Senegal - Second Telecommunications Project

Document of The World Bank FOR OMCIAL USE ONLY CR, /a/Y-&S Report No. 5977-SE STAFF APPRAISAL REPORT SENEGAL SOCIETE NATIONALE DES TELECOMMUNICATIONS (SONATEL) SECOND TELECOMMUNICATIONS PROJECT May 23, 1986 Industry Department Energy and Industry Staff This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not othervise be disclosed without World lank authorization.  CURRENCY EQUIVALENTS Currency Unit CFA Franc (CFAF) $1.0 CFAF 360 CFAF 1 million = $2,778 FISCAL YEAR Government and SONATEL: July 1 - June 30 SYSTEM OF WEIGHTS AND MEASURES: Metric ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BOAD - Banque Ouest-Africaine de Developpement (West African Development Bank) CCCE - Caisse Centrale de Cooperation Economique CEDEAO - Communaute Economique des Etats de L'Afrique de l'Ouest (Economic Community of West African States) CIDA - Canadian International Development Agency DEL - Direct Exchange Line EIB - European Investment Bank FAC - Fonds d'Aide et de Cooperation (FAC) GPC's - Guaranteed Private Credits ITU - International Telecommunication Union PANAFTEL - Pan-African Telecommunications Network OPCE - Office des Postes et de la Caisse d'Epargne OPTS - Office des Postes et Telecommunications du Senegal SONATEL - Societe Nationale des Telecommunications du Senegal TELESENEGAL - Societe Nationale des Thl&communications Iriternationales du Seingal UNDP - United Nations Development Programme  11t OWFFICIL USE ONLY SOCIETE NAIIONALE DES TELECOHMUNICATIONS (SONATEL) SECOND TELECOMMUNICATIONS PROJECT TABLE OF CONTENTS Page No. CREDIT AND PROJECT SUMKARY .........e....................e...... iv 1. INTRODUCTION ................................................ 1 II. THE TELECOMMUNICATIONS SECTOR ........g..... ........ ......... 2 A. Backgrount: .................................... 2 General 2................................................ 2 Access to Service ........... 2.......................... 2 Usage of Service......................................... 3 Quality of Service and Existing Facilities .............. -3 Demand for Service 4..................................... 4 Manufacturing ........................................... 4 B. Sector Organization .........0.............**.*.****.*.... 4 Restructuring .......................................... 4 The Entity - SONATEL .................. . 5 Ownership ........................................... 5 Organization ..................................**.*... 5 Management ..................................*.*...*. 5 Staff 6............................................. 6 Training 6.....................................*.. 6 Billing and Collection ..................e............ 6 Accounting ...................................*...... 7 External Audits ..... ................................ C. Development ............................................. 7 Sector Goals 7..........* 7 Sector Constraints ...................................*.. 8 Bank/IDA's Role and Strategy ............................. 9 1II. THE PROGRAM AND THE PROJECT r********,******.,............... 10 A. Description ........ ..............................*... 10 The Program ............. ............................*.. 10 The Project ............... ......................... 10 This report was prepared by Messrs. Henk Busz (Senior Financial Analyst) and Herman Ruud (Consultant Engineer). It is based on the findings of an appraisal mission consisting of Messrs. Herman Ruud and Robert Whyte (Consultants) who visited Senegal in June, 1985. Th docmt khm amtictd didbutbon d may be md by repients only in the pwomnmue of official dutiseL Its content. may no oterie be dicodwibout Wold Blnk _uthoton.  - is - TABLE OF CONTENTS - cont'd. Page No. Project Description ...... 11 (a) Physical components 11 (b) Technical assistance 12 B. Costs and Financing 12 Project Cost ee............. ... ....... e. 12 Contingencies ........................................ 14 Project Financing ........14 C. Procurement and Implementation .......15 Procurement 15 Disbursements 16 Project Implementation 16 Performance Monitoring 17 IV. FINANCIAL AND ECONOMIC ANALYSIS 17 A. Financial Analysis ............ e..........-.- 17 Past Financial Performance ......0...00.......e.... . 17 Present Financial Position 18 Future Financial Performance...... . . 18 Transfers to OPCE 20 Be Economic Analysis 21 Benefits 21 Tariff Policy ... 21 Return on Investuent 22 Risks .................. 22 Fiscal Impact . ....... ....... .... 23 Least Cost Solution .......23 Environmental and Health Aspects 23 V. RECOMMENDATIONS ................................ 23 List of Annexes 1. Existing Facilities as of January 1, 1985 26 2. Investment Program 19P,o-1993 29 3. Investment Program Implementation Schedule 31 4. Increase in the Number of DELs 1985-1993 ................ 32  - tii - TABILE OF CONTENTS - cont'd. Page No. List of Annexes - cont'd. 5. Disbursements Schedule ....................*............. 33 6 Performance Indicators ..........................e... 34 7. OPTS - Financial Statements, FY81-85...................... 35 8. TELESENEGAL - Financial Statments, FY81-85 ............ ... 38 9. SONATEL - Forecast Financial Statements, FY86-93 ......... 41 10. Notes and Assumptions for the Financial Forecasts ........ 44 11. SONkTEL - Organization Chart ... .......................... 48 12. Summary of Tariffs .........g .....................e 49 13. Return on Investments ....... ............................. 51 14. Consultants' Terms of Reference .......................... 53 15. Documents in the Project File ............................ 57 MAP: IBRD No. 19284-Senegal.  - iv - SENEGAL SOCIETE NATIONALE DES TELECOMMUNICATIONS (SONATEL) SECOND TELECOMMUNICATIONS PROJECT CREDIT AND PROJECT SUMUMRY Borrower: The Republic of Senegal. Beneficiary: SociStE Nationale des Thl6communications du S&ingal (SONATEL). Amount: $22-0 million equivalent. Terms: Standard IDA terms. Onlending Terms: The credit would be onlent to SONATEL for 20 years, including 5 years of grace, at the standard Bank interest rate prevailing at the date of the Credit Agreement. SONATEL will bear the foreign exchange risk. Project Description: The proposed preject consists of SONATEL's 1986-1993 investment program, excluding ongoing and future works. The program aims at improving operational efficiency and maintenance, and increasing system utilization through rehabilitation of existing equipment and network expansion. The project comprises: (a) installation of about 34,600 lines of witching equipment, with associated cable networks, buildings and subscriber facilities; (b) expansion and rehabilitation of long-distance transmission links; (c) establishment of a national maintenance organization; and (d) technical assistance. Project Benefits and Risks: The improved telecommunications services to be provided by the project will benefit all sectors of Senegal's economy, promote more efficient use of  capital and energy resources, and facilitate agricultural and comercial/industrial development, and the extension of health, educational, and other services to rural areas. Environmental pollution will be reduced due to more efficient transportation use. Substantial resource mobilization and net transfers to Government will occur. The project faces no unusual risks. The recent sector restructuring appears to bave been implemented smoothly. The technical assistance component of the project will assist management in critical areas. There could be delays in physical implementation; however, a number of project components will be executed on a turn-key basis and some are already well underway, se that this risk is considered minimal.  - vi - Estimated Costs: Local Foreign Total Component ($ million equivalent) Thies Regier. switching, networks, transmission, buildings 3.1 3.8 6.9 Ziguinchor-Cap Skiring-Boucote: microwave links, local installations 0.3 0.7 1.0 Cap Vert Region: switching, local networks, junctions 21.0 26.4 47.4 Ziguinchor, Kolda, Tambacounds Regions: switching, networks, transmission, buildings 9.5 12.3 21.8 Engineering and training for previous items 0.4 1.7 2.1 National Maintenance Plan 6.5 11.6 18.1 Kaolack, Fatick Regions: switching, networks, transmission, buildings 4.8 6.5 11.3 Various works in all regions 5.0 8.8 13.8 Technical Assistance 0.0 0.5 0.5 Total Base Cost 50.6 72.3 122.9 Physical contingencies 3.8 3.7 7.5 Price contingencies 11.7 14.8 26.5 TOTAL PROJECT COST: 66.1la/ 90.8 156.9 a/ Local costs include CFAF 12.8 billion ($35.5 million) in customs duties and local taxes.  - vi - Financing Plan: Local Foreign Total x (US$ million equivalent) IDA 0.0 22.0 22.0 14 CCCE 0.0 20.8 20.8 13 BOAD 0.0 4.2 4.2 3 AfDB 0.0 12.6 12.6 8 GPC's 0.0 5.6 5.6 4 SONATEL 66.1 25.6 91.7 58 TOTAL 66.1 9O.B 156.9 100 Estimated Disbursements: IDA FY: FY87 FY88 FY89 FY90 FY91 FY92 FY93 - - - - - - - USS million - - - - - - - - - Annual 0.4 2.0 3.0 5.3 6.9 3;0 1.4 Cumulative 0.4 2.4 5.4 10.7 17.6 20.6 22.0 Economic Rate of Return: 19% Staff Appraisal Report No: 5977-SEN, dated May 23, 1986. IBRD No. 19284-Senegal.  SENEGAL SECOND TELECOHIWNICATIONS PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.01 The Government of Senegal has requested IDA assistance in financing a high priority telecommunications project. The proposed IDA credit of $22.0 million equivalent will support rehabilitation and increased utilization of existing installations, as well as construction of new installations in various parts of the country. The project provides an opportunity to plan construction of a balanced national network on a least-cost basis and to achieve long-term institutional improvements. Major emphasis will be on improvements in maintenance and quality of service. Government recognizes that investment in the domestic teleconnmnications network has been at undesirably low levels during the past seven years, averaging 0.2Z of GNP. Investments during FY86-93 will average about 0.9% of GNP. 1.02 The estimated cost of the project is $156.9 zillion equivalent, with a foreign exchange component of $90.8 million. The $66.1 million local cost component includes $35.5 million in customs duties and taxes (54% of total local costs). About 202 of the project cost is for rehabilitation, 152 for maintenance and 65Z for expansion. The implementing agency, SONATEL, is expected to finance from net cash flow all local costs and up to 28Z of foreign costs. Contributions from Government will not be necessary and there will be substantial net transfers from SONATEL to Government. IDA will finance $22.0 million in foreign costs; other colenders are the Caisse Centrale de Cooperation Economique (CCCE), the African Development Bank (AfDB) and the Banque Ouest Africaine de Developpement (BOAD). Comercial loans will be provided in conjunction with the CCCE loan as private credits guaranteed by the French Government (Guaranteed Private Credits - GPC's). 1.03 The basic objectives of the project are to improve the telecomuunications sector in: (a) service quality; (b) access to service; (c) organization and management; (d) operational efficiency; and (e) resource mobilization. The project aims to meet 782 of expressed demand by mid-1993, compared to 70% at present; exchange capacity will be increased from about 31,600 to 55,000 lines, and the number of connected subscribers from 21,200 to 42,800. The project will take seven years to complete, with some retention payments falling due in the eighth year. This is in line with the Bank/IDA's disbursement profile for projects in Senegal. 1.04 IDA and CCCE have played a significant role in designing a project that focuses on sector rehabilitation and management improvements. Rehabilitation is underway with a first phase program in the Dakar region. Management improvements are expected to result from broad sector restructuring, introduced by the Government effective October 1, 1985.  -2- II. THE TELECOMMUNICATIONS SECTOR A. Background General 2.01 The telecomnunications sector in Senegal is under the general responsibility of the Minister of Information, Telecommunications, and Relations with the Assemblies. Until recently, sector responsibilities were divided between the Office des Postes et Telecommuinications du Senegal (OPTS), which handled domestic telecommunications services, and the Societe Nationale des Telecommunications Internationales du Senegal (TELESENEGAL), which was responsible for international telecommunications. Government merged the two entities into the Societe Nationale des Telecommunications (SONATEL), effective October 1, 1985 (para 2.09). Access to Service 2.02 As of January 1, 1985, the average telephone density was only about 0.32 telephone lines (DELs) per 100 inhabitants, which is only about 65Z of the average for Africa (excluding the Republic of South Africa). For example, the average telephone density in the Republic of Cote d'Ivoire, already low in comparison with other countries with similar GNP per capita, was 0.56 per 100 inhabitants in 1985. The low average density in Senegal is the result of underinvestment in the domestic network during the last seven years (para 1.01). The number of telephone subscribers has only been growing at about 4.2% per annum in recent years, half the African average of 8.7Z. Access to service is concentrated in the major cities, as shown in Table 2.1: Table 2.1: TELEPHONE DENSITY BY REGION Percent of Percent DELs Per 100 Areas Population of DELs Inhabitants Greater Dakar (Cap-Vert region) 22 71 1.03 Five major cities 1/ 11 17 .47 Rest of Senegal 67 12 .06 Total: 100 100 .32 1/ Kaolack, Thies, St. Louis, Diourbel, Ziguinchor There are about 150 public telephones in the country, about one-third of which are in Dakar. Telex service is available to about 780 subscribers, of which 690 are in Dakar.  -3- Usage of Service 2.03 The distribution of telephone subscribers by category as of January 1, 1985 is shown in Table 2.2: Table 2.2: DISTRIBUTION OF TELEPHONE SUBSCRIBERS BY CATEGORY Average Number of Private Government Public Lines Per Subscribers Subscribers Telephones City/Town (Percent) (Percent) (Percent) Greater Dakar 14,635 82 14 4 Five major cities 11 678 72 19 9 Other cities/towns:. - automatic service 106 65 24 11 - manual service 15 51 35 14 11 Kaolack, Thies, St. Louis, Diourbel, Ziguinchor The table shows that there is a lower percentage of private subscribers in small towns and rural areas than in Dakar and in other cities. Sample studies also indicate that many private lines are used for business purposes to a greater extent in small towns than in the bigger cities. This is consistent with the analysis of telecommunications usage in other developing countries. About 26% of telephone operating revenues are derived from domestic calls, 67% from international calls (due to the-large number of Senegalese living abroad and substantial transit traffic revenues) and 7% from rentals and other services. The average revenue per DEL in 1985 was approximately $1,750; this is high by international standards, reflecting the relatively high call charges (para 4.12) and the multiple and intensive use of many telephone lines. Quality of Service and Existing Facilities 2.04 The quality of service is generally poor. About 15% of the national network is out of service at any given time. An acceptable figure would be 22. Delays in reestablishing service are usually more than a week, often more than a month (50% should be reestablished in one day). The main causes of the outages are unsuitable or obsolete cable networks and lack of coordinated and systematic maintenance. Inadequate maintenance on domestic long distance connections has resulted in poor service and congestion as measured by the number of faults (5) per line per year (1 per year), the duration of such faults (50% last more than seven days, versus an acceptable figure of 50% lasting less than one day), and the average call completion rate during peak hours (generally less than 50%). International facilities (one type A satellite earth station and four submarine cables with terminal switching equipment) are well maintained and have low fault rates, but full utilization is inhibited by the poor local network.  -4- 2.05 As of January 1, 1985, total telephone switching capacity was 31,599 lines and telex exchange capacity 807 lines (Annex 1). About 94% of telephone subscribers and all telex subscribers are connected to automatic exchanges. About 96% of international telephone calls and 99% of telex comiunications are direct dialed. However, the capacity of much installed equipment is exhausted in some areas, underutilized in others, or is obsolete. Three of the ten regional capitals and 14 of the 30 departmental capitals n4ve only manual service. Local distribution networks are generally poo.- and have inadequate capacity. Demand for Service 2.06 As of January 1, 1985, connected telephone lines met about 70% of expressed demand (working lines plus registered applicants). However, there is significant suppressed demand which is not accounted for since potential subscribers are discouraged from registering by long waiting times. Expressed demand over 1980-85 grew at about 7.0% per annum, while connected DELs increased at only 4.3Z per annum. Expressed demand is expected to grow by at least 8.1% per annum over 1985-1993, as service and connection prospects improve. Present planning aims to meet about 78% of expressed demand by mid-1993 through an average 10% per annum growth in the number of lines. In addition to the demand for new connections, there is a large unsatisfied demand for domestic and international call services, illustrated by the heavy usage of available lines. Only about 63% of demand for telex connections is satisfied due to saturation of the available switching equipment. Additional capacity will be available from end 1987 on. Manufacturing 2.07 A telecommunications manufacturing industry does not exist in Senegal; all equipment and materials, except raw materials for civil works, are imported. A study by CEDEAO in 1981 concluded that, due to the relatively small quantities of equipment required and the diversity of technical specifications, domestic telecommunications manufacturing would not be economically viable in individual countries or groups of countries in West Africa. B. Sector Organization Restructuring 2.08 The need for sector restructuring became evident around 1980. Poor plamning and execution of investments in the domestic telecommunications network combined with inadequate maintenance and operating inefficiencies, led to increased customer dissatisfaction and aggravated the discrepancy between domestic and international services. In addition, the domestic service was part of OPTS and thus tightly controlled by Government and burdened with the problems relating to the postal/  -5- financial services. Initial Bank assistance to the sector (First Telecommunications Project, Loan 866-SE of $6.25 million), which was completed in 1980, focused on network expansion and did not achieve lasting institutional improvements (para 2.23). Further technical assistance, particularly in financial maLlagement and accounting, was provided to the sector for three years under the First Parapublic Technical Assistance Project (Credit 764-SE) starting in 1979. Based in part on the conclusions of the PCR of the first telecommunications project (December 31, 1981) and given the continuing problems in the sector, the Bank and Government subsequently agreed on the need to refocus investments on sector rehabilitation, and to reorganize the sector. 2.09 A 1983/84 study financed under the Second Parapublic Technical Assistance Project (Credit 1398-SE) made specific sector reorganization proposals. The following recommendations were adopted by Government in July 1985: (a) OPTS' postal/financial services would be reorganized into the Office des Postes et de la Caisse d'Epargne (OPCE); and (b) the telecommunications branch of OPTS would be merged with TELESENEGAL, forming SONATEL. The reorganization became effective on October 1, 1985. The Entity - SONATEL 2.10 Ownership - SONATEL is a Societe Nationale (State Corporation) with Government as the sole shareholder. Up to 49% of its shares can be sold to local governments. Shares cannot be sold to the private sector. 2.11 Organization - The status of Societe Nationale gives SONATEL's management wide ranging operating autonomy, subject to policy review and approval by its Board of Directors. Currently, only Government ministries are represented on the Board. The Board's composition can be broadened as local gojernments purchase part of the share capital. The Board is supervised by a Conseil de Surveillance (Supervisory Board) consisting of: (a) the Board; (b) four other Government representatives; and (c) a representative of the Chamber of Commerce and Industry. Matters such as private sector representation on the Boards and eventual abolition of the Conseils de Surveillance are being reviewed with Government in the framework of the Second Parapublic Technical Assistance Project. SONATEL's organizational structure is satisfactory (Annex 11). 2.12 Management - SONATEL was created through absorption by TELESENEGAL of the domestic telecommunications service of OPTS. All managers have been appointed, and the new entity is functioning satisfactorily. Initial problems with employee labor unions appear to have been resolved. Although SONATEL's ability to sucessfully manage and develop both the domestic and the international network remains to be tested, the overall impression is that the current management team is strong and highly motivated. The former general manager of TELESENEGAL is in overall charge of the new entity. SONATEL's senior staff consists of  - 6 - the most able managers of the two merged entities. They are qualified to implement the proposed project; in addition, technical assistance will be provided under the project to assist management in selected areas during the current transition period and thereafter (para 3.06). 2.13 Staff - SONATEL took over existing telecommunications staff from OPTS (1,740) and TELESENEGAL (290). This initial staffing of 2,030 results in a ratio of 93 staff per 1,000 DELs in service, which is high. Under the terms of its Performance Contract (para. 2.19), SONATEL will control recruitment and improve its personnel structure primarily through attrition, highly selective recruitment, and staff training. In addition, strict adherence to job descriptions and staff participation in management committees to improve productivity, as practiced by TELESENEGAL prior to sector restructuring, will be continued by SONATEL. These measures, and the expected increase in the number of connected lines, will result in a decrease of the staff ratio from 93 in 1986 to 50 in 1993. The staff ratio is one of the principal performance indicators to be monitored during project implementation (para 3.15). 