Tanzania - Second Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12444 PROJECT COMPLETION REPORT TANZANIA SECOND TnELCOMMUNICATIONS PROJECT (CREDIT 1810-TA) NOVEMBER 2, 1993 MICROGRAPHICS Report No: 12444 Type: PCR Public and Private Enterprise Division Country Department II Africa Regional Office This document has a restdcted ds oibutim and may be used by redplena only in the pertfonanae of their ,fficd duties Its contents my nt oterwise be diosed w_t Wodd Bank suthulaton.  CURRENCY AND EOUIVALENTS Currency Unit = Tanzanian Shilling (Tsh) Tsh 1 = US$ 83.72 (1987) = US$ 125.00 (1988) = US$ 192.30 (1989) = US$ 196.60 (1990) = US$ 233.90 (1991) = US$ 325.00 (1992) ABBREVIATIONS AND ACRONYMS DEL Direct Exchange Line EAC East African Community ERP Economic Recovery Program - 1986 ESAP Economic and Social Action - 1989-1992 GOT Government of the United Republic of Tanzania IDA International Development Association MTC Ministry of Transport and Communications PPF Project Preparation Facility SAP Structural Adjustment Program - 1982 TDP Total Demand Potential TPTC Tanzania Posts and Telecommunications Corporation TRP Telecoms Recovery Program FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY THE VORLD BANK WasIlngton, D.C. 20433 U.SA Office of Director-General Operations Evaluation November 2, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND TUE PRESIDENT SUBJECT: Project Completion Report on Tanzania Second Telecommunications Proiect (Credit 1810-TA) Attached is the "Project Completion Report on Tanzania - Second Telecommunications Project (Credit 1810-TA) prepared by the Africa Regional Office, with Part II prepared by the Borrower. The project's physical components were completed without major cost overrun but suffered delays due to procurement problems and turnover in project management. Modernization of billing and accounting was only partially completed due to design problems (incompatibility of computer hardware and software). Most significantly, the project failed to keep TPTC (Tanzania's PTT agency) on a sound financial footing. By 1988, TPTC had gone technically bankrupt. The Bank wvs slow to respond, did not invoke remedies and, indeed, waited until 1989 to halt processing a third project. Subsequent to the completion of the Second Project, the Government did agree on a Plan of Action to restructure TPTC's finances, under the Third Telecommunication Credit (No. 2486-TA), approved in April 1993. On balance, the project's overall outcome is rated as unsatisfactory, given TPTC's dismal financial situation throughout project implementation (an unusual occurrence in telecommunications projects). The institutional impact is rated as partial, and sustainability uncertain as it depends on the eventual c4nsolidation of TPTC's financial rehabilitation. The PCR could have been more thorough in its coverage of, intoe alia, the evolution of key operational performance indicators, most recent financial results, and the evaluation of the Bank's supervision performance. No audit is planned. Attachment I This docwmsnt has a nestricted 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.|  FOR OmCI4L USE ONLY EM12 mmtnLfro= Prefac .S Trable gf C"ontents Preface ................................. *.................. 14. Evaluation Summary ........................................... ii Part I ................................ 1 1. Project Identity ................................. 1 2. Backgrund .................................. 1 3. Project Objectives and Description ............................... 2 Sector Development Objecdves .............................. 2 Project Objectives ....................................... 2 Project Description ...................................... 2 Part A. - Rehabilitation ... . ... ............... 2 Part B.- Technical Assistance and Training. ............. 3 4. Project Design and Organization ................................ 4 5. Project Implementation .................................. 4 Credit Effectiveness and Project Start-up ............ ............. 4 Implementation Schedule ....S........ , Disbursements ........................ S Credit Allocation .S......... ....................... S 6. Project Results ....................... , . , , 6 Physical Results ...................... 6 Financial Results ...................... 6 Human Resource Development. ..................... 9 7. Project Susinabiity ......................... 9 8. Bank's Performance .................... 9 9. Bornower's Performance .................. 10 10. Project Relaonships .................. 10 11. Consulting Serices ..................... . 10 12. Project Doumetat ndDa ....D.............. 10 This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Cont.d) 13. Rate of Retun ........................ 11 14. Lesson Learned From Experience 1.... ........................... I I Part ............................ !. 12 Partt I .......................... 36 1. Related Bank Loans and/or Credits .. 2. Project Tinetable. 37 3. Credit Disbursements .38 4. Project Implementation. .......... 39 5. Project Costs (US$miilion). 4 5A. Credit Allocation ............... 4l 6. Project Results ............... 42 7. Status of Covenans ............... 43 8. Missions ............... 44 AnneL. 1. Financial Statements 4.  Second Telecommunicadons Prolect Credit 1810 TA Projlet Comtion Report 1. This report covers the Second Telecomnmunications Project in Tanzania, supported by Credit 1810-TA. The Credit for SDR 17.9 million to the United Republic of Tanzania on- lent to Tanzania Posts and Teleconmmunications Corporation (TPTC) was signed on June 16, 1987, became effective on August 12, 1987 and was closed on December 31, 1992. 2. Parts I and HI were prepared by Bank staff based on information available in the project files and information supplied by TPTC. 3. Part II has been prepared by the Borrower to give its perspective of the design, iplementation and the development impact of the project.  - ii - Ta-nznaa Second Telecom,muncaions Project Proiect Compleffon Rewrt EvqluW9_n Summslr Backrou_nd 1. Public telecommunications services in Tanzania are provided by the Tanzania Posts and Telecommunications Corporation (TPTC). TPTC is a monopolistic g3vernment owned institution responsible for operating, plannming, managing and developing of domestic an, international public teleconmnunications and postal services. Tanzania has no telecommunications manufacturing industry. The Corporation is administered by an eight- member Board of Directors, whose Chairman and Director General are appointad by the President of Tanzania. The other six members are appointed by the Minister of Communications. World Bank Involvement 2. The World Bank Group has been associated with the telecommunications sector in Tanania since 1966, first through the East African Community (EAC) and then directly with Tanzania. The Bank approved 3 loans to EAC Telecommunications Corporation; a US$13 million loan in 1967 (Ln 483-EA), a US$10.4 million loan in 1970 (Ln 675-EA) and a third