Nepal - Telecommunications Project

CviIbL RESTRICTED FILE Report No. PU- 16a 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE TELECOMMUNICATIONS EXPANSION PROGRAM NEPAL October 7, 1969 Public Utilities Projects Department  CURRENCY EQUIVALENTS US$1 - NRs 10.125 US$0.0987 - NRs 1.00 FISCAL YEAR ends mid-July (varying with Nepalese calendar) -LIST OF ABBREVIATIONS USED IN THE REPORT ARF - A Swedish Ericsson crossbar telephone exchange system CB - Central battery (manual telephone exchange) CCITT - Comite Consultatif International Telegraphique et Telephonique COPPERWELD WIRE - Copper wire with a steel core DROP WIRE - Insulated single pair cable used for subscribers' dis- tribution ERLANG (E) - The unit of telephone traffic (3,600 call seconds) HF - High frequency LUtS - Line units - exchange terminations ISP - Independent sideband ITU - International Telecommunication Union Kw - Kilowatt NTB - Nepal Telecommunications Board NTD - Nepal Telecommunications Department PBX - Private branch exchange PVC - Polyvinyl chloride (a plastic insulant) RNAC - Royal Nepal Airlines Corporation SHF - Super high frequency SSB - Single sideband STD - Subscriber trunk dialing (long-distance) TELEX - Teleprinter exchange service UHF - Ultra high frequency USAID - United States Agency for International Development UNDP - United Nations Development Programme VHF - Very high frequency  MEPAL APPRAISAL CF THE TELECGO1 CATIO?1S EXP'NSI0T ROGRAI Table of Contents Page No. SIARY i-i 1. INTRODUCTION 1 2. TIIE BENEFICIARY 2 History and Structure 2 Staff Establishment, Training and Technical Assistance 4 3. FlANCIACL ASPECTS 5 Accounting and Auditing 5 Present Financial Position 6 Tariffs 7 Past Financial Performance 8 4. EXISTING FACILITIES 9 A. Local Facilities 9 B. Internal Long-distance Facilities 10 C. International Facilities 10 D. Internal Telegraph Service 10 E. International Telegraphs 10 W. THE PROJECT 10 Procurement and Disbursements 14 6. ECONOMIC JUSTIFICATION 1I 7. FUTURE FfINANCES 16 Financing Plan 16 Future Financial Position and Operating Results 17 Rate Covenant 18 8. COIJCLusIONs AnD RECOinENDATIONS 18 This report is based on the findings of an appraisal mission to Nepal which was made in January/February 1969 and was composed of Nessrs. C. R. Dickenson and H. B. lNIeier of the Bank.  LIST OF ANMTEXES 1. Telephone Forecasts 2. Facilities Existing and Presently under Provision 3. Staff Organization within Department 4. Job Description - Controller of Administration, Personnel and Business Office 5. Job Description - Financial Advisor/Controller 6. Terms of Reference for Management Consultants 7. Timetable for Employment of Consultants and Setting up the Organization of the Nepal Telecommunications Board (NTB) 8. Pro Forma Balance Sheet Fiscal Years 1966/1974 9. Pro Forma Profit and Loss Statement Fiscal Years 1966-1974 10. Revenue Forecast 11. Expenditure Estimate and Forecast 12. Sources and Applications of Funds Fiscal Years 1966-19714 13. Tariffs 114. Development Project 1968/69-1972/73 15. Traffic and Engineering Design Factors 16. Number of Telephone Lines and Stations based on Project Provision 17. Economic Justification MAP 1 - HF Radio and Line Networks MAP 2 - Telephone Development - Long-distance Routes and Exchanges  TEPAL APPRAISAL OF THE TELECO4UNICATIONS EXPANSIOM PROGRAI SUNNA.RY AND CONCLUSIONS i. Excluding certain very small countries which have no telephone service, Nepal has the lowest telephone density of any country in the world. Because of topographical problems which make the development of surface and air communications both difficult and costly, development of telecommunica- tions is of more than usual importance to the economy. The project which is appraised in this report covers the provision of a basic level of tele- communications services to those parts of Nepal which have the greatest economic significance and where improved communications are most urgently required. The project only in part meets requirements for the country as a whole, but is the largest one that can be undertaken with available re- sources. With outside assistance and training to be provided under the pro- ject, the Nepal Telecommunications Board CUST) is capable of :"ealizing the ob- jectives. ii. The principal items included in the project are: (a) provision and extension of telephone exchanges; (b) provision of the associated local distribution networks; (c provision of a long-distance trunk network to Central, South and Eastern Nepal; (d) improvement of international communications; (e) provision of telex facilities in the Kathmandu Valley area; and (f) employment of consultants to advise on and design the organization of NTB and to intro- duce a modern commercial accounting system. IDA finance is involved in all items included in the project. iii. The project will be undertaken during the five-year period July 1968- July 1973. Total project cost would be NRs 42.0 million (US$4.15 million) with a foreign currency component of NRs 30.0 million (US$2.96 million). The proposed credit would be for NRs 17.2 million (US$1.70 million), and would cover the foreign exchange component of specific plant provisions in- cluded in the project, costing in all NRs 22 million (US$2.17 million). The lTepalese Telecommuxencations Board (ITB) will finance the balance of NIRs 4.8 million (Us$0o.7 