India - Telecommunications Project

RESTRICTED FIE Copy Report No. P-294 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE GOVERNMENT OF INDIA FOR A TELECOMMUNICATIONS PROJECT September 7, 1962 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE GOVERNMENT OF INDIA FOR A TELECOMMUNICATIONS PROJECT 1. I submit herewith the following report and recommendations on a proposed development credit to the Government of India in an amount in various currencies equivalent to $42.0 million to assist in financing the program for rehabilita- tion, modernization and expansion of telecommunications facilities included in India's Third Five-Year Plan. PART I - HISTORICAL BACKGROUND 2. The development of the Indian economy is placing a heavy load on its communications facilities and the Third Five-Year Plan includes a substantial program to modernize and expand the country's telephone, telegraph and wireless services. Late in 1961 the Government of India asked the Association to con- sider financing part of this program and in April 1962 an Association mission, assisted by Mr. I.H. Larsen, Assistant Chief Engineer of the Danish State Telephone and Telegraph Administration, visited India to appraise the project. Negotiations with representatives of the Government of India and the Posts and Telegraphs Board took place in August. 3. The proposed credit would increase the total of the Association's credits to India to $212.5 million, made up as follows: Credit No. Purpose Amount (mllion) 3-IN National Highways 60.0 8-IN Tubewell Irrigation 6.0 13-IN Shetrunji Irrigation 4.5 14-IN Salandi Irrigation 8.0 15-IN Punjab Drainage and Flood Protection 10.0 19-IN Fourth DVC Project 18.5 21-IN Sone Irrigation 15.0 Bombay Port 18.0 23-IN Purna Irrigation 13.0 24-IN Second Koyna Power 17.5 Telecommunications 42.0 212.5 1/ 1/ Including $124.0 million not yet effective. As of July 31, 1962, $6.7 million had been disbursed. - 2 - The Bank has now made 30 loans for projects in India. Their status as of July 31, 1962 was as follows: ($ Million) Total loans, net of cancellations 817.4 of which has been repaid 98.5 Total now outstanding 718.9 Amount sold 66.5 of which has been repaid 45.2 21.3 Net amount held by the Bank 697.6 1/ Including $19.5 million not yet effective and $167.6 million not yet disbursed. PART II - DESCRIPTION OF THE PROPOSED CREDIT 4. The main features of the proposed credit are as follows: Purpose: To finance part of the foreign exchange cost of the telecommunications development program in the Third Five-Year Plan. Borrower: India, acting by its President. Amount: The equivalent in various currencies of $42 million. Term of Amortization: The term of the credit would be 50 years with a grace period of 10 years. From March 1, 1973, one-half of one per cent of the principal amount would be repayable semi-annually for ten years, and one-and- one-half per cent would be repayable semi-annually commencing March 1, 1983 and ending September 1, 2012. Payment Dates: March 1 and September 1. - 3 - PART III - APPRAISAL OF THE PROPOSED CREDIT The Project 5. A detailed appraisal of the project (TO-342b) is attached (No.1). 6. As is natural in a developing economy, the use of telecommunication services has been expanding rapidly in India in recent years. During the first two Five-Year Plans, for instance, the number of trunk calls handled increased by five times and the number of telegrams handled by about 43 per cent. Yet, despite the substantial increases in capacity carried out, telephone and telegraph services in India are still far below the Asian average and are quite inadequate to meet present commercial and industrial demand. The Third Five-Year Program is designed to provide a substantial part of the highest priority needs, but because of the financial limitations on it the program is not expected to meet fully the demands which will be placed upon the telecommunications system by the end of the Plan. In order to reduce the foreign exchange cost of expanding its telecommunication service, India is manufacturing an increasing amount of the equipment required. At present various types of telecommunications equipment and parts are being manufactured by the government-owned Indian Telephone Industries (automatic exchange equipment), the Hindustan Cables Ltd. (underground cables and coaxial cables), the Teleprinter Factory (tele- printers) and various departmental workshops (switchboards and open-wire pole route fittings). 