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Report No. PU-64a

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 maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF THE

FOURTH TELECOMMUNICATIONS PROJECT

INDIA

March 30, 1971

Public Utilities Projects Department

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CRENCY E UVALNTS

US$1 -Rs 7.50Re 1 - US$ 0.133Rs 1 million - US$1,333.00

I$EASURES EQUIVALENTS

1 Kilometer - 0.622 miles

FISCAL YEAR

April 1 _ Narch 31

LIST OF AMBIIEVIATIONS USED IN THE REPORT

ARC - Administrative Reforms Commissionr&AG - Comptroller and Auditor GeneralCIDA - Canadian International Development AgencyDEL - Direct Exchange LineGOI - Government of IndiaHCL - Hindustan Cables LimitedP.TL - Hindustan Teleprinters LimitedINTEISAT - International Telecommunications Satellite ConsortiumITI - Indian Telephone Industries LimitedOYT - Own Your TelephonePABX - Private Automatic Branch ExchangeP&T - The Indian Posts and Telegraphs DepartmentPCM - Pulse Code liodulation (System)RAX - Rural Automatic ExchangeSTD - Subscriber T-unk DialingTAX - Trunk Automatic ExchangeVHF - Very High FrequencyYFPT - Voice Frequency TelegraphUHF - Ultra High Frequency

INDIA

APPRAISAL OF THE FOURTH TELECOINTJNICATIONS PROJECT

TABLE OF CONTENTS

Page No.

SUNIARY AND COINCLUSIONS i - ii

1. INTRODUCTION 1

2. THE SECTOR AND THE BORROWER 2The Economic Setting 2Sector Organization 2P&T Operations 3Existing Facilities 4

3. THE PROGRAJq AND THE PROJECT 5Project Targets 5Project Costs 5Progress Under Existing Loan 615-IN/Credit 153-IN 6The Proposed Credit 6Items for IDA Financing 6Contingencies 7Procurement 8Disbursement 9Project Execution 10

4. PROJECT JUSTIFICATION 11Market Demand 11Least-Cost Solution 11Internal Financial Rate of Return and Economic Benefits 12

5. FINANCES 13Financial Reorganization - Telecommunications Branch 13Audit 14Tariffs 14Pro Forma Financial Statements 14Present Financial Position 15Past Earnings 16Future Finances - Financing Plan 16Future Operating Results 18Future Financial Position 18

6. RECOUHENDATIONS 19

This report is based on the findings of a mission consisting ofHessrs. I.A. Newstead and J.k. Vance who visited India in November/December 1970.

LIST OF' ANNEXES

1. Telephone Density in a Number of Asian Countries

2. Organization Chart - Telecommunications Sector

3. Staff Levels

4. Project Service Targets

5. Project Costs

6. Schedule of Disbursements - Loan 615IN/Credit 153IN

7. Items for IDA Financing

8. Notes on the T lecommunications Manufacturing Industries

9. Measures for Improving Crossbar Production

.0. Estimated Schedule of Disbursements - Proposed Credit

1. Demand for Telephone Service

12. Internal Financial Rate of Return on the Project

13. Financial Reorganization - Telecommunications Branch

l4. Summary of Tariffs

15. Pro Forma Balance Sheets 1965/66-1975/76

16. Pro Forma Statements of Income 1965/66-1975/76

17. Pro Forma Sources and Applications of Funds 1965/66-1975/76

INDIA

APPRAISAL OF THE FOURTH TELECOMMUNICATIONS PROJECT

POSTS AND TELEGRAPHS DEPARTMENT

S 122IARY AND CONCLUSIONS

i. The Posts and Telegraphs Department (P&T) is approaching mid-termof its 5-year telecoramnications program, forming part of India's FourthFive-Year Plan (April 1969 - March 1974). The expansion program is a con-tinuation of sch'emes successfully carried out previously as part of India'sThird Five-Year Plan with financing from IDA (Credits 28-IN and 58-IN).

ii. The program aims at the balanced development of telecommunicationsto support the growing needs of industry, trade and Government through con-nection of an additional 540,0oo telephone services, extension of telexservices and rehabilitation and expansion of the long-distance network.This program constitutes the project under appraisal.

iii. The total project cost is estimated at US$652 million equivalentswith a foreign exchange content of US$168 million. Financing of foreignexchange costs during the first phase (approximately three years) of theproject was provided by Loan 615-IN/Credit 153-IN each of US$27.5 millionand by a CIDA credit of C$35.5 million (US$32.5 million) recently increasevto C$37.8 million (US$35 million). GOI is now seeking a Credit of US$78million to complete the financing plan.

iv. As with the previous Loan/Credit the proposed Credit would beused for direct imports by P&T (US$26 million) and for reimbursement ofthe foreign exchange content of goods supplied by the government domestictelecommunications factories (US$52 million).

v. Progress to date has been satisfactory despite shortfalls insupplies from the cable factory in West Bengal where there is acute indus-trial unrest, and shortages in crossbar switching equipment due to procure-ment and production difficulties at the ITI factory. Increased cable importsare proposed to offset local deficiencies, and measures to help overcomeproblems of crossbar production - relatively new and complex - are beingtaken by the Administration, including employment of production consult-ants and streamlining of procurement procedures for emergency purchases.Despite these delivery problems, the overall quality and price of locallyproduced telecommunications goods are competitive in world markets.

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vi. P&T has a high degree of autonomr, technical management is sound.and financial reforms, now being implemented according to agreement reachedon specific issues and timetables during negotiations for Loan 615-IN/Credit 153-IN, are creating the basis for eventual operation along commerciallines. Tariffs are reasonable and sufficient to ensure an adequate rate ofreturn on average net plant in service of 11% which is necessary to ensurethat P&T can finance a reasonable portion of its capital expansion frominternal funds. The internal financial rate of return for the 5-year projectis 16%.

vii. All goods purchased under the Credit with the exception of rela-tively small quantities of proprietary components available only from onesupplier will be procured through international competitive bidding orequivalent procedure acceptable to the Association.

viii. The project forms a suitable basis for a further credit of US$78million to complete the financing plan.

INDIA

APPRAISAL OF THE FOURTH TELECOOMUNICATIONS PROJECT

POSTS AND TELEGRAPHS DEPART'ENT

1. INTRODUCTION

1.01 The Government of India (GOI) has applied for assistance in financ-ing the foreign exchange costs required to complete the financing plan forthe telecommuiuications expansion program of the Posts and Telegraphs Depart-ment (P&T), forming part of GOI's current Fourth Five-Year Plan (1969/70 -1973/74).

1.02 There have been three Bank/IDA lending operations for P&T's tele-communications development in India. Two previous IDA credits, for US$42million (1962) and US$33 million (1964), were made during the Third Five-Year Plan period (1961 - 1966). Foreign exchange for the first part of thecurrent P&T five-year program was financed by Loan 615-IN/Credit 153-IlUJ,each for US$27.5 million, and a Canadian International Development Agencycredit of C$35.5 million (US$32.5 million) recently increased to C$37.8million (US$35 million). The Bank/IDA funds were intended to cover aboutthree years' imports of finished goods and the foreign exchange content ofabout two years' supply of goods from the local, government-owned factories;the latter will now extend to almost three years due to shortfalls in factoryproduction that necessitate an increased level of imported goods to completethe five-year program.

1.03 The proposed credit of US$78 million would cover the rest of theprogram. It is estimated that the current Loan/Credit will be about 90Odisbursed by lIlarch 1972 and fully disbursed by the closing date ofDecember 31, 1972. Additional foreign exchange is required now in orderto allow a smooth tendering, ordering and delivery process without disrupt-ing the program because of a required lead time of two years.

1.04 This report, which is confined to the telecommunications aspectsof P&T's operations except where the context indicates, is based on infor-mation provided by P&T and on the findings of an appraisal mission byMessrs. I. A. Newstead and J. h. Vance, who visited India in November/December 1970.

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2. THE SECTOR AND THE BORROJWfER

The Economic Setting

2.01 India has a population exceeding 550 million, second largest inthe world, and an area of over 3 million km2 which makes it the world'sseventh largest country. Since 1951, GOI has initiated a series of Five-Year Plans designed to foster balanced development of agriculture, industry,power supply and communications and to raise the standard of living, Whichtoday is indicated by a GNP per capita of about US$80 equivalent.

2.02 Telecommunications services are able to meet only about two-thirdsof the present demands of administration, commerce and industry. With 950,0CGdirect exchange lines (DEL's) connected there is a waiting list of nearly500,0OO which is expected to exceed 1 million by 1974. The telephone densityin India of 0.2 telephones per hundred population is one of the world's lowest.For comparison purposes, Annex 1 gives statistics of telephone density fora number of Asian countries.

2.03 The wide dispersion of industry -- cotton and textiles in the west,iron and steel in the northeast, forestry and timber in the central area andagriculture along the river deltas-- generates an enormous movement of goodsthroughout the country. This places special demands on telecommunicationsto aid the flow of information within these regions and between the principaltrading centers of Bombay, Madras, Calcutta and Nagpur. Similarly, the orga-nization of State Governments, with their close dependence on the CentralGovernment, generates considerable traffic between the fifteen State capital,and Delhi. Except for a few links, the long distance network is heavily over-loaded and trunk calls are subject to long delays.

Sector Organization

2.04 The organization of the telecommunications sector is illustratedin Annex 2. P&T operates all public telecommunications facilities in Indiaand to adjoining countries; overseas services are operated by the OverseasCommunications Service (OCS), a separate government authority. P&T is agovernment department under the jurisdiction of the Ministry of Informatioa,Broadcasting and Communications. It is controlled by a Board comprised ofthe six senior executives of the P&T directorate and chaired by the DirectorGeneral, who also holds the rank of Secretary in the Ministry. Only theMinister for Communications, the Minister of State for P&T, and the FinanceMinister (to whom the finance member of the Board has some direct responsibil-ity) are interposed between the P&T Board and the Cabinet. The Departmenttherefore has adequate autonomy in policy formulation and day-to-day operaSicrisalthough its finances are subject to government control, with receipts paidinto a consolidated revenue account, and both capital and operating fundscoming from the Government Budget.

2.05 Nearly 70% of telecommunications plant for P&T is manufactured bythree government factories -- Indian Telephone Industries Limited (ITI),Hindustan Teleprinters Limited (HTL), and Hindustan Cables Limited (HCL)

and the P&T workshops. The factories are separate entities, with independeutBoards of Directors. ITI and HTL are responsible to Government through tLeMinistry of Information, Broadcasting and Communications while HCL reportsthrough the Hinistry of Industrial Development, Internal Trade and CompaxyAffairs.

2.06 In May 1970 the Administrative Reforms Commission published itsreport on Posts and Telegraphs, which is now under consideration by Govern-ment. Its recommendations include the retention of P&T as a GovernmentDepartment, operating on commercial lines; the question of separation ofposts and telecommunications would be reviewed at a later date when the paceand intensity of development may outweigh the present balance of argumentfavoring administrative unity. This is acceptable to the Association.

P&T Operatio-ns

2.07 P&T has a strong headquarters organization, located in New Delhi.Telecommunications in eight of the largest cities are controlled by Districttelephone managers responsible for design, construction and operation Foithe remainder of the country there are 15 large regions known as Circles,each under the control of a Postmaster General with responsibility for postL,_savings-bank and telecommunications. Four functional units deal with exchare-:tconstruction, and construction and operation of long distance services.

2.08 The ARC has recommended grouping Circle telecommunication functicininto four Zones with headquarters at New Delhi, Bombay, aldras and CalcUtta,to carry out integrated planning, installation of major wiorks and maintenarceof long distance lines within Zonal areas. This would help reduce presentproblems in overall planning, control and coordination resulting from thelarge number of territorial and functional units, each reporting independent-ly to New Delhi, and is in line with the views expressed by the last appraiJlmission. At the time of the last Bank/IDA lending operation, agreement wasobtained that GOI will consult in advance with the Association about any clriifor the reorganization of the Telecommunications Branch. This also appliesunder the new credit agreement; in addition it was agreed, during negotia-tions, that Government's view on regional reorganization will be made knoTsnby September 30, 1971 or such other date as shall be mutually agreed.

2.09 Technical management of the department is sound, and there is noshortage of well qualified and competent people. MIajor technical decisiornsover the last decade, such as standardization of crossbar switching equip-ment and the inauguration of a broad-band national trunk system, were ad-vanced in terms of development at that time, and have been proved correctin the intervening years. A sizable P&T research establishment contributesmaterially to the development and modification of telecommunications systemsto best suit India's particular needs.

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2.10 In contrast, general adninistration of the Department is not soimpressive; some cumbersome practices are evident, compounded by the highdegree of centralization in New Delhi, and the organization tends to berather authoritarian. There is a general policy to move senior staff everyfew years to broaden experience and also to prevent anyone having a"vested interest" in a particular job. While it has some advantages,rigid application of this policy has caused some disruption at a time ofrapid growth when continuity is most important. This is now recognrized,and staff rotations will be made more selectively. Action to improve theother matters is in hand on several fronts, particularly in relation tofinancial reorganization. (See Section 5, 'Finances'.)

