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STAFF APPRAISAL REPORT

PHILIPPINES

TELEPHONE SYSTEM EXPANSION PROJECT

AUGUST 14, 1992

Industry and Energy Operations DivisionEast Asia Country Department I

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(As of December 1990)

Currency Unit 8 Philippine Pesos (P)US$1.00 P 28.0P 1,000 U.$35.7P 1 = 100 Centavos (ctvs.)

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

M4Hz = Megahertz (1,000,000 hertz)GHz Gigahertz (1,000 megahertz)km = Kilometer (0.6214 mile)

ABBREVIATIONS AND ACRONYMS

ASEAN - Association of South East Asian NationsDBP - Development Bank of the PhilippinesDOTC - Department of Transportation and CommunicationsIBRD - International Bank for Reconstruction and DevelopmentICB - International Competitive BiddingIFC - International Finance CorporationLCB - Local Competitive BiddingNTDP - National Telecommunications Development PlanNTP - National Telephone ProgramNTC - National Telecommunications CommissionOBU - Offshore Banking UnitsPCO - Public Call OfficePLDT - Philippine Long Distance Telephone CompanyTELOF - The Government's Telecommunications Off'.ce

FOR OMCLAL USE ONLY

PHILIPPINES

TELEPHONE SYSTEM EXPANSION PROJECT

Loan and Proiect Summary

Aorrower: Development Bank of the Philippines (DBP)

Guarantor: Republic of the Philippines

Isnaeficiar: Philippine Long Distance Telephone Company (PLDT)

Amount: US$134 million equivalent

Lending Torm: Repayable over 20 years, including five years ofgrace, at the standard variable interest rate.

Relending Terms: DBP would relend the funds to a banking syndicatethat in turn would relend the entire proceeds to PLDTthrough separate facilities: (a) the first, of whichDBP would subscribe the entire $35 million, wouldinclude a term of twelve years and a grace period offour years; and (b) the second, of which eachpartitipating Bank would assume the intermediationrisk for its subscribed portion of the remaining $99million, would include a ten year term and a graceperiod of four years. The interest rate applicableto both facilities would be 3A%X above the Bank'srate. PLDT would assume the exchange rate riskbetween the Philippine peso and the US dollar. Fromthe spread, the Government would receive a fee of 1Xfor guaranteeing the Bank loan, and a second fee of1X for assuming the cross currency risk between theUS dollar and the other currencies involved in theBank loan.

Secondarv Lending: The float resulting from the differences inmaturities between the Bank loan and the tworelending operations would be made available to theGovernment according to terms that mirror those ofthe Bank loan, and consequently hold DBP free ofbenefit or loss.

Pxojeeq;Objectives: The objectives of the proposed project are to (a)

increase telephone penetration and leased linefacilities in PLDT's service areas, with an emphasison provincial development; (b) improve PLDT's qualityof service; and (c) address deficiencies in sector

This document ha a uctod diurlbution and may be used by recipients only in the performanceof theit ofciaW dutie& Its covtets may not othawie be dibclsed without World Bank authoXztbn.

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management and regulation. Most of the proposedproject has been designed to provide improvedtelephone facilities in areas that the Government hasidentified as having major economic importance.

DeiU2ELgtigC: Under the proposed project PLrT will undertake thefollowing activities: (a) provision of new, andexpansion of existing telephone services, mostly inprovincial municipalities but also in Metro Manila;(b) extension of its toll network to interconnect theremaining isolated exchanges managed by otheroperators; (c) provision of networks, throughout thePhilippines, for leasing to businesses and otheroperators; (d) provision of equipment to improve itsoperations and maintenance capabilities and trainingfacilities; and (f) strengthening of its projectmanagement capabilities. In association w'th theproject, the Government proposes to strengthen itsmanagement and regulation of the sector.

Benefits: The benefits of the project would accrue to allsectors of the economy through increased access tocommunications facilities. Businesses and the publicin the 239 provincial municipalities involved in theproject would benefit most through new and expandedtelephone services which will markedly improveexisting communication services.

Risks: No significant risks are foreseen.

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Estimated Costa: i

Local Foreig Total--- -US$ Million--------

Telecommunications facilities 65.5 110.0 175.5Operations and Training Facilities 3.5 9.5 13.0Power Equipment, Towers 6.0 6.0 12.0

Vehicles & MiscellaneousCivil Work for Buildings, Sites 27.5 6.5 34.0

Outside PlantConsultancy 2..

Base Cost 102.5 134.0 236.5

Physical Contingency 8.5 8.5 17.0Price Contingency 11.0 5.5 16.5

Total Project Cost 122.0 148.0 270.0

Interest During Construction 5.0 13.0 18.0

Total Financing Requirements 127.0 161.0 288.0

PinanciUg PlAn:

PLDT 127.0 27.0 154.0IBRD 0.0 134.0 134.0

Total 127.0 1fi1L0 2s88.0

Estimated IBRD Disbursements: IBRD Fiscal Year

199 194 1995 122k 1222 1298 122i

Annual 8.0 22.0 32.0 32.0 26.0 12.0 12.0Cumulative 8.0 30.0 62.0 94.0 120.0 132.0 134.0

Zn Inclusive of duties and taxes estimated at US$40 million equivalent.Totals have been rounded to nearest $0.5 million.

