Iraq - Telecommunications Project

RESTRICTED FILE8 COPY Report No P-984 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTBENATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THEI EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF IRAQ FOR A TELECOMMUNICATIONS PROJECT August 25, 1971  DITERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMME'TDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF IRAQ FIOR A TELECOMMWNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Iraq for the equivalent of US $27.5 million, to help finance the foreign exchange costs of the Project which forms part of Iraq's five-year Program for the expansion and improvement of the national telecommunications system. The loan would have a term of 20 years, including 5-1/2 years of grace, with interest at 7-1/4 percent per annum. PART I - INTRODUCTION 2. Iraq received its first Bank loan of $12.8 million ($6.3 mil- lion, net of cancellation) for a flood control project in 1950 and its second one for $23 million ($19.0 million, net of cancellation) for a Road Project in 1966. To date therefore, the total net Bank lending has aggregated $25.3 million. The 1966 Road Project encountered some initial delays, because improvements in the organization of maintenance opera- tions and in maintenance workshops were not undertaken soon enough. After prolonged discussions, however, agreement was reached in July 1969, on measures required to achieve these improvements. By this time, except for one road section, most of the construction work had been satisfac- torily completed at costs substantially lower than original estimates. In the circumstances, and with Government's agreement, $4 million was cancelled from the loan and at the same time in October 1969, an additional road section and a bridge wjith approach roads were added to the project. The Road Project is now progressing satisfactorily and the currently un- disbursed amount of US $5.0 million is expected to be fully utilized at the completion of the project by the end of 1972. 3. After the first loan to Iraq was made in 1950, the Bank did not receive further requests for assistance, since the Government felt that its oil revenues provided the country with sufficient foreign exchange to carry out its public investment program without recourse to external borrowing. In the early 1960's, however, a considerable increase in public expenditure led the Government once again to seek foreign financing. In early 1963, it requested renewied Bank financing, and this resulted in the 1966 road loan. Internal political instability  - 2 - that followed thereafter, together with the Governxaent's reluctance to approach western sources for assistance, placed obstacles in the path of closer relations betwieen Iraq and the Bank, but then began to evolve more favorably after the present regime assumed power in July 1968. 4. A resumption of Bank lending to Iraq seems justified, particu- larly in view of the country's overall need to make good gradually the serious shortfalls in infrastructure which have accumulated over recent years. In its program for assisting Iraq, the Bank would propose to give priority to agriculture, education, transportation and public utilities. The project proposals which are at an advanced stage of preparation are the Lower Khalis irrigation and drainage, grain storage and education proposals. Assistance has been requested in preparing a second roads project and an integrated agricultural development project in NIorthern Iraq. 5. IFC has made no investments in Iraq. PART II - THE ECONOMY 6. A report entitled "Current Economic Position and Prospects of Iraq" (EMA-35) dated August 20, 1971 is being distributed separately to the Executive Directors. A Basic Data sheet is attached as Annex II. 7. The past decade in Iraq has been marked by political instability. The revolution of 1958 which created the Republic, has substantially changed the country's social and economic structure. It progressively deprived the former feudal and entrepreneurial classes of the basis of their political and economic influence, while at the same time, a socialist- oriented government gradually assumed control of larger commercial and industrial enterprises. This gradual but fundamental transition from one economic system to another, together with frequent changes of government and key officials in economic positions, has not allowed Iraq to grow as fast as its economic potential would justify and has affected the adminis- trative efficiency for long periods. The present Government, however, has now been in power for three years and has gradually been consolidating its position. Several recent measures taken by it seem indicative of its sense of growing confidence. It recently took steps to ease some of the past political controls, modify the highly centralized control over industry and seelc a greater role for private enterprise. It effected a settlement with Kurdish insurgents in March 1970, which made it possible to focus attention more closely on development problems. 8. Iraq has sought to develop its economy since the late fifties through a series of development plans. The most recent one (1965-69) fell far short of its objectives. The actual annual growth rate fell  - 3 - significantly short of the planned target of 8 percent, and public invest- ment over the period was 55 percent short of that projected in the Plan. The virtual cessation of investment by foreign oil companies, the low rate of public investment and savings, inadequate planning and adminis- tration, were major causes underlying this unsatisfactory performance. 