2.14 Training - Two multinational telecommunications schools exist in Senegal, one in Rufisque (lower level technical staff) and one in Dakar (higher level staff). They were established with assistance from the International Telecommmnication Union (ITU). During the project period, the two multinational schools will be merged and located in Dakar, and SONAIEL will take over the Rufisque facilities. ITU is expected to provide technical assistance to implement this plan. The schools will provide most of the technical staff training needed by SONATEL. Highly specialized and University level training will continue to take place abroad. Training needs will be established through evaluations against job descriptions and on the basis of recommendations by ITU experts. In addition, training to update technical staff will be provided by equipment suppliers. SONATEL will continue in-house training programs for financial and administrative staff previously provided by TELESENEGAL, and has committed itself under its Performance Contract to spend the equivalent of 5% of its salary budget on staff training. These arrangements are satisfactory. 2.15. Billing and Collection - Prior to sector restructuring, OPTS was responsible for billing and collection of domestic and international. charges. Bills were prepared on a bi-monthly basis through the Government's data processing department, but were frequently delayed by two to three months. To minimize delays, SONATEL will in the future process bills on its own computer system. An expert provided by the French Fond d'Aide et de Cooperation (FAC) is assisting in this. SONAIEL's Performance Contract epecifies that billing delays should be reduced from the current average of 50 days to 20 days by the end of FY89; progress will be checked through the performance monitoring system (para 3.15). 2.16 As of March 25, 1986, telecommunications accounts receivable were CFAF 14.3 billion, equivalent to about nine months of billing. Of this,  Gr iernment owes an estimated CFAF 5.3 billion (equivalent to 24 months of 1- ling to Government); the exact amount of Government arrears will be confirmed by May 31, 1986 and the private sector CFAF 9.0 billion (equivalent to seven months of billing). Actual arrears are less, in view of existing billing delays and a two-month period during which subscribers may pay their bills. Given improved application of disconnection procedures, as per SONATEL's Performance Contract, private sector arrears should be manageable. Clearance of Government arrears has long been a problem. However, under the terms of SONATEL's draft Performance Contract, Government commits itself to repay CFAF 2.4 billion in FY86 and FY87 each and the remaining CFAF 0.5 billion in FY88. The CFAF 4.4 billion in cross-debt from SONATEL, mostly due to previous debt rescheduling, would offset most of this. During negotiations, assurances were obtained from Government that it will: (a) settle its arrears in accordance with the schedule stipulated in the Performance Contract; (b) ensure that adequate annual budget provisions for payment of arrears and consumption are made; and (c) settle future telecommunications bills within 90 days of the billing date starting immediately and within 45 days by June 30, 1988 [para 5.01 (a)|. As a condition of effectiveness of the proposed credit, SONAIEL will present an accounts receivable aging schedule to IDA [para 5.02 (a)]. DurinLg negotiations, assurances were obtained that SONATEL will write off, by December 31, 1986, receivables that are uncollectable [para 5.01 (b)3. 2.17 Accounting - SONATEL will keep accounts on an accrual basis and in accordance with the Senegalese accounting plan. TELESENEGAL produced its annual accounts within four months of the end of each fiscal year. In recent years, OPTS has produced them within six months of the end of each fiscal year. With the simplification of accounts resulting from the separation of postal/financial services (para 2.09), SONATEL's unaudited accounts are expected to be ready within four months after the end of each fiscal year, which is satisfactory. 2.18 External Audits - During negotiations, assurances were obtained that SONATEL will: (a) have its accounts audited annually by external auditors acceptable to IDA; (b) present its unaudited financial statements to IDA within four months after the end of each fiscal year; and (c) present the external auditor's report to IDA within six months after the end of each fiscal year [para 5.01 (c)l. This schedule is realistic. C. Development Sector Goals 2.19 The Seventh Senegalese Plan (FY86-FY89) contains the following general objectives affecting the sector: (a) state enterprises should improve their management and generate funds sufficient to finance an adequate share of investments; (b) government subsidies to state  - 8 - enterprises should be reduced or eliminated to save public funds and to encourage increased efficiency; (c) the regions should be given increased participation in the national economy; and (d) as a matter of high priority, the telecommunications sector should be rehabilitated and expanded. The emphasis is on self-sufficiency, efficiency, and agreed operating policy frameworks in the form of Performance Contracts. A final draft of SONATEL's Performance Contract, acceptable to SONATEL, Government and IDA, was agreed upon during negotiations. Signature of this performance Contract is a condition of effectiveness of the proposed credit [para 5.02 (b)]. 2.20 In accordance with the Plan's overall objectives, SONATEL's objectives are to: (a) rehabilitate existing installations, conduct systematic maintenance, and make additional investments to bring system utilization to a satisfactory level; (b) expand sector facilities to meet expressed demand; (c) increase operational efficiency and quality of service through improved management, staff training and maintenance; (d) generate a strong cash flow to finance a major share of investments, primarily through improved efficiency; and Ce) make substantial net transfers to Government, directly through income taxes and indirectly through custom duties on imported equipment. Sector Constraints 2.21 The recent sector restructuring should be instrumental in overcoming some major past institutional problems. Firstly, the sector organization was not suited to highly commercial telecommunications activities. OPTS was directly supervised by Government and was burdened with problems relating to the postal/financial services. TELESENEGAL had adequate autonomy, but was hampered by dependence on OPTS for subscriber connections, maintenance of the domestic network, and bill collection. Secondly, job descriptions for most OPTS staff were rarely applied and there was inadequate delegation of authority and responsibility. Recruitment policy frequently did not match needs with qualifications. Thirdly, most investment planning for the domestic network was done by consultants or by equipment suppliers; overall programing was merely a listing of separate investments. This led to significant network  -9 - imbalances, creating congestion in some areas and underutilization in others. And fourthly, maintenance of the domestic network was not adequately organized. This led to neglect of equipment, increased maintenance costs, and reduced the useful life of existing equipment. 