PHILIPPINES

Telephone System Expandon Projed

Staff Appraisal Rtport

TAe of Cone

LAo andPtojectSummnary ... .................... -........ . . .....

TIlTHE TELECOMMUNICATIONS SECrOR ........................... . -1A. Background ....... ................................. . -1-B. SetorStutur e ................. .......... .......... . I-1C. DemandandExpansion ........ .............. 3.... -3-D. Govenmen Strategy fbr the Sector ........... .............. . -6-E. Rationale for Bank Involvement .......... ..... ................. .8-

2. TH*' PROJECT ................................. . 9-A. Gener ......................................... .-9-B. P Is invemtent Progs= ....... ... ........................ . 9. -9-C. ProjectObjves .......................... ........... .9-D. Projea D ctf l on .......................... .......... . -10-E. Projed os ..................... . .... 4.. .. O.. -12-P. ProJect Financng ................. .. ... ........ . -13-0. Procurme ..... ... .. ..................... -14-H. Disbursemet .... .............................. .-16-I. Projet Ile me on and Schedule .. ......................... . -17 -J. Montong and Repordng ................................... . 18 -IL SupervisionPln .. .. .............. ...... . 18-L. Enviromnet ................................... .-18 -

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3. THE BORROWER AND THE BENEFICIARY ...... ....... ....... - 19-A. Introduction .. .................................. -19 -B. The Development Bank of the Phflippines .......................... . -19 -C. lhe Philippine Long Distance Telephone Company ....... ............ - 22 -

4. FINANCLAL ANALYSIS .................................... - 28 -A. Backgrond . .................................... -28-B. Past and Present Financial Performance . . . . .-...... 28-C. Financing Plan .................................... - 31-D. Future Finance .................................... - 33-

S. ECONOIIC ANALYSIS .................................... . 36-A. Benefits .................................... ...... . 36-B. Tarif .s . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..... - 36 -C. Return on lIvestment .................................... . 37-D. Least Cost Solution .................................... .- 38 -E. Project Risks ..................................... 38-

6. AGREE.ENTS AND RECOMMENDATION ......................... . 39 -A. Agreements Reached .................................... - 39 -B. Recommendaion .................................... -40-

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1.1 Philippines - Growth in Telephone Services1.2 DOTC Circular 90-252 - Telecommuni -tions Policy1.3 DOTC Departmental Order 90-483 - Formation of Telecommunications Policy Directorate1.4 DOTC Letter of Intent on Telecommunications Policy Matters2.1 Details of X-5, X-SC and "Other Worksl Projects2.2 Description of Project Services2.3 Estimated Project Costs2.4 Proposed Secondary Lending Arrangements Related to Government us of the Float2.5 Proposed Procurement Arrangements for World Bank Financed Itms2.6 Project Disbursement Schedule2.7 Schedule of Construction2.8 Draft Terms of Reference for Project Management Consultants3.1 PLDT Organizational Chart3.2 PLDT Staffing Distribution (Pie Chart)3.3 PLDT Staffing Patterns3.4 PLDT Operational Performance Targets4.1 PLDT Annual Financial Statements and Projections 1987-975.1 PLDT Tariffs5.2 PLDT Return on Investment5.3 List of Documents in Project File

IBRD 22934 - PLDT's Telephone System Expansion Project

1. THE TELECOMMUNICATIONS SECTOR

A. Background

1.1 For much of the last half of the '980s, the Philippines wasstriving to sustain its recovery from the economic turmoil of the first halfof the 1980s. In 1985, the GDP growth rate in real terms was -3.81, foreigndebt bordered on $30 billion, and about 701 of Filipino households lived belowthe poverty line. In contrast, by 1988, GDP growth in real terms increased tomore than 6X, the inflation rate fell to slightly below 91, and other economicindicators registered positive improvement. However, starting in December1989, the economy sustained one shock after another as a result of politicalunrest, natural disasters, and the Persian Gulf crisis. The growth rate forGDP slowed to less than 3X in 1990, and turned negative in 1991.

1.2 Telecommunications is one of the least developed infrastructuresectors in the Philippines. Service is generally unavailable; and, where itis available, the quality of service is considered patchy. The Government be-lieves that inadequate communications were a constraint to economic devel-opment during the recent recovery, and a deterrent to the foreign investmentneeded to offset the negative economic impact of the recent shocks.

1.3 The telephone sub-sector is the segment of the telecommunicationssector that most urgently needs expanding and upgrading. Service coverage issparse, with most telephone installations being concentrated in Metro Manilaand only to a lesser degree in other principal cities; some cities, smalltowns and rural areas, and even relatively populous outskirts of principalcities have little or no access to telephone service. As of 1986, the nation-wide telephone density of 1.0 lines per 100 population was among the lowestamong the ASEAN countries; by contrast, telephone density was about 32.5 per100 population in Singapore, 6.5 in Nalaysia, 1.7 in Thailand, and 0.4 inIndonesia. The telephone density in Manila of about 9.6 per 100 population isvery low for a Southeast Asian capital city, and waiting lists for serviceaverage three to five years. Elsewhere in the country, telephone density is avirtually non-existent 0.3 per 100 people.

