improving service quality and NTC's efficiency, through increased network automation, use of modern techno- logies, improvement of organization and management, and increased staff training; and (d) ensure adequate resource mobilization by NTC to sustain rapid development of the sector and increased fiscal benefits for the Government. Role of the Bank Group 33. IDA has been associated with the telecommunications sector in Nepal since 1969 through three projects--Credit 166-NEP for US$1.7 million in November 1969, Credit 397-NEP for US$5.5 million in June 1973 and Credit 799-NEP for US$14.5 million in August 1978. Through these projects, IDA has  -11- played a significant role in the physical, technical and institutional development of the sector. In physical terms, under the three IDA projects, the local telephone facilities will have been expanded significantly, the domestic long distance service upgraded to a fully automatic subscriber trunk dialing (STD) service and telephone service provided for the first time in many rural areas. Technically, IDA contributed significantly to NTC's progressive moves from manual exchanges through electromechanical automatic exchanges to eLectronic digital exchanges, and from fault-prone open-wire lines and inefficient HF radio circuits to high capacity stable microwave radio systems and satellite communications. However, the sector will con- tinue to need substantial external assistance for some years to further expand the facilities to meet the forecast demand for aLl services, upgrade the level of service in areas currently served and provide access to service to rural areas of economic significance currently without service. 34. IDA has also played a major role in the institutionaL development of the sector. In 1969, before the first project was undertaken, the only sector specific organization was the Telecommunications Department of Nepal (TDN) within the Ministry of Works, Transport and Communications, mainly concerned with engineering and operational functions of the sector but without commercial accountability or tools for efficient management or training. The semi-autonomous Nepal Telecommunications Board (NTB) was created in October 1969 as a condition of the first credit and its internal organization and accounting system studied by consultants and their recommen- dations implemented. In 1972, with IDA's support, the legislation creating the Nepal Telecommunications Corporation (NTC) was passed providing the sector with increased operational and financial autonomy. NTC was sub- sequently established as an autonomous state enterprise in June 1975. The Bank's Project Performance Audit Report on the first project issued in December 1977 commented favorably on the "establishment of an institutional framework for the sector to provide and operate telecommunications facilities on a commercial basis with proper tools for effective management". 35. Because of its long involvement in the sector, IDA is well-equipped to provide the necessary assistance to NTC in the institutional, technical and financiaL disciplines as follows: (a) institutionally, through a wide spectrum of organizational, managerial, operational and financial improve- ments in NTC, introduction of modern tools including computer facilities, improving local training facilities, technical assistance and fellowships for foreign training of NTC staff; (b) technically, through assistance to NTC in developing internal strategic planning capability for long-term balanced development of the sector responsive to spatial, sectoral and economic priorities of national development while keeping in view the macro-economic constraints, in designing fully integrated switching and transmission net- works for local and long distance services to derive maximum technical and economic benefits from the new digital technology, and in procuring the latest proven equipment at least cost in a field where the rate of technical obsolescence is high; and (c) financiaLly, by funding part of the foreign cost of a much needed development program and acting as a catalyst for attracting cofinancing on satisfactory terms from other sources.  -12- PART IV - THE PROGRAM AND THE PROJECT The Program 36. NTC's FY86-90 program comprises a mix of investments designed to improve the quality of existing services, expand service across the country in response to forecast demand and, based on regional priorities, provide facilities in some of the areas currently without access to service. The program is large compared to past achievements. It aims at increasing the number of connected lines at an annual rate of 25% (against 11% achieved in FY80-84), and extend service to about 155 new rural communities (against only 28 communities currently served). Even then, the number of outstanding applicants for telephones at the end of the program is expected to be about twice that at its beginning and only a small fraction (12%) of the total country's population will have access to telephone service. The program comprises: (a) ongoing works under the second and third telecommunications projects (Credits 397-NEP and 799-NEP); (b) the rural telecommunications project to be financed by the Japanese International Cooperation Agency (JICA), hereinafter called the JICA project; (c) the proposed fourth telecom- munications project to be partly financed by an IDA credit; and Cd) preinvestment for civil works and equipment related to the FY91-95 investment program. The total investments under the program are estimated at NRs 2,131.2 million (US$115.2 million) with a foreign component of MRs 1,850.0 million (US$100.0 million). 