2.11 In December 1970 the Telecommunications Branch had a staff ofnearly 150,000, including some 12,000 in telegraphs and 7,000 in the P&Tworkshops. Wages are low and because of the labor surplus in India, it hasnot been the policy of government to restrict the intake of personnel. Thepresent level of staffing is high, but the 1969 figure of 17.9 staff per100 DEL's is expected to fall to 17.4 in 1974, (despite a more than doublingof the long-distance network during this period) because of increased tele-phone mechanization and installation of more modern plant. Consequently,the planned rate of increase of staff over the period 1969-74 is not muchmore than half the corresponding rate of increase in plant in service.Annex 3 gives details of estimated staff levels at 1969 and 1974.

Existing Facilities

2.12 Since March 1969, the start of the Fourth Five-Year Plan, thenumber of telephone subscribers (DELs) had grown from 810,000 to 950,000in January 1971. The telephone network now comprises some 2,100 automaticand 1,600 manual exchanges, with a total installed capacity of 1,161,000lines. Of these, 910,000 lines (or 78%) are automatic equipment, of which70,000 are crossbar and the remainder step-by-step equipment. There areapproximately 5,000 Telex services.

2.13 The existing coaxial cables, carrier cables and microwave routesof the long distance network are shown in the Map which also indicates theexpansion program. Spur routes of low capacity UHF and VHF radio and opon-wire systems supplement the main routes shown. Automatic trunk switchingequipment, required for STD, is installed at the Main trunk switching centersof New Delhi, Bombay and Madras and at the Secondary center of Kanpur. STDfacilities have also been installed on a limited, point-to-point basis at anumber of other centers; overall, about 305, of all long distance calls inIndia are subscriber dialed. A new earth station at Arvi. commissioned inMarch 1971, now gives international access through the INTELSAT IndianOcean satellite, supplemented by HF radio systems.

3. THE PTROGRP4M AND THE PROJECT

3.01 P&T is engaged on an extensive program for expansion of tele-communications services during India's Fourth Five-year plan period, Apr-iJ1969 - M'arch 1974. This program constitutes the Project for Bank/IDAfinancing. The initial phase (approximately three years) of the projectis being assisted by Loan 615-IN/Credit 153-IN (US$55 million), and a fur-ther Credit is now proposed to complete the financing plan; at the time ofthe last Loan/Credit, it was envisaged that there would be further lendingto complete the program, subject to satisfactory progress being made.

Project Targets

3.02 Details of the project service targets are shown in Annex 4. Theprincipal targets are:

(i) An increase in the capacity of local telephone networks topermit connection of an additional 540,000 DEL's.

(ii) Extension of long distance networks by radio, cable andopen wire transmission systems providing an additional26,000 trunk channels. About 7,500 km of coaxial cableand 12,000 km of microwave radio routes are included inthis large program of trunk network expansion. The majorlinks of the trunk network (existing and proposed) areshown on the Niap.

(iii) Extension of trunk exchange capacity and installation of neTWautomatic trunk exchanges at 18 locations. This will permitthe growth of subscriber trunk dialing (STD) from the pre-sent level of 30% of all trunk calls, to about 55% by 1974.

(iv) Expansion of existing Telex exchanges and installation ofnew exchanges to permit an increase of 9,300 Telex services.

Project Costs

3.03 The project cost of Rs4,888 million or US$652 million equivalentincludes foreign exchange of $168 million. The cost breakdown by yearsand service category is shown in Annex 5 and summarized as follows:

Rs Million US$ M4illionTocal Foreign Total Local Foreign Total %

Local Exchange Syrstems 1,714 764 2,478 229.3 101.9 330.5 51Long Distance Systems 795 421 1,217 106 56.2 162.2 24Open Wires, Telexand Telegraph 595 66 661 79.3 8.8 88.1 ,L

Land, Buildingsand Miscellaneous 521 11 532 69.4 1.5 70.9 11

TOTAL 3,625 1,262 4,888 483.3 168.4 651.7 100___m______

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3.o4 At the time of approval of the existing Loan/Credit, the projectcost was estimated at US$624 million, including $155.5 million foreignexchange. The foreign exchange has increased by approximately $13 milliondue to the need for increased imports to offset shortfalls in local produc-tion (paras. 3.13-15). The estimated project cost has increased by US$28million due to customs duty, insurance and freight on these additionalimports (approximately US$12 million) and because of expected wage increases(see para. 3.09).

Progress Under Existing Loan 615-IN/Credit 153-IN

3.05 The Bank/IDA funds were intended to cover about three years importsof finished goods and the foreign exchange content (in the form of raw mate-rials and components) of about two years' production by the government fac-tories. Due to shortfalls in factory production (see paras. 3.13-15) theBank/IDA funds will now provide nearly three years of factory materials andcomponents. Annex 6 indicates the actual and estimated disbursements underthis Loan/Credit, which are expected to be fully disbursed before the closuredate of December 1972.

3.06 Connection of new telephone services during the first two yearsof the project period exceeded targets by 10% but the exchange installationprogram is slipping due to late deliveries of crossbar switching equipmentfrom ITI. The increase in long distance circuits was about 25% below target,also due to late deliveries of coaxial cable from HCL and imported equipment.As a result of the supply difficulties, the effects of which will carry overinto the next few years, the five-year targets have been adjusted to levelsgenerally about 10% lower than the original targets. With the adjustedtargets given in Annex 4, the project is progressing satisfactorily.

The Proposed Credit

3.07 With procurement lead times of up to two years, foreign exchangefor the remainder of the five-year program is required now in order to allowa smooth tendering, ordering and delivery process without holding up theproject. There would therefore be a time overlap between the existingLoan/Credit and the proposed Credit of US$78 million.

Items for IDA Financing

3.08 The Credit would provide US$26 million for goods directly importedby P&T and US$52 million for the foreign exchange content of local productionby the factories, representing imported materials and components. Shownbelow are the amounts under various categories. Further details of theseitems and the approximate breakdown of raw materials among the three factoriesare given in Annex 7.

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(a) P&T ImportsUS$ Million

(i) Local exchange systems - (RAX's, PCM & Misc.) 4.3(ii) Coaxial cable, copper wire, and cable

accessories 13.3(iii) Radio systems and test equipment 3.4

(iv) P&T Workshop - materials and machinereplacements 4.0

(v) Research, training and testing equipment 1.0Total $ 2614

(b) P&T Purchases from Government Factories

(i) Foreign exchange content of normal production-raw materials and components 48.2

(ii) Imported components for trunk exchange (TAX)production 3.7

(iii) Consultants - $2$ 52M

TOTAL $ 7MM

Contingencies

3.09 Telecommunications development is a continuous process which occursthrough the installation and augmentation of plant at thousands of locationsin any program year; an overall increase in program cost therefore results ina corresponding time deferment in achieving the physical targets. Except fora few of the largest installations such as trunk exchanges and microwaveradio systems, which are individually costed, estimates are based on a for-ward projection of unit-costs for the various types of installation. Becauseof the variety and wide spread of telecommunication works, the overall riskis negligible and no explicit contingency allowances are included in theproject cost estimates. There are however, certain implicit contingencies:

(a) Included in the amount of US$48.2 million for factory produc-tion (item b (i)) is US$3.4 million for overseas purchase ofstrategic raw materials. These stocks represent a quantitycontingency against the rejection or non-delivery of indige-nous items essential to factory production.

(b) An overall contingency in local currency costs of approxi-mately Rs200 million (6%) is contained in the project esti-mates. This covers (1) an expected wage increase in 1971,estimated to cost approximately Rs150 million over the finalthree years of the project and additional to annual cost-of-living adjustments included; the overall increase in wagelevels averages about 619 per annum; (2) a 5% contingency(approximately Rs5O million) in estimating the quantity ofsubscriber cables to be laid; thousands of small to mediumcapacity cables are installed each year in a continuous con-struction program, hence precise quantities are not knownuntil each task is undertaken.

Procurement

3.10 All IDA-financed imports by P&T will be subject to internationalcompetitive bidding. Equipnent manufactured locally will be purchased byP&T from the government factories or obtained from its own workshops. Ex-cept for trunk automatic exchanges (TAX's are a special case discussedbelow) and for proprietary components available from only one supplier andamounting to less than 7% of the value of factory imports, all materialsand components imported for local manufacture will be obtained throughinternational competition, including tendering and purchases from the inter-national metal markets.

3.11 Specialized proprietary components for TAX's, representing aboutUS$3.7 million or 60% of the value of these exchanges, will be imported underreserve procurement. ITI will complete the assembly and trunk exchange manu-facture using locally produced crossbar switches. TAX's are key installationsin the P&T program for trunk network expansion and for further introductionof subscriber trunk dialing (STD). TAX manufacture being at an early stage,not all required components are produced locally; about $2.4 million or 40%of the value of the TAX's ($6.1 million) will be local added value. Theprice of the finished equipment is competitive with overseas prices.

3.12 Annex 8 gives some details of the background and operations of thethree government factories -- ITI, HCL and HTL -- which GOI has establishedwithin the past 20 years in order to procure its expanding telecommunicationsrequirements at least-cost and conserve foreign exchange. The most recentfactory, HTL, continues to do well; over the past two years it has raisedits level of profit, lowered the prices of teleprinter products, increasedthe local content of production, and strengthened its export earnings.

3.13 Intense labor problems continue to retard production at theHindustan Cables Limited (HCL) factory in West Bengal, where output isunlikely to exceed 60% of capacity for the next few years. Consequently,there will have to be large imports of cables and wire of which US$13million would be financed by the proposed IDA Credit. Despite the reducedoutput, the quality and price of HOL cables are highly competitive in theworld market.

3.14 ITI is the oldest and by far the largest of the three companies;it manufactures practically all of India's requirements for switching andtransmission equipment and an increasing percentage of microwave radio equip-ment. During the last two years ITI has attempted to increase rapidly itsoutput of crossbar switching equipment. Crossbar is a modern switchingsystem, now adopted for development in India; the first crossbar lines wereproduced by ITI in 1967. With the increasing scale of crossbar productionand the simultaneous attempt to produce locally more of the components re-quired, problemis have been encountered resulting in an imibalance in crossbaroutput, whereby many installations cannot be commissioned because of non-delivery of a few essential items. These problems stem from production-planning and procurement difficulties, including the high rate of rejection

of indigenously produced raw materials such as steal sections, brass sheets,etc. and the difficulties of getting rapid supply from an alternative source.Nearly 2,000 items of raw materials and components are needed for crossbarmanufacture.

3.15 Recommended measures to ensure the timely supply of crossbar equip-ment from ITI were discussed by the mission with the Director General, P&T,and the top management of ITI. During negotiations, assurances were obtainedthat action is being taken as outlined in Annex 9. Nweasures include employ-ment of production and material procurement consultants, strengtheningliaison between P&T and ITI, the creation of contingency stocks of strategicmaterials and components, and a streamlining of government proceduresto facilitate urgent purchases by ITI.

3.16 Despite these difficulties in crossbar production, which is stillin the early years, the overall price and quality of ITI's products arecompetitive in world markets.

Disbursement

3.17 Disbursement of IDA funds would be made against CIF cost incurreddirectly by P&T in importing, for the purpose of the project, equipment andcables, and materials for manufacture in their workshops.

3.18 For materials and components imported by the government factories,it is proposed, as with the current Loan/Credit, to disburse against invoicesto P&T a pre-determined percentage representing the average foreign exchangecontent of the product mix supplied from each factory for the remainder ofthe project. These were estimated during the appraisal mission to be:

- for HTL: 900 of selling price - this is a reduction from the previousfigure of 13%., as a result of the increased local content of production.

- for HCL: 55% of selling price, the percentage currently applied.

- for ITI: 25% of selling price (except for TAX's) - this is an increaseof 5% due to the high rate of rejection of indigenous material experiencedin the past two years, requiring additional imports of strategic items toensure continuity of production.

- for TAX's: 60% of selling price - this is a new type of exchange forwhich the full range of components and piece parts are not yet producedlocally (para. 3.11).

These percentages will be subject to review if substantial changes occurin material prices or exchange rates during the period covered.

3.19 Because of the long lead times required, P&T will need to commenceprocurement action for coaxial cables, copper weld wire, TAX equipment andmicrowave antennas to a total of US$17 million, in advance of credit approvalbut no commitment or retroactive financing will be involved.

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3.20 A schedule of estimated quarterly disbursements under the proposedcredit is shown in Annex 10. The size of the current expansion program islimited partly by the funds available and will not meet all the forecastdemand for services (see para. 4.03). Therefore, any unused credit balancecould be applied, after consultation with the Association, to the purchaseof additional goods similar to those procured under the credit, providedthat local physical resources are adequate to ensure their effective use.

Project Execution

3.21 Installation and maintenance of all telecommunication equipment isby P&T. They have a large and technically competent staff and comprehensivetraining schemes ensure an adequate supply of technicians and lines staff forfuture maintenance of project installations. Buildings and associated civilworks are constructed by contractors after public tenders advertised locally.