B. Sector Structure

1.4 The Government has regarded the provision of telecommunicationsservices to be mainly the responsibility of the private sector. An array ofprivately owned carriers provide a reasonable range of services for both in-ternational and local communications. Generally, the Goverwaent intends thatthese services be offered by franchised carriers on a "reguiated competition"basis; however, the Government recognizes that certain faci'Lties, such aslocal telephone service, are most efficiently provided on a single carrier perfranchise area basis. The Government's Telecommunications Office (TELOF), re-sponsible to the Department of Transportation and Communications (DOTC), alsoprovides telegraph services, and some telephone services to remote areas.

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1.5 Historically, one group of companies has been licensed to providerecord services (telegraph, telex, data and facsimile) and another licensed toprovide telephone services. National record services are provided by sixprivately owned carriers and TELOF, while four privately owned carriers pro-vide the international segment of these services. Two international recordcarriers, Eastern Telecommunications Philippines, Inc. (ETPI) and PhilippineGlobal Communications (PHILCOM), have telephone correspondence agreements withseveral countries in the region, and are also licensed as carriers of recordand telephone services. Two of the privately owned dow3stic record carriers,the Philippine Telegraph and Telephone Corporation (PT&T) and Radio Commu-nications of the Philippines, Inc (RCPI), maintain small nationwide recordtransmission facilities in parallel with those of the dominant telephonecarrier, the Philippine Long Distance Telephone Company (PLDT), and have usedthem to provide unlicensed voice toll services. In some cases, these threecompanies cooperate by leasing circuits from and providing restoral facilitiesto each other. Moreover, PLDT often leases the local loop cable connectionsto the record carriers. Two other companies, both carrier's carriers, are li-censed to operate satellite communications facilities. The Philippine Commu-nications Satellite Corp. (PHILCOMSAT) leases international circuits to tele-phone and record carriers; the Domestic Satellite Philippines Corp (DONSAT) issupposed to provide'similar services domestically; but it currently providesonly television relay services. An affiliate of PLDT, PILTEL, is the majorprovider of mobile telephone services. A second company, Extelcom, waslicensed in 1989 to provide mobile telephones in competition to PLDT/PILTEL.

1.6 As of early 1990, PLDT was providing telephone service to about 902of the country's 625,000 working lines and about 941 of the nation's 1.05 mil-lion installed telephones (many subscribers share party lines). Its localservice areas consist of most major cities and larger towns, so that the Com-pany serves many of the nation's lucrative markets. PLDT is one of the na-tion's largest companies; at the end of 1991, its net worth exceeded P 18 bil-lion and its annual revenues were about P 16.6 billion. About 50 other inves-tor and local government owned operators provide 81 of te1ephone connections.Generally, they are small, financially weak, and thinly cspitalized; and theyprovide poor quality of service. TELOF provides the remaining 22 of connec-tions. TELOF's efforts to provide telephone service have proven ineffectual;an affiliate of PLDT currently operates TELOF's networks in Regions I and II(northern Luzon). DOTC is planning to divest itself of TELOF's activities.

1.7 PLDT also owns most of the long distance networks that interconnectwith local exchanges. It carries virtually all domestic long distance andinternational traffic. Until recently, PLDT was the only carrier to provideinternational telephone service; however, in 1989, NTC opened this service tocompetition by awarding licenses to operate gateways to ETPI and PHILCOM.Small operators that are not interconnected to PLDT's long distance networksare limited to providing local service in marginal markets and thus have aweak revenue base. Operators that are interconnected share only modestly inrevenues from long distance and international service. The Government needsto provide leadership so that operators will become more accountable to theirconsumers and to the national interest; this is particularly true of PLDT,

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whose policies and actions set the standards for investment and operating per-formance for the sector.

1.8 DOTC is the core Government agency responsible for the sector. Its'le is Inter alia to formulate (i) policies for directing the sector-(ii) a framework for the future expansion of service; and (iii) objectivesagainst which the operational performance and investments of sector partici-pants could be measured. An attached agency, the National TelecommunicationsCommission (NTC), is responsible for regulating the activities of the opera-tors by (a) awarding and renewing , rating licenses to franchised companies;(b) approving the expansion plans and tariffs of carriers; (c) monitoring theperformance of network operators; and (d) managing the frequency spectrum.

1.9 These arrangements could work satisfactorily; however, because ofthe low priority accorded to telecommunications until recently by the Govern-ment, neither DOTC nor NTC has adequately fulfilled its responsibilities.DOTC has lacked both a clear strategy for development of the sector and aclear policy regarding sector structure, service priorities and operationalperformance. The uncertainty created by this lack of a policy framework hasleft NTC without a clear direction for its regulatory activities, which hasbeen ranifest by inconsistency in rulings regarding the sector's structure anddelays in approving expansion plans. The resultant lack of timely and effec-tive regulation has led to operators pursuing parochial interests without anyofficial authority interceding to ensure that national developmental pri-orities would be served, and that consumers would receive satisfactory qualityservice. Most importantly, in the absence of effective competition and aneffective medium for accountability, PLDT understandably furthered its cor-porate interests by (i) structuring rates and revenue sharing arrangements toits own advantage, often to the detriment of the small operators; (ii) denyinginterconnection to some operators, and disconnecting others in instances ofnon-payment; and (iii) providing patchy quality of service to its subscribers.