million) covering local expenditure for these works, and ilill also meet a foreign exchange cost of NRs 0.7 million (US$0.07 million) and a local expenditure of lTRs 1.3 million  -ii- (US$0.13 million) in respect of certain on-going works included in the pro- ject. Certain other works included in the project are being financed in their entirety by Indian Government grants amounting to URs 12.1 million (US$1.20 million) for the foreigi e cchange component and OEs 5.9 million (US$o.58 million) for local expenditures. iv. The proposed borrower is the Government of Nepal, which will make the funds available to lNTB which is being set up to exercise the telecom- munications monopoly in Nepal. v. The technical standard of operation for the existing facilities, which are extremely limited, is comparable with that in other developing countries. The telecommunications organization is, however, overstaffed and lacks the responsibilities, facilities and methods necessary for ef- fective management; there is, therefore, a need to develop an effective organization, as well as provide a modern accounting system. This resulted in the decision to set up a telecommunications board and employ consultants to advise on and assist in its organization. vi. The telecommunications operations have not been profitable in the past. Upon completion of this project, however, a rate of return of ap- proximately 10%i is expected. The economic rate of return is likely to ex- ceed 40%. On the basis of the financial position which the mission esta- blished and nrojected, MTB will be able to provide from self-generated funds most of the local expenditure for the project and for future expansion, and will also be in a position to assume responsibility for the servicing of its debt. vii. The project is suitable for an IDA credit to the Nepalese Govern- ment of NRs 17 million (US$1.7 million) to be made available to ITB for a period of 12 years including a grace period of 2 years at an interest rate of 6 1/2%. The period for repayment proposed is considered reaJistic in the light of the likely cash position. viii. All purchases under the credit will be subject to international competitive bidding.  iLL?AL APPRAISAL OF TTIE TELECO11tA4ICTIOV:3 EXPAMTSIO)IT PROGRAM1 1. INTRODUCTION 1.01 The Kingdom of lIepal forms an east-west rectangle between China (Tibet) to the north and India to the south. The country, extending as it does from the Terai plains in the south through the Siwalik Hills and Mahabharat Mountains to the peaks of the Himalayas and the Tibetan border, is subject to both topographical and climatic extremes. The economy is essentially agricultural, with a large part of the commercial production concentrated in the fertile Eastern Terai where some 800,000 hectares are under cultivation. Efforts to develop industry and manufacture have been largely concentrated in the Eastern and Central Terai adjoining the border with India, and in the Kathmandu Valley area. 1.02 For more than a century, until 1951, Nepal was largely isolated from the rest of the world; association and communication with other countries were forbidden. This has been a major factor in restricting the development of communications. 1.03 The country's topographical features create great difficulties in the development of road and rail communications and in the provision of safe all-weather aircraft landing facilities, thereby increasing their cost. This, in a relatively poor country, gives added emphasis to the need for adequate telecommunications facilities in those places wihere com- munications are of vital importance to the further development of the country. 1.04 Nepal's telephone density is about .025 per 100 people - the lowest recorded figure for any country with a telephone network. Only three telephone exchanges exist, t-wo in the Kathmandu Valley area and the other at Biratnagar. The only long-distance internal communication net- works are a single-wire telegraph land line, use of rhich ha:- been largely abandoned, and point-to-point radio links largely used for telegraph pur- poses. Limited international telegraph and telephone facilities are available via high frequency (HF) radio systems operating to India and Pakistan. 1.05 The apparent priorities for the development of telecommunications in Nepal are (a) the provision of local exchange networks in the larger towns with the greatest agricultural and industrial significance, (b) the interconnection of these and existing netwlorks via a reliable and satis- factory trunk system, and (c) the improvement of international communications. 1.06 Since the reopening of the country in 1951, there have been various plans for the development of telecommunications in Nepal, commencing with a USAID project put in hand in 1958 and completed in 1964 at a cost of some US$3.0 million equivalent. A verbal request by the Nepalese Government in May 1966 for an IDA Credit to finance telecommunications development was based on a United Nations team's recommendations, in 1966, for major exten- sions to the network. These proposals were examined in October 1966 by  -2- Mr. R. N. Wlalsh of the Bank s Projects Department, who felt that the pro- posals were unrealistic and that,before a project could be developed fur- ther,outside expert advice was desirable. A written request for IDA as- sistance was made on December 19, 1967, but, at this stage, no further outside advice had been obtained. However, following appointment of an ITU advisor in tay 1968, 1Mr. C. R. Dickenson visited Nepal in June 1968 and recommended that consideration should be given to the possibility of IDAls financing the provision of trunk service and limited exchange pro- visions in Central Nepal and in the Southern and Eastern Terai. 