China - Telecommunications Project

Document of The World Bank FOR OFFICIAL USE ONLY ReportNo: 21736 IMPLEMENTATION COMPLETION REPORT (CPL-36870; SCL-3687A; SCPD-3687S) ON A LOAN IN THE AMOUNT OF US$ 250.00 MILLION TO THE PEOPLES' REPUBLIC OF CHINA FOR A TELECOMMUNICATIONS PROJECT March 13, 2001 Global Information and Communication Technologies Department Private Sector Development Unit, East Asia and Pacific Region This document has a restricted 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.  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2000) Currency Unit = Renminbi Yuan Yuan 1.00 = US$ 0.123456 US$ 1.00 = Yuan 8.1 FISCAL YEAR 1 January 31 December ABBREVIATIONS AND ACRONYMS BITS - Swedish Board for Investments and Technical Assistance (later called SIDA) CoCom - Co-Ordinating Committee on Multilateral Export Control DGP - Directorate General of Posts DGT - Directorate General of Telecommunications ERR - Economic Rate of Return FRR - Financial Rate of Retum ICB - Intemational Competitive Bidding KDD - Kokusai Denshi Denwa LIANTONG - CHINA UNITED TELECOMMUNICATIONS CORPORATION (CHINA-UNICOM) Mb/s - Megabits per second MEI - Ministry of Electronic Industry MIl - Ministry of Information Industry MoF - Ministry of Finance MoP - Ministry of Power MoR - Ministry of Railways MPT - Ministry of Post and Telecommnunications PTAs - Provincial Post and Telecommunications Administration SDPC - State Development and Planning Commission SIDA - Swedish Intemational Development Authority SPB - State Pricing Bureau SPC - State Planning Commission VSAT - Very Small Aperture Terminal UMTS - Universal Mobile Telephone Service Vice President: Jemal ud-din Kassumn Country Manager/Director: Yukon Huang Sector Manager/Directors: Emmanuel Forestier/Loup Brefort Task Team Leader/Task Manager: Alberto Cruzat  FOR OFFICIAL USE ONLY CHINA TELECOMMUNICATIONS PROJECT CONTENTS Page No. I Project Data 1 2 Principal Performance Ratings 1 3 Assessment of Development Objective and Design, and of Quality at Entry 1 4 Achievement of Objective and Outputs 3 5 Major Factors Affecting Implementation and Outcome 7 6 Sustainability 8 7 Bank and Borrower Performance 9 8 Lessons Learned 10 9 Partner Comments 1 1 10 Additional Information 12 Annex I Key Performance Indicators/Log Frame Matrix 14 Annex 2 Project Costs and Financing 15 Annex 3 Economic Costs and Benefits 17 Annex 4 Bank Inputs 19 Annex 5 Ratings for Achievement of Objectives/Outputs of Components 20 Annex 6 Ratings of Bank and Borrower Performance 21 Annex 7 List of Supporting Documents 22 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   Project ID. P003633 Project Name TELECOMMUNICATIONS Team Leader. Alberto Cruzat TL Unit. CITPO ICR Type. Core ICR Report Date March 13, 2001 1. Project Data Name TELECOMMUNICATIONS L/C/TF Number CPL-36870, SCL-3687A, SCPD-3687S Country/Department CHINA Region East Asia and Pacific Region Sector/subsector CC - Telecommunications & Informatics KEY DATES Original Revised/Actual PCD 01/23/1992 Effective 07/20/1994 07/20/1994 Appraisal 05/03/1993 MTR Approval 12/21/1993 Closing 06/30/1999 06/30/2000 Borrower/lImplementing Agency GOVERNMENT OF PRC/MIN OF POSTS & TELE Other Partners BITS - SIDA from SWEDEN STAFF Current At Appraisal Vice President Jemal ud-din Kassum Russell Cheetham Country Manager Yukon Huang Nicolas Hope Sector Manager Emmanuel Forestier & Loup Richard Stem Brefort Team Leader at ICR Alberto Cruzat Bjom Wellenius ICR Primary Author Alberto Cruzat, Svetoslav K Tintchev; Christine Zhen-Wei Qiang 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome S Sustainability L Institutional Development Impact SU Bank Perfornance S Borrower Performance- HS QAG (if available) ICR Qualitv at Entrv Project at Risk at Any Time No 3. Assessment of Development Objective and Design, and of Quality at Entry 3 1 Original Objective  The Project supported development of a modem telecommunications sector that would evolve increasingly towards market-driven resource allocation. The Project included priority tasks that were part of an agreed Medium Term Policy Action Program of Sector Reform for 1994 - 1997, to help develop an environment for increasing competition and private participation. The Government of China (GoC) expected the reforms to enable rapid and sustainable sector development to overcome widespread telecommunications shortages which resulted in high costs throughout the economy and hence impeded effective implementation of development programs in other manufacturing and social sectors. In the course of helping the GoC in achieving these objectives, the Project financed investments in modem technology of fiber optical long distance links connecting eleven provinces and local digital switching in three provinces. 3 2 Revised Objective The World Bank Board approved an Amendment to the Loan Agreement on November 15, 1996. As a result of extremely economical procurement, project cost savings totaled US$ 120.3 million in the purchase of all the equipment included in the original Project Components. And in the view of the need for accelerating telecommunications development, the GoC requested the Bank to amend the Loan Agreement of April 25, 1994 and to authorize the use of project cost savings to replicate original project investments in a number of China's less developed areas. 