loan of US$32.5 million in 1973 (Ln 914-EA). These were completed satisfactorily. The first credit to Tanzania, following the breakup of EAC in 1977, was approved *n July 1982 (Credit 1173-TA) for SDR 22.1 million (US$27 million equivalent). The credit supported an essentWial part of TPTC's 1980-86 investment program, focussing on service expansion to rural areas and expansion of the network to unserved or underserved areas at the time, both urban and nual. It also had a broad institutional objective of developing TPTC, mainly through expandin training facilities. The second project (Credit 1810-TA) for SDR 17.9 million was approved in June 1987. The Third project has been approved by the Board on April 27, 1993. project Obiectives and Descrinton 3. The project was designed to (a) addres the key institutional constraints of the sector by strengthening TPTC's management, organization, financial and engineering systems to maintain and operate the existing network, to undertake furither rehabilitation and to plan for expansion; and (b) rehabilitate key parts of the network, removing bottlenecks and imbalances to maximize capacity utilization of existing installations. 4. The project was designed in line with the TPTC's 1986-90 Investment Program within the framework of the country's Economic Recovery Program. The project's goals were to  - iii - overcome the key constraints of the sector namely, (i) lack of management skills, systems, and trained manpower; and (ii) lack of foreign exchange for essential maintenance and spares and to provide for rehabilitation and expansion. Proect Implementation 5. The project start-up was smooth and on scheduie. TPTC, by undertaking advance procurement action, avoided all initial delays. Both conditions of effectiveness namely, (i) appointment of a project coordinator and (ii) signing of the Subsidiary Agreemnent; were fulfilled on time and the Credit was made effective on August 12. 1987. Progress during the flrst two years of implementation was reasonable, with about 90% of the IDA credit being committed by the end of 1988. Since 1989, the project implementation activities started to lag behind schedule and continued to do so throughout the span of the project. The main problem with the implementation has been the inability of TPTC to rneet commitments in respect of tariff increases and capital restructuring. This eventually led to deterioration in relations between IDA and TPTC. In addition, delays due to renegotiation and re-bidding of contracts previously approved led to the postponement of the project completion by one and a half years. The closing date was first extended to June 30, 1992 and subsequently to December 31, 1992. Project Results 6. Physical results: The implementation of the physical components of the project even though delayed was as per expectations. Due to small modifications in the project in 1990, there was a reallocation of fumds (Annex SA) from some rehabilitation components (outside plant) to spares and technical assistance and training. Computerization of billing and of the financial departnent was not completed due to selection of unsuitable hardware and incompatible software. 7. Financial results: Between 1987-1989 even though TPTC was operationally sound, as a result of losses due to currency devaluation, the financial performance of the organization has been poor in terms of profitability and liquidity. Since 1988, the organization was virtually bankrupt, as highlighted by its negative equity position. The primary reasons for the dismal performance of the entity were (i) unusually high non-operating expenses like provisions and reserves in 1988; (ii) lack of appropriate tariff increases which led to decline in revenues in real terms while operating costs continued to rise with inflation; (iii) high level of outstanding bills receivable arising from inadequate collections and delays in issuing bills; and (iv) devaluation of the Tanzanian Shilling. TPITC had to bear the foreign losses on its loans which were mostly foreign currency denominated. In an effort to rectify the situation the Govermnent took over US$34 million equivalent of TPTC's loans in 1990-91. Proiect Sustainability 8. A reliable telecommunications sector is crucial to the sustained economic recovery of Tanzania. The main linkages between telecommunications and economic recovery are (i) information requirements of business and government; (ii) the cost to the economy of an unreliable telecommunications network including net external trade; (iii) the fiscal implications of an efficient telecommunications operation; and (iv) the sector's inportance as a foreign  - iv - exchange earner. Investment in the telecommunications sector therefore has to be a continuous process though not necessarily through a public sector monopoly with demonstrated inefficiency. The need for further improvement and expansion is evident and IDA jointly with ADB, EEC, Denmark, Japan and Sweden, has undertaken to finance a third telecommunications project in 1993. The Government and TPIC have taken the first steps towards restructuring TPTC and the sector. A management performance contract has been signed between TPTC and Governmnent, tariffs have been increased as per IDA's recommendations, a Fixed Assets revaluation exercise has been effectively completed in 1992, a Statement of Affairs has been prepared and the Govermnent has agreed to invest a portion of IDA's credit as equity to TPTC. Bank's Perforanc 9. Overall Bank performance has been broadly satisfactory under adverse circumstances. The Bank has mnade a positive impact on the physical and institutional development of the organization. In the design of the project, the Ba. k could not foresee the institutional difficulties that would arise in implementing tariff increases, billing ard collection and other essental programs like capital restructuring. P' taking a firm stand in 1991 regarding the preparation of the third project the Bank succeeded in convincing TPTC and Government to initiate tariff adjustments, necessary policy and institutional improvements to overhaul the telecommunications sector. Bank's support for this has also attracted cofinancing to support TPTC. Borrower's Performnce 10. During the implementation stage there were several major lapses on the part of TPTC in achieving performance indicators presented in the Stauf Appraisal Report. The most critical lapse has been in financial management rather than operational performance primarily in the areas of billing and collections and delays in increasing ta in line with inflation and late submission of unaudited and audited fnancial statements. Since the Government had the authority to increase tariffs, that tariffs were not increased as required, was not entirely TPTC's fault, however, even when TPTC was empowered to raise tariffs they did not do so effectively. Other problems included inability to complete on time action plans and implementation of capital restructuring and manpower planning. During the project period, TPITC's net profits went from Tsh 435 million to a negative TSh 10.3 million. Proiect Relationships 11. Bank relationship with the Govermment and TPTC were initially good but had deteriorated in the light of TPTC's poor performance. The relationship has now been restored as it has become clear that IDA's concerns were essentially in the company's best interests. Project Documentation and Data 12. The credit and project agreements 1810-TA were adequate and appropriate for achieving project objectives in the key organizational and financial areas. The Appraisal  Report of the project provided a useful framework for the Bank and TPTC to review implementation. TP1TC provided regular progress reports on implementation during 1987- 1990 after which time they were delayed and infrequent. Lesson Learned From Experience 13. The most important lesson that has been learned from this project is that unless Public Enterptises are held to strict operational and financial target. 