1.07 The mission's examination of the development plan submitted by Nepal indicated a need to (a) relate it to demographic and economic factors; (b) coordinate the proposals with works to be undertaken with Indian grants in aid; (c) ensure that the program was a balanced one with adequate utilization of plant; and (d) relate it to a realistic timetable for execu- tion. The mission therefore prepared a study (see Annex 1) weighted in re- lation to demographic; industrial, economic and administrative factors, and indicating the likely telephone capacity and long-distance circuit requirements over a period of time. Based on this document, a five-year development project (including 1968/69) was produced, covering all provi- sions including those to be made under Indian aid and agreed upon with the Ne- pal Telecoim,munications Department (NTD) and the ministries concerned as sa- tisfactorily meeting the more urgent needs and as being capable of realizatax. 1.08 Total expenditure for the project will amount to US$4.147 million. The proposed Credit would make available US$1.7 million equivalent; this 'will be wholly for foreign exchange expenditure, and will be the first fi- nancing by the liorld Bank Group for any project in Nepal. As the Borrower, the Government of Nepal would make the proceeds available to iYTB as the beneficiary. 1.09 This report is based on information provided by NTD and on the findings of an appraisal mission consisting of Messrs. C. R. Dickenson and H. B. Mleier which visited Nepal in January/February 1969. Basic data for the network are given in Annex 2 and Map 1. 2. THE BENEFICIARY - INEPAL TELECOXINUNICATIONS BOAR-D (Mim) History and Structure 2.01 Commencing in the year 1913, single-wire overhead telegraph lines were installed for administrative purposes from Kathmandu to Raxaul on the Indian border,to Dhankuta in the east,and to Palpa in `Uhe wtest. Fol- lmiing the restoration of the monarchy in 1951, the lines to the east and west were extended to Biratnagar and Bhairawa, respectively, and limited public telegraph service was introduced together with a public telephone service in the Kathmandu area. Subsequently, HF radio communi- cations were provided to India and to six of the main towns. The Nepal  -3- Telecommunications Department (NTD), which formed part of the IMinistry of Works, Transport and Communications, was established in 1959 to cooperate with USAID in the construction of the initial phase of a modern telecommuni- cations system, and subsequently take over responsibility for the operation and further development of the networks. The Nepal Telecommunications Board (NTB) -i- beiag created to take over the legal monopoly for the provision and operation of the local, long-distance and international telephone and telegraph networks. 2.02 The head of NTD was the Chief Engineer, who was responsible for service and engineering functions and had certain limited financial respon- sibilities. Annex 3 shows the departmental structure which had developed over the years. The Chief Engineer had three assistants covering adminis- tration, accounts, and international services. Three divisional engineers are responsible for the operating and planning functions. The Denartment's structure allowed for very little management control and virtually no fi- nancial control. 2.03 Although the incorporation of telecommunications in the Govern- ment administrative structure had, during the early years of NTDts opera- tions, offered certain advantages in the common use of facilities, it had become apparent that, to become efficient, IITD must have a well-defined organization and modern management tools such as an adequate accounting system. In addition, it needed improved performance standards and produc- tivity that could not easily be introduced within the departmental structure. Changing the norms and setting up an adequate organization under the old structure would have inevitably delayed the operation of the proposed credit and thus the urgently needed development of telecommunications. 2.04 Efforts to introduce a formal training and career program for civil servants are of recent date; although good progress has been made, priority understandably is being given to general administrative problems. A considerable period is likely to elapse before adequate organizations can be developed within the civil service structure for those departments which should operate along normal business lines. Government has set up a number of public utility corporations which, despite initial "teething" troubles, have made considerable progress, and introduced reasonable or- ganizational and financial practices. An Administrative Reforms Commission has however recently submitted a report in which it is recommended that any further corporate bodies which may be set up to run Government-owned businesses should consist of boards coming within overall bid-etar- arpropria- t