3 3 Original Components The Project comprised a Reform Component, and an Investment Component. The Reform Component supported, inter alia: 1. consultant assistance in developing an appropriate accounting system, as well as a program to train about 25,000 P&T accountants in enterprise accounting; 2 telecommunications tariff review and preparation of an implementation plan for tariff adjustment; and 3. overseas training of MPT staff to enhance their expertise in legal and regulatory fields The Investment Compoaent included: I provision of two segments of the long distance inter-provincial fiber optical network: 2. expansion of 920,000 lines of local telephone switching systems in three provinces: Heilongjiang, Jiangsu and Liaoning. 3 4 Revised Components The additional investments under the project included: 1. three inter-provincial fiber optical routes; 2. three intra-provincial fiber optical routes. 3 5 Quality at Entry This Project was not reviewed by QAG-QER. However, at the time of the appraisal, the Quality at Entry was considered to have been satisfactory. As mentioned above, the Project was designed in line with the urgent needs to improve its telecommunications services through an accelerated expansion of its telecommunications networks. The risk of the Govemment's interference with the implementation was identified. Adequate technical assistance was subsequently provided to the Government of China on policy -2 -  recommendation. 4. Achievement of Objective and Outputs 4 1 Outcome/achievement oj objective The project was successful in achieving its overall objective. The sector has undergone major reform with emergence of a pro-competitive and market-driven environment and this has enabled dramatic improvement in sector performance. The project contributed to the adoption of international accounting standards in CTC and implementation of cost-based tariff structure. Although the investment contribution through the project was marginal compared to the overall large scale investment in the sector, it helped to set a benchmark for high technical standards and contributed to the implementation of sound competitive procurement practices in CTC. Project achievements are summarized in the paragraphs below. 4 2 Outputs by components 4.2.1 Physical component. The outputs of the physical component are highly satisfactory as summarized below. 4.2.1.1 Switching network In the First Phase of the Project, the Bank Loan financed expansion of digital switching exchanges in three provinces: Heilongjiang, Liaoning and Jiangsu. The installed capacity in Heilongjiang in 1992 was 671,100 lines and the planned expansion was to reach 2,840,000 by 1997, with around 2,393,000 of these lines working. For this expansion plan, the Bank Loan funded the procurement of around 160,000 lines of digital switching equipment. As of December 31, 1999, Heilongjiang PTA had more than 6,000,000 digital lines installed with 4,641,600 working lines. With a total of 25,345 telecom staff, this gives a ratio of staff per 1,000 working lines of around 5.5, indicating a very high efficiency. In addition to the services of the provincial branch of CTC (fixed lines), as of December 2000, Heilongjiang is served by 2,359,600 cellular phones provided by the provincial branch of CMC (originally also part of the MPT operator) and 600,600 cellular phones provided by LIANTONG. The combined subscriber density (fixed + cellular) has reached 23.5 phones per 100 people, which is remarkable considering that Heilongjiang is a rather "poor" province in China. The installed capacity in Liaoning in 1992 was 1,006,700 lines and the planned expansion was to reach 3,590,000 by 1997, with some 2,586,000 of these lines working. For this expansion plan, the Bank Loan funded the procurement of around 170,000 lines of digital switching equipment. As of 31 December 1999, Heilongjiang PTA had more than 3,000,000 digital lines installed with 2,300,000 working lines. The installed capacity in Jiangsu in 1992 was 1,513,900 lines and the planned expansion was to reach 4,705,000 by 1997, with some 3,570,000 of these lines working. For this expansion plan, the Bank Loan funded the procurement of around 590,000 lines of digital switching equipment. As of December 31, 1999, Jiangsu PTA had more than 7,000,000 digital lines installed and around 6,000,000 working lines. This figures along with 18,000 employees gives a ratio of staff per 1,000 working lines of around 3 4, indicating a very high efficiency. In addition to the services of the provincial branch of CTC (fixed lines), 3-  Heilongjiang is served by more than 3,000,000 cellular phones from the provincial branch of CMC and from LIANTONG as of December 2000. 4.2.1.2 Transmission network The Bank's financed contribution to the digitalization of the long distance transmission network mainly consisted of the construction of a grid of optical fiber cables and the implementation of the SDH technology. A summary of the overall digitalization of the transmission system was prepared by CTC and is attached to the Borrower's Contribution in Section 10 "Additional Information" In the first Phase, the Project financed two out of 27 inter-provincial fiber optical cables planned by MPT. These two routes were: (a) a 2,084 km fiber optical cable in the North of China, going from Beijing through Zhengbei in Hebei province, Hohhot, Baotou and Wuhai in Inner Mongolia, Yinchuan and Wuzhang in Ningxia province, up to Lanzhou in Gansu province; and (b) a 4,661 km fiber optical cable in the South of China, going from Hangzhou in Zhejiang province and from Fuzhou in Fujian province to meet in Nanchang in Jiangxi province and continuing West through Changsha in Hunan province, Guiyang in Guizhou province, up to Chengdu in Sichuan province. The Second Phase of the Project included