4 .y will have little incentive to take the often painful managerial measures to achieve efficieiu;y and profitability. In this project most of the components of the project were committed within the first two years, and the borrower had almost no incentive subsequently to fulfill conditionalities. In fact, it was only because IDA took a firm stand to suspend processing the third project that many of the critical elements like capital restructuring and tariff increases have been achieved. In addition, for improved efficiency there is a need for increased financial and managerial autonomy for the operating entity.  Ta~nznia Second Tel-conuunicatons Prolc Credit 1810 TA fpiect Comnlilon Renort 1. Project Identi_y 1.01 Title Second Telecommunications Project Credit No 1810 - TA RVP Unit AFR Country Tanzania Sector AF2PE Subsector Telecommunications 2. * Bk a Mk 2.01 Public telecommunications services in Tanzania are provided by the Tanzania Posts and Telecomnumications Corporation (TPTC). TPTC was established by the Tanzan Posts and Teleomunications Corporation Act of December 2, 1977, following the break-up of the East African Community. TPC is a monopolistc government owned insutution responsible for operating, plaming, managing and developing domestic and inttional public telecommunications and postal serices. In addition to the public telecommunications services, dedicated networks exist to meet the specialized requiements of the police, military, rai'ways, and civil aviation. Other private users also operate radio call services in areas inadequately served by public networks. Tanzania has no telecommunicatons manufacuring industry. The Corporation is administered by an eight-member Board of Directors, whose Chairman and Director General are appointed by the President of Tanania. The other six members are appointed by the Minister of Communications. The current organizational structure is attached as Annex 1. 2.02 The World Bank Group has been associated with the telecommunications sector in Tanzania since 1966, first through the East African Community (EAC) and then directly with Tanzania. The Bank approved 3 loans to EAC Telecomnmnications Corporation; a US$13 million loan in 1967 (Ln 483-EA), a US$10.4 million loan in 1970 (Ln 675-EA) and a third loan of US$32.5 milion in 1973 (Ln 914-EA). These were crompleted satisfactorily. The first credit to Tanzania, following the breakup of EAC in 1977, was approved in July 1982 (Credit 1173-TA) for SDR 22.1 million (US$27 million equivalent). The credit supported an essental part of TPITC's 1980-86 invesment program, focussing on service expansion to rural areas and expansion of the network to unserved or undereved areas at the time, both urban and rral. It also had a broad institutional objective of developing TPTC, mainly through  2- expanding training facilities. This project was closed on June 1987. 18 months behind schedule (PCR dated May 17, 1990 Report No. 8662). The second project (Credit 1810-TA) for SDR 17.9 million was approved in June 1987. The Third project has been approved by the Board on April 27, 1993. 3. Project Objectives and Description 3.01 Sector Development ObJectives: Having realized the crucial importance of the teleconununications sector to the Government of Tanzania's (GOT) overall Economic Recovery Program, and in particular, to achieve the targeted growth in exports and increased efficiencies in all sectors, the main telecommunications sector goais were to: (a) increase operational efficiency and quality of service through network rehabilitation, introduction of an effective maintenance program and improved management systems, and staff development. (b) ensure that revenues cover operating costs and contribute significantly to investments; (c) generate revenues for the Government; and (d) extend service to the rural areas. 3.02 Proiect Objecives The project was designed to address the constraints of the sector by: (a) Sw,ngthening TPTC's mnangement, organization, financial and engineering systems to maintain and operate the existing network, to underake further rehabilitation and to plan for expansion; and (b) rehabilitating key parts of the network, removing bottlenecks and imbalance to maximize capacity utilization of existing installations. 3.03 oect esariimiDn The project comprised of the following components: Part A. - Rehabilitation: (a) Provision of equipment for rehabilitation of local cable networkm and subscriber facilities; (b) replacement of worn out or obsolete switching and transmission equipment, including marginal expansion where justified by subsntial excess demand; (c) installation of new transit exchanges for local and interational traffic and a satellite earth station for international services;  -3- (d) upgrading of maintenance facilities by providing tool and test equipment. spare parts and specialized vehicles, training equipment. upgrading the stores and the repair facilities in workshops; and (e) upgrading the computer facilities for: (i) introduction of management information systems; and (ii) automation of local cable and subscriber data to ensure optimum utilization of existing resources. Part B. - Technical Assistance and Training: (a) strengthening TPTC's organizational structure and management systems; (b) strengthening TPTC's training programs; and (c) overseas training for about 40 staff; 3.04 The project had been conceived to (a) rehabilitate the country-wide long distance networks (46% of the total Project costs); (b) rehabilitate local networks (35%); (c) improve international facilities (12%); and (d) enhance TPTC's management capabilities (7%). 3.05 The total cost of the program was estimated at Tsh 3,575 million (US$65 million) with a foreign exchange component of Tsh 2,860 million (US$ 52 million). The sources of financing are summarized in Table 3.1 below. The project's foreign exchange costs of US$49.0 million would be financed by ADF, Italian Aid, Japan and Swedish Govermnent Aid and the IDA credit. Local currency financing, estimated at US$11.0 million equivalent would be financed by TPTC through internally generated funds.  - 4- Table 3.1 - Project Financing (USS millions) Local Foreign Total % of Total IDA - 23 23 39 ADF - 5 5 8 Italy - t0 10 17 Sweden - 11 11 18 TPTC 11 - - 18 Total 11 49 60 100 4. Projiect Design and Organization 4.01 The project was designed in line with TPTC's 1986-90 Investment Program within the framework of the Economic Recovery Program and consistent with the sector goals. The project rehabilitation and implementation of works were a continuation of the First Telecomnications Project. The project was designed to address and overcome the key constraints of the sector namely: (i) Lack of Magemem skills. svstems and trained manpower throughout the organization. Particular weaknesses were identified in manpower planning, budgeting and cost control, maintenance, customer services and data processing capabilites. Under a PPF of US$581,000 approved in November 1986, consultants were employed to do a comprehensive review of the organization and management in the administrative, technical and financial disciplines and remmend correctve measures. Based on the consultants recommendations technical assistance amounting to 140 man- months was provided under the project for implemention according to the action plan agreed during negotiations. It was agreed that TPTC with the assistance of the consultants, prepare an action plan by December 1987 and commence implementation of the recommended measures through (a) resmtrcring of its organizaton structure and management procedures: (b) establishing profit centers; and (c) contracting out those activities which can be handled more efficiently by other external agencies. (ii) Lack of forejan exchan,e: TPTC's limited access to foreign exchange had resulted in severe shortages of essentWa spare parts and routine operational requiements. As a result, the quality of service had continued to decline in most areas. The project was designed. to provide foreign exchange to meet the urgent reqments of services, equipment and matials for rehabilitation and maintenance and to establish sufficient stock levels for project implementation and to achieve a minium inventory level of six months by the project completion targeted to be December 31, 1990. 5. Project Inplementation 5.01 Credit Effectiveness and Proiect Start-up: To minimize possible delays, advance procurement activity had been unetaken by TPTC, including IDA's review of all  - 5 - procurement packages it would finance. By April 30. 1987. TPTC had finalized and submitted to IDA for review and clearance. bid documents for 50% (by value) pf IDA financed items. The two conditions of effectiveness for the project were: (a) TPTC and the Government to sign a subsidiary loan agreement acceptable to IDA, whereby US$23 million equivalent of the proceeds of tic IDA credit would be onlent to TPTC at 7.92% for 20 years with TPTC bearing the foreign exchange risks and including 4 years of grace; and (b) a project coordinator to be appointed under the terms of reference and conditions of service to be agreed between TPTC and IDA. Given (i) the early progress made with procurement arrangement and (ii) the experience gained in the sector under the First project, the project was expected to be completed by December 31, 1990. 5.02 The Project Coordinator was appointed in May 1987 and the Subsidiary Agreement between GOT and TPTC was signed in August 1987. Both conditions being fulfilled without delays, the credit was made effective on August 12, 1987 as per schedule. 5.03 Implementation Schedule: Progress during the first year of implementation was very good. 60% of the IDA credit was conmmitted by June 1988 with tenders being anmounced for another 30%. Since 1989, the project implementation activities started to lag behind schedule and continued to do so throughout the span of the project. Delays due to renegotiation and re-bidding of contracts previously approved led to the postponement of the project compledon by one and a half years. According to Para 2.03 of the Development Credit Agreement the Project Closing date was determined to be June 30, 1991. On April 10, 1991 the closing date was extended to June 30, 1992 upon the request of the Government of Tanzania. On June 26, 1992, in order to facilitate the execution of committed contracts, the closing date was further extended to December 31, 1992. The main reasons for the lag in project implementation were: (i) The Project Coordinator left TPTC 18 months after the project commenced; (ii) even though about 90% of the physical components were committed and cleared by IDA, TPTC's Board of Directors, decided to renegotiate a number of such contracts and in some cases re-bid; and (iii) the Board did not approve any tariff increases between March 1990 and October 1991. Issues (ii) and (iii) finally led to the deterioration of relations between TPTC and IDA in 1991. One problem that TPTC and the Bank supervision mission faced through the implementation period of the project was that the Minister of Communications was replaced five times and therefore a stable relationship with him could not be built up. 5.04 12isbureme: Disbursement had been as per schedule during the first two years of the Project. Progress on procurement, disbursement and tariff increases during this period allowed a rating of 1. Since 1990, disbursements have been constantly lagging and because of delays in processing procuremen documentation, the project completion date had to be extended twice. The project rating was dropped to 3 during 1990-92. Although the appraisal report stated that disburement would be made through FY95 based on standard disbursement schedules for Tanzania, during negotiations it was agreed that the project would be completed by June 1991, by which time disburement would be conpleted. 5.05 Credit All : The original and revised allocation and the actual disbursement by categories for Credit 1810-TA are shown in Part m. The original allocation was revised on November 10, 1988 to reflect the changes in increased financing for equipment and spares and consultants and training.  -6- 6. Proiect Results 6.01 Physical Results: Even though physical implementation of the project has been according to expectation. the execution became slow and in some cases unproductive. For exampJe. the Wang computer installud for improving the financial data processing was ineffective because of the obsolescence of its tectmology by the time it was installed. In addition, the software that was installed was not totally compatible. As a result, the computer is being discarded and a new system is being reconumended under the IDA-111 project. The following progress had been made under the project: (i, Cables and accessories for rehabilitation of the outside plant for which US$4 million had been allocated initially and subsequently changed to US$2.1 million has been disbursed and implemented; spares were procured for switches, microwave systems., power and air-conditioning equipment; (ii) 1,000 line digital exchanges were installed in Mtwara and Singida in 1992-93; (iii) New digital exchanges have been installed in Tanga and Moshi and additional trunk lines installed in other regions. (iv) Terminal equipment consisting of 19,000 sets, 420 telex terminals, 140 payphones and 315 switchboards were installed in 1990-92; (v) Call logging equipment (the "tiger" system) were installed in the international exchanges; 6.02 Financial Results: During the period between FY85-91 the financial performance of TPTC was poor both in terms of cash flows and net profitability. TPTC's dramatic deterioration in performance is highlighted by the change in earnings during this period. From a net profit of Tsh 435 million in 1985, profitability declined to a net loss of Tsh 10,295 million in 1989. The financial statements of TPTC are attached as Annex 2. During the period 1987-89 the operational performance was up to expectations but due to foreign exchange losses and interest on loans, the net profitability declined. Some financial indicators are presented in the following table:  - 7 - Income Statements (Tshs Million) 198S 1986 1987 1988 1989 1990 1991 Telephone 1,148 1.343 2.420 3,536 4.909 8.098 9.457 Telex 170 276 560 1.019 1.934 2.680 2,445 Telegraph 27 87 53 77 78 78 99 Other Revenue 8 301 101 224 227 250 403 Telecoms Opera Revenue 1,353 2,007 3,134 4.855 7,148 11.106 12.404 Tdecoms Operating Expesem 631 1,624 2,453 3.701 5,173 8,630 14,600 Net Telecoms Operadng Income 7r2 383 681 1.155 1,975 2,476 (2.196) Net Postal Operating Income (Loss) 26 (34) 7 10 (37) (254) (412) Less: Interest on Loans 14 56 309 255 3,615 1.456 795 Foreign Exchange Gain (Loss) (48) (2,328) (3,705) (2,650) (5.269) (494) (358) Net Profit (Loss) 435 (2,146) (4,666) (6,272)(10.295) (228) (3,761) 6.03 The main reasons for the dismal performance of TPTC were: (a) The lack of appropriate tariff adjustment measures from 1990 onwards to overcome the high rate of inflation and the devaluation of the Tanzanian Shilling. Whereas inflation over the 6 year period 1985-91 was around 1,000% and whereas the Tanzanian Shilling devalued from an exchange rate of Tsh 16,50 = US$1 in 1985 to Tsh 225 = US$1 in 1991, tariff increases amounted to only 300% over the same period. As a result of the imbalance between increases in costs and revenues, operaton and maintenance expenses increased from 14% of gross operating revenues (GOR) in 1985 to around 76% in 1991. (b) High level of bills receivables continue to be a major bottleneck to the liquidity position of the organization. In 1987, bills receivables amounted to the equivalent of 569 days of revenues, resulting in a negative internal cash generation of Tsh 3,064 million. The shortage of liquidity and short term financing led to negative working capital during the period 1988-91, which has in turn impeded maintenance and routine operations. The shortfall in worldng capital is reflected by the decliing curren ratio from 2.3 in 1985 to 0.6 in 1991. The high level of receivables is the result of (i) poor collections policy and (ii) delays in billing. A major objective of the IDA II project was to institute an effective billing and collections system. IDA supervision missions had during 1987-89 made regular 80/20 analyses to implement a incentive based collections procedure for the higher-revenue yielding 20% of the customers. Consultants had made various recommendatons, however the recommendations were never effectively incorporated over any reasonable period. In 1990, a collections policy was in effect and efforts were made to visit customers (including visits by supervision missions) with substanial oustandings and a disconnecton policy was approved but never stricdy enforced. By early 1991 since the measures were not consistently implemented the collections policy did not achieve  expected results. During 1990-92 the billing system deteriorated further to the extent that the amount of outstanding debts to TPTC could not be ascertained with any level of accuracy. The issue was highlighted in the Auditors Report of 199f. Under the IDA III project, a study is underway to determine accurately the level of outstanding bills receivables. (c) In addition to poor collections and delays in billing, there is a high level of non-billing present in the sector. It appears that at least 30% of the traffic goes unbilled. This problem had been highlighted in IDA supervision reports and recommendations to improve the situation were made in 1990. Under the IDA II project, funding was made available to finance the "Tiger" systern, which had been effectively used in many countries to overcome the problem. Even though the system was installed in 1991, its impact was not up to expectations. It is apparent that non-billing continues to be a major hinderance to the profitability of the organization. As one of the objectives of the proposed IDA III project, technical assistance will be provided to institute stringent controls on the billing and collections process. (d) The continual devaluation of the Tanzanian Shilling has probably been the most binding external constraint to the financial deterioration of the entity. Sectors such as telecommunications, where the foreign currency component of capital expenditure is almost 80% of the investment program, have been most seriously impacted. In TPTC, foreign exchange losses as a result of currency devaluation increased from Tsh 48 million in 1985 to a staggering Tsh 5,269 million in 1989. The problem had been exacerbated by the refusal of the Treasury to accept TPTC's request to make debt service payments to the Treasury in local currency. If accepted this would have produced a completely different performance scenaro for the entity. The issue of carrency had been addressed in the IDA U project from the appraisal stage. TPTC was required to present to IDA a proposal for restructuring by December 31, 1988. However, no proposals were prepared until 1990 when the Bank took a position to discontinue processing the IDA m credit unless a restructuring proposal was presented. Only the organization's debt has been restrctred. As part of the restructuring process the Govermnent assumed US$34 million equivalent of TPTC's debt. This considerably improved the financial situation, reducing foreign losses from Tsh 5,269 million in 1989 to Tsh 494 million in 1990 and Tsh 358 in 1991. TPTC will be completely restructred under the IDA m project to maintain a Debt Equity ratio of 1.5 from the dtird year of effectiveness. 6.04 It is worth noting that although operating expenses increased, expenses on salaries and wages actally declined from 19% of GOR In 1985 to 13.3% in 1989. The failure to increase staff compensation in the face of hyperinfiation led to a demoralized work-force and therefore substantal inefficiencies crept into the organization which further affected the organiztion's performance. Under the IDA II project, TPTC was required to institute an incentive scheme to improve performance. The scheme was introduced in 1990 on an experimental basis in certain regions for a short period. The scheme did not prove successful becuse of the inability to meas=ue performance for the operational/engineering staff and therefore was abandoned shortly thereafter. In 1992 an incetive scheme has been introduced which appears  -9- to be successful. Approximately 30% of the staff have received bonuses during the first 2 months of the program. 