C. Demand and Expansion

1.10 Because of the low priority accorded to the telephone sub-sector bythe Government, expansion of service has been too slow to keep pace with thedevelopment of other sectors of the economy. During the 1980s, PLDT's numberof working lines grew by only about 6% per year; this corresponds to a growthrate of about 5.9% for Metro Manila and about 7.0% for the provinces (Annex1.1). These rates are below the 8% average for developing countries and muchless than the 12-15% rates recorded in the more dynamic econc ,es.

1.11 PLDT has historically taken a conservative approach to meeting de-mand growth in the large cities; and given the existence of other local opera-tors including TELOF, and the lack of guidance from the Government, it hasnever actively sought to extend its service beyond narrowly defined, hig.hlyprofitable areas. Moreover, the Government has prevented PLDT from growing asfast as the Company itself had proposed. In the early 1980s, after consider-able delays, NTC required that PLDT substantially reduce its planned X-5 ex-pansion program. Then, the Government constrained the Company's access to

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foreign exchange, thereby making loan syndication for the reduced X-5 moredifficult and delaying its start. Implementation of that program has onlybegun within the past year. In turn, the smaller operators hid behind themodesty of their profits and the high cost of capital to curtail their own in-veatment programs. With such sparse penetration of telephores and the rela-tively slow growth in service during the 1980s, PLDT not surprisingly has abacklog of about 400,000 applications for telephone service. For the sameperiod, the other operators realized a growth rate of 3.6% for working lines.They too have significant backlogs in applications for service. In contrast,TELOF's complement of working lines fell by about 5.6% during the 1980s.

1.12 In the early 1980s, the Government decided that TELOF should imple-ment its own nationwide program to expand service. Under the first phase,18,000 lines were installed in Regions I and II (northern Luzon). The demandon which the project was based never materialized, and TELOF was unable tooperate and maintain the networks. After several years of contracting with aPLDT subsidiary for their operation, the Government has decided either toprivatize or lease these networks (para. 1.15).

1.13 Future expansion of telephone service is expected to flow fromthree initiatives:

(a) PLDT's Long Term Exoansion Erogrm. During the 1990s, PLDT plans amajor expansion program to install about 658,000 new lines, for anannual growth rate of about 10%3/. The first phase (the X-5) isnow under construction; the needed financing for the second phase,the X-5C, is currently being finalized; and plans for the thirdphase, the X-6, are nearing completion. The proposed project,which would provide 149,000 of the new lines under this long termexpansion program, was formulated by ?LDT specially to meet theGovernment's appropriate and feasible sector development prioritiesby bringing forward ccaponents of the X-6 and subsequent expansionplans; moreover, it contains only components that NTC indicated itcould approve, pending financing. This combined program is expect-ed to stretch the institutional and financial limits of PLDT'scapability to expand, and therefore represents appropriate mediumterm growth for the company.

(b) The Natlonal Telephone Program (MTP). This initiative aims to in-stall some 87,000 new lines by 1994 in localities unserved by PLDTin Regions III-XII. This would double the service currently beingprovided by TELOF and the other operators. The Government has se-cured bilateral financing for different segments of the NTP fromJapan, France and Italy. Some additional finance may be needed;and the Bank indicated it could consider financing part of the bal-

3/ After appraisal, PLDT substantially increased the size of its expan-sion plans; the changes are reflected in Annex 3.4. During projectsupervision the Bank would appraise the scope and size of those newplans and PLDT's capacity to implement them.

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ance if the Government (i) engages capable operators for theplanned networks, and (ii) revises designs and procurement arrange-ments to ensure that those networks are least cost. The Governmentwill address the operator issue using technical assistance financedby a Bank-managed Japanese Grant.

(c) The Municlial Telephone Act. This Act, passed in 1989, mandatesthat the Government implement a program to provide basic telecom-munication service to the 1,200 or so unserved municipalities by1993. It directs DOTC to administer the program and authorizes theGovernment to use its own funds as well as official loans to fi-nance private sector efforts to implement this program. Currently,the Government is receiving bilateral offers of support for thisprogram.

Few detail'.s were available about the expansion plans of the other 60 or sooperators or of independent companies that have expressed interest in enteringthe telephone industry. However, these efforts are expected to be modest andin keeping with their low development profiles of recent years.