9. Prospects for the seventies however appear to be more encouraging. The present Government expects to make a stronger public sector contribution to economic development than in the past. The National Development Plan (1970-74), which it has formulated, focuses on strengthening agriculture, developing human resources and building up import substitution and extractive industries. The Plan, initiated in April 1970, foresees an average annual growth rate of 6.8 percent in GDP over the five-year period 1970-74, with agriculture expanding at an average annual rate of 7 percent and industry at 12 percent. The Plan projects a total investment of $3 billion, to be financed mostly from oil revenues and domestic savings, together with modest external assistance. 10. Oil continues to be the key sector in the Iraqi economy accounting for nearly 40 percent of the GNP, 90 percent of exports and over 50 percent of Government revenues. WJith the agreement reached recently with the foreign oil companies in Tehran, followed by that on oil exported from Mediterranean ports, oil revenues are expected almost to double. 11. But the financing requirements of the current Plan are heavy. Even with improved oil revenue prospects, the country will need to rely on some external aid to achieve the planned target of a 6.8 percent growth rate. At present, there is only a tenuous linkage of macro- economic aggregates with the projects with which those aggregates are to be achieved. The scope for the success of the Plan will significantly depend on better project preparation, effective implementation machinery and closer coordination of Plan requirements with fiscal and monetary policies. 12. The Bank has in recent years been approached by some of Iraq's creditors with regard to outstanding claims of foreign contractors for works or services contracted or performed under preceding regimes and has been in contact with the Government from time to time, on this matter. The Government has recently been dealing with such claims on a government- to-government basis, after a period during which appeals to the Iraqi courts had been allowed in case the sums offered by the Government on the basis of the review of the cases by a governmental committee were considered unsatisfactory by the contractors. It would seem from the recent example of the settlement of the French claims and current  - 4 - discussions of British claims, both pursued through diplomatic channels of the countries of the contractors concerned, that Government intends and is gradually moving towards the overall settlement of such claims. 13. In the last few years, Iraq's reliance on external financing for public investment has been very modest. The total amount of external public debt stood approximately at $290 million at the end of 1970, most of it in the form of long-term loans with relatively low interest. As a result, the debt service ratio is still rather low (slightly over 2 percent in 1970). In the absence of assistance from western sources, Iraq has been increasingly relying on suppliers' credits and bilateral assistance from East European countries. In March 1971, for instance, it obtained a 200 million rouble credit from the USSR, under a frame agreement, to be repaid by oil exports on a barter basis. The credit is proposed to be utilized primarily for exploiting oil and mineral resources as well as for industrial development. This pattern of financing in these fields can be expected to continue. Finance for the requirements of agricultural development, training of human resources and expansion of basic infrastructure, on the other hand, is likely to be sought from western and international sources such as the Bank and the UNDP. Iraq has the capacity to service substantial additional external debt, and in view of its need for some external assistance for its development objectives, I consider it eligible for further assistance from the Bank, PART III - THE PROJECT Sector Background 14. Since 1945, the development of telecommunications has been severely limited both qualitatively and quantitatively, and the last ten years have been years of virtual stagnation. Equipment is anti- quated, both for national and international service. Nearly half of the automatic exchanges which are of the step-by-step type are between 20 to 33 years old. Local cable networks are largely of the same age and in very poor shape. Long distance telephone service in Iraq is provided by carrier systems on open wire routes, wvhich permit limited capacity and reliability. The telegraph services in Iraq are mainly operated on Morse, with very few manually operated gentex switch boards. The telex system is also manually operated with only 50 subscribers, essentially airlines, news agencies and embassies. The international service is operated by high frequency radio and is subject to shortcomings of this type of operation. 15. Progress in this sector was hampered in the past years by repeated inadequate budgetary allocations and changes in PT&T leader- ship. Long waiting lists for telephone connections, and abnormal delays in long-distance national and international services, are clear  - 5 - symptons that this important sector lags behind the demand for its services and the needs of a country, over 50 percent of whose GNP is contributed by oil, industry and commerce. 