37. The five-year (FY86-90) fourth telecommunications project proposed to be partly financed by IDA is a self-contained balanced and integrated package of high priority works. A major thrust of IDA's role under the project will be on the institutional development of the NTC in all dis- ciplines aimed at enhancing its capabilities to manage and operate the expanded facilities. The project was appraised in September-October 1983 and the information was updated in February 1985. A timetable of key events relating to the project and special conditions are given in Annex III. Negotiations began in Washington on April 12, 1984. In the course of nego- tiations HMG indicated that in addition to the Belgian cofinancing offer other governments had expressed interest in cofinancing certain components of the project. Negotiations were therefore not concluded at that time in order to allow HMG to evaluate all the cofinancing offers. Due to delays in finalizing the cofinancing arrangements, the negotiations were finally com- pleted on April 2, 1985. Project Description 38. The main components of the project are as follows: (a) provision of management consultants, technical assistance and fellows.iips for foreign training of NTC staff; (b) installation of (i) about 35,000 lines of local automatic switching equipment with associated cable distribution network  -13- and subscriber plant to connect about 31,000 new subscribers lines and replace about 1,370 lines of all remaining manual exchanges, (ii) about 2,500 additional terminations in national/ international trunk exchange, (iii) about 75 transmission systems in the long distance network, (iv) equipment for expansion of existing earth station and telex exchange, and (v) about 550 local and long distance public call offices in urban areas and 200 long distance connections and public call offices in about 90 rural areas; (c) provision of air conditioning and power equipment, vehicles, computer equipment, teleprinters, office aids and training equipment; and (d) civil works for cable ducts, cable networks and buildings for telecommunications equipment and offices. Project Costs 39. Total project cost is estimated at NRs 1,208 million (US$65.3 million) with foreign cost of NRs 1,032.2 million (US$55.8 million). The costs of switching equipment, main transmission systems and telephone cables to be obtained through tied procurement under cofinancing are based on unit costs quoted by suppliers in Belgium, Denmark, Finland and France. Other costs are based on NTC's contracts for ongoing works with adjustments up to end 1984 levels and are reasonable. 40. The provisions for equipment and civil works are based for the most part on detailed designs and engineering. Hence, no significant change is expected in the proposed quantities during the project period. A physical contingency of 10% of the annual base local and 5% of the annual base foreign costs has been included and are considered adequate. The local price contin- gencies are based on the following increases each year: 1985: BZ; 1986: 7%; 1987 to 1990: 6Z. The foreign price increases on the equipment to be financed under the IDA credit are based on the follow-ing annual increases: 1985: 5.0%; 1986: 7.5% and 1987 to 1990: 8.0%. Since telecommunications equipment contracts are normally fixed price contracts, the foreign cost increases are applied up to the anticipated contract dates. For the equip- ment to be procured under cofinancing (para 41), no price contingencies have been included in respect of their foreign costs as the unit prices of these items are fixed. Based on these assumptions, the locaL and foreign price contingencies amount to 18.8% and 6.7% respectively of the base costs plus physical contingencies. Financing 41. The local costs of the project amounting to NRs 175.9 million (US$9.5 million) will be financed from NTC's internal cash generation. These costs exclude NRs 62.9 million (US$3.4 million) of indirect foreign costs (assessed at 50X of total costs of civil works Eor construction of cable networks and buildings for telecommunications equipment and offices) which will be financed by IDA credit. An IDA credit of SDR 20.7 million (US$22.0 million equivalent) is proposed to finance about 39% of the foreign costs of the  -14- project; the balance 61X (US$33.8 miLlion) is expected to be cofinanced by the financial assistance packages as follows: Cofinancing for Project's Foreign Costs Equipment Amount Country to be Financed US$ Million Equivalent Belgium Switching 10.9 Denmark Cables 7.5 Finland Transmission systems 5.3 France Switching 10.1 Procurement 42. Procurement arrangements are summarized in the table below. Costs include proportionate contingencies.  -15- Procurement Method Negotiated Total Project Item ICB LCB Purchase Others Cost