Ghana - Telecommunications Sector Investment Project

Report No. PIC1567 Project Name Ghana-Telecommunications Sector Investment Project Region Africa Sector Telecommunications Project ID GHPA919 Borrower Government of Ghana Implementing Agencies Ministry of Transport and Communications P.O. Box M38 Accra, Ghana Telephone: 233 21 669986 Telefax: 233 21 667114 Ghana Posts and Telecommunications Corporation Head Office Accra North, Ghana Telephone: 233 21 221001 Telefax: 233 21 667979 Date PID Prepared January 1995 Projected Appraisal date December 1995 Projected Board date July 1996 1. Country and Sector Background. Following the introduction of the Economic Recovery Program in 1983, Ghana enjoyed a number of years of reasonable economic growth (around 5t per annum). The Government wishes to accelerate the pace of this growth. The Country Assistance Strategy identifies greater participation by the private sector in the economy as critical to meeting this objective. It notes that it is imperative to lay the foundations now in terms of investment in education, infrastructure and access to technology, which have long gestation periods. The absence of an efficient telecommunications sector has long been identified as a major constraint on economic development. 2. Ghana Posts and Telecommunications Corporation (P&T) is the state- owned monopoly provider of all telecommunications services, with the exception of cellular. The Ministry of Transport and Communications (MOTC) has overall responsibility for the sector. Licenses have been granted to six cellular operators. One is now operational and a second is expected to commence shortly. 3. The Bank's involvement in the telecommunications sector in Ghana began in 1971. A loan agreement (No. 1122-GH) for $23 million for the First Telecommunications Project was signed in 1975 with the aim of improving service quality, extending services and strengthening the newly created P&T. The project failed to meet all of its objectives mainly due to the difficult economic conditions in the country during the implementation period and management and financial weaknesses within P&T.  4. With the change of environment accompanying the Economic Recovery Program, the Second Telecommunications Project commenced in 1988 when a credit agreement (No. 1946-GH) for SDR 13.8 million was signed. The objectives were to (i) assist P&T with the implementation of its investment program for the period 1987 to 1992 through rehabilitation and expansion of the network; and (ii) support a program of institutional and management improvements in the sector. Co-financiers from Japan, France and the Netherlands were to contribute a further $133 million, mainly for network expansion. The project aimed to modernize much of the existing network and to expand network capacity from 56,000 lines to 76,000 lines. To date, some of the objectives have been achieved, with the installation of a new international telephone exchange, the rehabilitation of the satellite earth station for international service and rehabilitation of various exchanges and external cable network. The closing date has been extended by two years to June 30, 1995 due mainly to delays in appointing the project management consultants, but also in procurement of the co-financed components. 5. Meanwhile, the gap between demand and supply has grown (estimates of the additional lines needed to the end of the decade are upwards of 300,000 compared to 50,000 connected lines at present), service quality remains poor and P&T's institutional capacity and financial position continue to be very weak. Its excessive level of indebtedness needs to be reduced to restore financial viability. The Government recognizes that the existing sector structure has failed to deliver. Over the past two years, the Bank Group has helped the Government to formulate its strategy to improve performance of the sector, including defining the appropriate regulatory framework and institutions. Extensive consultation has taken place with beneficiaries and donors, partly through workshops hosted by MOTC in Accra in 1993 and 1994. Enabling legislation has been passed to split P&T into separate posts and telecommunications businesses and legislation to establish a regulatory body is before Parliament. The Government has requested the Bank Group to provide it with on-going assistance in implementing the proposed new sector policy. 6. Project Objectives. The primary objective of the project is to assist the Government to implement its proposed new policy for the telecommunications sector. The policy aims to achieve rapid expansion and improved quality of service through increased private sector participation, the promotion of competition and the establishment of an appropriate regulatory framework. The project also aims to support the Government's divestiture program by (a) exploring opportunities for partnership between the public and private sectors and between foreign and local investors; (b) generating revenue for Government from the sale of Ghana Telecom (GT), which will be created once the split of P&T has been completed; (c) developing capital markets in Ghana, including broadening share ownership in the country; (d) developing a divestiture model and process which can be replicated in other infrastructure sectors; and (e) ensuring that the needs of the postal service after it has been split from telecommunications are adequately addressed. 7. Project Description. The proposed new sector policy provides for (a) the sale by Government of its controlling interest in GT through (i) - 2 -  the sale of a minority stake (which will have management control) to a strategic investor, (ii) the sale of a stake to international financing institutions and (iii) the sale of a stake to local investors in Ghana; (b) the licensing of a second main operator which will compete with GT; (c) a more liberal regime of licensing privately owned cellular, payphone and small local telephone operators; (d) large corporate users to develop their own private networks; and (e) the establishment of a regulatory body for the sector to be known as the National Communications Authority (NCA). The policy was endorsed at a two day workshop in Accra attended by all stakeholders in October 1994. 