6.05 The financial situation of TPTC reached its lowest ebb in 1989, when it was technically bankrupt. The Organization had a net negative equity of Tsh 19.456 million comprised primarily of accumulated losses amounting to Tsh 22,734 million. 6.06 Throughout most of the project period it was never possible to take any corrective action based on the rate of return and self financing indicators as all financial and accounting data or information was always too late. This constraint, highlighted during the completion report of the First IDA project, was addressed during the first year of inplementation of the IDA II project through employrnent of consultants. The Rate of Return on Fixed Assets (of at east 12%) as defincd by IDA, covenanted in the Project Agreement was complied with. It must be mentioned that this rate of return as calculated umder IDA's prescription does not take into account interest on loans and more importantly, foreign exchange losses. Since 1990, financial statements have been consistently delayed and inaccurate (as reported by the external Auditors). 6.07 Human Resource Developmen: The project by supporting the telecommunications training institutions in Tanzania and through various fellowships and tramining programs overseas contributed to considerable strengthening of the human resource support of TPTC. Under the IDA II project about 28 officials have been provided overseas training and about 120 staff-months of consultants have been funded to provide training in Tanzania. Also, about 17 fellowships were offered courses in management of training functions and about 4 fellowships in post graduate studies in telecoms technology and management. Hardware and software for PC trainng system have been installed. Training equipment for satellite comnmnications was procured but has not yet been installed. 7. Project Sustainabilitv 7.01 A reliable telecommunications sector is crucial to the sustained economic recovery of Tanzania, The main linkages between telecommunications and economic recovery are (i) information requirements of business and government; (ii) the cost to the economy of an unreliable telecommunications network; (iii) the fiscal implications of an efficient telecommunications opertion; and (iv) the sector's importance as a foreign exchange earner. Investment in the telecommunications sector therefore has to be continuous process. 8. Bank's Perfonnance 8.01 Despite the Bank's best efforts the Borrower's financial performance deteriorated and it went into bankruptcy over the project period. The Bank has made a positive impact on the physical and instiutonal development of organizaion. In the design of the project, the Bank could not have foreseen the insttutional difficulties that arose in implementing tariff increases and other essential program like capital restucring, however, by taking a firm stand in 1991 to suspend processing the third project wi61 the backing of major donors, it was able to institute the necessary policies and agreement through conditionalities requisite for the preparation of the third project. Bank's support for this has also attracted cofinancig to support the IDA II and HI projects.  - 10- 9. Borrower's Performance 9.01 There have been several major lapses on the part of TPTC in achieving performance indicators presented in the Staff Appraisai Report. During the project period, TPTC's net profits went from Tsh 435 million to a negative TSh 10.3 million. Annex 3 contains the review of TPTC's performance in comparison to the performance indicators mentioned in Annex 12 of the SAR. The most critical lapse has been in financial management rather than operational performance primarily in the area of billing and collections and delays in increasing tariffs in line with inflation and late submission of unaudited and audited financial statements. Since only the Government had the authority to increase tariffs, it was not entirely TPTC's fault that tariffs were not increased as required, however, even when TPTC was empowered to raise tariffs they did not do so effectively. Oth'er problems included inability to complete on time, action plans and implementation of capital restructuring and manpower planning. 10. Proiect Relationships Bank relationship with the Government and TPTC were initially good but had deteriorated in the light of TPITC's poor perfonnance. The relationship has now been restored as it has become clear that IDA's concerns were essentially in the company's best interests. 11. Consulting Servic 11.01 Consultancy services and technical assistance comprised about 13% of the IDA credit. Consultants were initially employed under the PPF to undertake a comprehensive review of the organization and management in the adnministrative, technical and financial disciplines, identifying weaknesses, and have recommended corrective measures. The assignment was completed in 1987 and formed the basis for an institutional restructuring, manpower and training program for the project. During the implementation of the Project, consultants were employed to provide assistance for engineering activities, namely project planning, Materials Management and data processing capabilities. The assignment covered transfer of managerial expertise to TPTC. The consultants' performance in the implementation of billing and financial systems had been less than acceptable. This was because of the lack of coordination between the consultants and TPTC. As a result, the financial and billing systems were not effectively established and has been earmarked for re-implementation under the THird Credit. Consultants were effectively employed in performiing Fixed Assets revaluation which was completed in 1992. 12. Proiect Documentation and Data 12.01 The credit and project agreements 1810-TA were appropriate for achieving project objectives in the key organizational and financial areas. The Appraisal Report of the project provided a useful framework for the Bank and TPTC to review implementation. TPTC provided regular progress reports on implementation during 1987-1990 after which time they were delayed and infrequent.  13. Rate of Return 13.01 The rate of return for the project is as follows: 1987 1988 1989 l92Q Rate of Return on Revalued Fixed Assets 11% 11% 12% 16% The calculations are based on expected revalued cost of assets at US$1,500 per connected Direct Exchange Line. The rate of return is in compliance with IDA's expected rate of return of 12%. 