three inter-provincial and three intra-provincial fiber optical cables: (a) a 1,522 km fiber optical cable branching from Hohhot in Inner Mongolia (from one of the cable routes funded in the First Phase) to Xi'An in Shaanxi province; (b) a 1,422 km fiber optical cable joining the extremes of the two inter-provincial cable routes funded in the First Phase from Lanzhou in Gansu province to Chengdu in Sichuan province; (c) a 1,653 km fiber optical cable around Hebei province, from Shijiazhuang in the South west of Hebei to Qinghuangdao in the North-East of Hebei, although this route is 100% inside Hebei the investment was handled by Central MPT/MII and considered as part of the Inter-Provincial cable grid, (d) eight routes with 2,791 km of intra-provincial fiber optical cable in Guangxi Zuang Autonomous Region (out of 14,700 km installed in the Project period), plus upgrading of the digital microwave link to SDH technology in the route: Nanning - Qinzhou - Beihai; (e) two of the three intra-provincial SDH digital microwave rings: for the South and the Westem rings, plus 223.8 km of optical fiber cable for the link from Pingxiang to Ji'An (out of 2,200 km installed in the Project period); and (f) more than 10 fiber optical cable links in Sichuan province, as part of a provincial plan which included 21 sections for a total of 5,178 km, with total cost of US$ 65.6 million, out of which the Bank contributed US$ 18.3 million. 4.2.2 Institutional development program (IDP) component Bank supervised in close coordination with co-financier BITS (later SIDA) from Sweden the two main consultancies: (a) an accounting consultancy where the Consultant performed an in-depth case study of Jiangsu PTA and prepared a report on how to move from the existing Chinese Accounting Standards toward IAS; and (b) a tariffs study which culminated in a "Tariffs Seminar" held in Beijing in October 1998, to discuss the study recommendations, aimed at moving service rates closer to cost-based values. The seminar recommendations were approved by the State Council and implemented by MU in December 1998. 4.2.3 Sector Restructuring Component. The outputs of this component were rated as highly satisfactory during the Project implementation period, and major additional steps were completed toward the time of Project closing The sector went through major changes during the life of the Project, as shown below: - 4 -  CHINA - Telecommunications Sector - 1993 Policy Ministry of Posts Regulation And Network Operation: Telecommunications International Long Distance Local 44 ~~~~~~~~~~~~~~Fixed Cellular Customers for Public Telecommunication Services  CHINA- Tclecommunications Sector - Dec 2000 1 Policy Ministry of Information and Industry Regulation i Network CTC CMC CM-IHK Thousands O Operation: (China LIAN- of intemational (China (China Mobile- TONG companies Long Tcccom Mobile Hong- providing i Distance Corp) Corp) Kong) Value-added Local (Joint Services Fixed stocks Srie Co) Cellula: Customers for Public Telecommunications Services The sector reform measures initiated under the project were advanced: I post operation was separated from telecom operation; 2 competition was introduced by the creation of LIANTONG and JITONG, and later by splitting the main operator into CTC and CMC, in addition to having a major joint-stock company, subsidiary of CMC, also competing in the market; 3 value-added services, in particular paging, are provided by around thousand privately-owned companies and by LIANTONG; 4 private participation in the provision of basic services was greatly advanced with the transfer of additional provincial operations from CMC to its partially private subsidiary, CM-HK; 5. the split on February 14, 1999 of MI's operating entity into a fixed line operator (CTC), a cellular operator (CMC), and a satellite operator (CHINASAT). (Please see Section 10: "Additional information" for more detailed background informnation); and 6. CTC (the largest operator) is positioning itself for re-entering competition in the mobile market and for floating IPOs to introduce private capital participation in its ownership. 4 3 Net Present Value/Econonzic rate oj return This Project benefited all sectors of the economy through improved access to telecom facilities and improved service quality. The government services and business community also benefited from improved access to modem transmission facilities enabling good quality data transfer. Calculation of the financial (FRR) and economic rates of return (ERR) on individual components and on the Project as a whole, however, became trivial, as this Project represented only a small percentage of total MPT and/or provincial PTA's planned investment. In summary, Bank financed some 950,000 switching - 6 -  lines in the period of 1993 to 2000; during the same period the main fixed line network increased from 22.2 million to over 180 million, making the Bank-financed part a mere 0.6% of the total increase. The fiber optical cables funded in both the first and second phases arnounted to 16,000 kIn, equivalent to 1.6% of the total of 1 million km installed in China during that period. The following table illustrates the situation of the local switching system at the provincial level. Bank Loan Financed Lines Total Increase 1% of the Investment Plan Heilongjiang 184.000 5.500.00( 3.3% Liaoning 170.000 3.000.00( 5.7% Jiangsu 5900000 6.500.00 9.1% 4 4 Financial rate of return CTC's and CMC's financial performance during the project period was strong enough to generate sufficient funds from their operations to cover