Jamaica - Telecommunications Development Project

CiRCULATING COPY RESTRICTED 10 BE RETURNED TO REPORTS DESKR- 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE JAMAICA TELEPHONE COMPANY LIMITED FOR A PROJECT FOR TELECOMMUNICATIONS DEVELOPMENT January 12, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION ANXD DEVELOPl1ENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE JAIMAICA TELEPHONE COI-IPANY LlMITED FOR A PROJECT FOR TELECO%ITUNICATIONS DEVELOPM4ENT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$ 11.2 million to the Jamaica Telephone Company Limited (JTC). PART I - HISTORICAL 2. In October 1965 JTC and the Government of Jamaica approached the Bank for assistance in a telecommunications development project. A Bank mission visited Jamaica in May/June 1966 to appraise the project. 3. Formal negotiations for the proposed loan were held in Washington from December 19 to 21, 1966. Principal representatives in the negotia- tions were, for the Borrower, lir. Leslie Ashenheim, Director, and Mr. C. R. Dickenson, Managing Director, and for the Government, Mr. Horace G. Barber, Under Secretary of Finance. 4. The following is a summary statement of Bank loans to Jamaica as of December 31, 1966: (US$ Million) Year Borrower Purpose Amount Undisbursed 1965 Jamaica Highways 5.5 5.4 1966 Jamaica Public Service Company Power 22.0 19.4 1966 Jamaica Education 9.5 9.5 Total now outstanding 37.0 34.3 Amount sold 0.6 Total now held by Bank 36.4 Only a small amount has been disbursed under the highway loan due to the initial delay in the selection of consultants. However, a U.S. consulting firm was engaged in April 1966 and work is now advancing at a satisfactory pace. Although no reimbursements have been requested, to date, by the Government under the education loan, work is already under way. 5. The Government has expressed its desire to seek Bank assistance for possible projects in industry, agriculture, transportation, water supply and sewerage, all of wihich are still at an early stage of prepara- tion.  - 2 - 6. IFC has an investment of $187,000 in Jamaica Pre-Mix Ltd., making pre-mixed concrete. IFC is also discussing, with a private group, the feasibility of establishing a private development finance company in Jamaica. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Jamaica Telephone Company Limited Guarantor: Jamaica Amount: The equivalent in various currencies of US$ 11.2 million Purpose: To help finance a telecommunications development project Amortization: In 21 semi-annual installments beginning March 15, 1972, and ending March 15, 1982 Interest Rate: 6% per annum Commitment Charge: 3/8 of 1% per annum PART III - THE PROJECT 8. An appraisal report entitled "Appraisal of the 1967-71 Development Program of the Jamaica Telephone Company Limited - Jamaica" (TO-567b) on the proposed project is attached. 9. With about 50,000 telephones connected to the general telephone network, telephone density in Jamaica is about 2.9 telephones per hundred of population, which is low. The public telephone, telex and teleprinter services in Jamaica are provided by JTC and public telegraph services by the Government's Post Office Department. Overseas telephone, telegraph, telex and teleprinter services are provided by Cable and Wireless (West Indies) Company Limited. 10. JTC is a private corporation which has three licenses from the Government to provide all public telephone, telex and teleprinter services within Jamaica and to use wireless radio techniques for these purposes. Earlier licenses expiring in January 1967 have been replaced by new 25-year licenses with provisions for 10-year extensions. As a condition to the granting of the aforementioned licenses, Telephone and General Trust Limited of the United Kingdom, which now owns 50.2 percent of JTC's share capital, is required to reduce its holdings to no more than 20 percent over a five- year period.  11. The Company's organization and management are sound and qualified to carry out the proposed development program and to operate the extended facilities. Telephone and Associated Services Limited of the United Kingdom is providing technical consulting services to JTC under a five-year contract signed in 1965. The Company is likely to continue its satisfactory management and operation in the future and, under the terms of the proposed loan, the Bank wjill be consulted on any change in JTC's chief executive. 12. The project consists of JTC's expansion program for the five- year period from 1967 through 1971. Among other works, the project would provide 26,000 additional automatic telephone exchange lines. Nine existing automatic exchanges would be re-equipped and extended, twenty-five other existing exchanges would be extended, and ten new automatic exchanges would be installed. Fourteen new concentrators will provide telephone service to isolated areas. Long distance telephone services, including direct long-distance dialing to all subscribers, would be improved and wJidely extended. A new 100 line automatic telex exchange would be installed in Kingston and telex service would be extended to the main tourist and industrial districts in Jamaica. 