Pgst Bank Involvement in the Sector

1.14 The Bank has been actively involved for several years in helpingthe Government address some of the basic policy issues constraining the growthof the sector. In 1985, under the Technical Assistance Project (Loan 2495-PH), the Bank made a $4 million loan aimed at strengthening NTC and updatingthe NTP. Despite a number of implementation problems, that project met mostof its objectives. During supervision of that project, the Government fol-lowed the Bank's advice to constitute a National Telecommunications Develop-ment Committee (NTDC) as a forum for discussing policy issues facing the sec-tor; based on those deliberations, DOTC would formulate the urgently neededpolicy framework. The NTDC has reached the end of its term and was dissolved,but many of its recommendations have been used as inputs to legislation and tothe formulation of sector policy. Recently, the Government and the Bankagreed to (i) continue NTC's institutional development efforts; and (ii) en-sure adequate operating arrangements for the NTP. In conjunction with theproposed project, a Japanese Grant will finance consultancy services to assistthe Government's efforts at addressing these issues. Separately, IFC hasmaintained long-standing financing relationship with PLDT. Since 1969, IFChas made five investments (fcr a total of $128.5 million) with the Companywhich included, at one point, the owning of some 376,000 shares of PLDT'sstock. Recently, IFC served as PLDT's financial advisor. In that role, IFCled the syndication of $155 million in loans for the X-5 -oject. That syndi-cation included a direct IFC loan of $30 million and a B-Loan of another $40million, both of which were approved by .. , Board in June 1989. IFC isexpected to assist PLDT complete its financing arrangements for the X-5Cproject. The main lesson to be drawn from IFC's experience is that PLDT hasgenerally met its implemenuation targets apart from delays in completing theassembly of project financing plans, regulatory clearances, or equipmentdeliveries. Consequently, IFC has rated PLDT's project implementation capa-bility as very good. Past implementation problems are being addressed under

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the proposed project: (i) the proposed Bank loan will provide all the neces-sary external financing; (ii) the regulator has already given approval-in-principle for PLDT to implement the project components (formal clearance canonly follow confirmation of the financing arrangements), and efforts to obtainfinal regulatory clearance are well advanced; and (iii) under the Bank'sprocurement procedures, bids from potential suppliers will not be acceptedunless accompanied by commitments to meet PLDT's delivery timetable.

D. Government Strategy for the Sector

1.15 For many years, the Government has been unclear about its object-ives for the telephone sub-sector as well as about its own role. As a result,the privately owned carriers have generally felt free to maximize their shortterm profitability and foreswear investments that failed to promise immediatestrong returns, without regard for national priorities. In 1988, DOTC begar.the process of filling the policy vacuum by establishing the National Telecom-munications Development Committee (NTDC) to serve as a forum within which allinterested Government agencies and private carrisrs could air their viewsregarding proposed policies. More recently, DOTC has made substantial prog-ress in the following areas:

(a) DOTC's Role. On August 10. 1990, DOTC issued Department Circular90-252 (Annex 1.2) stipulating that the Government would (i) vestresponsibility for operation and maintenance of telecommunicationsnetworks and investment in the future development of facilities inthe private sector; (ii) serve as a facilitator for and regulatorof sector participants, while occasionally serving ag developer oflast resort; (iii) privatize its telecommunications networks; (iv)address the sector's business environment to enable private compa-nies to operate more profitably, and thereby undertake responsibil-ity for investment in their service areas; and (v) strengthen thesector's regulatory framework. On November 21, 1990, DOTC issuedDepartment Order 90-483 (Annex 1.3) establishing a Policy Director-ate inter alLa to implement Department Circular 90-252.

(b) Development Plan for the Sector. In October 1990, DOTC adopted theNational Telephone Development Plan (NTDP), which provides a rea-sonable policy framework for future expansion and operation of thesector. The NTDP, which was formulated with the active collabora-tion of the private sector, addresses (i) investment priorities forthe medium and long term, and (ii) network performance standards.These objectives could be used by NTC as the basis for assessingthe operators' (a) investment plans, and (b) applications to renewtheir operating licenses. This is a dynamic plan that needs to bereviewed regularly and adapted to changing conditions in the coun-try and in the sector.

(c) FlnancIng of Investment. Despite the inrerent profitability oftelecommunications operations, the country's large outstanding for-eign debt and current uncertain economic climate constrains even

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the strongest of the privately owned operators from raising neededinvestment capital solely from commercial sources. Having recog-nized this problem, the Government decided in 1990 to make avail-able to private operators borrowings from official sources; in thepast, this form of funding had been reserved to finance only tele-communications investments being pursued by Government entities.As a first step, the Municipal Telephone Act includes a pr,visionfor making available the proceeds of official loans up to theequivalent of P 300 million and up to P 200 million of budget fundsto support private sector investments in public call offices incurrently unserved localities. The proposed loan in support ofPLDT is in keeping . x this revised Government policy. In gener-al, the Government t. r,visages its role as a facilitator ofprivate investment-i zler than as an implementor and/or owner oftelecommunicatior..- tems.

(d) Interconnection and Revenue Sharlng. NTC has recently promulgatedacceptable guidelines governing (i) access of all local serviceoperators nationwide to ocher local networks, domestic long dis-tance, and international service, and (ii) revenue sharing arrange-ments between local and long distance operators (domestic and in-ternational). PLDT has developed plans for complying with the in-terconnection guidelines, and the proposed loan will finance a sub-stantial part of the necessary investment. It has also adjustedits rate sharing formula to provide local operators with a greatershare of domestic long distance and international revenues. Incoming years, the Government and PLDT will need to review the stru-cture of rates to ensure that implied levels of cross subsidizationare appropriate.

(e) Strengthenlng of Government Institutions. DOTC has received ap-proval of a V 278 million grant from a Bank managed Japanese Gov-ernment facility to finance technical assistance to (i) developsound operating arrangements for the NTP; (ii) continue NTC'sinstitutional development efforts; and (iii) provide services andfacilities to improve the telecommunications sector's training pro-grams. DOTC and NTC have retained some consultants and are in theprocess of retaining others for these activities.