a high percentage of the total project costs and to meet all financial covenants. In addition, each of those "less-developed" provinces, such as Jiangxi, Guangxi Zuang, has been able to generate sufficient sources from depreciation, surcharges and installation fees and to obtain access to local financing for the remaining part of their investment plans which demonstrates a solid financial position. The financial performance of Guangxi and Jiangxi Provinces are provided in Annex 3 4 5 Institutional development impact The institutional development impact of the Project, during the Project period (1992-2000), was substantial: CTC and CMC, two parts of the original Borrower, have developed the largest telecommunications network in the World and have reached unprecedented efficiency levels, as demonstrated by a ratio of around 4 staff per 1,000 working lines for CTC. 5. Major Factors Affecting Implementation and Outcome 5 1 Factors outside the control of government or implementing agency None 5 2 Factors generally subject to government control The Government's commitment to sector reforms was firm throughout the Project implementation. The first important step was the agreement reached during Project preparation on the "Policy Action Plan for the Telecom Sector", which had been developed in 1990-1993 during the "Telecommunications Sector Study" (Report # 9413-CHA, issued on February 14, 1994). These agreements were incorporated in the SAR as Annex 2.3 "Medium - Term Policy Action Program". Now, after ten years, all recommendations were taken, and today the Chinese telecommunications market is approaching an open competitive market envisioned by the Bank at the time of the Project approval. It is estimated that as soon as the process of accession to the WTO is finalized, the two remaining main steps will also be accomplished- (a) opening competition to all service providers in all market segments (for instance, it would be possible for CTC to - 7 -  compete in cellular services); and (b) the main service providers ( CTC and CMC), currently without private sector participation in ownership, will float IPO and become joint-stock companies. Even before these steps, the two service providers already with private sector participation, LIANTONG and CM-HK, will increase the percentage of privately owned shares. One example of the different sequences being followed in the reform process between the Bank recommendation and the GoC decision was the case of issuing a new Telecom Law The Bank recommended to take this step at the very beginning of the process, and MPT prepared some drafts of the telecom law. However, as of December 2000, the GoC decided to shift priorities, and is seeking the Bank's advice on preparing new telecom policy recommendations and reform options and in reviewing the existing law to make it compatible and supportive of the forthcomning E-Conumerce legislation. These new urgent needs have again delayed the issuance of a Telecom Law, mainly because China had not experienced any major problems due to the lack of an updated telecom law. 5 3 Factors generally subject to implementing agency control The operating branch of MPT, later on MII, and later CTC - CMC, exhibited a remarkable implementation record. In more than 50 contracts signed under Phases One and Two of this Project, the Bank never received a complaint from Bidders, and the imnplementation timing was never delayed. On the contrary, it -was the Borrower who asked the Bank for speeding up procurement/disbursement processes, because they wanted to strictly comply with their intemally agreed schedules. S 4 Costs and financing The Project's original financing plan, revised loan amounts, and total disbursement at Project closing (30 June 2000) are shown in the Table below: Original Financing Plan Actual Disbursed Financing Plan Local Foreign Total as of 30 June ______________ ~~~~2000 IBRD 0 250.0 250.0 208.2 83.3 % BITS/SIDA 0 1.3 1.3 1.3 100.0 % MPT-MII-CTC 548.9 30.2 579.1 548.9 94.8 % TOTAL 548.9 281.5 830.4 758.4 91.3 % The lower amount shown for Borrower's funding of the Project is only the result of an accounting change where a smaller part of the total investrnent was charged to the Project Account. It should be noted that, as explained in Sections 4.2.1.1 "Switching" and 4.2.1.2 "Transmission", the Bank's funding represented a very small percentage of the total investrnent (US$ 208 million compared with more than US$ 120 billion in the last ten years). 6. Sustainability 6 1 Rationale for sustainability rating The sustainability of this Project's. achievements is high. The national optical fiber backbone was - 8 -  successfully established. Currently, the operators in China are already capable of providing access to modern, high-capacity network transmission facilities. Sector reforms achieved under the Project have introduced and will continue to increase private participation in the sector. The new operators are planning for further expansion and improvement of their network coverage to prepare for foreseeable open competition in both local and international aspects. The Government is planning to award new UMTS licenses to increase competition. All this should cortinue the progress already made and contribute to improving access and quality of telecommunications services in China. 6 2 Transition arrangement to regutlar operations At the Project closing, CT corporate structure was reorganized to fit a highly commercially oriented pattern of operation. CT appears to be a well structured company that is capable of using greater financial flexibility. It expects IPO in the near future. 