7. The project consists of India's program in the Third Five-Year Plan for the rehabilitation, modernization and expansion of the urban and inter- urban telephone services, telegraph services and telecommunications facilities for the Indian State Railways. The urban telephone networks are to be expanded by increasing the number of subscriber sets from 461,000 to 761,000 and by increasing the capacity of the central exchanges from 412,000 to 758,100 lines. The inter-urban telephone network will be improved and expanded with ten new trunk automatic exchanges and a number of manual exchanges. Coaxial cables will be completed between several major cities; the length of coaxial cables will be increased from about 500 km to over 7,000 km. In addition, the network of pole lines will be extended, About 2,000 new telegraph offices will be constructed and about 3,100 teleprinters will be installed, of which more than half will be on subscribers' premises. 8. The program will be carried out by the Telecommunications Branch of the Posts and Telegraphs Department under the Ministry of Transport and Communications. The organization has a competent technical staff and should have no difficulty in carrying out the program. The Association proposes to assist in the selection of and financing the cost of consultants who would review the accounting practices of the Telecommunications Branch and make recommendations for improvements in budgeting, control and other accounting practices. 91 The financial allocation for the telecommunications investment pro- gram in the Third Plan is now set at about $280 million. Of this amount, a substantial part, equivalent to about $120 million or over 40 per cent, will be provided from the Branch's own resources. The direct foreign currency cost, for imported equipment, is estimated to be about $62 million and the indirect foreign exchange cost, covering materials and components for the plants manufacturing telephone equipment in India, about $40 million. The proposed IDA credit is intended to finance the direct foreign exchange cost of the program for the two fiscal years from April 1, 1962. 10. Funds for capital investment required in addition to those provided from retained earnings are made available from the general revenues of India as capital-at-charge, which in effect becomes a permanent investment. By conventions agreed periodically between the Posts and Telegraphs Depart- ment and the Ministry of Finance - similar to those agreed for Indian Railways - the Department pays into the general revenues a contribution in lieu of interest on the capital-at-charge. This contribution is fixed by the convention for the five years from April 1, 1961 at 44 per cent. The proceeds of the proposed credit would be made available to the Department as part of the Government's contribution to capital-at-charge. 11. All the goods to be financed under the proposed credit would be procured on the basis of international competitive bidding. Particular attention will be paid to the selection and procurement of the new automatic central exchange equipment since the type chosen will be standardized for the next 10-15 years. The Posts and Telegraphs Department intends to manufacture the same equipment in India and it will ask the foreign supplier of the equipment to submit an offer not only to supply the equip- ment but also to include the licence for its manufacture in India and to provide the requisit technical assistance. The Economy 12. A summary of India's current economic position was included in my Report and Recommendations (IDA/R62-13) of July 3, 1962, on a proposed development credit to India for the Port of Bombay project. PART IV - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 13. Attached is a draft Development Credit Agreement between India and the Association (No.2). This conforms generally to the pattern of Associa- tion credits. 14. Pursuant to Section 5.02 of the Development Credit Agreement India will cause rates for its telecommunications operations to be set at such levels that the revenues provided will not fall below those sufficient to cover all operating expenses and to meet a reasonable portion of the cost of expanding its telecommunications facilities. With reference to this section the Association advises India in a letter (No.3) that, under the present circumstances, an amount not less than 35 per cent of the cost of expanding such facilities would be considered a reasonable share. The adequacy of the rates would be verified annually using a 4-year average comprising the two years prior to and the two years following the close of each fiscal year and provision is made for the percentage to be adjusted from time to time by agreement between the Association and India. 15. The recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association is attached (No.4). PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 16. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMqENDATIONS 17. I recommend that the Association make available a Development Credit to India in an amount in various currencies equivalent to $42.0 million for a total term of 50 years with service charge of 3/4 of 1 per cent per annum and on such other terms as are specified in the draft Development Credit Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D.C. September 7, 1962