2.22 Management was in the past the principal operative constraint on development of the domestic telecommunications network. It was unable to provide the necessary leadership for system development, both vis-a-vis Government as well as its own staff. This resulted notably in stagnation of investments even though financing was available, inability to connect subscribers, and a lack of operating efficiency stemming from the absence of financial management and of adequate recruitment policies. With the creation of SONATEL and its stronger, more purposeful management team, this constraint appears to have been substantially alleviated. Similarly, the absence in the past of an agreed operating policy framework is a constraint that will be eliminated upon signature of SONATEL's Performance Contract (para 2.19). Bank/IDA's Role and Strategy 2.23 Experience with Past Lending. The Bank became involved in the sector through the first telecommunications project (Loan 866-SE) of $6.25 million, approved in November 1972. The project, completed in December 1980, comprised two principal components: (a) rehabilitation, modernization and expansion of local telephone facilities in Dakar and in other cities and towns in the northern provinces; and (b) construction of long distance radio links from Dakar to the north and from there eastwards along the Senegal river, to support agricultural development. Technical assistance was provided to improve staff training and financial management. However, contrary to expectations, OPTS' management did not take full advantage of training provided, neglected financial management and maintenance, and was unable to introduce systematic overall planning and programing. This caused delays, cost overruns, inadequately balanced investments and a lack of operating efficiency. Under the First Parapublic Sector Technical Assistance Project (Credit 764-SE) approved in 1979, IDA provided further support to OPTS in accounting and financial management; some improvement occurred (para 2.17). However, realizing the magnitude of the restrictions imposed on sector development by the fragmentation of the sector, Government decided to reorganize the sector (para 2.09). 2.24 Proposed Project. IDA's role through this project is to address the principal constraints facing the sector (paras 2.21 and 2.22). The primary emphasisis on institutional development. Through prior sector restructuring and agreement on a Performance Contract (paras 2.09 and 2.19), significant obstacles to improved sector management have already been removed. The technical assistance component of this project aims to provide added impetus to this process and provide management with valuable support in critical areas.- IDA has been instrumental in bringing program  - 10 - size down to levels that are feasible, both from the point of view of physical implementation as well as availability of external financing at concessionary terms. Finally, IDA focuses through this project on rehabilitation, increased capacity utilization and improved maintenance as the primary means of optimizing the contribution of the sector to the economy. III. THE PROGRAM AND THE PROJECT A. Description The Y mam 3.01 SONATEL's investment program covers July 1, 1986 - June 30, 1993 and comprises ongoing works (15%), the proposed project (69%), and future investments (16%). Ongoing works are being cofinanced by CCCE, BOAD, CEDEAO, and by SONATEL. They consist predominantly of equipment rehabilitation and will increase utilization of existing equipment in the Cap Vert (Greater Dakar) region. IDA had a major impact in the formulation of the proposed investment program by insisting on: (a) rehabilitation and maintenance; (b) achieving a balanced network; and (c) network expansion if of high priority and economically justified. Future investments consist mostly of investments for the international network, commencing around FY89. The Project 3.02 The project will be implemented during FY87-93. It comprises the following components: (a) about 24,000 lines of (mainly) electronic switching equipment and associated cable networks and intra-regional junction, switching and transmission facilities in the Cap Vert Region; (b) about 3,400 lines of electronic switching equipment and associated buildings and cable networks for eight cities in the Ziguinchor, Kolda, and Tambacounda regions, plus interurban transmission facilities; (c) about 7,200 lines of electronic switching equipment, associated buildings and cable networks for ten stations in the Thies, Kaolack, and Fatick regions, plus interurban transmission facilities; (d) facilities for linking Cap Skiring and Boucote to the national telecommunications network;  - 11 - (e) rehabilitation of various existing installations and cable networks, and establishment of a national maiutenance organization; (f) various works in all regions (feeder links, multiplex equipment, conventional and solar power installations, etc.); and (g) staff training, engineering and other technical assistance. Targets for the projected growth of telecomunmications facilities and improvements in service quality during the project period are shown in Annex 6. The resulting network configuration is shown in Map IBRD 19284 - Senegal. Project Description (a) Physical Components 3.03 Under the first telecommunications project (para 2.23), the capacity of switching installations and arteries in the cable network in Dakar was increased. However, OPTS did not install sufficient additional distribution cables. As a result, installed switching capacity is underutilized. This situation is being corrected with ongoing works (para 3.01). Under the proposed project, switching and interconnection capacity would be further expanded to meet part of the unsatisfied demand in the Cap Vert region. 3.04 The 'Axe Nord' microwave li.nk, which functions unreliably, will be rehabilitated under the project; the new maintenance organization (para 3.05) will ensure future proper functioning. In the South and Southeast, existing microwave links cannot be fully utilized. Multiplex equipment will be provided to increase utilization at a marginal investment cost. Some economically or administratively important towns, located at or near existing microwave links, will be connected at relatively low cost by branch links. 3.05 Maintenance of domestic facilities (ex-OPTS) is inadequate with about 15% of DELs out of order at any given time. This is due to poor coordination of testing and repair; inadequately trained staff; and limited availability of vehicles, spare parts, tools and testing equipments. The proposed project will establish a national maintenance organization within SONATEL with well defined tasks, responsibilities and equipment. Based on a proposal prepared with ITU assistance, maintenance will be coordinated centrally from Dakar and regionally through provincial centers. Under the proposed project, these cenLters will be provided with trained staff, vehicles and equipment.  - 12 - (b) Technical Assistance 3.06 Technical assistance is currently being provided to SONATEL from a variety of sources: (i) engineering and rehabilitation of installations (FAC); (ii) computerized billing system (FAC); (iii) introduction of data processing in accounting and administration (CIDA); (iv) management and operation of power supply and transmission equipment (CIDA); (v) preparation of a Master Plan (UNDP/ITU); and (vi) personnel management (IDA-Second Parapublic Technical Assistance Project, Credit 1398-SE). Total assistance from these sources during the project implementation period is about 270 manmonths. In addition, SONAIEL has engaged, under its own financing, experts in the operation of hightly specialized telecommunications installations and a general management expert for a total of about 36 manmonths. During project appraisal (June, 1985) IDA identified the following broad areas where expert support is considered necessary: planning, data processing, management information, and supply logistics. SONATEL expects to be able to obtain grant financing from sources other than IDA for experts in these areas, with terms of reference (Annex 14) and qualifications acceptable to the Association. Appointment of these consultants is a condition of effectiveness of the proposed credit [para 5.02-(c)]. Due to the phasing of the tariff study (para 4.12), a tariff expert will not need to be recruited until the beginning of 1987. During project implementation other areas may be identified where expert assistance is required to ease transition and project implementation problems. An amount of US$0.5 million (36 manmonths) has been allocated within the credit to meet additional technical assistance requirements as necessary. Terms of reference for these additional experts would be agreed to during project supervision. B. Costs and Financing Project Cost 3.07 Total project costs are estimated at CFAF 56.5 billion ($156.9 million), including foreign costs of CFAF 32.7 billion ($90.8 million) and local costs of CFAF 23.8 billion ($66.1 million). Local costs include CFAF 12.8 billion ($35.5 million) in customs duties and taxes, equivalent to 40% of the c.i.f. value of imported goods. Project base cost estimates are based on mid-1984 prices experienced by Senegal and other francophone countries in Western Africa, and adjusted to mid-1986 level. Detailed project costs are presented in Annex 2 and summarized in Table 3.1 below:  l~ ~ ~ ~ - 13 - Table 3.1: PROJECT DST SUNKARYa/ Comooent CFAP Billion $ million Local Foreign Total Local Foreign Total Thies Region: mitdhing, networks, transmission, buildings 1.1 1.4 2.5 3.1 3.8 6.9 Ziguinchor-Cap Skiring-Bocote: micrcuave links, local installations 0.2 0.2 0.4 0.3 0.7 1.0 Cap Vert Region: switcbing, local networks, junctions 7.6 9.5 17.1 21.0 26.4 47.4 Ziguinchor, Kolda, Tambacoxnda Regions: switcbing, networks, transmission, buildings 3.4 4.4 7.8 9.5 12.3 21.8 Engineering and training for previous items 0.1 0.6 0.7 0.4 1.7 2.1 National Msdaintnce Plan 2.3 4.2 6.5 6.5 11.6 18.1 2Kaolack, Fatick Regions: switching, networks, transmBsBion, buildings 1.7 2.4 4.1 4.8 6.5 11.4 Various works in ell regions 1.8 3.2 5.0 5.0 8.8 13.8 Technical Assistance 0.0 0.2 0.2 0.0 0.5 0.5 Total Base Cost 18.2 26.1 44.3 50.6 72.3 122.9 Physical contingencies 1.4 1.3 2.7 3.8 3.7 7.5 Price contingencies 4.2 5.3 9.5 11.7 14.8 26.5 IUTAL PROJECT COST 23.8 32.7 56.5 66.1 90.8 156.9 _- m _ - al Local costs include CFAF 12.8 billion ($35.5 million) in custons duties and local taxes.  - 14 - Contingencies 3.08 Physical contingencies have been calculated at 5Z for imported equipment and 10% for services and local cost items. Price contingencies for local costs have been computed at 7% annually. The standard rates have been used for price contingencies for foreign costs, i.e., 7.0% (1986); 7.0% (1987); 7.5Z (1988); 7.7Z (1989); 7.6% (1990); and 4.5% per annum thereafter. ProJect Financing 3.09 The project's foreign costs ($90.8 million) will be financed by a number of cofinanciers and SONATEL (para 3.10). CCCE, together with guaranteed private credits, will provide foreign cost financing for switching and intraregional transmission in the Cap Vert region. AfDB will finance investments under the national maintenance plan. BOAD intends to finance switching and transmission in the Ziguinchor, Kolda and Tambacounda regions. IDA would finance the remaining project components. The above financing arrangements were confirmed during negotiations. Fullfillment of the conditions of effectiveness of the CCCE and AfDB loans, which have already been appraised, is a condition of effectiveness of the proposed credit [para 5.02 (d)]. Appraisal of the BOAD-financed component is expected in the beginning of FY87. 3.10 SONATEL will finance all local costs ($66.1 million) and the foreign exchange gap of $25.6 million from net internal cash generation (para 4.07). Efforts are continuing to find additional cofinancing for the foreign cost portion the project. The current financing plan is summarized in Table 3.2 below: Table 3.2: PROJECT FINANCING PLAN Local Foreign Total C$ million equivalent) IDA 0.0 22.0 22.0 CCCE 0.0 20.8 20.8 BOAD 0.0 4.2 4.2 AfDB 0.0 12.6 12.6 GPC's 0.0 5.6 5.6 SONATEL 66.1 25.6 91.7 TOTAL 66.1 90.8 156.9 During negotiations, assurances were obtained from SONATEL that it will seek prior agreement with IDA on any proposed changes in the investment program that would increase its cost by more than 10% in any one year or that would substantially alter network balance [para 5.01 Cd)].  - 15 - C. Procurement and Implementation Procurement 3.11 Procurement arrangemenets for the proposed project are summarized in Table 3.3 below: Table 3.3: PFalJRM.fT ARRRES1BU ($ 9000)S/ Ltited Inter- Negotiated natlmal local ICB ontract Bidd1ng Bidding Other Total 9witdchg 16,011 (7,672) 1,362 (800) 26,415 43,788 (8,472) Local netoiks 8,825 (2,598) 1,006 (220) 26,42 36,373 (2,818) Timumission 14,432 (7,684) 2,592 (660) 14,006 31,030 (8,344) Pwer equipt. 3,395 (866) 705 (130) 2,507 6,607 (996) nIstzunmts 3,434 (314) 1,214 (284) 2,830 (272) 9,432 16,910 (870) Civil works 14,8D5 14,805 ( 0) Tedufral assistanze 3,550 (500)b/ 3,831 7,381 (500) umL 46,097 (19,134) 6,879 (2,094) 6,383 (772) 82,733 156,894 (22,000) Nate: Figures in prertbues rqresemt amnts flnanmed by the proposed IA credit. a Tndb3dIg EoLt1nndes. B/ Ebnk gaidelites for the use of cmunats.M 3.12 Equipment for $19.1 million to be financed by IDA will be procured through ICB in accordance with the Bank's guidelines. Some spares and equipment to be financed by IDA ($2.1 million), required to remove physical bottlenecks, would be procured on the basis of negotiated contracts with existing suppliers. IDA's approval will be required for the negotiated contracts to ensure that the prices are comparable to those likely under ICB. Limited international bidding (LIB) would be used to procure $0.3 million of test instruments, tools and specialized vehicles, for which there is a limited number of suppliers. Consulting services for $0.5 million will be procured according to Bank guidelines for the use of consultants. IDA financed contracts of over $100,000 each will be subject to prior review covering about 70% of all contracts for equipment. Other IDA financed contracts will be subject to post-award review. Procurement  - 16 - under cofinancing will be in accordance with the guidelines of the respective institutions. Project preparation is well underway; specifications for major project items are either already prepared or are nearing completion. To minimize implementation delays, the issuance of invitations to bid for goods and services to be financed by IDA for an amount equivalent to 50% of the credit amount is a condition of effectiveness of the proposed credit [para 5.02 (e)]. Disbursements 3.13 The proposed IDA credit of $22.J million would be disbursed against full standard documentation for: (a) 100% of foreign expenditures for goods, including the foreign exchange component of equipment installation; and (b) 100% of total expenditures for technical assistance. A Special Account of $1.5 million, to be maintained in US dollars in a bank acceptable to IDA, will be established. This $1.5 million is equivalent to about four months' estimated expenditure during the peak disbursement period of 1987-1990. The Special Account would be used for disbursement against all expenditures. Applications for replenishment will be submitted on a bimonthly basis. Disbursements for amounts of less than US$50,000 would be made against Statements of Expenditure. The estimated disbursement schedule (Annex 5) is in line with standard Bank disbursement profiles for the country. The Credit closing date is expected to be June 30, 1993. The allocation of the credit by category of disbursement is shown in Table 