7. Bank and Borrower Performance Bank 7 1 Lending Bank performance at identification, preparation and appraisal of the project was satisfactory During the 24 months of preparation, from the initial identification mission to Board approval, the Bank maintained a close dialogue with its Chinese counterparts to ensure that the project objectives were directly in line with the Government's goals for the sector. The Bank staffs assistance and follow-up during preparation and appraisal were satisfactory. The loan amount and project execution period was well estimated at the time. Given the final outcome of current sector restructuring aimed at competitive service provision and privatization, the design of the project may be considered as appropriate. There was a clear awareness of the project risks by the preparation team, namely the potential of political interference in the implementation of the sector restructuring. There was no delay in the investment part of the program due to the borrower's quick and efficient implementation of Bank's procedures, in particular the adherence to Bank's procurement guidelines. 7 2 Supervision The overall supervision of the project was satisfactory, as recognized by the borrower Regular supervision missions were carried out generally every six months and the documentation in the project file has been adequate. Project performance indicators and financial indicators, as outlined in the SAR, were monitored on a regular basis and generally served as realistic measures of the project's performance. Following Bank-financed tariff reforms studies and support in the implementation of new accounting practices, CT managed to introduce a more efficient financial management model, which resulted in significant resources optimization. Starting with cellular service provision, the GoC undertook consistent steps in licensing several competitive operators in all telecommunications market segments 7 3 Overall Bank performance Overall Bank performance was satisfactory. Bank staff worked closely with the Government and the implementing agency to monitor progress on the physical components and to assist in the sector reforms. -9-  The Bank gave substantial advice to the GoC on cost-based tariffs and tariff-rebalancing approaches, following international best practices. Borrower 74 Preparation The quality of the Borrower's commitment and contributions to project preparation was highly satisfactory. 7 5 Government implementation performance The GoC, with active support from China Telecom, was mainly responsible for the implementation of the sector restructuring components. The GoC and CT took steps to ensure a successful implementation of sector reforms by: (a) issuing licences to independent operators and eliminating the monopoly of CT in all segments of the market, and (b) creating a new independent and financially viable operating company, China Telecom. Given the overall progress made on the sector reforms during the entire project period, the Government's performance was considered highly satisfactory. 7 6 Implementing Agency In terms of investment and technical assistance components, the project started with the operating branch of MPT as its first implementing agency. After that it was replaced by MII and recently by CTC - CMC. All these counterparts exhibited remarkable implementation records In more than 50 contracts signed during the First and Second project phases, the Bank never received any complaint from bidders, and the implementation timing was never delayed. The implementing agencies' performance was highly satisfactory. 7 7 Overall Borrower performance Overall Borrower performance was highly satisfactory. 8. Lessons Learned Sector Review. From the very beginning, extensive and focused efforts were made by the Government and the Bank staff in an interactive process to reach an agreement on the policy action plan based on a comprehensive sector study. Up-front understanding of the sector, commitments to sector reforms made by the Governnent and open dialog among all stakeholders led to the success of achieving all the objectives of the Project Sector Reform. China has achieved dramatic improvement in sector performance in the absence of modem regulatory environment. Now that an early-stage pro-competitive market-driven environment has been created, the Chinese government has recognized a need for a clear institutional and legal framework as crucial for the next step of sector reforms and sought Bank assistance. Borrower's Implementation Capacity. The Borrower strictly followed Bank procurement guidelines and even pushed for speeding up the procurement/disbursement processes. Along with the project cost savings and competitive bidding, the Borrower's motivation to comply strictly with its internally agreed schedules and the capacity of absorbing and using the technical assistance in sector reforms greatly contributed to the overall success and sustainability of the Project. - 10-  Rural Access. CTC and CMC have reached an outstanding expansion of their networks, which has extended access to telecommunications services to more than 80% of all rural villages, and has improved the telephone density to more than 20% of the already connected areas. Some of the PTBs had already secured financing for the investment plan aimed at reaching a 100% coverage. In China, only the fixed line operator has a Universal Service Obligation. The targets set by the government, however, were successfully met in the provinces relevant to this project Unlike the universal access funding models known in other developing countries, this central-planning scheme is worth further researching. 