14. Lesson Learned From Experience 14.01 The most important lesson that has been learned from this project is that unless Public Enterprises are held to meeting strict operational and financial targets, they will have little incentive to take the often painful managerial measures to achieve efficiency and profitability. In this project since most of the components of the project were committed within the first two years, the borrower had almost no incentive to fulfill conditionalities. In fact, it was only because IDA took a firm stand to suspend processing the third project that many of the critical elements like capital restructuring and tariff increases have been achieved. This project also provides evidence of problems that may arise in fast disbursing projects. Another important lesson that is learned from the project is the importance of regular tariff adjustments in line with inflation for the sustained financial viability of the telecommunications sector.  - 12 - TANZANIA SECOND TELECOMMUNICATIONS PROJECT (Credit 1810-TA) PROJECT COMPLETION REPORT PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 1. PREFAC PA RT 1 - This Project-Completion -Report. (PCR) presents a review of Credit 1810 - TA of SDR 17.9 Million (USS 23.0 million equivalent) for the Second Telecommunications Project of the Tanzania Posts and Telecommunications Corporation (TPTC) for telecommunication development. Credit 1810 - TA was approved and was declared effective in August 1987 and was closed in December 1992, 12 months behind schedule. The PCR is based. interalia, on the Staff Appraisal Report; the Credit, Guarantee, and Project Agreements. supervision reports; correspondence between the Bank and the Borrower 2. EVALUAT&IQp SMABX 2.1 OB ECTIVUS The current deteriorated state of the Tanzanian telecommunications network and consequent poor quality of all telecommunications services are severe constraints on Tanzanian economic development, particularly of the agricultural and other productive sectors which play a key role in the Tanzanian economy. The project aimed at reducing these constraints through rehabilitation, building up the supply of spares, and limited expansion of physical facilities to improve overall performance and to ensure that the now and rehabilitated assets were maint;ined. A further objective is the institutional development of TPTC, with special emphasis on utilisation of financial and technical tools to improve management performance and efficiency. 2.2 JIumemntatlon Exoerience Substantial delays in loan effectiveness were caused initially by loan disbursement process/procedure to Tanzania. This was however later streamlined, by greation of special A-c'bynt in Deutsche Bank, New York, Branch. The project: was .. -~--'--j b* in December, 1992 about a year behind the original appraisal schedule. Delays in civil worht and lack of cables for Moshi and Tanga delayed the completion of outside plant works. In this case, the local cable ne,tworks a substantial part of cables and accessories under the project were utilised for rehabilitation, operation and maintenance due to lack of foreign exchange for this purpose.  - 13 - Despite these factors, TPTC's efforts in successfully processing procurement and in the executing the project components resulted in timely implementation of the project. 2.3 Besult The projects physical targets were achieved as planned. The financial perform4nce of TPTC over the project period (1987 - 92) was satisfactory. The tariff raise and TPTC's subsequent action incorporating a trigger mechanism linking international tariffs, to currency devaluation has helped TPTC's financial performance.  - 14 - THE PJROET_ 1. BBGON TPTC was established by the Tanzani3 Posts and Telecommunications Corporation Act of December 2. 1977,- following the break-up of the East African Community. TPTC is an autonomous government - owned public corporation responsible for all domestic and international postal and telecommunications services in Tanzania. It commenced operations on February 3, 1978. In addition to the public telecommunications network operated by TPTC, dedicated networks exist to meet the specialized requirements of the police, military, railway and civil aviation services. Private users are licenses to operate radio link services in areas inadeqgately served by the public network. Tanzania has no telecommunications manufacturing industry. TPTC is responsible for the establishment expansion' operation and maintenance of all local, national and international telecommunication services. The national development plans give priority to rural development and dispersal of the development efforts. In accordance with national objectives, TPTC directs its yearly investment programes towards improving the poor quality of existing services and addressing the heavy demand for new telephone connections to provide access to the Telecommunications network. 2. PIIQJT OJETIVESf AND DESCRI 2.1 Proiect obiectives The current deteriorated state of the Tanzanian telecommunications netw7rk and consequent poor quality of all telecommunications services are severe constraints on Tanzanian economic development, particularly of the agricultural and productive sectors which play a key role in the Tanzanian economy. The project aims at reducing these constraints through rehabilitation, building up the supply of spares, and limited expansion of physical facilities to improve overall performance and to ensure that the new And rehabilitated assets are maintained. A further objective is the institutional development of TPTC, with special emphasis on utilisation of financial and technical tools to improve management perfomance and efficiency.  - 15 - 2.3 Prolect Description The prolect comorises: a) Rehabilitation of cables and subscriber dist ribution networks and provision of equipment to relieve traffic congestion to improve quality of service; b) Upgrading of maintenance by: i) strengthening maintenance units; ii) upgrading stores, garage and workshops; iii) providing tools, instruments, spare parts and specialised vehicles. iv) partial financing of recurrent maintenance costs; c) Provision of ancillary equipment, power and airconditioning; computer hardware and software, civil works materials and training equipment. d) Provision of fellowships and staff training. e) Provision of consultant services to enhance TPTC's capabilities in project planning, monitoring and control; equipment installation, operational and maintenance; finance and accounting; stores and material management.  - 16 - 3. S?AFP A31? AND PEMSC= FINANCIN The World Bank Staff Appraisal Report No.6728 - TA of 5th May, 1987 is the blueprint of the project. The size of the project and the cost by category is a shown below:- . ~ MILLION USi ITEN LOCAL FOREIGN TOTAL COST COST 1. Local cable Network 2.0 6.3 8.3 2. Switching equipment cost 0.4 13.7 14.1 components and spares 3. Radio and Transmission 0.4 5.5 5.9 Equipment, Components and spares 4. Tolephones, Teleprinters 0.6 3.2 3.8 and switchboards S. Earth Station 0.4 9.2 9.6 6. Vehicles, Power Plants. Airconditioning, Repair 3.S 3.2 6.7 Centre, Workshop equipment, training equipment, Civil works, Materials and . _ . spares. 