1.16 The Bank has assisted DOTC in the formulation and development ofthese initiatives. Through a continuation of the dialogue, the Bank can helpensure the coherence of these efforts and that necessary follow-up activitiesare adequately supported. During negotiations, the Government agreed that itwould (i) furnish to the Bank a summary of the results of its annual review ofthe implementation of its telecommunications policies; and (ii) seek theBank's comments if major change in any such policy is expected. In addition,the Government sent a letter (Annex 1.4) to the Bank confirming that it wouldconduct an annual review of progress with regard to implementing its policiesand plans, including the provisions of Departmental Circular 90-252; (b) byJanuary 1, 1994, review its policy framework including the structure oftelephone tariffs; and (c) share with the Bank the results of those reviews

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and adopt, if feasible, the recommendations reached. Moreover, the letteraffirmed that the Government would share with the Bank the result of thest. andother reviews that might result in major changes in sector development policy,and solicit the Bank's views prior to deciding any such changes.

E. Rationale for Bank Involvement

1.17 The inadequacy of infrastructure generally, and of telecommunica-tions services specifically, is a major constraint to investment and economicgrowth in the Philippines. For telecommunications services to improve tolevels comparable to nearby countries, the sector needs (i) considerable in-vestments to upgrade existing facilities and expand networks at a time whencountry conditions inhibit even the strongest companies from raising invest-ment capital from commercial sources; and (ii) greater institutional cohesion,wherein the Government and the major providers of service improve their effec-tiveness in their allotted roles. In addition, the Government needs to imple-ment the policies enunciated in the NTDP and develop an institutional frame-work within which the sector can grow; and, it needs to provide the leadershipneeded for PLDT to evince greater concern for national developmental priori-ties and increased responsiveness to the service requirements of its consum-ers. Because of the depth of its existing dialogue with both the Governmentand PLDT, the Bank is uniquely positioned to use its involvement in the pro-ject to address all of these issues. In particular:

(a) By financing a project that focuses on developing service in areasof high priority to the Government, the Bank would lead PLDT totake a more balanced approach toward future network development.

(b) By financing the proposed project, the Bank would assume the roleof a cornerstone financier for PLDT, thereby enhancing the Com-pany's financial credibility as well as its efforts to obtain thebalance of its investment requirements from commercial sources.

(c) By emphasizing cost optimization and quality of service as well asa more expansive approach to investment, the Bank would induce PLDTto become more responsive to its consumers.

(d) By channeling a substantial official loan to a private company, theBank is encouraging the private sector to assume responsibility fora major development investment.

(e) By supervising the consultancies financed by the Japanese Grant,the Bank would continue pursuing sector policy and regulatoryissues, including (i) the institutional strengthening needed toenable DOTC to become more effective at managing and NTC at regu-lating the sector; and (ii) the constructive dialogue between theGovernment and PLDT needed to enable PLDT to play a leading rolewithin a clearly defined policy framework.

2. THE PROJECT

A. General

2.1 The proposed project is a stand-alone part of PLDT's planned in-vestment program for the period 1991-94.

B. PLDT's Investment Program

2.2 PLDT's investment program for 1991-96 is divided into four princi-pal ccmponents: (i) the X-5 project, which is currently under implementation;(ii) the X-5C project, part of which is under implementation; (iii) the pro-posed project; (iv) the X-6 project which is planned to start in 1994; and (v)other works. The Bank's appraisal mission examined PLDT's investment program,except for the X-6 project for which plans were still being formulated, andfound it fully consistent with the sector objectives outlined in para. 1.15.

2.3 The X-5 and X-5C parts of PLDT's expansion program provide for ex-pansion of existing networks and customer facilities. Contracts for the X-5project have been awarded and works are expected to be completed in 1992.Contracts for the turnkey construction of 120,000 lines of the X-5C projecthave been awarded and bids for the drawing, supply and construction of theremaining 265,000 lines have been called. The other works included in theinvestment program are expected to expand PLDT's international and localtransmission networks and include a variety of sub-projects for expanding andimproving service, including works to rehabilitate PLDT's cable networks.Contracts related to the "other works" component of the investment program arebeing let on a case-by-case basis; progress is to a large extent dictated bythe availability of acceptable financing. Further details about these proj-ects are provided in Annex 2.1.

C. Project Objectives

2.4 The proposed project aims to (i) increase telephone penetration andleased line facilities in PLDT's service areas, with an emphasis on provincialdevelopment; and (ii) improve PLDT's quality of service and efficiency. Ingeneral, the proposed project will enable PLDT to advance its plans for imple-menting a variety of customer and operating facilities needed urgently to meetdemand in areas that the Government has identified as having major economicimportance (para. 1.13(a)) and to improve PLDT's operational performance.

2.5 In conjunction with, yet separate from the proposed project, theGovernment has agreed to take action to strengthen sector management and regu-lation (para. 1.15). The Bank will support DOTC's efforts to improve its ca-pacity to manage the sector, and NTC's efforts to improve its ability to regu-late sector activities, through (i) continuing dialogue with DOTC and NTC dur-ing project supervision; and (ii) technical assistance which is being providedfrom the Bank-managed Japanese Grant Facility (para. 1.15(e)). That technical

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assistance Grant for 1 278 million has been approved and is effective, and theGrant amount is therefore not included in the project costs. The amount oftechnical assistance is adequate given the absorptive capacity of DOTC and NTCto effectively use consultant support.