9. Partner Comments (a) Borrower/implementing agency The contribution of Borrower to Implementation Completion Report: China Telecom In 1988, The World Band started to approach the Ministry of Posts and Telecommunications of China to discuss the provision of the World Bank loan in the telecom industry. After numerous meetings between the World Bank and the corresponding departments of China, the project went on smoothly and the loan agreement amounting to 250 million US dollars was signed in 1994. By international competitive bidding, the price of optical cable transmission and switching equipment was lowered As a result, during the process of implementing the project (the first phase), we discussed with the World Bank about the establishment of the following-up project (the second phase) funded by the savings of the World Bank loan Soon the second project went into operation. As is known to the World Bank, great changes took place in China during the process of implementing the World Bank loan. The first was the separation of the regulatory and operational functions On the basis of the former Ministry of Posts and Telecommunication, the Ministry of Information Industry was established At the same time, the operation of post and telecom was also separated, leading to the establishment of the State Postal Bureau and the Directorate-general of Telecormmunications. In the wake of the above events, the Directorate-general of Telecommunications separated the fixed, mobile, paging and satellite services and formed China Telecom Corp., China Mobile Corp., Guoxin Paging Corp. and China Satellite Corp. respectively. As a result, the market competition was created in the telecom industry of China, with China Telecom, China Mobile and China Unicom as the major players. While providing the project loan, the World Bank also provided technical assistance projects to the beneficiary organizations in the loan project, covering the tariff study and the consultant and training on accounting. Through these studies, the financial management and accounting work level of these organizations was greatly improved. We thank the World Bank for the assistance it has provided for the system reform and development of the telecom industry in China. The assistance has facilitated the progress of China Telecom toward the modern enterprise. New technologies adopted by China Telecom in the transmission network I Wave division multiplexing technology is widely used. The wave division multiplexing of 16-32 waves is widely adopted for the backbone networks to give a full play of the optical fiber bandwidth. 2. The transmission rate is further improved. 10Gb/s system is widely constructed. In connection with the - 1 1 -  wave division multiplexing technology, the transmission rate of single optical fiber is 320Gb/s. 400G and 1600G system is also used over the network to support the big capacity communications. 3. For the newly laid optical cables, G.655 of new type of optical fibers is adopted to improve the transmission capacity. 4. Integrated operation of loop and mesh networks (8 vertical and 8 horizontal) to make the good use of the advantages of each type so as to improve the reliability and capacity of the networks. 5. The construction of DXC network all over the country improved the flexibility of the network and the efficiency of the service provision. 6. Advanced network management technology is adopted and various network management systems are developed to improve the overall management capability of the transmission networks and to have the real-time understanding of the network situation at any time. (b) Cofinanciers (c) Other partners (NGOs/private sector) 10. Additional Information Background of Sector Reforms Until 1990, the MPT was a monopoly service provider and at the same time, the sector regulator. On September 13, 1993, the State Council authorized the creation of "China United Telecommunications Corporation" (or LIANTONG, or CHINA-UNICOM), jointly owned by the Ministry of Railways (MoR), the Ministry of Power (MoP), and the Ministry of Electronic Industry (MEI). This action introduced, for the first time in China, competition in the provision of basic voice telephone services, and started a reform path. As a reaction to the newly introduced competition, MPT obtained in March 1994 from the State Council the authorization to re-organize itself by creating a "Directorate General for Posts" (DGP) and a "Directorate General for Telecommunications" (DGT). The original intention was to use DGP and DGT as the seed for new commercially oriented operators, and DGT was expected to evolve into a "Holding Company" for the provincial telecommunications operators. However, this was never fulfilled. Successive re-organizations have carried the sector to a different structure. In April 1995, DGT changed its name to "CHINA TELECOM", which was a commercial reaction to Liantong. A more substantial step by MPT followed in the commercial competition with LIANTONG In June 1997, MPT created a subsidiary cellular operating entity based in Hong Kong, "CHINA TELECOM - HONG KONG" (CT-HK). The cellular operations of three key provincial PTAs: Jiangsu - Zhejiang and Guangdong CT-HK were transferred to CT-HK which went public at the Hong Kong stock exchange. MPT/GoC obtained US$ 4.2 billion for 23.5 % of the shares. On April 1, 1998, the GoC restructured itself by reducing from 40 to 29 Ministries. As