13. As mentioned before, telephone density in Jamaica is low and telecommunications services are inadequate to satisfy the present high demand. Furthermore, Jamaica has experienced a high rate of economic growth in recent years and growth prospects continue to be favorable. The rate of economic growth expected will substantially increase the already high demand for telecommunications services. The project is intended to alleviate the present congestion and to provide by 1971 a telecommunications system wihich wJill handle the estimated traffic requirements with little or no delay. 14. The total cost of the project is estimated at about US$ 18.3 million of which the foreign component of about US$ 11.2 million would be covered by the proposed loan. The balance of US$ 7.2 million would be covered by JTC's retained earnings together with a small amount of bank overdraft financing. 15. Equipment and materials to be financed under the proposed Bank loan would be purchased on the basis of international competitive bidding. Telephone sets are being manufactured locally and would be eligible for Bank financing provided the local producer submits the best evaluated bid. 16. JTC has a history of satisfactory financial results and its financial position is expected to remain sound. The ratio of long-term debt to equity would change from 30/70 at the end of 1965 to t9/51 at the end of 1971 as a result of the project. Earnings are expected to be sufficient to cover debt service at least 2.4 times throughout the forecast period.  - 4 - 17. JTC has outstanding four issues of long-term debt, secured under separate Debenture and Debenture Stock instruments by a floating charge on the Company's assets. The first three issues, totalling .f800,000 ($2.2 million) and maturing in 1968, 1970 and 1978, rank pari passu with each other and ahead of the fourth issue (f800,000 maturing in 1982) which was effected under a 1962 Trust Deed. In view of the relatively small amount and early maturities of the first three issues, it is proposed that the Bank accept a position junior to these three but equal to the fourth issue. Accordingly, the following security arrangements have been agreed: JTC will amend the 1962 Trust Deed to provide for the issue of further Debenture Stock to the Bank which would rank pari passu in all respects with the 1962 issue and would mature on dates (both prior and subsequent to the date of maturity of the 1962 issue) corresponding to the amortization schedule in the Loan Agreement. The majority of the stockholders of the 1962 issue have indicated their preparedness in principle to make the above amendments (see also paragraph 20 (a), below). 18. The Government has enacted legislation establishing a Public Utility Commission, based on United States practice, as an independent body to supervise the activities of public utility companies, including JTC. The Commission will control the rates of public utility companies, set standards to be followed by them and ensure their compliance with the ob- ligations under their licenses. The Commission is expected to be established within the next few months. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 19. The Draft Loan Agreement between the Bank and JTC, the Draft Guarantee Agreement between Jamaica and the Bank, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 20. The following points in the Loan and Guarantee Agreements, which are otherwise in the form followed in the case of telecommunications loans generally, are of particular interest: (a) The loan will be secured by Debenture Stoclc issued under an amended Trust Deed creating a floating charge on all of the present and future property of the Borrower in favor of British trustees. Until the amendment to the Trust Deed providing for the issue of Debenture Stock to the Bank (see paragraph 17) shall have been duly executed and registered, the Borrower shall not, without the Bank's prior approval, withdraw more than US$ 500,000 equivalent from the loan account (Section 2.02 of the Loan Agreement).  -5- (b) Both the Borrower and the Guarantor have entered into covenants (Section 5.12 of the Loan Agreement and Section 3006 of the Guarantee Agreement) to maintain adequate rates for the Borrowerls telecommunication services, pursuant to the terms of the Borrowerts licenses and the provisions of the Act establishing the Public Utility Commission. Furthermore, the Guarantor has given an undertaking that until the project is com- pleted, the Borrower shall be allowied such a return on its rate base as will enable it to achieve the sound financing of the project, the financing plan for which is presently based on the maintenance of telephone rates presently in force. (c) A change in the Borrower's licenses without the Bank's prior concurrence, a default under the Trust Deed, and the prematuring of any debt of the Borrower, are additional events of default under the loan (Section 6.02 of Loan Agreement). 