3.22 Delays in the supply of cables and switching equipment from the localfactories and in overseas procurement of coaxial and microwave equipment(see paras. 3.05 - 3.06) have caused bunching in the 1971/72 and 1972/73years of the Program. Nevertheless much preparatory work (such as accessroads, buildings and towers for microwave systems) can proceed and the equip-ment installations should be completed within the project time frane. Finalacceptance testing and commissioning may delay the "fin-service" date of sometrunk network installations, but not more than six months beyond the end ofthe project period.

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4. PROJECT JUJSTIFICATION

4.01 The primary issues in the justification of a telecommunicationsproject are whether its component services are in line with the realpriorities, and whether the project design represents the least-costsolution in meeting the prescribed portion of demand at an adequatestandard of service.

4.02 The financial estimates originally submitted by P&T for theFourth Five-Year Plan aimed at reducing over a long period the 500,000waiting applicants for service, but the funds allocated by Governmentwere insufficient and P&T therefore was forced to modify its originalprogram. Priority was wisely given to the network traffic-carrying plant(including long-distance facilities) to restore a balance between the numberof subscribers connected and the quantity of plant provided for their use, sothat the network will operate efficiently.

Market Demand

4.03 Provision of local telephone services constitutes over 60% of theproject investment. Annex 11 shows graphically the past and forecast recordeddemand for telephone services and lines connected. About a year ago P&Tcalled for reregistration and payment of a fee of RslO from all outstandingapplicants, in order to determine an up-to-date picture of unsatisfied demand.The review is not yet completed but the figure of waiting applicants is alreadyapproaching 500,000. Consequently, there are dela-ys of many years in providingservice, even for applicants under the CYT (own your telephone) scheme who aregiven priority and pay a large capital deposit on connection, equivalent toUS$400 in the big cities. The extreme shortage of telephones is a severeimpediment to government, trade and commerce and results in excessive usageof existing facilities, with frequent overloading of the network and degradationof service. The number of purely private telephones is negligible. Despitethe connection of 540,000 new DEL's during the project period, the estimatednumber of waiting applicants at March 1974 will have increased to approximatelyone million. Further increases over the next decade seem inescapable; evenif additional funds were available, it is unlikely that any telecommunicationsorganization could successfully mount a program of expansion faster than thepresent rate in which plant assets are doubling every five years.

4.04 Long-distance services account for approximately 30% of the projectiLvestment. A serious shortage of long-distance circuits is causing longdelays in service on all but a few of the major routes and is restrictingfurther introduction of subscriber trunk dialing. An important objective ofthe program is the rehabilitation of the existing trunk network as well as theprovision of new long distance services.

Least-Cost Solution

4.05 Selecting the least-cost solution to meet prescribed portions of theforecast demands for service involves: (i) making the correct technologicaldecisions when planning the basic network structure, and (ii) following an

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optimizing path with respect to the design, dimensioning and timing of thethousands of installations carried out annually as part of the continuousdevelopment process. For the larger projects, this is achieved by makingpresent-value studies of engineering alternatives over a period of typically20 years, using an appropriate discount rate. For the remaining smallerprojects, the principle is the same but generalized solutions are obtainedfor the various classes of plant to guide decisions about the particulartype and size of plant to be selected.

4.06 The fundamental decisions determining the network structure overthe next decade or so were made in the early 1960's and include the nationalnumbering, charging, switching and transmission plans, the choice of crossbarequipment as the national standard and the pattern of broad-band transmissionsystems for the long distance networks. These decisions were soundly basedand provide the framework for the most economic overall development.

4.07 There is evidence that the design periodsl/, laid down for planningpurposes as standard for various sizes of subscriber cable, have been rathertoo long for optimum economic development in the light of capital shortagesand the low ratio of labor to capital costs in India. However, because ofthe large backlog of applicants,leading quickly to full utilization, thepenalty has been minimal. Instructions are now being prepared to reduce thedesign periods--for example, from eight years to five years for secondarydistribution cables. Otherwise the development course determined by currentplanning practices is sound and will result in a least-cost network.

Internal Financial Rate of Return and Economic Benefits

4.08 The improved communications service resulting from the project willconfer benefits on all sectors of economic activity and help achieve the

Government's objective of further decentralization of industry. Improvedservice will facilitate business information flow and greatly reduce economiclosses due to present telecommunication delays. These benefits are extremelydifficult to quantify but are nevertheless important. A measure of one aspectof the economic worth of telephone service is given by the extent of current

deposits made by existing subscribers under the OYT schemes which stands atRs273 million (US$36.4 million), or on an average US$300-400 each subscriber.

4.09 The internal financial rate of return for the project is assessedas 16% at current prices. (See Annex 12,) The figure of 16% is judged tobe consistent with that expected from a project which embraces a five-year

time slice of all telecommunication activities - the less remunerative aswell as the more remunerative - and is acceptable. The internal financialrate of return is judged to give a minimum measure of the project's internaleconomic return mainly because revenues plainly do not include all userbenefits as demonstrated by the extent of unsatisfied OYT demand, estimated

as a minimum of 100,000 by 1974.

1/ The time over which a newly installed item of plant reaches full utiliza-tion.

- 13 -

5. FINANCES

Financial Reorganization - Telecomuinications Branch

5.01 P&T is proceeding satisfactorily with its financial reorganiza-tion according to agreement reached on specific issues and timetablesduring the negotiations for Loan 615-IN/Credit 153-IN. These undertakingswill be continued under the new credit agreement. Important steps towardestablishing commercial accounting for the Telecommunications Branch havebeen taken that closely follow the recommendations of its consultants,Peat, Marwick, Miitchell & Co. of London, wiho reviewed the Branch's account-ing organization and procedures. Detailed information is given in Annex 13.Two major changes already made are the transfer of the accounting functionto P&T from the Comptroller and Auditor General, completed on schedule asof September 1, 1970, and the preparation of pro forma commercial accounts,which have been audited by the C&AG and will soon be presented to Parliament.

5.02 The changes under way will help establish a firm basis for theTelecommunications Branch to make a start in operating along commerciallines. It should be recognized, however, that it may take a number ofyears for commercial accounting principles to become meaningful and beuniversally accepted and fully used on a day-to-day basis.

5.03 As agreed with the Association during negotiations for the lastlending operation, P&T has appointed consultants, satisfactory to theAssociation, to help set up an effective stock control system and lookinto the feasibility of establishing a career service or similar form oforganization for the stores operation within P&T. This work has beenassigned to the Consultancy Division of the Administrative Staff Collegeof Hyderabad, India, with the participation of P&T's former consultants,Peat, Marwick, Mitchell & Co. P&T has decided to establish a staffexperienced in modern stock control methods. This would be timed tocoincide with implementation of the Staff College Consultants' recom-mendations on an effective stock control system. Agreement to thiseffect was obtained during negotiations.

5.04 P&T's latest finalized accounts are for fiscal year ending March31, 1969. It has taken longer for P&T to produce the accounts than mightotherwise have been the case, because the Telecommunications Branch wasin the midst of the accounting function transfer and this is the firsttime that accounts on an accrual basis have been prepared and submittedfor audit. To speed up the future preparation of accounts, P&T plans tocalculate the revenues and expenses and to separate the postal and telecom-munications accounts on a monthly rather than an annual basis, now thatthe Branch's accounting function rests with P&T. Double entry bookkeepingmethods will be established and working at division level and above byDecember 1, 1971.

- 14 -

Audit

5.05 Under the Constitution, the Comptroller and Auditor General isresponsible for auditing government accounts. He discharges his auditresponsibilities in P&T through one of his senior officers, the AccountantGeneral, P&T. As the C&AG is no longer responsible for maintaining theaccounts of the Telecommunications Branch, the independence of the auditshould be assured. In addition to the audit of the cash accounts, therewill be an audit of the commercial accounts by the C&AG.

5.06 Due to the Government audit procedure, it has not been possibleto obtain audited P&T accounts in less than nine months after the closeof the fiscal year. During negotiations it was agreed that unauditedcommercial accounts would be made available no later than four monthsafter the close of the fiscal year and that P&T will make every effortto begin making the audited commercial accounts available within sixmonths after the close of the fiscal year. It was also agreed that theaudited cash accounts would be submitted promptly as available.

Tariffs

5.07 Forecasts show that, based on the pro forma commercial accounts,the present tariff level is adequate to continue providing a level ofearnings sufficient to meet the minimum rate of return of 11% requiredunder the present loan/credit agreement and to finance a reasonable portionof capital expansion. During negotiations it was agreed that the require-ment will continue under the proposed credit. The valuation of fixed assetsis covered by the agreement described in paragraph 5.13.

5.08 There are presently no regulations establishing a specific tariffpolicy, but a tariff review is made annually and considers the cost of pro-viding service and revenue requirements. The overall tariff structure isreasonable, with long distance and local call rates comparable to those inmore developed countries. Proposals for tariff changes are formulatedwithin P&T and reviewed and approved by the P&T Board. They are requiredto be placed before both Houses of Parliament for a period of 30 days.Normally there is little delay in effecting changes. In the past fiveyears there have been tariff increases for all the main services. Asummary of the tariffs is given in Annex 14.

Pro Forma Financial Statements

5.09 Although the Telecommunications Branch is in the process ofsetting up commercial accounts and an operating statement/balance sheethas been prepared for the first time, covering one year's operations(fiscal year ending March 31, 1969), certain refinements need to be madebefore these statements show the Branch's complete financial picture on acommercial basis. In order to show such a picture, this report gives a

- 15 -

pro forma commercial presentation of the past, present and forecast finan-cial operations and position of the Telecommunications Branch, includingbalance sheets (Annex 15), statements of income (Annex 16), and sourcesand applications of funds (Annex 17).

Present Financial Position

5.10 The telecommunications and postal accounts are kept separately,hence all financial data in this report apply only to the TelecommunicationsBranch.

5.11 The finances of P&T, as a government department, form part ofthe National Budget. All of its funds are paid into the Central Govern-ment's consolidated fund and made available to P&T through appropriationby action of Parliament. Funds made available by GOI to the Telecommmni-cations Branch in excess of those from internal sources are called "capital-at-charge" and consist of Central Government contributions and foreign ex-change loans, such as the current Bank loan/IDA credit, borrowed by GOI onbehalf of the Branch. GOI is responsible for servicing the debt on theseloans. 'Capital-at-charge'! is treated as a non-repayable loan to P&T onwhich annual interest at between 4-3/4% and 6-3/4% is paid, depending onthe year involved.

5.12 Using assumptions contained in paragraphs 9 and 10 of Annex 15,a sunmary of the pro forma balance sheet of the Telecommunications Branch,as of March 31, 1970, is given below.

Rs MillionASSETS

Net fixed assets 3,959Net current assets 338Deferred charges 170

Total Assets

LIABILITIES

Equity - Capital-at-charge representingCentral Government contrlbutions 2,283

Reserves 1 136Total Equity

Long-term debt - Government loan (current maturity) 79Capital-at-charge representing

foreign exchange loans 780Total long-term debt less current maturities 780

Subscriber deposits 34Deferred credit 234

Total Liabilities 4,467

- 16 -

5.13 With the introduction of commercial accounting concepts and thestipulations of a rate of return covenant, the value of the plant willattain a basic significance and therefore should be reviewed from time totime to determine whether adjustments should be made on account of varia-tions in the applicable price levels in the economy. During the negotia-tions for the last Bank/IDA lending operation, it was agreed that, wheneverappropriate and in any case at least every five years, P&T would reviewthe value of the Telecommunications Branch's net fixed assets in operationto determine whether adjustments are required, and appropriate adjustmentsin the value of net fixed assets in the commercial accounts would be madeto the extent agreed between GOI and the Bank. The effects of a change inthe stated value of P&T's fixed assets on the rate of return calculationswill be carefully assessed whenever such a change is made. This arrange-ment will continue under the proposed credit.

Past Earnings

5.14 Pro forma statements of income for the past six years endingMarch 31 are in Annex 16. The rate of return over the six-year periodranged between 11.3% and 13.4% and the operating ratio varied between 68%and 73%, which is satisfactory. On a notional basis, after deducting debtservice from internally generated funds and including Postal Branch trans-fers as a requirement of funds (averaging about 20% of the Teleconmunica-tion's Branch's net operating income), net internal cash generation wasequivalent to 51% of construction costs and working capital increase asshown below:

1965/66 - 1970/71Rs -Million %

Internally generated funds 2,d75 77Less: debt service 994 26

Net internal cash generation 1,1831 7T1/Central Government contributions 916 24OYT payments 161 4Subscriber deposits 52 1Borrowings 742 20

3, 722 55

Cost of construction plus workingcapital increase 3,367 90

Postal Branch transfers 385 10

Future Finances - Financing Plan

5.15 On a sirilar notional basis, the net internal cash generationover the five-year period of the project would be equivalent to 43% ofconstruction costs and working capital increase as shown below:

1/ See footnote, page 17

- 17 -

1969/70-- 1973/74-i.Rs US$

Million Million %Sources

Internal cash generation 3,549 473 65Less: debt service 1 211 161 22Net internal cash 3 w 7 12

Central Govt. contribution 1,572 209 29OYT payments 189 25 3Subscriber deposits 87 12 1Borrowings:IBRD Loan 615-IN )IDA Credit 153-IN) 413 55 8Canadian Credit 263 35 5Other foreign exchange loans 5 1 -Proposed IDA credit 585 78 11

Total Sources 5,452 757 100

RequirementsCapital construction 4,888 652 90Working capital increase 330 44 6Transfers to Postal Branch 234 31 4

Total requirements 5,452 727 1U

Borrowings would amount to 24% and OYT payments and subscriber deposits, 4%.Government would contribute 29%. In fact, the total requirements of theTelecommunications Branch would be met by specific Government appropriationsunder the Parliamentary Grant System, as in previous years.