a result, MPT was replaced by a new Ministry of Information Industry (MII), which merged MPT (the main owner of China Telecom) with MEI (one of the key owners of the competitor LIANTONG), the broadcasting functions, but not the staff, from the National Radio Regulatory Commission, and the responsibilities from the "Informatization Commission" Among other things, this created for the first time in China a centralized regulatory entity by giving MII the main regulatory and sector policy functions, including issuing of - 12 -  licenses, tariffs setting and monitoring, frequency management and supervision of interconnection agreements in a multi-operator environment. In 1998, LIANTONG was protected by the measures undertaken by the State Council and maintained competition in the telecom sector: (a) some key staff from the old-MPT were transferred to LIANTONG, (b) most of LIANTONG's debt was absorbed by the GoC; and (c) all paging operations from the PTAs (which had been centralized in the new entity: "GUO XIN") were transferred to LIANTONG 1998 was also the year when the full separation of Postal and Telecommunications activities was implemented. This process was initiated in June 1998 with pilot cases in the new "provincial area" of Chongqing and Hainan. Another major step in restructuring the telecom sector was accomplished in 1999 with the separation of CHINA - TELECOM into four independent entities (a) CHINA TELECOM CORPORATION - CTC, as the fixed line operator (in essence it was returning to the original wire-line operator in place at the beginning of this Project); (b) CHINA MOBILE CORPORATION - CMC, as the cellular operator which took the mobile operations of the 28 PTAs still under MPT/MIl; (c) all Paging operations, already centralized as "Guo Xin" were transferred to LIANTONG; and (d) all satellite operations, formerly under "China Telecommunications Broadcasting Satellite Corporation (CTBSC)" were given to a new operator: "CHINASAT" Following tariff adjustments which took place in 1994 (for cellular services), 1995 and December 1996, the State Council approved on March 1, 1999, a major change in tariffs. This was the result of one of the Technical Assistance components under this Project, funded by BITS/SIDA from Sweden, whose reconumendations were discussed on the Final Consultancy Seminar held in Beijing in October 1998. The State Council adopted all the recommendations included in the Tariffs Study, except for the tariffmg of cellular services, where the Study recommended "European style tariffs", i.e. with calling party paying and no payment for receiving calls; instead, the State Council adopted the "American style", where the cellular subscriber also pays for receiving calls. This decision was reversed to "calling party pays" a year later. CT-HK later changed its name to "CHINA MOBILE - HONG KONG" (CM-HK) to reflect that now it is a subsidiary of CMC. (Additionally, it has been the policy of the GoC/MII and CMC that most of the assets of the formerly government-owned operator CMC be transferred to CM-HK, which is now in part privately owned). During the year 2000, first the mobile operation of three more PTAs was transferred to CM-HK: Fujian, Henan and Hainan; and on October 4, 2000, seven more followed: Hebei, Shandong, Liaoning, Beijing, Shanghai, Tianjin and Guangxi Zuang. This transaction was for an amount of US$ 32.84 billion, and made CM-HK the largest cellular operator in China with 55 9 % of the market (the second largest in the world). This deal also included selling shares to VODAPHONE, UK. for US$ 2 5 billion, thus increasing the private participation in CM-HK. During 2000, LLANTONG completed its long delayed IPO, which had to wait for a final settlement in the CCF cases. Finally, CTC positioned itself for an IPO by increasing its efficiency through successive re-organizations. It is clear that private sector participation and competition are now becoming an integral part in the Chinese telecom sector. - 13-  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: . IndiicatorlMarix Procteod In last PSRL Actual/Latest Estimate (Fiscal Year ending December 31) (1996 SAR Targets) (2000 Actual) Jiang-Xi Province Installed 2,900,000 4,800,000 Rural 1,080,000 1,100,000 Working 2,030,000 3,500,000 Penetration 6,24 8 10 Digital microwave routes 16,000 km n/a Optical fiber cables 5,000 km n/a Rural fiber cables 14,000 km 15,299 km Staff/1,000 connected lines 5 6 5 76 (1) Guang-Xi Province Installed 3,107,000 3,800,000 Rural 1,464,000 670.000 Working 2,500,000 3,100,000 Penetration 7 11 6 34 Digital microwave routes 5,000 km 15,294 km Optical fiber cables 500,000 km n/a Rural fiber cables 80,000 km n/a Staff/1,000 connected lines 3 4 5 68 (*1) Heilong- Jiang Province (*2) Installed 4,630,000 6,000,000 Rural n/a 928,500 Working 4,160,000 4,641,600 Penetration 5 03 (1997) n/a Digital microwave routes n/a n/a Optical fiber cables n/a 6,607 km Rural fiber cables n/a 37,000 km Staff/1,000 connected lines n/a n/a 5 48 (*1) * 1 As of December 31, 2000 *2 For Heilongjiang, the SAR targets were drawn from the 1993 SAR Output Indicators: Indicator/Matrix PM*Jeftd In last Pd R Actual/Latest Estimate Quality of Serice Targets December 2000 a) Call Completion rate (long distance calls) 55% in December 1993 - 41 % b) Call Complebon rate Incoming & Outgoing Intemational Incoming 64% December 1997 - 45% Outgoing 53% End of project - 14 -  Annex 2. Project Costs and Financing Project Cost by Component (in UJS$ million equivalent) Apptzaisal ActuailLatest Percentage of E3;timate Estimate Appraisal