3.4. Table 3.4: PROPOSED DISBURSEMENT OF IDA CREDIT BY CATEGORY Category Item Amount ($ Mln) 1. Switching 7.0 2. Local networks 2.7 3. Transmission 7.4 4. Power equipment 0.7 5. Instruments and vehicles 0.8 6. Technical assistance 0.4 7. Unallocated 3.0 TOTAL: 22.0 Project Implementation 3.14 Project implementation will be coordinated by the technical department of SONATEL. Installation of equipment will be done by suppliers under supervision from SONATEL. Local contractors would be hired for civil wores and other suitable tasks. The transfer of knowledge to SONATEL staff would be achieved through staff participation in installation and testing work, training provided by suppliers and institutions abroad, as well as in  - 17 - local training centers (para. 2.14). The project implementation schedule is at Annex 3 and Annex 14, page 4. SONATEL will submit quarterly progress reports on the physical implementation of the project to IDA. The project is expected to be substantially completed by June 30, 1992, with final acceptance testing and guarantee payments by June 30, 1993. PLrformance Monitoring 3.15 Improvement of SONATEL's management systems will be monitored through selected performance indicators on service quality, financial performance, operating efficiency and program implementation (Annex 6). This will enable SONATEL to take the required corrective actions in a timely manner. While the targets for later years are indicative, those for fiscal years 1987 and 1988 were agreed upon with SONATEL during negotiations, as representing desirable and feasible levels of attainment. During negotiations, assurances were obtained from SONATEL that: (i) the targets for each of the subsequent fiscal years will be agreed to with IDA by March 31 of the preceeding fiscal year; and (ii) SONATEL will furnish semiannually, for IDA review, a report on its performance against these indicators [para 5.01 (e)]. IV. FINANCIAL AND ECONOMIC ANALYSIS A. Financial Analysis Past Financial Performance 4.01 In the recent past, the financial performance of OPTS and TELESENEGAL was satisfactory. 4.02 OPTS' financial statements for FY81-85 are at Annex 7. OPTS did not keep separate accounts for telecommunications and postal/financial services, although this was a covenanted requirement under the first prcject (Loan 866-SE). Pro-forma separation of accounts was obtained during project preparation. 4.03 The telecommunications branch produced a rate of return of about 15% per year on the book value of average net fixed assets in operation, with an operating ratio of about 60%. Given the low level of investments over the past four years, debt remained low at about 18% of debt plus equity, net internal cash generation averaged the equivalent of 190% of investments, and the debt service coverage ratio averaged 3.8 times. The current ratio, however, was inadequate at about 0.9, particularly because accounts receivable were very high (para 2.16). 4.04 TELESENEGAL's financial statements (Annex 8) indicate a strong financial performance, as should be expected from an entity dealing solely with international telecommunications. Net income, after payment of a 33%  - 18 - income tax, doubled over 1981-85. The operating ratio remained low at about 35%. The after tax rate of return on average net fixed assets in operation was around 43% and net internal cash generation averaged the equivalent of 253Z of investment expenditures. Debt service coverage was over five times and debt was reduced to only 13% of debt plus equity. The current ratio was inadequate at about 1.6, because accounts receivable (mostly due from OPTS) were very high (para 2.16). Present Financial Position 4.05 The preliminary opening balance sheet of SONATEL as of October 1, 1985, is given below. Table 4.1: SONATEL - OPENING BALANCE SHEET CFAF Million Assets Net fixed assets 18,971 Work in progress 1,967 Other long-Term assets 1,689 Current assets 21,800 TOTAL 44,427 Liabilities Equity 21,425 Long-term debt 6,828 Current liabilities 16,174 TOTAL 44,427 The current ratio of 1.3 is unsatisfactory because of the high level of accounts receivable. Mearures to reduce receivables are being taken (para 2.16). The debt/debt plus equity ratio is strong at 24%. Accounting firms are currently finalizing SONATEL's opening balance sheet; their work is expected to be completed by June 30, 1986. Agreement between Government and SONATEL on the latter's definitive opening balance sheet is a condition of effectiveness of the proposed credit [para 5.02 (f)l. Future Financial Performance 4.06 Forecast financial statements for FY1986-1993 are in Annex 9. Notes and assumptions are in Annex 10. Assuming a 10% average tariff increase in FY1989, SONATEL's financial performance and position are expected to be satisfactory. Key financial indicators projected for FY1986-1993 are shown below:  - 19 - Table 4.2: XEY FINANCIAL INDICATORS, FY86-93 FY ending June 30 -1986 1987 1988 1989 1990 1991 1992 1993 Operating Income (CFAF bln) 18.1 19.5 21.1 24.4 25.0 26.5 29.2 31.6 Operating Expenses (CFAF bln) 10.7 11.6 12.6 14.1 15.9 18.3 20.8 23.3 Operating ratio (%} 59 60 60 58 64 69 71 74 Rate of return (%)a/ 29 28 25 25 17 13 12 10 Net internal cash generation (%)b/ 128 70 69 61 49 48 83 71 Debt service coverage {times) 6.5 4.1 3.1 3.2 2.6 2.5 2.4 2.6 Ctrrent ratio (times) 1.6 1.8 2.2 2.1 1.9 1.7 1.6 1.5 Debt/debt + equity (%) 27 31 31 32 33 36 33 30 Accounts receivable/gross revenues () 79 48 31 25 25 25 25 25 a/ On average net fixed assets in service (after income tax). b/ As a percentage of construction requirements. 4.07 Despite substantial investments during the project period, the financial indicators would remain satisfactory. The operating ratio would range from 59 in FY86 to 74 by FY93. The after tax rate of return on average net fixed assets in service would decrease from the abnormally high levels achieved in the past (as a result of high tariffs and limited investments), but would remain satisfactory through 1993, at 10% or above. Debt service coverage would be adequate at over 2.5 times and the debt level would remain low around 30% of debt plus equity, despite the increase in borrowings (para 4.08). The current ratio would be adequate at 1.5. Net internal cash generation would finance on average 62% of investment expenditures. During negotiations, assurances were obtained that SONATEL will finance from net internal cash generation not less than 50% of investment expenditures, on a moving three year average basis, in any one year during the project implementation period [?ara 5.01 (f)]. 