5.16 Postal Branch transfers are assumed to continue in line with pastpractice (see page 3 of Annex 16). During the negotiations for the lastBank/IDA lending operation, it was agreed that funds of the Telecommunica-tions Branch will not be diverted to the Postal Branch, or for any otheruse, unless all funds required for carrying out the proposed project areavailable to the Branch. It was also agreed that, for purposes of cal-culating the interest on capital-at-charge, the amount of interest payablewJill be computed after reducing the capital-at-charge by the amount of anyfunds diverted to the Postal Branch. These agreements will remain ineffect under the proposed credit.

1/ The pro forma commercial accounts in this report show net internal cashgeneration as a percentage of total requirements after including postaltransfers as a requirement of funds, but without including amortizationof foreign exchange debt, which is the responsibility of Government(paragraph 5.11). If amortization at Bank terms had been included, thepercentage would be reduced by about 2%. The relatively small amountof debt service is due primarily to the large amount of notional equitycontributed by Government.

- 18 -

5.17 Borrowings by GOI for the P&T project are shown in paragraph 12of Annex 15. The financial statements in this report show the Tele-communications Branch paying annual interest at about 7% on the totalamount of GOI's borrowings for the F&T program, which form part of P&T'scapital-at-charge. The amount of interest on capital-at-charge paid bythe Branch would cover with a considerable margin the actual debt servicepayable by Government.

Future Operating Results

5.18 Forecast statements of income through fiscal year 1975/76 are inAnnex 16, along with notes and assumrptions. Total operating revenues overthe seven-year period, beginning with the first year of the project, showan average annual rate of growth of 13.6%, with telephone revenue estimatedto grow at an average annual rate of 14.5%, telegraph at 3% and telex at27%. Operating expenses, excluding depreciation, provide for an averageannual increase of about 13%.

5.19 The rate of return on average net plant in service is shown todecline from 13.4% in 1969/70 to 11.1% in 1974/75, the first year follow-ing completion of the project, and to rise to 11.4% in 1975/76. The oper-ating ratio varies between 70% and 75% during this period. These aresatisfactory.

Future Financial Position

5.20 Balance sheets as of March 31 for fiscal years through 1975/76(Annex 15) show that the value of net plant in service is expected to in-crease by Rs2,620 million -- almost doubling -- during the five-year pro-ject period. In the following two years net plant in service is expectedto increase by another Rsl,640 million, assuming a continuation of capitalexpansion at the same level as in the past. The debt/equity ratio is shownto be 19/81 in 1969/70, rising to 27/73 in 1974/75 and 1975/76. Theseratios reflect a financing pattern wherein, besides internally generatedfunds, the Government would be making substantial contributions which aretreated as capital-at-charge representing equity (see paragraph 9 ofAnnex 15).

5.21 Internal cash generation (Annex 17) is estimated to increase fromRs589 million in 1969/70 to Rs862 million in 1973/74 and to Rsl,179 mil-lion in 1975/76, covering debt service between 2.6 and 3.5 times duringthe forecast period. This is satisfactory. Internal funds less debtservice would amount to about 47% of total requirements during the five-year project period and about 51% during the seven-year period. This isa substantial contribution considering that the entity's total net fixedassets would more than double during the project period and increase byabout 140% over the seven-year period.

- 19 -

6. RECONMENDATIONS

6.01 During credit negotiations, agreement was reached on the followingprincipal points:

(a) Consulting in advance with the Association about any planfor reorganizing the Telecommunications Branch (para. 2.08);

(b) action to be taken to correct imbalances in the crossbarproduction from the ITI factory (para. 3.15);

(c) continuation of the financial reorganization (para. 5.01);

(d) establishment of an experienced staff for the storesorganization (para. 5.03);

(e) audited commercial accounts to be available within areasonable period and unaudited commercial accountswithin four months after the close of the fiscal year(para. 5.06);

(f) tariffs to be maintained to assure a minimum rate of returnof 11% on average net plant in service (para. 5.07).

6.02 The proposed project constitutes a suitable basis for anAssociation Credit of US$78 million for a term of 50 years including a10-year grace period.

March 30, 1971

ANNEX 1

DIDIA

POSTS AND TELEGRAPHS DEPARTTENT

Telephone Density in a iNumber of Asian Countries

Country Telephones per100 Population

Singapore 5.95

Lebanon 5.76

China (Republic) 2.o5

Klalaysia 1.80

Syria 1.70

Jordan 1.62

Korea 1.60

Iraq 1.30

Iran 0.92

Saudi Arabia 0.62

Ceylon O. Li8

Thailand 0.34

India 0.20

Pakistan 0.16

Cambodia 0.11

From The Worlds Telephones (AT&T Publication),applies at January 1969

INDIAN POSTS AND TELEGRAPHS DEPARTMENT ANNEX2

ORGANIZATION CHART

MINISTRY OF INDUSTRIALDEVELOPMENT,

MINISTRY OF INFORMATION, BROADCASTING INTERNAL TRADEMINISTRY OF FINANCE AND COMMUNICATIONS AND COMPANY AFFAIRS

CABINET MINISTER

MINISTER OF STATEMINGISTER OF STATE FOR INFORMATIONFOR OCS AND PFT I O MINISTRIES

AND BROADCASTING - INSRE

,,' _ Z SECRETARY'^

. OVERSEAS HINDUSTAN /EINDIAN HINDUSTAN6 COMMUNICATIONS TELEPRINTERS INDUSTRIES CABLES| i SERVICES LIMITED LIMITED LIMITED

I I /

DIRECTOR MANAGING MANAGING MANAGINGGENERAL DIRECTOR DIRECTOR DIRECTOR OTHER ENTITIES

I I

i ffI CHAIRMAN* <- PaT BOARDI I __ _ _ _ _ _ _ _ _ _ _ _ _ _ ________ ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

I MEMBER ~~~~~~SENIOR DIRECTOR SENIORMSENIOER MEMBER MEMBER GENERAL MB MEMBER MEMBER

FINANCE (TELECOM) OPERATIONS ADMINISTRATION POSTS SAVINGSFINANCE (TELECOM) (TELECOM)

- l - I I I I IF/NANCE PLANING STAFF STAFFSELATIOS STAFF BAANK//NG DIRECTORATE

ACCOUNTS DESIGN OPERATIONS INFORMATION MAIL SAVINGS

AUDIT CONSTRUCTION MAI/TENA/CE PUBLIC RELATIONS STAMPS

EFFICIENCr RESEARCH MANUFACTURE

PROCUREMENT

(JABALPUR) (8 LOCATIONS) (4 LOCATIONS) (IS LOCATIONS)

CONSTRUCTION TELEPHONE REGIONAL CIRCLEWORKSHOPS CENTER DISTRICTS CENTERS HEADQUARTERS STORES

GENERAL ADDITIONAL MANAGER CONTROLLER POST MASTER CHIEFMANAGER CHIEF OF OF GENERAL CONTROLLER

ENGINEER TELEPHONES LONG LINES OPERATIONAL

MANUFACTURE CONSTRUCTION DESIGN CONSTRUCTION POSrS PROCUYREMENr UNITSCONSTRUCTION OPERATION SAVINGS DISrRIBUrION

| OPERATION l ||TELECOMMUNICATIONS ACCOUNTING

* Three positions held by one individual.

IrALICS = Functionl responnwb,Ihhes.

-Secondary line of responsibilIty

JAN 1971 IBRD - 4356IR)

ANNEX 3INDIA

POSTS AND TELEGRAPHS DF2ARINT

TELECOAiTJLRN ICATIONS BRA1NCH

S'TAFF LEVELS

Estimated as of 31.3.69 Estimated as of 31.3.74Hiaintenance Const. TotaL inam tenance Uonst. Total

Gazetted Officers

Engineers 666 988

Assistant Engineers 1,666 2,324

Non-Gazetted Staff

Ehgineering Supervisors 6,300 295 6,595 13,063 522 13,585

Telephone Inspectors 3,757 - 3,757 5,477 - 5,477

Repeater Stn. Assistants 2,284 - 2,284 9,323 - 9,323

Wireless Operators 500 - 500

Mechanics 6,931 1,444 8,375 12,802 2,409 15,211

Wiremen 3,444 385 3,829 7,757 547 8,304

Batterymen 140 - 140 275 - 275

Telephone Operators 25,049 - 25,049 43,583 - 43,583

Teleph=one hionitors 2,505 - 2,505 4,359 - 4,359

Linemen 28,935 131 29,066 39,874 215 40,089

Sub Inspectors 5,787 26 5,813 7,975 45 8,020

Line Inspectors 577 3 580 793 4 797

Cable Jointers 928 68 996 1,508 112 1,620

Clerical Including Accts. 18,761 392 19,153 33,036 795 40,131

Telegraphists 6,975 - 6,975 7,693 - 7,693

Telegraph Supvy. Staff 1,426 - 1,426 1,5714 - 1,574

Telegraphmen 4,718 - 4,718 5,204 - 5,204

Other Staff 19,118 291 21,409 26,559 733 27,292

145,502 235,859

INDIA

POSTS AND TELEGRAPHS DEPARTM4ENT

Project Servioe Tarqte 8a eeme 90

AdditonalServces__196_7__9__ 071_ 17 at December1 -19730)ToaFacilities Provided (actlual)

1. Direct TelephoneExchange Lines(thousands) 80 85 100 125 150 540

2. Telephone Sets(thousands) 102 110 130 162 196 700

3. Exchange Capacity(thousands) 86 89 102 127 161 565

4. Voice Frequency

Channels commissioned*:

a) Microwave - 696 1,380 2,052 2,088 6,216

b) VHF/UHF 19 35 410 765 765 1,994c) Coaxial 1,128 1,608 2,268 1,932 2,904 9,840d) Cable Carrier 300 312 372 384 420 1,788e) Open Wire 712 982 1,312 1,512 1,560 6 078

TOTAL 2,159 3,633 5,742 6,645 7,739 25,916

5. Telex Lines 800 450 4,200 810 3,000 9,260

6. VFT (TelegraphChannels) 828 485 500 400 400 2,610

7. Combined TelegraphOffices 418 500 500 500 500 2,418

* The percentage of STD will increase from the present level of 30%

of all trunk calls to about 551' in 1974.

INDIA

pCSTS 1i5D TELFIOIJ?FIS i)s-.PAIRT,i'

0?LE9N:IMUNICI.TIOJS RA CH

PROJECT CCSTS

(Rs. million)

1969/70 1970/71 1971/72 1972/73 1973/74 Total 1969-74Foreign Local Total Foreign Local Total Foreigl Local Total Foreign Local Total Foreign, Local Total Foreign Local Total

Local Telephone Systems

Switching Equipment 96.6 110.4 160.7 215.3 231.3 814.3Cables O4.9 105.8! 476.4 404.5 227.5 1,299.1Lines 38.9 29.5' 32.2 35.3 38.5 174,4Subscribers equipment 33.9 32.5! 35.6 41.3 47.1 190.4

Total for 1. 46.5 207.8 254.3 72.7 205.5 276.2 290.0 414.9 704.9 215.3 481.1 696.4 152.9 391.5 544.4 777.4 1,700.81 2,478.2

Lung Distance Systems

T.A. Xs & S.T.D. 13.6 22.6 13.5 25.1 24.4 99.2Manual Trunk Exchanges 10.1 11.1 12.1 12.8 13-9. 60.0Cable Systems 43.8 45.3 92.4 161.5 1l32.9i 475.9Microwave Systems 20.8 27.0 100.0 164.6 109.9 422.3VHF/UHF Systems - 131.3 9.7 4.3' 25.3Open Wire Carrier Systems 32.3 12.9 27.2 32.0 29.6, 134.0

Total for 2. 18.1 102.5 120.6 22.6 96.3 118.9 79.3 177.2 256.5 168.7 237.0 405.7 92.7 222.3 315. 381.4 835.3T1,216.7

Open Wire & TelegraphsOpen-wire 100.7 6 4.7 90.5 108.4 92.1 456.4Telegraph Offices .5 .4 .4 .5 .5 2.3Telex equipment 39.9 43.2 39.8 39.6 39.6 202.