Project Cost By Component US$ million US$ million Buildings 548 90 548.90 100 Switching 108.50 78 24 72 11 Transmission 171.40 129 96 75 82 TA + Training 1.60 1.30 81.25 Total Baseline Cost 830.40 758 40 Physical Contingencies 0.00 0 00 Total Project Costs 830.40 Total Financing Required 830 40 758 40 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Procuretment Method' Expenditure Category [ICB sc N.B.F. Total Cost 1. Works 0.00 0.00 0.00 548.90 548.90 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 257.30 0.00 0.00 22.60 279 90 (249.70) (0.00) (0.00) (0 00) (249.70) 3. Services 0.00 0.00 0.30 1 30 1.60 (0.00) (0.00) (0.30) (0 00) (0 30) 4. Miscellaneous 0.00 0.00 0.00 0 00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0 00 0 00 (0.00) (0.00) (0.00) (O 00) (0.00) 6. Miscellaneous 0 00 0.00 0.00 0 00 0.00 (0.00) (0.00) (0.00) (0.00) (O 00) Total 257.30 0.00 0.30 572.80 830 40 (249.70) (0.00) (0.30) (0 00) (250.00) - 15-  Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) Expenditure Category ICe P Cu M tho 2 N.B.F. Total Cost ICS ~~~NCS Other _____ 1. Works 0.00 0 00 0.00 548 90 548.90 (0.00) (0.00) (0.00) (O 00) (0.00) 2. Goods 208.20 0.00 0.00 0 00 208 20 (208.20) (0.00) (0.00) (0.00) (208.20) 3. Services 0.00 0.00 0.00 1 30 1.30 (0.00) (0.00) (0.00) (0.00) (O 00) 4. Miscellaneous 0.00 0.00 0 00 0 00 0 00 (0.00) (0.00) (0.00) (O 00) (O 00) 5. Miscellaneous 0.00 0.00 0.00 0 00 0 00 (0.00) (0.00) (0.00) (0.00) (O 00) 6. Miscellaneous 0.00 0 00 0 00 0 00 0 00 (0.00) (0.00) (O 00) (0.00) (O 00) Total 208.20 0.00 0.00 550.20 758.40 (208.20) (0.00) (0.00) (0 00) (208 20) ' Figures in parenthesis are the amounts to be financed by the Bank Loan All costs include contingencies 2' Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Apraisatl Estimate ActuallLatest Estimate Bank Govt. CoF. 0auk Govt. CoF. Bank Givt. CoF. Buildings 0 00 548 90 0 00 0 00 548 90 0 00 0 0 100 0 0 0 Switching 86 50 22 00 0 00 78 24 0 00 0 00 90 5 0 0 0 0 Transmission 163 20 8 20 0 00 129 96 0 00 0 00 79 6 0 0 0 0 TA + Training 0 30 0 00 1 30 0 00 0 00 1 30 0 0 100 0 TOTAL 250 00 579 10 1 30 208 20 548 90 1 30 83 3 94 8 100 0 - 16 -  Annex 3: Economic Costs and Benefits Please refer to para. 4.2.1 Physical Component, including 4.2.1.1 Switching Network and 4.2.1.2 Transmission Network, plus para. 4.3 and 4.4 for the reasons why the calculation of the ERR and FRR is not appropriate in this Project. The financial statements for Guangxi Province are provided below. - 17 -  CHINA - GUANGXI PROVINCE P & T (thousands of Yuan) year ended 31 Dec. 199... Audited 1996 Audited 1997 Audited 98 Audited 99 2000 Net Oper. Rev. (A) 2,397,680 3,239,050 3,790,356 2,818,184 2,963,362 Other Revenue 12,550 (3,070) 12,560 6,010 Non - Oper revenue 11,450 16,830 60,230 70 16,830 TOTAL REVENUE (C) 2,421,680 3,252,810 3,863,146 2,824,264 2,980,192 TOTAL OPER. EXPENSES (D) 2,287,980 3,176,190 3,788,420 3,570,861 4,212,746 Difference Revenue - Expenses (C-D) 35,420 26,630 (59,654) (932,807) (1,287,919) DEPRECIATION 14 77% 13 55% 14 00% TOTAL FIXED ASSETS 6,271,810 7,133,070 9,568,720 6,898,235 7,402,470 TOTAL CURRENT ASSETS (R) 2,567,160 3,825,150 4,288,060 2,037,945 0 TOTAL ASSETS 8,838,970 10,958,220 13,856,780 8,936,180 7,402,470 TOTAL EQUITY (S) 5,271,010 6,612,160 7,744,800 4,341,020 0 TOTAL CURRENT LIABILITIES (U) 2,198,900 2,785,530 3,602,230 2,852,180 0 TOTAL EQUITY AND LIABILITIES 8,838,970 10,958,220 13,856,780 8,936,180 0 Net Allocated Profit 362,420 438,090 315,326 (726,397) (1,287,919) less: Income tax 0 149,870 178,070 3,110 (425,013) After Tax Net Alloc. Profit 362,420 288,220 137,256 (729,507) (862,906) Profit for Distribution 353,794 278,571 16,256 (841,507) (690,325) * Production & Expansion Fund 51%,70% 180,435 142,071 (483,227) Capital Reserve 173,359 136,500 (207,097) Depreciation + Admin Deprec 882,160 1,118,500 1,214,400 1,100,000 1,610,963 less: 70% LD Deprec to MPT 6,014 6,741 14,441 * Net Depreciation 876,146 1,111,759 1,214,400 1,100,000 1,000,000 Surcharges 125,146 295,440 235,600 147,800 * Connection Fees 681,530 623,840 124,600 609,000 * Diff =borrowing+State Funds 1,185,698 (112,007) 909,144 264,707 500,000 - 18 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Pcrformance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Dcvelopmcnt Month/Year Count Specialty Progress Objective Identification/Preparation 1992 - 1993 3 TS, TA, TE combined with Sector Study Appraisal/Negotiation 1993 4 TS,FA,TE,TE Supervision May 1994 - Seq 2 3 FA, TE, TEc S HS I ISept 94 - Seq 3 2 FA, TE S S 22 July 95 - Seq 5 2 FA, TE HS S May 96 - Seq 6 2 FA, TE HS S 21 June 97 -Seq 8 2 FA, TE HS HS 9 July 98 - Seq 10 2 FA, TE HS HS 26 May 99 - Seq 12 2 FA, TE HS HS ICR Nov 2000 - Jan 2001 4 FA, TE, ECON, PA (b) Staff Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US5 (.000) Identification/Preparation 90 66 318 20 Appraisal/Negotiation 44 57 162 80 Supervision 75.74 333 70 ICR 7.50 30.00 Total 218 47 844 70 - 19 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies O H OSUOM O N * NA O Sector Policies O H *SUOM O N O NA X Physical * H O SU O M O N O NA N Financial O H * SU O M O N O NA X Institutional Development 0 H * SU O M 0 N 0 NA FEnvironmental O H OSUOM O N * NA Social OPoverty Reduction O H OSUOM O N * NA JGender OH OSUOM ON *NA OOther (Please specify) O H OSUOM O N O NA 2 Private sector development 0 H 0 SU O M 0 N 0 NA O Public sector management 0 H 0 SU O M 0 N 0 NA O Other (Please specify) OH OSUOM ON O NA - 20 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6 1 Bank performance Rating F Lending OHS*S Ou OHU