21. The Government is authorized by law to sign the Guarantee Agreement. No further Parliamentary action is required to make the Loan Agreement and Guarantee Agreement effective. PART V - THE ECONOMY 22. A report (WH-154a) on "The Current Economic Position and Prospects of Jamaica" was distributed to the Executive Directors on December 30, 1965 (R 65-198). The report concluded that Jamaica's economic performance in recent years has been satisfactory and that the prospects for the continued growth of the economy were favorable. The developments in the Jamaican economy since the completion of the above report fully corroborate these conclusions. 23. The high rate of economic growth (7.5 percent) which has characterized the Jamaican economy during 1964-65, continued during 1966. Increased industrial production and mining, combined with a substantial expansion in tourism, furnished the main basis of this growth. Moreover, this impressive economic growth has taken place under conditions of financial stability. 24. Public finances have continued to present a difficult problem, however, because of pressing demands for increased recurrent and invest- ment expenditures which have been accentuated by continuing high unemployment. Nevertheless, the fiscal position appears to have been strengthened somewhat during 1965-66. Moreover, both revenues and expenditures have been increasing during fiscal 1966-67 and the authorities appear to have arranged their financing plans in a manner which is consistent with the dual objectives of price stability and economic growth. Continued sound management of public finances will  - 6 - require implementation of the present Governrnentls decision to reduce the rate of increase in recurrent expenditures and adopt new revenue measures in the budget for the fiscal year 1967-68. Since elections are scheduled to be held within the next few months, these fiscal measures will have to be adopted by the incoming Government in order to permit the maintenance of the present high level of public invest- ment. 25. Management of the balance of payments has continued to be satisfactory. The restraint in growth of imports well below the growth in GNP, the maintenance of exports and the very substantial increase in tourism, have contributed to the achievement of a current account surplus during the first half of 1966. The principal exports, bauxite and alumina, have performed very well; on the other hand, sugar prices weakened and exports have continued to require preferential treatment under quota allocations. Because of these developments in combination with a large increase in foreign capital inflows for estab- lishing and/or enlarging manufacturing plants, an overall balance of payments surplus was probably achieved in 1966. 26. The external public debt of Jamaica repayable in foreign exchange in the middle of 1966 totalled the equivalent of US$120 million, of which US$80 million had been disbursed and US$h0 million was in the pipeline. Since then additional debt of approximately US$18 million was incurred, consisting of a loan from IBRD of US$9.5 million and a placement on the London market of an issue of f3 million with an effective yield slightly over 8 percent. The annual service payments on the outstanding external debt amount to approximately US$10 million until 1970, rise to about US$12 million in 1972 and US$15 million in 1973, after which date they begin to decline. These debt service payments at their peak represent less than 5 percent of Jamaica's present level of foreign exchange earnings. Taking into account this relatively low level of debt service, the prospects of continued sound economic and financial management, and the future growth potential which this portends, Jamaica may be regarded as creditworthy for the proposed loan. PART VI - COMPLIANCE WITH ARTICLES OF AGPEEMENT 27. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOIMENDATION 28. I recommend that the Executive Directors adopt the following resolution:  RESOLUTION NO._ Approval of Loan to Jamaica Telephone Company Limited in an amount equivalent to U.S.$ 11,200,000 to be guaranteed by Jamaica RESOLVED: THAT the Bank shall grant a loan to Jamaica Telephone Company Limited to be guaranteed by Jamaica, in an amount in various currencies equivalent to eleven million two hundred thousand United States dollars (U.S.$ 11,200,000), to mature on and prior to March 15, 1982, to bear interest at the rate of six percent (6%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Tele- communications Project) between the Bank and Jamaica Telephone Company Limited, and the form of Guarantee Agreement (Telecommunications Project) between Jamaica and the Bank, which have been presented to this meeting. Attachments George D. Woods President Washington, D.C. January 12, 1967