Total for 3. 5.6 135.5 141.1 12.7 95.6 108.3 30.4 100.3 130.7 28.5 120.0 148.5 15.3 116.9 132.2! 92.5 568.3 660.8

Land, Buildings & Others LLand & Buildings 64.5 73.5 91.0 126.0 159.5 514.5Research, Training & Testing Equipment 2.1 - ! 4.1 5.6 5.6 17.4

Total for 4. 66.6 66.6 - 73.5 73.5 3.5 91.6 95.1 3.g 127.8 131.6 3.6 161.3' 165.1 11.1 520.8 531.9

PROGRAM TOTALS 70.2 512.4 582.6 108.0 470.9 578.9 403.2 784.o 1,187.2 416.3 965.9 1,82.2 264.7 892.0l1,156.7 1,262.4 3,625.2 4,887.6

January 15, 1971

ANNEX 6

INDIA

POSTS AND TELEGRAPHS DEPARWMENT

T ELM0l4UWNICATIONS BRANCH

Disbursement Under Loan 615IN/Credit 153IN as of Feb. 1971

IBRD/IDA Cumulative DisbursementFiscal Year at End of Quarter US$OOOand Quarter Actual Estimated

1969/70

1st 1,343

2nd 2,998 -

3rd 6,045

4th 9,245 -

1970/71

1st 11,341 _

2nd 13,223 -

3rd 16,070 _

4th - 23,600

1971/72

1st - 31,900

2nd - 33,500

3rd - 47,600

4th - 52,200

1972/73

1st 5h,44o00

2nd - 55,000

ANNEX 7Page 1 of 2 pages

INDIA

PO6TS AND TELEGRAPHS DEPARTIENT

TELECOMIMJNICATIONS BRANCH

Items for IDA Financing

Direct Imports by P&T Under Proposed Credit

(i) Local Exchange Systems $

Rural Automatic Exchanges (RAX) 2.8Pulse Code Modulation (PCM) systems(junction carrier systems) 1.0

3 .7 3.8(ii) Cables, Wires and Accessories

Coaxial cable 9.0Copper-weld Wire 4.0Cable Terminal Boxes 0.3

13.3 13.3(iii) Radio Systems and Equipment

Microwave Systems (2 Systems) 0.9Microwave Test Equipment 0.8

Antennas & Waveguides 1.2UIF and VHF Spur Systems 0.5

3- 3.4(iv) P&T Workshop

Raw Materials 3.3Switchboard Plugs and Cables 0.5Machine replacements and additions 0.7

(v) Equipment items for Research,Testing and Training 1.0 1.0

US$ 26.0 millionNotes

Radio Systems

The two microwave systems are for international circuits to adjacentcountries: Ceylon - (MaduraL - Columbo); Nepal - (Patna - Birgang). Themicrowave testing equipment and the antennas and waveguides will be used ona number of systems already ordered.

P&T Workshops

The raw materials for the P&T workshops which are largely for manufactureof various types of manual switchboards, are discussed in Annex 8 (para. 21).Switchboard plugs and a quantity of switchboard cords have to be imported. Themachine replacements are for obsolete cord braiding and coil winding machineswhich are slow and subject to frequent breakdown. Other machinery is for testingand maintenance and for production of small crossbar PABX's.

ANNEX 7Page 2 of 2 pages

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELECOMMUNICATIONS BRANCH

Items for IDA financing

Foreign Exchange Content of Factory ProductionUS$m

HCL

Raw Materials (Mainly copper, lead, paper, steel tapes) 25.0

ITI

Raw materials- and components(Includes $3.4 m increase instrategic production items) 21.2

Consumable production tools andtool materials 1.2

22.4

Trunk Exchange Components 3.7

26.1

Consultants 0.1

26.2 26.2

HTL

Raw materials (Mainly alloy steel, magnetic iron,and piece parts) 0.8

52.O

Note

1/ For principal items, see Annex 8, paragraph 4.

ANNEX 8Page 1 of 5 pages

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELECOMMUNICATIONS BRANICH

NOTES ON THE TELECOMMUNICATIONS IMANUFACTURING INDUSTRIES

Below is summarized information about the three Government factories,ITI, HTL and HCL, and the P&T Workshops.

Indian Telephone Industries Limited: (ITI)

1. This factory which commenced operations in 1950 is owned by GOI(77%), the Mysore State Government (7%) and the two collaborating companies -Plessey, England (4%) and International Standard Electric Gorporation, U.S.A.(for Bell Telephone Manufacturing Co., Belgium) (12%) on whose designsswitching equipment is based. Now employing a staff of 13,400, ITI's pro-duction value in 1969/70 was Rs210 million (equivalent to US$28 million).The production consists of step-by-step and crossbar switching equipment,line and cable carrier systems, microwave radio systems, telephones andnumerous lesser items of telecommunication and signalling equipment. P&Tbuys over 80% of the factory's output, the balance going to other public-sector and private users in India and some to export. The factory produc-tion has been established on the basis of P&T's expansion plans, and ITIplans to increase productioni facilities and establish satellite factoriesfor some lines as the requirements of P&T and other users increase and asmore export markets become open to it on the expiry of collaboration agree-ments.

2. During the five years of the program, the value of ITI's normaloutput to P&T will be US$154 million of which the foreign exchange is $35.5 mor an average of 23%. Reimbursement of foreign exchange under the existingLoan/Credit is 20% but this needs to be increased to 25% for the proposedCredit because of the past few years experience of production difficultiesdue to:

i) high rejection rate of indigenous materials - approximately12% of all 'lots' of local materials fail to meet specifica-tions.

ii) Late delivery and non-delivery of key materials andcomponents.

iii) deterioration and breakages of crossbar production tools.

3. Action being taken includes impcrtation of contingency supplies ofcertain strategic materials and crossbar components and re-equipment ofcrossbar production tools:

ANNEX 8Page 2 of 5 pages

Strategic raw materials andcomponents 3.4

Production tools andtool materials 1.3

US$4.7 million

Reimbursement for these purchases will also be included in the percentageof the value of finished goods delivered to P&T, increasing the reimburse-ment percentage under the proposed credit to 25%.

4. The 5-year average reimbursement of 23% compares with a foreignexchange content of 25% in 1964, which rose to about 40% in 1966 on accountof the Rupee devaluation. The principal items out of many still imported,are tempered sheets and strips of nickel-silver, phosphor-bronze, brass andbimetals, moulding powder, tissue paper, fine gauge copper wire, resistancewire, phenolic laminates, magnets, ferrities, capacitors, transistors,diodes, klystrons, measuring instruments, and some piece parts for crossbarmanufacture. Procurement of the above items is through international tender-ing where appropriate and through acceptable alternative procedures such asthe international metal exchange markets. Some proprietary items incorporatedin the design of equipment are available from only one source, and pieceparts are brought from the collaborating firms which were originally selectedon the basis of international competition. In addition to normal outputitems, ITI will be producing, during 1972/73 and 1973/74, trunk exchanges(TAX's) to a value of US$6.1 m, using imported components and relay assem-blies and locally manufactured crossbar switches. The percentage to beapplied for foreign exchange reimbursement on this equipment is 60%.

5. Before 1967, the price of equipment supplied to P&T was on acost plus 10% basis, but there is now a fixed price agreement between ITIand P&T which is subject to periodic review. In 1969/70 ITI made a returnof 9.4% on capital employed.

6. Swiitching equipment accounts for about 45% of the value of P&T'spurchases from ITI. Step-by-step equipment has been locally manufacturedsince 1950 and now has a foreign exchange content of only 15%. The sellingprice to P&T is about 80% of the lowest CIF prices on the world market.Crossbar switching equipment will eventually become standard for all instal-lations, but during the five year program only about 38% of new linesinstalled will be crossbar. Crossbar prices to P&T were reviewed inOctober 1969 and some items imere reduced by up to 20%. The average cross-bar price per main exchange line over the 5-year period is about $145.After deducting the customs due on imported raw materials and components,this figure is competitive with prices for equivalent switching equipmentavailable through international competition. Prices on certain lesser usedcrossbar items range up to 20% higher than imported equipment but can beexpected to decrease as P&T's annual consumption of these items increases.

ANNEX 8_Page 3 of rpages

7. The balance of P&T's purchases from ITI is made up of trans-mission equipment such as open wire carrier systems, medium capacity coaxialcable systems, small capacity microwave systems and voice frequency telegraphsystems. The first high capacity microwave systems are also nearing com-pletion. Detailed equipment design has been by P&T and ITI following inter-national standards. Prices for all but small production items have provedto be less than P&T could obtain previously under international competitivebidding.

8. Apart from new lines of production such as crossbar equipment,for which the maximum indigenisation has yet to be reached, it can be saidthat overall, ITI's prices to P&T are generally lower than would be expected,in the Bank's experience, to be tendered C.I.F. in international bidding.

9. Custom tariffs on imported equipment of this class are in the 60%to 70% range.

Hindustan Teleprinters Ltd. (HTL)

10. This factory, which is wholly Government owned, commenced opera-tions in 1960 under a collaboration agreement with Olivetti of Italy. Frominitial assembly only of piece parts, it has now developed manufacture to astage of relative independence from the collaborator on whom it relies onlyfor special tools and a few piece parts amounting to less than 4% of salesvalue. Staff currently numbers 1,100 and output in 1969/70 was 5,300 tele-printers with spares, a six percent increase over the previous year. Theprice of teleprinters also decreased from Rs5600 to Rs5300 in this year.

11. Production is made up of page teleprinters for Telex use, tapeteleprinters for use in P&T's public telegraph system, printing reper-forators, tape transmitters and other usual ancilliary items. P&T buys70% of the factory's output, the balance going to other public sector usersin India and to a fast growing export market. Production is kept in linewith the demands for teleprinters. During the 5-year project, P&T will ordermachines to the value of Rs126.4 million (US$16.8 million equivalent).

12. There has been a progressive reduction in the foreign exchangecontent of production; during 1969/70 local production of teleprinter motorswas introduced along with other items, representing a saving of Rs818,000annually in foreign exchange. Reiirbursenent under the existing loan/creditis 13%o of the value of goods delivered to P&T but for the proposed creditcovering the remainder of the 5-year period, this will be reduced to 9%.This compares with a foreign content of 50% in 1964. In addition to thespecial tools and piece parts which are still obtained from Olivetti, smallquantities of non-standard steel stock and other specialized material con-tinue to be purchased at least cost from this source, which was originallysettled upon after competitive international tendering, at rates fixed in1960. For other items, whether i.mported or locally obtained, internationalor local tenders as appropriate are called.

ANNEx 8Page 4 of 5 pages

13. The company is an efficient production unit which continues toimprove its financial position, paying a 12% dividend in 1970. It has alsosecured export orders to various countries including Kuwait, Iran, Ceylonand Nepal, to a total value of approximately Rs5 million. From recent inter-national bidding HTL's prices to P&T are below the lowest C.I.F. price atwhich any teleprinter could be landed in India. P&T would pay a 50% customstariff were it to import teleprinters.

Hindustan Cables Limited (HCL)

14. This factory, which is wholly Government owned, started operationsin 1954 under a collaboration agreement with Standard Telephones and CablesLtd., England. HCL now employs a staff of 2600 and the value of output in1969/70 was Rs69 million (US$10.1 million equivalent). This is about 20%below the output of the previous year due to critical labor problems whichare prevalent throughout the state of Bengal where militant union action,including strikes and go-slow tactics, is causing widespread industrial dis-ruption. The operation of four politically affiliated and competing unionswithin HCL makes it impossible to maintain industrial peace despite a recent20% wage increase and other concessions. For these reasons management considersit unlikely that production for the next few years can exceed more than about60% of the installed plant capacity which was recently doubled - the decisionto increase capacity was made well before the present problems.

15. A second factory to be constructed over the next few years atHyderabad will provide relief in the long term but meanwhile extensive cableimports are necessary to enable P&M's development program to proceed.

16. P&T buys all of HCL's production which consists of paper insulatedsubscriber cable (approximately 65% by value) coaxial trunk cable (30%) andplastic insulated cable for internal wiring (5%). A collaboration agreementexists with Sumitomo of Japan for production by HCL of copper-clad steel wirefor aerial lines, which should commence in 1971. During this year HCL willalso commence production of small capacity coaxial cables and aluminumsheathed cables for which new production machinery was recently installed.

17. During the five-year project period the total value of HCL'soutput to P&T will be Rs572 million (US$76.3 million). The foreign exchangecontent of the cables, which comprises copper, lead, manila paper and finegauge steel tapes, is 55% of the sales value, and would amount to Rs31lmillion (US$42 million equivalent). This is the same percentage as appliedin 1964., but considering the Rupee devaluation it represents an improvementin manufacturing efficiency and indigenisation.

18. Because of the high degree of mechanization in cable manufactureand also the low wage rates in India, labor represents only about 12% ofthe value of output. This means that the labor problems and the consequentlowering of labor productivity has not had a serious effect on HCL's cableprices which are highly competitive in the world markets. A comparison of

ANNEX 8Page 5 Of 5 pages

recent international cable tenders showed that HCL's prices for different sizesand types range from 5% below the lowest foreign tender (C.I.F. value) toabout 5% above depending upon the numnber of pairs and conductor weight.Customs tariff on imported cable is 90%. HCL pays approximately 25% in tariffson the imported raw materials, all of which are obtained through internationalcompetition.

The P&T Departmental Workshops

19. The three P&T Workshops manufacture almost entirely for P&T. Pro-duction is debited at actual cost including depreciation of production faci-lities.