16. Recognizing these shortcomings, as a part of the National Development Plan (1970-74), the Government formulated a five-year Program to improve and expand the national telecommunication system. It aims at quantitative and qualitative improvements in local service and at partly satisfying the demand for subscriber connections by the installation of about 100,000 lines of local exchange equipment and facilities. It also aims at satisfying in full the traffic demand fore- cast for existing subscribers and new connections for long distance telephone, telegraph and telex facilities and for international services. Project Description 17. The proposed Project consists of most of the principal ele- ments of the Government's above-mentioned five-year telecommunication expansion/improvement Program. The main fea%vures of the Project and the loan are summarized in Annex III, and the Appraisal Report (PU-65a) is also attached. Briefly, the Project includes the provision of (i) a microwave system colinecting main towns in Iraq with Baghdad, together with multiplexing equipment for about 1,500 channels and spurs for about six TV stations and UHF links to important urban centres in the northeast, (ii) long-distance exchange facilities with capacity for direct subscriber trunk dialling for about 5,000 lines, (iii) national and international telex and gentex services with about 700 lines, (iv) part of the local cable network, drop wires, branich exchanges and other subscriber apparatus, (v) satellite ground station and associated facilities, and (vi) consultant services. Besides these Project comonents, the Program includes the installation of about 100,000 lines of automatic local exchange equipment, together with the balance of the local and junction cable network and associated facilities, buildings and other facilities required for the expansion Program, some international links with neighboring countries and training facilities for PT&T's technical personnel. 18. The Project is estimated to cost about $39.7 million. The proposed loan of $27.5 million will cover its estimated foreign exchange component. The Program is estimated to cost about $61.4 million. The financing of the items in the Program not included in the Project, as also the local cost expenditure of about $12.2 million relating to the Project, will be provided by the Government.  - 6 - 19. Procurement of goods financed by the loan would be on the basis of international competitive bidding. Disbursements would be made for the full foreign exchange cost of the equipment imported and services provided. No disbursements would be made for expenditures made before signing of the proposed loan. Project Implementation 20. The Project will be implemented by Iraq through its Posts, Telegraphs and Telephones Administration (PT&T), which is responsible for all postal and telecommunication services in Iraq. Although statu- torily, the PT&T is run by a Board of Directors nominated by the Government, with the Director General of PT&T as Chairman, in effect, PT&T operates as a department of the Government. Financially, it is also not a fully independent body, and under Iraqi laws, the capital for new telecommunication facilities is to be provided by the Govern- ment. In these circumstances, the proposed loan is being made directly to the Government, although the implementation of the Project and its ultimate operations will be carried out by PT&T. 21. The Government however is cognizant of the need to operate telecommunication services with qualified and experienced personnel on sound management principles. Towards that objective, it has already engaged management consultants who are reviewing the administrative and financial procedures of PT&T, to enable the Government to consider the introduction of appropriate improvements. The Government also has been studying, as a long-term proposition, the feasibility of forming separate departments for telecommunications and postal operations. The same consulting firm is reviewing this aspect and has tentatively proposed separation of postal and telecommunication accounts as the first step towards eventual separation of these two functions. Accounts and financial statements relating to telecommunications operations are to be provided from April 1, 1975. Recognizing the need for technical consultants to draw up bidding documents and evaluate them, the Government has also engaged suitable consulting firms for the microwave system and intends employing consultants for the satellite ground station. These services will be financed from the proceeds of the proposed Bank loan. The Gcvernment is further arranging financial assistance from the UNDP, for an expansion of the existing training facilities for training engineers and technicians who can operate the modern and rather sophisticated telecommunications system which will be installed through the current expansion. Financial Aspects and Rate of Return 22. Under the Iraqi system, all developmental or expansion projects, including the telecommunication expansion Program, have to be sepecifically included in and financed from the National Development Plan. Financing  therefor is provided out of Plan funds, which are replenished with part of the oil revenues and a share of the profits of the various departments and entities of the Government as laid down in the laws appropriate to each case. In the case of PT&T, the amounts to be appropriated annually to the Treasury and to Plan funds out of profits are prescribed in various laws. While this pattern of financing differs from conventional practice, the Government does recognize that PT&T should operate on a commercial basis as prescribed in PT&T Law No. 81 of 1963, and has agreed that steps will be taken to ensure that from April 1, 1977, a reasonable return on the national investment in telecommunications will be obtained. For this purpose the Loan Agreement provides that annual revenues should cover operating expenses, maintenance and depreciation, interest and repay- ment on long-term borrowing to the extent not covered by depreciation, plus a reasonable surplus. This surplus accrues to the funds of the National Development Plan, to be used for Plan investments. 