D. Project Description

2.6 The main components of the project are (Annex 2.2):

(a) Expansion and rehabilitation of telephone services in provincialareas through the provision of 133,000 lines of exchange equipment;

(b) Provision of about 97 public calling offices (PCOs) in currentlyunserved municipalities in 10 provinces;

(c) Interconnection of six isolated exchanges, managed by independentoperators, with PLDT's toll network thereby providing them with ac-cess to national and international services;

(d) Provision of outside plant to connect about 41,000 new customersthereby utilizing more completely the local exchange capacity be-coming available in the Metro Manila area;

(e) Provision of special circuits,, in the Metro Manila area and 20 Pro-vincial cities, to be used as leased voice and data lines;

(f) Provision of a transmission maintenance system to improve PLDT'sinter-exchange circuit operations and maintenance performance;

(g) Provision of training equipment for PLDT; and

(h) Consultants to strengthen PLDT's program management capabilities.

2.7 Provincial Telephone Expansion. This component involves the in-stallation of about 133,000 lines of exchange and related telecommunicationsequipment for providing (i) new telephone services in 53 unserved municipalit-ies in 9 provinces; (ii) expanding existing telecommunications facilities; and(iii) replacing obsolete equipment. The areas were selected on the basis ofgovernment priority (para. 1.13(a)). A total of 32 new exchanges (34,000lines) are to be installed in provincial towns, and 23 existing exchanges areto be expanded by about 51,000 lines to accommodate pending requests for ser-vice. In many cases lines will be extended from new and expanded exchanges toserve adjoining municipalities. In addition, about 20,000 lines of obsoleteelectromechanical equipment at 23 exchanges will be replaced with about 49,000lines of new digital exchange equipment. Six of the above new exchanges willprovide modern telecommunication facilities for eight industrial parks; twoexchanges will each serve two parks. The parks are under development in Re-gions III and IV, and the availability of acceptable telecommunications facil-ities is a prerequisite to attracting investors. In total, after allowing forreplacement of old exchanges and an exchange fill ratio of 95X, this componentwill provide a net increase of about 108,000 new telephone lines.

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2.8 Public Call Offices. Through this component, PCOs will be in-stalled in 97 currently unserved municipalities in 10 provinces. The PCOswill be connected to exchanges through a variety of techniques, including:(i) fixed base stations to access PLDT's existing cellular mobile radio facil-ities, and (ii) multi-access radio systems being provided under the project.The use of cellular techniques will make these services robust and more immuneto outages during natural disasters. This component will enable PLDT to ful-fill its obligations under the Municipal Telephone Act (para. 1.13(c)).

2.9 Interconnection of non PLDT exchan,es. Through this component, oneGovernment and five independently operated telephone exchanges would be inter-connected to PLDT's toll network. These are 6 of the 25 licensed Governmentand independently owned telephone exchanges in the Philippines that are stillnot connected to toll networks that would give them access t .omestic longdistance and international services. Services in these isolated exchanges aretherefore confined to local calls. Interconnection has been mandated by arecent NTC guideline, and PLDT plans to install most of the facilities neededto comply with that guideline through the X-5 and X-5C projects. PLDT plansto interconnect, under this project, the six remaining isolated telephone ex-changes that are in proximity to its toll networks!/.

2.10 Manila Outside Plant and Services. Under the X-5C project, PLDTwill implement a significant upgrading and expansion of telephone exchanges inthe Metro Manila area. The resultant rationalization of customer connectionswill release some spare exchange capacity throughout the network. This compo-nent will utilize that spare capacity by providing outside plant and equipmentfor customer premises for about 41,000 new connections.

2.11 Leased Line Facilities. This component would accommodate growingdemand from businesses for leased voice and data lines by providing a dedicat-ed transmission network in the Metro Manila area and selected provincial cit-ies. The network would consi.t of a distributed optical fiber cable systemwith a capacity of about 2,000 voice and data circuits interconnecting majorexchanges and buildings through 21 nodes in the Metro Manila area. Extensionsto the system will be provided to 20 nodes in provincial cities through theuse of PLDT's existing and planned network transmission facilities.

2.12 Transmission Maintenance System. This component will provide aspecial digital maintenance system with facilities to improve PLDT's abilityto centrally monitor and test inter-exchange and private circuits in the MetroManila network. This component is designed to reduce circuit outage times andthereby improve service quality.

2.13 Tralning Facillties. Additional simulatior and miscellaneoustraining equipment will be provided in order to maintain PLDT's training fa-cilities at an acceptable level of performance.

!/ The Government plans to interconnect the other isolated exchanges to thelong distance networks being developed under the NTP.

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2.14 Strenthenlng of PLDT's Protect Managemt CapablUtles. Consul-tants will be engaged to review and help PLDT strengthen their project manage-ment operations (para. 2.30).