7. Technical Assistance and 0.3 3.4 3.7 TraininS 8. Physical Continsencies 0.4 2.2 2.6 9. Price Contingencies 0.3 2.3 5.3 TOTAL PROJECTS COST. 11.0 49.0 40.0 In conceiving the Second Telecommunications Project, the Worid Bank Staff Appraisal Report looked at the total network requtrement first. Projects which could attract bilateral aid/loan were identified and IDA undertook to finance the remaining projects which although could not a-.ract bilateral aid/loan are ndcessary projects for efficient performance of the total network.  - 17 - The project financing is distributed as follows:- MILLION USS SOURCE __________ LOCAL FOREIGN TOTAL % TOTAL IDA _ 23.0 23.0 39 AfDB _ 5.0 5.0 8 ITALY - 10.0 10.0 17 SWEDEN - 11.0 11.0 18 TPTC 11.0 - 11.0 18 TOTAL 11.0 49.0 60.0 100 The project foreign costs of USS 49.0 million equivalent would be financed by AfDB, Italian Aid, Swedish Government Aid and the IDA Credit. Local currency financing, estimated at USS 11.0 million equivalent, would be provided by TPTC through internally generated funds. The IDA Credit of USS 23.0 million equivalent would be on lent to TPTC at 7.92% interes for 20 years including a 4 years grace period. The grants from SIDA and Italy will be on lent to TPTC under the same concessionary terms as to the- Government. The loan from AfDB will be on lent to TPTC on the same terms as the IDA Credit. TPTC would bear the foreign exchange risks. The execution of the subsidiary loan agreement between the Government and TPTC, acceptable to rDA is a condition of credit effectiveness. The IDA financed segment of the program comprises high priority creditical elements, particularly for spare parts, maintenance and institutional development and can stand on its own, cross effectiveness conditions are thorefore not required. M reover, the parallel financing AfDB, SIDA and the Italian -aSwernment is largely confirmed.  - 18 - 4. STATUS OF FIJNANCXXQ OF VARIOUS PQIECTS BY OTHER DONOR FIfNCIER IX THE SECOND TELECONUN ICATION PROJQC. 4.1 AIML LOAN:i USS 4,550,000 have been made available by AfDB for the procurement of two 4,000 lines each digital exchanges for Kigoma and Bukoba and for the purchase of microwave radio equipment to link Tanzania with other countries in KBO region. These are lines across the borders to Rwanda, Burundi as Uganda. KB0 was the executing agency for the Project. Fujitsu represented by Marubeni and Siemens have been the contractors for the supply of switching equipment and radio equipment respectively. The exchanges and .;adio systems have been commissioned. 4.2 ITALIAN FINANCING: Bilateral Aid Italy made available 11,270 million Liras for the supply and installation of a Standard A Earth Station, including power plant. Factory Training to six TPTC staff has been provided. The Standard A Earth Station has been commissioned. TPTC financed and constructed civil works. Also, made available funds, USS 3,766,870 for the supply and installation of Nwanza - Musoma 34mb/s digital microwave system. The equipment has been installed and it will be commissioned shortly. Also, factory training to TPTC staff has been provided. 4.3 SIDA ASSISTANCE TO TPTC During this period SIDA's assistance comprises of the following elements:- a) Consultancy contract including reimbursables related to the services as specified in the Specific Agreement. b) Pellowships/training for TPTC staff which had a direct relation to the programme. c) Import support Funds for 0,e Implementation of the SIDA/TPTC projects.  - 19 - Funds gbtained: The SIDA/TPTC Specific Agreement in cooperation amounted to MSEK 45 for training and comprised item(a) 41MSEK for Import support and item(b) 4 MSEK for consultancy. The portion of SIDA Import Support Funds to TPTC was annually agreed upon between the Treasury and SIDA. thus the amount could increase/decrease over the (four years) period of paramount impor.tance was of course TPTC's request to Treasury for such funds. The Import Support Funds was used by TPTC a follows:- a) Rehabilitation of part of Dar es Salaam Network and commissioning of Operation and Maintenance Centre (OMCI. b) Rehabilitation of Singida. Dodoma and Zanzibar networks. c) Updating of tne TPTC Development Programme - i.e. Master Plan for Telecommunications Development -Tanzania and TRP - TelecommuAications Recovery Programme. d) Importation of various telecommunication spares and upgrading the Staff College. 4.4 JAPAN: Japan has provided USS 10,0 million for the following:- i) Rehabilitation of the Dar es Salaam cable network in Oysterbay, Upanga, Government offices and President's office areas. (Phase 1) ii) Provision and installation of:- a) Container type (3000L) digital telephone exchange with standby engine at Oysterbay and a junction cable between Oysterbay and Dar es Salaam Central. b) Container type digital telephone exchanges with standby engine (7000L) at Pugu Road, (3000L) at Wageni, (1000L) at Tabata. 4.5 BDI&IDh Belgium has prov.ided (USS 6.4 million +,for the following:- i) Provision and installation of 2000 trunks Intetnational Telephone Exchange (ITE) ii) Provision and installation of 1000 line digital exchange and 34 Mbit radio link to Kigambon'i.  - 20 - 4.6 6 M: CANADA through CIDA has provided Canadian $9.7 million for providing the following:- Automatic Number Identification (ANI) equipment (exchanges to allow for International Subscriber Dialling (ISD). a) Dar-es-Salaam - 2000L b) Pugu Road - 5001 -- c) Wageni - SOOL d) Kurasini - 2000L e) Songea - IOOOL f) Iringa - IOOOL a) Dodoma - IOOOL h) Tabora - IOOOL i) Mwanza - IOOOL J) Musoma - IOOOL K) -Lindi i - IOOOL 1) Kijitonyama - 1000L m) Ubungo - IOOOL n) Msasani - 1000L a) Arusha - 1000L 4.7 FRANCE: France has provided a soft loan of 12,450,000 FF for the supply and installation of a 2000 Trunks Dodoma digital telex exchange. Training to TPTC staff has been provided and commissioning of the system is in due course. 4.8 ITU: Through ITU assistance programme, TPTC has received 29 telefax machines, and 42 PBXs. 4.9 TPTC/BANK OF TANZANIA: JYen 149,906,000 was made available for provision of a 140/Mbit radio link between Dar es salaam ( Central- Pugu Road - Wageni). 4.10 IDA - CREDIT: The second IDA Credit amounting to US 23,000,000 equivalent to SDR 17,900,000 was obtained in August, 1987. Two agreement associated with the credit. namely Development Credit Agreement (DCA) and Project Agreement (PA) were signed on 16th June, 1987 and became effective on 17th August. 1987.The credit was reallocated and used as follows:-  - 21 - SECOND TELECOMMUNICATIONS PROJECT STATUS OF CIEDIT ALLOCATION AS AT 31/12/1990 COST IN U.S.* DETAILED CATEGORY ORIOINAL AMOUNT UTILISED S5NO. DESCRIPTION ALLQ=ION RE-ALLOCATION AS AT31/12/1992 1. Cables and Accessories 4000000 2f897P00 3851311.06 a) Wooden poles 803539.00 b) Drop-wire 375534.71 c) Open wire and joining sleeves 319497.14 d) Cables & Accessories 948952.15 e) Tools and-other cable accessories 4000000 2897000 1413288.Q