23. The Program, including the Project is considered to be technically sound and economically justified. It is not practicable to compute a rate of return for the project alone; the internal financial rate of return on the whole Program is estimated to be about 14 percent. PART IV - LEGAL INSTRUIMNTS AMD AUTHORITY 24. The draft Loan Agreement between the Bank and the Republic of Iraq, the Report of the Comrittee provided for in Article III, Section 4 (iii) of the Articles of Agreement, the draft Supplementary Letter on Procurement and the text of a Resolution approving the proposed loan are being distiributed to the Executive Directors separately. The draft loan documents on the whole follow the pattern of documents for similar projects, except for the rate of return covenant which has been for- mulated to meet the special circumstances of the Iraqi planning system, including the financing arrangements which it provides for projects included in the country's Plan. 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RECOMbiENDATION 26. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments August 25, 1971 WTashington, D.C.  Annex I Page 1 of 1 REPUBLIC OF IRAQ STATEMENT OF BANK LOANS (as of July 31, 1971) Amount (US$ million) Loan No. Year Borrower Purpose Bank Undisbursed 26-IQ 1950 Iraq Flood Control 6.3 457-IQ 1966 Iraq Roads 19.;O 5.0 Total,net of cancellations 25.3 of which has been repaid to the Bank and others 7.3 Total now outstanding 18.0 Amount sold 0.3 of which has been repaid 0.1 0.2 Total now held by Bank 17.8 Total undisbursed 5.0 5.0  Annex II Page 1 of 2 REPUBLIC OF IRAQ BASIC DATA Area 435,000 km 168,000 square miles Population 9.1 million (1969) Rate of Growth 3.3%o per annum Density per km2 21 (54 per square mile) Gross National Product (1969) ID 962 million Rate of Growth 1966-1969 (current prices) 6.5%/ per annum Rate of Growth 1969 (current prices) 7%0 Per capita GNP 1969 ID 106 (US $296) Gross Domestic Product at Factor Cost (1969) ID 1039 million of which, in per cent: Agriculture, Forestry and Fishing 19.0 Mining and Quarrying 32.6 Industry 9.0 Distribution, Transportation and Communication 22.0 Public Administration and Defence 12.4 Other 5.0 Percent of GNP at Market Prices (1969) Gross Investment 16.5 Gross National Savings 20.6 Private Consumption 53.1 Money and Credit December 1970 Annual Rate of (TDirullion) Increase, 1966-70 Money Supply 215.6 8.5% Claims on Government 118.8 9.2% Claims on Private Sector 87.2 6.9% Rate of Increase in 1968-69 1966-69 Consumer price index 9.0Y/J 3.3% per annum Government Finance (ID million) 1968-69 1969-70 (Provisional) (Estimate) Current Expenditure 247.5 286.5 Current Revenue 293.3 335.1 Surplus 45.8 48.6 Development Expenditure 65.7 94.9  Annex II Page 2 of 2 External Public Debt (US $ million - preliminary estimate) Total Debt Outstanding: December 31, 1970 290 Net of Undisbursed 277 Total Annual Debt Service 25 Debt Service Ratio approx. 2.2% of exports of goods and services Balance of Payments (ID million) 1968 1969 Exports of Goods and Services 224.1 211.0 Imports of Goods and Services 157.0 158.6 Balance on Goods and Services 67.1 52.4 Commodity Concentration of Exports 1969 % of Total Exports Oil 87.6 Date 3 5 Livestock Products 1.5 Net Foreign Exchange Reserves (December 1970) US $312 million (equivalent 8 months imports) IMF Position (US $ million) (March 31, 1971) Quota 109 Net Drawings/Fund Sales - August 25, 1971  Annex III Page 1 of 3 REPUBLIC OF IRAQ LOAN AND PROJECT SUMMARY Borrower: Republic of Iraq. Amount: US $27.5 million equivalent. The proposed loan would fully cover the project's estimated foreign exchange component. Tenns and Conditions: Payable in 20 years, with 5-1/2 years grace, at 7-1/h% interest per annum. Project: Project forms part of the Borrower's five- year Program for the expansion and improvement of telecommunication facili- ties, expected to be completed by March 31, 1976, and includes: (i) Microwave system connecting main town with Baghdad, together with multiplexing equipment for about 1,500 channels, and interconnecting spurs for 6 TV stations, UHF links to urban centers in Northeast Iraq; (ii) Part of the local exchange cable network for subscriber distribution and subscriber apparatus; (iii) Long distance direct subscriber trunk dialling facilities for about 5,000 lines; (iv) National and international telex and gentex services with facilities for 700 lines; (v) Satellite ground station, interna- tional switching center and related facilities; and (vi) Consultant services.  Annex III Page 2 of 3 (US $ millions) Cost of Proje-,t Component Local Foreign Total 1. Long distance scheme consisting of: (a) Microwave system 1.4 11.4 12.8 (b) Long distance exchange equipment accessories 1.2 4.2 5.4 2. Local cable network subscriber apparatus, etc. 8.0 5.0 13.0 3. National and inter- national telegraph/telex facilities 0.3 1.6 1.9 4. Satellite ground station facilities 0.5 3.3 3.8 5. Consultant services - 0.4 0.4 6. Contingencies 0.8 1.6 2.4 TOTAL PROJECT COST 12.2 27.5 39.7 (US $ millions) Financing: Local Foreign Total IBRD Loan - 27.5 27.5 Government contribution 12.2 - 12.2 TOTAL 12.2 27.5 39.7 Procurement Arrangements: Bank financed items will be procured, following international competitive bidding.  Annex III Page 3 of 3 Estimated (US $ millions) Disbursements: 1971 1972 1973 1974 1975 1976 0.1 8.0 8.2 7.3 3.3 o.6 Management Consultants: Arab Research and Administrative Center, U.A.R. Microwave Consultants: Microwave Services, Inc., U.S.A. Satellite Ground Station Consultants: Consultant arrangement being finalized with Comsat, U.S.A. Internal Financial Rate of Return: 1h% Appraisal Report: Report No. PU-65a dated August , 1971. August 25, 1971