8. The investment requirements of the sector over the 5 year period 1995 to 1999 are estimated at $450 million. Consistent with the integrated approach to sector development, the Bank Group is coordinating its approach to the project, with IDA working closely with IFC and MIGA. The bulk of the financing required is expected to come from private investors. The following areas will be examined for possible support by IDA: (a) support to GT to put it in a position where it will prove attractive to private investors and to add value to the Government's stake in it; (b) telecommunication services in the rural and smaller urban areas which are likely to be beyond the initial geographical range of the two proposed main operators; (c) support to the MOTC and the NCA on policy and regulatory matters respectively; (d) support to Ghana Posts (GP) after the split from telecommunications is effected; and (e) training. IDA will determine during project preparation any further actions which may be required to facilitate the participation of private investors. In particular, IDA will review the steps needed to promote local private participation, including the broadening of share ownership. 9. The integrated approach to the sector's development, the involvement of all stakeholders in policy determination, the coordination of the efforts of all donors, common implementation arrangements and minimal reliance on long-term technical assistance all contribute to ensuring the quality of the project. 10. Project Financing. The overall financing plan remains uncertain. The identity of financiers and the specific types of financing instruments to be used will become clearer during project preparation. However, most of the estimated requirement of $450 million, the bulk of which will finance network expansion and working capital, is expected to come from private sources (both domestic and foreign), international financing institutions who work closely with the private sector (such as IFC, Commonwealth Development Corporation, European Investment Bank, etc.), and internally generated funds. The IDA contribution is tentatively estimated at $50 million. The need for innovative financing instruments will be examined during project preparation. 11. Project Implementation. The MOTC will have overall responsibility for coordinating project implementation. It will be responsible for setting policy and creating the conditions necessary to achieve the policy objectives. The NCA will be the regulator. Specific components of the project are likely to be implemented by GT and GP. Other implementing agencies may be identified during project preparation. - 3 -  12. Project preparation is being undertaken by the MOTC. A Coordinator will be recruited from the private sector in Ghana, reporting directly to the Minister and supported by a small staff, to oversee implementation of the new policy and to assist the MOTC to prepare the project. Various advisors will be appointed - investment bankers, sector specialists and lawyers. MOTC has prepared an action program for the early stages of project preparation and has started the process of securing resources. Financing for project preparation is expected to come from the existing Public Enterprise Technical Assistance Credit, a recently approved PHRD grant of $750,000 and a Project Preparation Facility. 13. Project Sustainability. The project is sector-wide in its scope. It supports a sector reform policy which aims to allow investors to make commercial returns within an acceptable risk profile. Extensive consultation has already taken place with all stakeholders and donors. There is strong commitment from all levels in Government. The management of the incumbent monopoly (P&T) recently announced that it supports the concept of a strategic investor. The project will have a strong private sector orientation, with emphasis on local private sector participation and widening of domestic share ownership through the divestiture of GT. Support for the project will be enhanced by seeking to broaden public access to telecommunications services throughout the country, including in the rural areas. 14. Lessons Learned from Past Operations in the Country/Sector. The principal problems encountered by P&T, as the state-owned monopoly, in the past were lack of commercial autonomy (in particular in relation to staffing issues and remuneration, investment and financing decisions, and tariffs), excessive reliance on tied credits to finance network expansion, excessive levels of poorly skilled and inadequately remunerated staff, poor network maintenance practices, and weak financial management. The existing sector structure has resulted in only a portion of the total demand for service being met and will not allow the scale of investment and the skills needed to develop the sector to be mobilized. 15. The proposed project is consistent with and fully supportive of IDA's Country Assistance Strategy (dated March 1994), in which reform of state owned enterprises, a shift from adjustment to sector investment lending and the development of an efficient telecommunications sector involving the private sector are key components. It is consistent with Bank Group policy in the telecommunications sector, which emphasizes sector reform, increased competition and increased participation by the private sector. It is also consistent with the World Development Report for 1994 on Infrastructure for Development which advocates the application of commercial principles, broadening competition and the involvement of users. The Bank Group, with its global experience in the sector and the lessons learned from past operations in Ghana, can play a unique role in helping the Government to conceive and implement a comprehensive strategy to achieve its policy objectives. IDA can act as a catalyst to mobilize private investment. It can facilitate the provision of service in those areas not served by the main operators, which will help the development of those areas. - 4 -  16. Poverty Category. Not applicable. 17. Environmental Aspects. The project is in Environment Category B. The impact of the project is expected to be environmentally neutral in the short-term and that any negative effects are likely to be indirect. A process to conduct environmental audits will be provided for under the project. 18. Program Objective Categories. The project supports IDA's Economic Management (EA) and Public Sector Development (PV) program objectives. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 5 -