4.08 Sources and applications of funds during the project implementation period are summarized in Table 4.3 below:  - 20 - Table 4.3: SONATEL-SOURCES AND APPLICATIONS OF FUNDS, FY87-93 CFAF $ Billion Million Percent Sources Internal cash generation 72.2 200.6 97 Less:debt service 26.1 72.6 35 Net internal cash generation 46.1 128.0 62 Borrowings: Existing loans*/ 2.9 8.1 4 Proposed IDA 7.9 22.0 11 Proposed CCCE 7.5 20.8 10 Proposed GPC's 2.0 5.6 3 Proposed AfDB 4.5 12.6 6 Proposed BOAD 1.5 4.2 2 Future Borrowings 1.8 4.9 2 Sub-Total 28.1 78.2 38 TOTAL SOURCES 74.2 206.2 100 Applications Construction Requirements 74.6 207.2 100 Change in working capital -0.4 -1.0 0 TOTAL APPLICATIONS 74.2 206.2 100 *1 Financing for ongoing works. The financing plan was confirmed during negotiations (para 3.09). Interest rates, grace and amortization periods for the CCCE, AfDB, and BOAD loans are assumed to be the standard terms and condit.1ons of the respective institutions. The interest rate on private guaranteed credits is assumed to be 9.5Z interest, zero grace and a five-year repayment period. The IDA credit would be onlent by Government to SONATEL at the standard Bank interest r_te prevailing at the date of the Credit Agreement, with repayment over fifteen years following five years of grace. SONATEL will bear the foreign exchange risk. Conclusion of a subsidary loan agreement, acceptable to IDA, between Government and SONATEL is a condition of effectiveness of the proposed credit [para 5.02 (g)3. Transfers to OPCE 4.09 OPCE (para 2.09) will need financial support during a transition period of about five years, after which it is expected to break even on operations. In the past, the telecommunications sector subsidized the postal/financial services through OPTS. Government would have prefered continuation of a direct financial link between SONATEL and OPCE; however,  - 21 - this would not enhance the autonomy and efficiency of OPCE. Under the terms of the Performance Contract (para 2.19), SONATEL will transfer to Government gradually decreasing amounts starting at CFAF 1.7 billion in FY86; Government, in turn, will transfer these funds to OPCE. During negotiations, assurances were obtained from Government that: (a) any services rendered by SONATEL to OPCE will be paid in full by the latter; and (b) the level of the annual subsidy from SONATEL to OPCE will decline each year and end by June 30, 1989 [para 5.01 (g)]. B. Economic Analysis 4.10 The economic analysis covers ongoing and new works under SONATEL's FY86-93 investment program, except those components which will not start until FY89, and whose benefits are unlikely to accrue until the mid 1990's (para 3.01). Given the interdependencies between program components, it is not possible to evaluate separately the project components proposed for IDA financing. Benefits 4.11 Telecommunications services benefit all sectors of Senegal's economy and promote more efficient use of capital and energy resources. They are likely to play a particularly significant role in Senegal in: (a) promoting industrial and commercial development in the Cap-Vert region and in the regions around Diourbel, Thies, Tambacounda, Kaolack, Ziguinchor and Kolda; (b) developing tourism; (c) stimulating agricultural development through better access to market information and more efficient management; (d) improving the services offered by regional development agencies; (e) facilitating the improvement and extension of health, education, government administration and other services to rural areas; (f) substituting for transport and facilitating vehicle coordination; and (g) mobilizing domestic savings by transfering part of SONATEL's net income to Government (para 4.15). Tariff Policy 4.12 A summary of tariffs as of July 1, 1985 is shown in Annex 15. Telecommunications tariffs were increased regularly in the past. The most recent increase effective FY84 averaged 10%, bringing the base call charge  - 22 - to CFAF 55. Senegal's tariff level and structure are comparable to those of neighboring West-African countries; tariff levels are relatively high by iuternational standards. Current tariff levels are expected to be adequate through FY88, with a 10% average revenue increase required in FY89 to ensure adequate cash flow (para 4.07). However, the tariff structure should be reviewed to ensure economic efficiency in the use of existing plant and new investments. For example, the connection charge and monthly rental in Dakar are relatively modest but the base call charge is relatively high. This could encourage a high demand for new connections from customers with low prospective usage, resulting in underutilized networks. There is no peak/off peak pricing, and local calls are not metered. Under the proposed project a tariff study would be carried out by SONATEL, with the assistance of an IDA financed expert. (para 3.06). During negotiations, assurances were obtained from SONATEL that it will carry out, and furnish to IDA, the tariff study by January 1, 1988 and implement its recommendations, as appropriate, by July 1, 1988 [para 5.01 (h)]. Return on Investment 4.13 The internal financial rate of return on the investment program is estimated at about 13% (Annex 13). The quantifiable economic rate of return is about 19%. This estimate understates total program benefits, since it does not take into account the total consumer surplus or the secondary benefits derived from telecommunications, such as more efficient use of development, responsiveness to market forces, more effective health services, etc. Risks 4.14 The program faces no unusual risks. The merger of TELESENEGAL and OPTS into SONATEL appears to have proceeded smoothly. The project's technical assistance component will provide management with expert assistance, should problems develop in specific areas. The principal risks. are that the new entity will not be able to implement the investment program as rapidly as scheduled; and that it will not be able to achieve prompt recovery of arrears and future billings. Protection against the first risk is provided by the fact that implementation of the first phase of network rehabilitation is well underway and that many contracts will be on a turn-key basis, and by the technical assistance provided by IDA and other donors. Protection against the risk of low recovery of receivables is provided by Government's assurances concerning arrears settlement and payment of future bills as well as the improved billing and collection procedures to be implemented under the project. A sensitivity test on the rate of return (Annex 13) indicates that a combination of a 20% increase in capital expenditures and operating costs combined with a 20Z reduction in revenues, which is extremely unlikely, would reduce the estimated economic rate of return from 19% to about 10%. A two-year delay in all benefits without postponement of costs would reduce the economic rate of return to about 13%.  - 23 - Fiscal Impact 4.15 Government will get substantial revenues from the telecommunications sector without having to provide budgetary support for operations or investments. During the project implementation period, the 33% income tax is expected to generate CFAF 17.7 billion in revenues for Government. Amounts transferred to Government to subsidize OPCE (para 4.09) are estimated at CFAF 5.8 billion. In addition, SONATEL would pay duties and taxes equivalent to 40% of the c.i.f. value of imported equipment (about CFAF 12.8 billion) during the project implementation period, plus an additional CFAF 2.5 billion on imported operating equipment items and services. Thus, total transfers from SONATEL to Government would be CFAF 38.8 billion ($107.8 million) during the project period. Least Cost Solution 4.16 The investment program (para 3.01) is the least cost solution for providing the planned service levels, within the constraints imposed by the configuration and technology of the existing telecommunications network. The timing and dimensioning of various elements in the system are based on accepted engineering practice with regard to selection of techniques and equipment. Environmental and Health Aspects 4.17 The project is expected to have no adverse environmental or health impacts. On the contrary, increased use of telecommunications services produces more efficient use of the transportation system, reduces environmental pollution, and promotes energy conservation. In addition, improved telecommunications services improve the delivery system for routine and emergency health services. V. RECOMMENDATIONS 5.01 During negotiations, the following assurances were obtained: (a) government will: (i) settle its arrears in accordance with the schedule stipulated in SONATEL's Performance Contract; (ii) make adequate annual budget prov