For 1969/70, the scope of activity can be summarized as follows:

Value of Output Staff Employed

Calcutta shop Es 23.7 million 2,644Jabalpur slop Rs 25.3 million 2,371Bombay shop Rs 13.1 million 2,000

Total Es 62.1 million 7,015

20. The production consists of galvanized tubular steel poles, armsand line hardware; switchboards, relay racks and power supplies for manualtelephone exchanges, private branch exchanges and long distance exchanges;coin-in-slot telephones and many miscellaneous items.

21. In the five year project period, manufactures to the value ofapproximately Rs300 million from the workshops are included in P&T's expan-sion of capital plant. The foreign exchange content of Rs53 million (US$7.0million equivalent) includes Rs25 million for purchase of zinc, lead, tin,magnetic iron, copper wire and other production materials; Rs4 million forswitchboard plugs and cables and Rs5 million for replacement of obsoletecord braiding and coil winding machines and for new machines required forproduction of small crossbar PABX's. Procurement is carried out by theSupplies and Disposals Ministry on behalf of the Workshops and is by fullcompetitive international tendering.

22. Direct comparison between the cost of production by the Workshopsand international prices is not generally possible because most of the itemsproduced have been specially developed for local conditions. For those itemswhere direct comparison can be made, such as cable distribution cabinets andterminals recently put into production, prices are below the C.I.F. price ofequivalent items previously imported.

ANNE 9

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELECOEMUNICATIONS BRANCH

Measures for Improving Crossbar Production

The followiing measures, reconmended by the mission for improvingthe supply of crossbar switching equipment, were discussed and agreed withthe Director General, P&T, and during negotiations it was confirmed thatappropriate action is now being taken on all items.

(i) The employment of production consultants, including a residentproduction specialist at the ITI factor-y for the next two years. Becauseof the long experience of the Bell Telephone Manufacturing Company, Antwerp,with crossbar production in India, it is considered that ITI's interestswould best be served by using the resources of this company which can alsodraw on the expertise of other Pentaconta crossbar manufacturers of theInternational Telephone and Telegraph group.

(ii) A review of the system and procedures for procurement of materialsand components for the production of switching equipment. The ConsultativeServices Division of the Hyderabad Administrative Staff College who are pre-sently engaged in a related study of P&T stores management would, in theopinion of the mission, be well qualified to handle this assignment. TheCollege is willing to submit a proposal to ITI as soon as requested.

(iii) The appointment of the Member (Development) P&T, as a member ofthe Board of Directors of ITI. This would bring about the necessary directand high-level coordination between P&T and ITI. Coordination committees,operating at the working level, would continue their activities throughscheduled meetings held at least quarterly.

(iv) A revision of the purchasing agreement between P&T and ITI andother steps to place responsibility for the achievement of balanced crossbarproduction targets more directly with the top management of ITI. Possiblesteps could be the inclusion of penalty clauses for non-adherence to agreeddelivery schedules, or the withholding of some percentage of the value ofcrossbar equipment items delivered, until final balanced deliveries for theparticular exchange concerned were completed.

(v) Importation of contingency supplies of strategic materials andcomponents for crossbar production. This should obviate production holdupsdue to unforeseen rejection or non-delivery of key material items. Theforeign exchange for these stocks would be considered as forming part ofthe cost of production and would qualify for reimbursement under the pro-posed IDA credit in the normal way, through the percentage applied to thevalue of finished goods delivered to P&T.

(vi) A streamlining of government procedures to facilitate urgent pur-chases of relatively small quantities of materials, components or productiontools. In discussion with the Director General, Technical Development anda Finance Ministry representative it was agreed that an advance import licensecovering a generic list of materials could be authorized against whichlimited emergency purchases could be made.

AiThEX 10

ETDIA ~ ~ _.

POSTS AND MULMRAPHS DEPAR'31-2T

TELECO'1UIMTICATIONS PROJECT

Estimated Schedule of Disbursements - Proposed Credit

IBRD/IDA CtrJ,IU4ATIVE DISBURS2AMTFISCAL YEAR AT E%TD OF QUARTER& 0QUARTER (US$000)

1971/72

Ist 200

2nd 1,200

3rd 6,300

4th 12,100

1972/73

1st 20,100

2nd 32,000

3rd 42,9o00

4Itth 50., 6o.')03

1973/74

1st 58,800

2nd 69,300

3rd 76,500

4htn 78,000

ANNEX 11

INDIA: POSTS AND TELEGRAPHS

RECORDED AND FORECAST TELEPHONE DEMANDEXCHANGE CAPACITY AND CONNECTED LINES

2.5

#4

01.5 Hax.

1. -- -1,As,

2 .0

EXCHANGE CAPACITY *0,0

.5 _

, THIRD PLAN PERIOD 4 FOURTH PLAN PERIOD l

0

60 61 62 63 64 65 66 67 68 69 70 71 72 73 74

I ' ACTUAL > I N ESTIMATEDED

YEAR ENDING MARCH 31

I BRD-5527

ANNEX 12Page 1 of 2pages

INDIA

POSTS AND TELEGRAPHS DEPARTNT

TELECOMMUNICATIONS BRANCH

Internal Financial Rate of Returm on the Project

1. The capital cost of the Project includes provisions for con-tingencies, but excludes the amount of related customs duties. Aresidual value is assumed in connection with the forward provision ofland and buildings. It is assumed that the assets under the Projectwould have a life span of 22 years, including the five-year constructionperiod.

2. The table below presents the net cash flow attributable to theProject which derives from the additional revenues produced by theProject, less the capital cost and attributable operating expenses, notincluding depreciation. The discount rate which equates present worthof the capital expenditure on the new facilities to the present worthof the net revenues is 15.9% at current price levels. This return isjudged to be consistent with that expected from a project which embracesover a five-year period all telecommunication activities of P&T--theless remunerative as well as the more remunerative--and is acceptable.The internal financial rate of return gives a minimum measure of theproject's internal economic return in that revenues do not include alleconomic benefits as demonstrated by the extent of unsatisfied OYTdemand (estimated at a minimum of 100,000 by 1974) where subscribersare prepared to pay Rs 2,500 - Rs 3,000 (US$333 - $400) for service.

ANNEX 12Page 2 of 2 pages

(Rs Million)

Revenue AdditionalCapital Residual Attributable Operating Net

No. Year Investment Value to Project EMenses Flow

1 1969/70 565 _ 192 69 -442

2 1970/71 539 - 377 148 -310

3 1971/72 939 - 575 236 -600

4 1972/73 1,153 - 761 343 -735

5 1973/74 1 ,o56 - 1 ,003 473 -526

6 1974/75 - - 1,037 473 564

7 1975/76 - - 1,076 473 603

8 1976/77 - - 1,076 473 603

9 1977/78 - - 1,076 473 603

10 1978/79 - - 1,076 473 603

11 1979/80 - - 1,076 473 603

12 1980/81 - - 1,076 473 603

13 1981/82 - - 1,076 473 603

14 1982/83 - - 1,076 473 603

15 1983/84 - - 1,076 473 603

16 1984/85 - - 1,076 473 603

17 1985/86 - - 1,076 473 603

18 1986/87 - - 1,076 473 603

19 1987/88 - - 1,076 473 603

20 1988/89 - - 1,076 473 603

21 1989/90 - - 1,076 473 603

22 1990/91 - 177 1,076 473 780

ANNEX 13Page 1 of 5 pages

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELDCMMUNICATIONS BRANCH

Financial Reorganization

A. BACKGRCND

The finances of the Telecommunications Branch, as part of B&T'sfinances, form part of the national budget and are subject to control ofthe parliamentary grant system (see below). Its accounts have beenprimarily a record of cash receipts and payments; no balance sheet orprofit and loss statement had been prepared. Most of P&T's accountingfunction was carried out by an outside body, the Comptroller and AuditorGeneral's Department. Consequently, whatever accounting information wasreceived by the DLrectorate of P&T was either insufficient or too latefor any prompt appropriate action to be taken.

The Government of India agreed with IDA in September 1962 toemploy consultants to assist in reviewing the accounting procedures ofthe Telecommunications Branch. The firm of Peat, Marwick, Mitchell & Co.was retained in July 1964 and they submitted their report in May 1965.The main recommendations contained therein were the establishment of anaccounting staff with internal controls and audit within and undercontrol of the P&T, and the reorganization of the existing accountingsystem along commercial lines. Both recommendations were accepted inprinciple by the Government of India. A Presidential Order datedMarch 1, 1968, provided for the separation of the accounts of the Tele-communications Branch from the Comptroller and Auditor General.

B. PARLIAMENTARY GRANT SYSTEM OF ACCOUNTING AS IT RELATES TO P&T

Traditionally, a parliamentary grant system of accounting isdesigned for Government departments financed out of a general pool ofGovernment revenue. The primary purpose is to ensure that no money isspent contrary to the intention of the legislature. This places theemphasis on the control of cash with little regard for operating results.

Under the parliamentary grant system, P&T's expendituresrequire sanction by the Ministry of Finance, and examination by theComptroller and Auditor General. Parliamentary control is global with-out a basis for interference into P&T's day-to-day operations, and islimited to three basic votes: (i) P&T working expenses including pettyworks; (ii) dividend to, and repayment of loans from, general reservesand appropriation to reserve funds; (iii) capital outlay (not met fromrevenue). Within each of the three categories, the P&T Board, in con-junction with the Ministry of Finance (through the Member Finance), hasconsiderable powers to reallocate funds between headings and sub-headingswithout specific parliamentary approval.

Annex 13Page 2 of 5 pages

C. PRESENT STATUS OF FINANCIAL REOR5ANIZATION

The start and subsequent pace of implementation of the con-sultants' recommendations was slow owing to the lengthy deliberationby Government and the conceptual and administrative problems involved.

P&T is now moving ahead with its financial reorganizationaccording to agreed stipulations and time schedules and is followingclosely the recommendations of its consultants, Peat, Marwick, Mitchell& Co. The Government of India has taken important steps uhich will leadto the establishment of commercial accounting for the TelecommunicationsBranch. The following summarizes the progress and status of the Branch'sfinancial reorganization.

Transfer of the Branch' s accounting function from the Comptroller andAuditor General (OCAG) to P&T

The transfer was completed on schedule as of September 1, 1970.This was a major change in the Government structure requiring Cabinetapproval and affecting some 1,800 government employees.

Beginning with the accounts for fiscal year ending March 31, 1969,commercial accounts on an accrual basis should be submitted toParliament together with the appropriation accounts and areconciliation statement

Commercial accounts on an accrual basis for fiscal year endingMarch 31, 1969, have been prepared recently and audited by C&AG; theywill be submitted to Parliament shortly. This practice will continue forthe foreseeable future with increasing emphasis and reliance expected tobe placed on the more informative commercial accounts. There has been con-siderable delay in getting out these first commercial accounts, which wasto be expected at this stage when P&T was in the midst of the accountingfunction transfer while at the same time having to prepare and submitfor audit its first commercial accounts on an accrual basis. To speed upthe future preparation of accounts, P&T plans to calculate the revenuesand expenses and to separate postal and telecommunications accounts on amonthly rather than an annual basis now that the Branch's accounting func-tion rests with P&T. Also, introduction of double entry bookkeepingmethods at divisional level and above, scheduled beginning December 1, 1971,will make it easier to maintain the commercial accounts on a current basis.

Beginning not later than April 1, 1971, the clearing of accounts betweenthe Branch and other government departments should be by direct renderingof bills and settlement

Effective from October 1, 1969, the cash settlement of accountbetween Telecommunications accounting units of P&T and other departmentsof Central or State governments has been introduced. Also, all trans-actions arising in other Departments of the Central Government or inState Governments and adjustable in the Telecommunications AccountingUnits of P&T will be settled by cash or bank drafts.

ANNEX 13Page 3 of 5ipages

In each of the accounting units transferred to F&T an internal audit

group should be functioning within one year after the transfer of theunit.

As a unit has been taken over, a P&T internal audit staff has

been established and fully functioning within a year of the transfer.

An asset register should be maintained in the Directorate which shows

capital expenditure by year of installation for each group of assets.

An asset register was completed as of March 31, 1968, and is

being maintained on an annual global basis at historical cost. Later

on an attempt will be made to establish the value of assets by circle/

district in order to eventually be able to calculate each district's

operating results.

The circle/district should become an intermediate accounting unit.An accountant should be attached to each circle/district when its

telecommunications accounts are taken over by the F&T. The accountant

should be directly responsible to the head of the circle/district and

functionally responsible to the Director of Accounts.

As each circle/district has been taken over, an accounting

staff, headed by a financial adviser, has been established to beresponsible for finances. And now with the completion of the accounting

function transfer, the circle/district has become an intermediateaccounting unit with the financial adviser directly responsible to the

circle/district head and functionally responsible to the Director of

Accounts at Directorate Headquarters.

The senior member (Finance) should be assisted by three ancillary units:(a) Costing, (b) Stati.stics and (c)- =ficiency.

Each of these units has now been established at Directorate

Headquarters.

Periodical reviews of the lives of telecommunications plant should be

made by a standing committee consisting of engineers and accountantsto ensure that book lives are kept in line with achieved lives.

A standing committee with the following members was constituted

as of June 27, 1969 for recommending the lives to be assigned for differ-

ent categories of assets:

Deputy Director General: Stores and MaintenanceLong DistanceEfficiency Bureau

Deputy Chief Engineer: TelegraphDirector of AccountsDirector of Finance II

It has been decided that this standing committee will also determine the

current value of assets each year by the use of price indices.

AMEX 13Page 4 of 5 pages

Divisions should maintain works registers (cost sheets) for each workcosting over Rs 2,500

This is being done in each of the divisions.

A greater measure of financial responsibility should be delegated to theloier levels of management

TVith coEpletion of the transfer of the accounting function toP&T and the assigruaent of a financial adviser and accounting staff toeach of the circles/districts, a greater m.asure of financial responsi-bility nowy rests with the loler levels. It is planned to further delegatefinancial responsibility as follows: budget preparation and revievJ ofproposals, and more detailed accounting inforimation at the division level.Circles/districts have already been given greater financial authority toincur both revenue and capital exi'enditures.

Consultants, satisfactory to the Bank, should be retained prior toDecember 31, 1-9b9, to assist P&T in establishing an effective stockcontrol systemX

LTith the Barl''s concurrence, P&T has engaged tiie AdministrativeStaff Colleg,e o_ India to assist in establishing an effective stock controlsysterm. PLT's former consultants, Peat, Iart,wick, Jatchell & Co., wrill beassociated with the study.

The conmiercial accounts of the Telecorumnications Branch, beginning iiththose for the fiscal year ending iarch 31 1969 should be audited annuallyby the Comptroller and Auditor General

TLe comiercial accounts for fiscal year ending A-larch 31, 1969have been audited by the CC-AG.

A systen of double entry bookceeping is to begin to be established from thefirst of the fiscal year corimencinG after the conpletion of the t_ranser ofthe accounting function fror,m the C&AG to P&T

A cormittee w-as fonred to assist in establishing double entrybookkeeping itethods for the Teleconmunications Branch, keeping in rind thestatutory position and function of the CLIO. As agreed w-ith the Association,a system of double entry bookkeeping will be established and working byDecember 1, 1971.

D. ADDITIO±TAL STEPS TAKEIM R7uLt.TI1 TO TIHE FIAUajCIAL REORGAIIIZATIOU

Abolishlent of the renewyals reserve fund

The idnistry of Finance has issued an order abolishing therenewals and reserve fund effective April 1, 1970. The aiuount of thefund accumulated through harch 31, 1970, will be netted against the3 1 capital-at-large" of Governm-ent on Uhich P,:T pays interest. Beginning

ANNEX 13Page 5 of 5 pages

April 1, 1970, depreciation charges will be debited to working expensechargeable to revenue and vill be available for capital works. This isan important step towards commercial accounting and follows the recom-mendation of P&T's consultants, Peat, Marwick, Mitchell & Co.

Performance budget

Beginning with fiscal year ending March 31, 1970, P&T beganpublishing a performance budget, to be submitted as a supplement to theconventional budget, which will show the physical accomplishment againstthe physical plan. Although this is a first attempt for P&T and initiallymay not be more than an exercise, it can become meaningful as a gauge tomeasure work performance and is a step in P&T's long-range plans to operatealong commercial lines.

Training programs

In order to meet the increased requirement for additional andbetter qualified financial staff, as a result of the financial reorgani-zation, P&T has established training programs for various levels of itsfinancial staff, including new recruits. They consist primarily of super-vised, on-the-job training over a two-year period with the individualrequired to pass a qualifying examination at the end of the training period.

Separate P&T finance service

A separate F&T finance service has recently been formallyestablished within Government entitled "P&T Accounts and Finance Service."This means that the P&T finance service will have its own personnel assig-ned full time rather than on secondment from other services and will be ableto recruit directly through competitive examination conducted by the UnionPublic Service Commission as for other all-India services of GOI. This istimely, coinciding with the P&T taking over its accounting function andwill serve to strengthen the P&T in all aspects of its broadening finan-cial responsibilities.

Billing and collection, and stores stock control

Remedial action is being taken in two areas requiring attention,i.e., billing and collection, and stores stock control. Pursuant to re-commendations of a committee studying ways to improve the billing and col-lection procedures, the billing function for Bombay, Calcutta, New Delhiand Madras, the four largest telecommunication centers in India, are tobe computerized. In the other smaller units new simplified and improvedmanual billing and collection procedures are being introduced in accord-ance with the recommendations of the committee. A manual incorporatingthe new procedures is under preparation.

ANNEX 1 4Page 1 of 2

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELECOMMUNICATIONS BRANCH

SUMMARY OF TARIFFS(in Indian Rupees)

1. Telephone

(A) Initial deposits

(i) "Own Your Telephone" (OYT) schemeBombay, Calcutta, Delhi & Madras 3,000.00

All other OYYT connections 2,500.00

(B) Installation fee

Per line 50.00

(C) Rental for direct exchange line

(i) Measured rate system quarterly chargeBombay, Calcutta, Delhi, Madras 90.00

All other measured rate exchanges 75.00

(ii) Flat rate system

Monthly charge 30.00

Annual charge 340.00

(D) Call charges:

(i) Local no time limitUp to 750 calls .15In excess of 750 calls .20

(ii) Long distance (3 minutes)

Distance STD(Kilometers) Manual Pulse Metered

Up to 20 .5021 - 50 1.00 .9051 - 100 2.00 1.65

101 - 200 3.00 2.40201 - 500 5.00 4.65501 - goo 8.00 6.90Exceeding 900 - 13.65901 - 1,300 12.00Exceeding 1,300 16.oo

ANNEX 14Page 2 of 2

2. Telegraphs

Ordinary Express

(A) Non press:

First 8 words 1.20 2.40

Each additional word .10 .20

(B) Greetings

First 8 words 1.40 2.80

Each additional word .10 .20

(C) Press

First 50 words 1.00 2.00

Each additional word ,10 .20

3. Telex

(A) (i) Rental for telex servicewith teleprinter (withinthe local area of a telexexchange system) p.a. 1,800.00

(ii) 'here T.P. machine has beenprovided by subscriber himself 280.00

(B) Local call charges(3 minutes) .60

(C) Long distance:

.60 charge for a unit period of:

Up to 200 kilometers 60 seconds

201 to 600 " 30 seconds

6o1 to 1 ,ooo " 20 seconds

Exceeding 1,000 ' 10 seconds

INDIA

POSTS AND TELEGRAPHS DEPARTMENT Annex 15

Page 1 Of 5PagesTELECOMblUNICATIONS BRANCH

Pro Forma Balacce Sheet 1965/66 _1975/76

Actual Adjusted Forecast1970/71

As of March 31: 1965/66 1966/67 1967/68 1968/69 1969/70 (Estimate) 1971/72 1972/73 1973/74 1974/75 1975/76

ASSETS

Fixed AssetsPlant in service 2,785 3,166 3,536 3,831 4,291 4,799 5,330 6,157 7,378 8,577 9,631Less: depreciation 706 807 924 1, 01 1,164 1 334 1,509 1 709 1.946 2.230 2,559

Net plant he -erice 9 797 5735-9 -2,61-2 2,812 3,127 721S 5,43 2 6,37 707Plant under constru-ti- 245 342 579 745 832 871 1 477 1 976 i.848 1 679 1 750

70101 octfiooed aesets -2,3-2h 2,701 3,1- - 3,959 4-33~ 2 ~4 7,280 -8

Correct AssetsA-n .. ts recevaible 181 171 174 222 265 303 344 383 434 491 544

-entories 249 273 241 193 216 242 269 311 373 434 487Total current assets 4i3i0 T!!7 uis *7T5 i T 3 1-3 ; 007925 1,01

Less: corrent liabilitiesPayables 48 54 57 55 64 76 90 102 117 131 143Corrent maturities - - 7 100 79 - - -Net corrent assets 2 90 301 ; * *9- T52 3 592 490

Deferred charges - 202 190 180 170 160 150 140 130 120 110

TOTAL ASSETS 276 3,291 682 4,467 756 2

LIABILrTIES

EquityY/Capital-at-charge represeting

Central Gon't contributions 1,536 1,678 1,854 2,017 2,283 2,347 2,690 3,185 3,589 3,807 4,067Reserves 691 773 850 961 1 136 1 381 1 583 1 802 2 ,29 2 304 2,655

Total equity 2,227 ,51 2,704 2,978 3,1 4,27 3 5 X 6,722

Long-tesr debt9/sent loan - - 170 179 79 - - -

Capital-at-charge r-pres-ntingforeign e-change loans:IDA Creditn, 28-IN 169 313 313 313 313 313 313 313 313 313 313

58-TN 96 248 248 248 248 248 248 248 248 248 248153-IN - - - - 45 177 226 206 206 206 206

IBERD Loan 615-IN _- - 186 207 207 207 207Canadiao Credit - - - - - - 142 263 263 263 263Oth2 r foreigo exchange loans 79 129 142 169 174 174 174 174 174 174 174Proposed IDA cre.dis - - - - - - 47 322 285 585 585FPture borrowings _ _ _ _ _ _ _ _ _ 300 525

Total long-tern deht lesscorrenaat mtrities 344 6909/ 816 809 780 912 1,316 1,733 1,996 2,296 2,521

Subs-riber deposits - - - 13 34 52 68 84 100 116 132

Deferred credit 135 150 162 197 234 273 314 352 386 417 445

TOTAL LIABILITIES 2,706 3,291 3,682 3,997 4.467 4 156

Long-tern debt/equity ratio 13/87 22/78 23/77 21/79 19/81 20/80 24/76 26/74 26/74 27/73 27/73

/ For analytical purposes the capital-at-charge was divided in this presentation between funds raised by Goveroment as long-term debt sad conrtibutions from CentralGovernment. From P&Tss poiet of ciew the -onts shosn as long-tern debt have no repayment ter-s and interest is charged at the rate of 4-3/4% - 6-3/4% (seep-argraph .l.l),

| Reflects d8bt revaluation as a resolt of rupee devaluation.

Jausary 15, 1971

ANNEX 15Page 2 of 5 pages

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELECOCMUNICATIONS BRANCH

NOTES AND ASSUWMTIONS ON THE PRO FORMA BALANCE SHEET

Plant in Service and Depreciation

1. The Indian rupee was devalued in June 1966 from Rs4.76/US$l toRs4.50/US$1. The P&T did not revalue its telecommunications plant. Theassets register prepared by the Department records plant at historicalcost, as do the pro forma commercial accounts presented in this report.A revaluation does not appear necessary now: the growth in amount of newplant since the rupee devaluation has been substantial--an estimated 70%by the close of fiscal year 1970/71; replacement costs are lower on manyitems of plant; and a considerable portion of the value of telecommunica-tions plant is local cost and that part which was imported was subject tooverall customs of about 60%.

2. P&T has compiled and is maintaining a fixed asset register show-ing the main categories of plant and their value beginning with fiscalyear 1925/26. Depreciation has been recorded based on the estimated lifeof the assets, and write-offs have been made on the basis of the assumedlife of the assets regardless of the actual life. The composite rate ofdepreciation on average gross wasting assets in service is about 4.5%,which is reasonable. The value of the assets includes "petty works" whichhave been charged against revenue under P&T's system of accounts. Grossplant in service may be somewhat understated due to (1) small assets -less than Rs 500 - Rs 2,500 - not being included; (2) plant not adjustedfor the 1966 devaluation and (3) no interest capitalized. The foregoingnotwithstanding, the figures used in the pro forma financial statementsare sufficiently accurate so as not to affect the financial analysis. Atthe time of the last Bank/IDA lending operation, agreement was obtainedthat, whenever appropriate, and in any case at least every five years, areview will be made of the value of net fixed assets in operation and theminimum average rate of depreciation to determine whether, because of sub-stantial changes in current priceS, adjustments to such values are required;and confirmation was obtained that periodic reviews of the telecommunica-tions plant will be made by engineers and accountants to ensure that booklives of assets are kept in line with achieved lives.

Plant Under Construction

3. In the forecast it is assumed that the amount of plant underconstruction each year will be the sum of 50% of the construction programof the previous year plus 100% of the construction program of the currentyear.

ANNEX 15Page 3 of 5 pages

Cash

4. No cash balance is shown since P&T does not have any cash ofits own. As a Government department all revenues of P&T are required tobe paid into the Government's consolidated fund.

Accounts Receivable

5. Over the years the amount of subscribers' accounts receivablehas been substantial, amounting in some years to almost three months oftotal annual operating revenues. Attention is being given to this matterand the amount of receivables is being reduced to a more reasonable level.The forecasts assume that for the next five years the receivables willamount to about 2-1/3 months of total operating revenues.

Inventories

6. Inventories in stock at the stores and workshops, work in pro-gress at the workshops and certain goods in transit comprise the totalamount of inventories. The forecasts assume stores to increase propor-tionately to the increase in gross plant in service.

Accounts Payable

7. The amount of accounts payable is not large since under theparliamentary grant system any payments not made may not be chargedagainst the current grant and will lapse. For purposes of the forecasts,it has been assumed that 1/12 of staff expenses (mainly salaries, wagesand allowances), and 1/12 of the value of stores at the end of the fiscalyear are owing.

Deferred Charges

8. As a result of the rupee devaluation in 1966, a foreign exchangeloss of Rs 200 million was incurred. This is shown as a deferred charge,and amortized over the life of the foreign exchange debt.

Reserves and Capital-at-Charge Representing Central GovernmentContributions (Equity)

9. In constructing a pro forma balance sheet for the purpose of thisreport, "capital-at-&hargW" is divided between: (i) Central Government con-tributions, which, with reserves, would in a commercial sense be consideredequity, and (ii) long-term debt in foreign exchange, which, together witha repayable Government loan, would be considered long-term debt.

10. All funds utilized by P&T for its capital expansion are madeavailable through the Central Government, including P&T's own internallygenerated funds and any foreign exchange loans. In establishing theTelecommunications Branch's pro forma equity (reserves and "capital-at-charge" representing Central Government contributions) as of March 31,1965, the reserves are taken as those amounts which were identifiable ascoming from the entity's operations. The amount of Central Government

ANNEX 15Page 4 of 5 pages

contributions served as a balancing figure between the amount of totalassets (net of current liabilities) and the sum of long-term debt (seeitem ii, previous paragraph), reserves and deferred credit. From 1965on, reserves and "capital-at-charget, representing Central Government con-tributions reflect the amount of net profit transferred to reserves, andCentral Government contributions are the balancing item as shown in thesources and applications of funds.

Government Loan

11. This loan was made to P&T in order to allow interest paymentsto be met on Central Government contributions. The shortage was due tothe Telecommunications Branch transferring funds to the Postal Branch.

Capital-at-charge Representing Long-term Debt in Foreign Exchange

12. The amount of capital-at-charge representing long-term debt inforeign exchange includes Bank/IDA borrowings, the CIDA credit, a smallamount of foreign exchange and bilateral aid made available by Government,and the proposed IDA credit. P&T's accounts treat foreign exchange loansmade available by Government as part of the Central Government contribu-tion which are in turn treated as non-repayable loans. P&T is not requiredto service these long-term loans, but pays the Government annual interestat between 4-3/4% and 6-3/4%, depending upon the year involved. Theborrowings by GOI for the P&T program are as follows:

(a) Bank loan 615-IN (US$27.5 million) and IDA credit 153-IN (US$27.5million) totaling US$55 million equivalent with terms for the Bank por-tion at 6;-% per annum and a term of 30 years, including a grace periodof 10 years. The IDA portion is at the usual IDA credit terms.

(b) Canadian International Development Agency credit of US$35 millionequivalent at no interest or commitment charge and a term of 50 years,including a grace period of 10 years.

(c) Bilateral aid from various sources amounting to US$.6 million equi-valent on soft terms.

(d) Proposed IDA credit of US$78 million equivalent at usual IDA creditterms.

Subscriber Deposits

13. This is a guarantee deposit instituted in 1968 and pertains tonon-OYT subscribers in measured rate areas. This deposit is refundableat the time service is surrendered.

ANNEX 15Page 5 of 5 pages

Deferred Credit

14. In order to augment funds for capital expansion, a schemeknown as "Own Your Telephone" (OYT) was put into effect in 1949 wherebya subscriber by paying a lump sum as advance rental would receive pre-ference in obtaining telephione service. The subscriber in effect recoupshis advance payment in 20 years by paying a lesser rate for telephone ser-vice. Under the plan, the subscriber is entitled to a refund if he dis-connects his service. However, in actual fact, there have been scarcelyany disconnections of OYT service.

Annex 16Page 1 of 3 pages

INDIA

POSTS AND TELEGRAPHS DEPA3734ENT

TELECOMMUNICATIONS BRANCH

Pro Foroa Statement Of Inoome 1965/66 - 1975/76

(Rs Million)

Actual Adjusted Forenoot1970/71

Year ending March 31: 1965/66 1966/67 1967/68 1968/69 1969/70 (Estinote) 1971/72 1972/73 1973/74 174/75 1975/76

Rk7ENUE

Telepho-eLooal rental and coll oharges 343 405 469 548 691 818 948 1,058 1,202 1,370 1,521Tronk and international chargen 228 264 299 330 363 402 443 495 555 639 734I-stallntion fees 4 3 5 4 5 6 7 9 11 11 12

Total telephone revene 575 79 - 5 1,059 162 172,02 2

TelegraphDode-tic 89 99 113 130 132 135 138 141 144 147 151Istenotioon-l 17 20 16 16 18 20 22 24 26 28 30

Total tele.raph r venue 106 129 ¶9 150 155 160 %%7 170 175 19%

Telex 3 8 11 22 45 6o 80 100 130 165 190

Railway caimunions 21 29 46 52 45 45 50 50 55 58 h1

Viscell-aeous 24 24 46 25 25 29 33 37 45 46 50

Total Op-roting Rheenue 729 852 1,005 1,l07 1,324 1,515 1 721 1,914 L,6 2,4 ;0748

EXPENSES

Staff enpe-ses 338 362 433 496 555 671 812 916 1,041 1,149 1,232

Other c00t0 of operati-n 66 102 113 164 180 197 216 240 266 302 337

Depreciation 98 117 137 130 181 202 225 256 301 354 4')

For eign exchonge loss - _ 10 10 10 10 11 10 11 10 1O

Totol Operating Epenses 502 581 693 820 926 1,0o0 1,763 1,422 1,617 1,815 1,183

NET OPERATI00 INMOSI - 2elore iter-est 227 271 312 317 398 435 458 492 551 . 51 765

Leso interest)Forei_a enohonge loan 16 35 39 41 46 51 73 97 115 040 158Central oo't co-itrbhtioon 65 72 76 86 00 112 123 136 165 195 216G.orer-oent loan 9 - _ 9 4

fET PROFIT 146 164 197 171 246 268 o6h 259 2f.7 315

Tranefero to nstsl Fro.c.h 29 82 120 6o 71 23 6o 4o 40 41 L.

Net profit tr-osfesned to reserres 117 82 77 1ll 175 245 202 219 '27 Aft o51

irerage net plont in ermice 1,922 2,219 2,486 2,712 2,970 3,296 3,643 4,135 4,.4o 5,890 4,71,

RBte of re-trnJ/ 11.8% 12.2% 12.6% 11.3% 13.4% 13.2% 12.6% 11.% 11.2%, 11.1:. 11. -.

Operating ratio.z/ 69% 68% 69% 73% 70% 71% 73% 74% '5% 74%

1 Rtio of sot operating income to average net plant in servie.

Ratin of total operating expenses to total operating reeenes.

Jan-a-y 15, 1971

ANNEX 16Page 2 of3 pages

INDIA

POSTS AND TELEGRAPHS DEPARTMENT

TELECOMMUNICATIONS BRANCH

NOTES AND ASSUMPTIONS ON THE PRO FORMA STATEMENT OF INCOME

Revenues and expenses are shown on an accrual basis as distinctfrom a cash receipts and payments basis. Allowance is made for servicesrendered for which payment has not been received and, conversely, forrevenue realized in advance without corresponding service having beenrendered. Similarly, with expenses, allowance is made for expensesincurred for which payment has not been made.

Telephone Revenue

Local rental, call charges and trunk charges have been forecaston the basis of planned average increase in direct exchange lines butwith some allowance for the planned expansion of STD.

Installation fees have been forecast on the basis of the esti-mated number of telephones to be installed during the year, includingreconnections and shifting of telephones.

Telegraph Revenue

Domestic revenues have been assumed to increase at an annualrate of 3%o based on past growth and allowing for the likely diversionof telegraph traffic due to increased telephone and telex service.

International revenues are forecast to increase by Rs 2 millionannually.

Telex Revenue

Telex service is of recent origin and a sizable growth intraffic is envisaged. Telex revenue is forecast on the basis of plannedaverage increase in number of telex connections; revenues are assumed toincrease at about 30% annually.

Railway Telecommunications

Revenue under this category has been estimated to be Rs 45million in 1970/71 and gradually rising to Rs 61 million by 1975/76.

Miscellaneous

Revenues from miscellaneous sources such as cost of brokeninstruments, payment of guarantees, fees and directory advertising areestimated to be Rs 29 million in 1970/71 and to increase to Rs 50 millionby 1975/76.

ANNEX 16Page 3 of 3 pages

Expenses

Staff expenses and other costs of operation have been forecastto increase on the basis of planned increase in direct exchange lines,but taking into account increased system automization as well asassumed increases in wages and cost-of-living allowances.

Depreciation has been assumed at a composite rate of 4.5% onaverage assets in service.

Foreign exchange loss is in connection with the devaluation.See note under "Deferred Charges" on page 3 of Annex 15.

Postal Transfers

The amount of loss on the Postal Branch's operations has beenreflected by the Telecommunications Branch in its accounts to show annuallythe postal loss that telecommunications notionally covers. Although, thetransfer of funds from Telecommunications to Postal is notional, the amountof the postal loss unfavorably influences the amount of funds allocatedby GOI for telecommunications development. Over the past six years thePostal Branch losses have amounted to Rs385 million, about 20% of theTelecommunication Branch's net operating income for the same period.

Annual transfers to the Postal Branch are assumed to be Rs23million in 1970/71, which is the present budget estimate, and Rs6O millionin 1971/72. This larger amount is assumed to be required to cover anestimated loss by the Postal Branch in 1971/72 as a result of an expectedpostal wage increase that year. From 1972/73 on, annual Postal Branchtransfers of Rs4O million are included because in the past the Telecommu-nications Branch has continually made up the Postal Branch's losses.This was discussed with the former Director General and the present SeniorMember (Finance), who stated that the postal operation does not operateat a loss as a matter of policy, rather it occurs as a result of delaysin obtaining increases in postal rates.

INDIA A2NEX 17

POSTS AND TELZGRAPHS DEPARTMFNI

TELECONNUNICATIONS BRANCH

Pro Forna Sources and Applications of Ponds 1965/66 - 1975/76

(Rs Million)

Actoal Adjusted Forecast1970/71

Year ending March 31: 1965/66 1966/67 1967/68 1968/69 1969/70 (Estimate) 1971/72 1972/73 1973/74 1974/75 1975/76

SOURCES OF FUNDS

Internal cas' generationNet operating incore

before interest 227 271 312 307 393 435 458 492 551 651 765Amortization of eaciange lose - -o 10 10 10 10 10 11 10Depreciation 9& 117 137 150 i1i 202 225 256 301 354 404

Total intes:al cast generotia 325 4 399 4 7~ - : U99 9 793 758 oo2 1,115 1 ,179

Central Oceroest contribution 155 142 176 163 266 64 343 495 404 21i 260

OYT paynents (less discountgranted s-bs-riters) 23 15 12 35 37 39 41 38 34 31 23

SubscrIber depDeits - - - 13 21 1i 16 16 16 16 16

Soorccologs:IDA Credits: 2S-TU 71 47 - - - - - - -

53-li 65 95 -- - -_ _ _ -1535-l - - 4 - -5 132 29 _ - _ -

IBRD Loenrs 5-:11 - - - - - - 186 2-C-aad'an Credit - - - - _ 142 121-cier -r-eign e-c-an-e loans 3 4 13 27 5 - -

lcver-ment lon --_ 17C 66 - -2rcpseT IT .credit -- - - - 17 275 263 - -Fucure bccrccltasrr - - i - - - - - -300 225

Coctc b-rr-ircigs 146 idS3 93 50 132 'tSE TTT 293 300 225

-O. S,-,JREI OF FUilDS 591 691 831 77I 963 900 l.a97 1,724 1,59j 1.51 1,

AP7LICTIDrS WF FJIoDS

c,e,t-,cti.n p- I-s 43o 494 627 498 583 579 1,187 1,382 1,157 1,100 1,231

7--af-r c ?-5 al Br-lich 29 S2 120 6o 71 23 6o 40 41 40 41

Debt see- e:Aos-ts'sr - lo-ornoent ben - - - 57 110 79 - - -este e.t 1/

G---e-r-e'-t lcan _ - - 9 9 4Canotal-at-charge representing:

Fore. ign cthenge loans(oinrld-t, IBRD loan and IDA

redits) 16 35 39 41 46 51 67 S1 85 85 85Cenra Gc't contribubions 65 72 76 86 97 112 123 136 165 195 216

P-p-oee I' credit - - - - - - 6 i6 34 42 42tuore occoccotogs - - - - - -- - - 1L 31

Ictal dent service ol 107 115 193 252 ; 233 T23 336 374

Increase (decrease) -inking capital 51 6 (32) 20 57 52 54 69 S 104 94

ICIAL APPL_CATIOiS OF F-P2ID2 591 691 330 771 963 900 1,497 1,724 1,579 1,98 1,704

Cines debt -erv-ce coee-ed by internalcas generatIon 4.0 3.6 4.0 2.4 2.3 2.6 3.5 3.3 3.° 3.° 3.2

1/ See footnote, Adnne 15, page 1.

-auae-y 15, 1971

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