E. Project Cost

2.15 The total project cost is estimated at US$270 million (excludinginterest during construction), of which US$148 million is projected to be theforeign cost (direct and indirect). Detailed cost estimates for the projectare presented in Annex 2.3 and summarized in Table 2.1:

Table 2.1: PROJECT COST ESTIMATE

Foreign CostPesos Million US$ Million as % of

Local Foreign Total Local Foreign Total Total

Ecuinment & ServioesTelephone Exchanges 563.5 1.414.0 1.977.6 20.0 50.5 70.5 72

Transmission Equipment 334.0 733.5 1,067.5 12.0 26.0 38.0 se

Outside Plant 882.5 831.5 1,714.0 31.5 29.5 61.0 48

Customer Premises 59.5 114.5 174.0 2.0 4.0 6.0 67Equipment

Operations and Training 102.0 271.0 373.0 3.5 9.5 13.0 73Facilities

Power Equipment, Towers, 175.0 174.0 349.0 6.0 6.0 12.0 50Vehicles & Miscellaneous

Civil WorksOutside Plant 238.5 65.0 303.5 8.5 2.5 11.0 23

Suldingp and sites 526.0 105.0 631.0 19.0 4.0 23.0 17

Consultansv 0.0 56.0 56.0 0.0 2.0 2.0 100

TotlE BeCo tm 2,881.0 3,764.5 6,645.5 102.5 134.0 236.5 57

Physioal Contingenoy 232.5 235.5 468.0 8.5 8.5 17.0 -Ptice Contingency 311.5 156.0 467.5 11.0 5.5 16.5 -

Tot Protect Cost is 3,425.0 4,156.0 7,581.0 122.0 148.0 270.0 53

INT. DURING CONSTRUCTION 138.0 369.0 506.0 5.0 13.0 18.0 -

TOTAL F^IANCING REUIRED 3,561.0 4,525.0 8,087.0 127.0 161.0 288.0 se

NgW: Cost estimates have been rounded to the nearest 0.5 million.l The project cost includes an estmated US$40 million equivalent in duties and taxes

2.16 All costs are in April 1992 prices and based on recent price quota-tions from equipment suppliers. Physical contingencies related to (a) foreign

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costs are 5X for switching equipment and 10 for other items, and (b) localcosts are 5 for goods and 10 for labor and overheads. The price escalationof foreign costs is calculated according to anticipated international pricemovement of 3.9X per annum during the implementation period of the project(1992-96). The price escalation for local costs is calculated according tothe projected local inflation rate of 10 per annum. Interest during con-struction is calculated by applying the Bank's current interest rate of 7.73Xplus a spread of about 3.25X applicable to the onlending to PLDT, to the aver-age amount expected to be drawn down during each year of construction and byadding the commitwent fee on the average undrawn amount of the loan. Theproportion of interest during construction attributable to the proposed Bankloan itself, is allocated to foreign cost; the proportion attributable to thespread is allocated to local cost.

F. Project Flnancing

2.17 The financing plan for the project is presented in Table 2.2 below:

Table 2.2: PROJECT FINANCING PLAN(US$ million equivalent)

Local Foreign Total 1 of Total

IBRD 0.0 134.0 134.0 46.5

PLDT 127.0 27.0 154.0 53.5

Total 127.0 161.0 288.0 100.0

2.18 The proposed Bank loan of US$134 million would be lent to the De-velopment Bank of the Philippines (DBP) for 20 years, including five years ofgrace on repayment of principal, at the standard variable interest rate. TheGovernment would guarantee the entire amount of the Bank loan to DBP, andwould charge a guarantee fee equal to 11 per annum on the outstanding loanamount. While DBP would assume (and transfer to PLDT) the exchange rate riskbetween the Peso and the US dollar, the Government has agreed to assume thecross currency risk between the US dollar and the Bank's currency pool, for asecond fee of 11 per annum on the outstanding loan amount.

2.19 In turn, DBP would relend the proceeds of the Bank loan to a bank-ing syndicate, which would include DBP as well as four other participatingbanks. The Banking Syndicate would in turn relend the entire proceed to PLDTthrough two separate facilities: (i) the first, of which DBP would subscribethe entire $35 million, would include a term of twelve years with a graceperiod of four years on repayment of principal; and (ii) the second, of whicheach participating bank would take the primary responsibility and assume theintermediation risk for its subscribed portion of the remaining US$99 million,

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would include a ten year term with a grace period of four years on repaymentof pxincipal. In addition to serving as a member of the syndicate, DBP wouldserve as originator of the syndicate and would act as agent for the syndicatemembers throughout the life of the loan to PLDt.

2.20 In addition to bearing responsibility for the Bank's interest rate,the aggregate of 2X in fees being charged by the Government will be borne bythe banking syndicate and flow through to PLDT. DBP would earn 1XX on theentire amount for its role as originator and administrator of the relendingarrangements, and each of the syndicate members (including DBP) would share anadditional spread of 1% to compensate for the intermediation risk. Thus, therate to PLDT will be 31.% above the Bank's rate, which over time is expected tobe a reasonable proxy for market rate for a loan of similar size and maturity.

2.21 Each participating bank is in good standing with the Central Bankof the Philippines and in compliance with posted prudential regulations.Moreover, all participating banks have been accredited under the Bank financedIndustrial Restructuring Project (Loan 3287-PH).

2.22 Because the maturities applicable to the two relending operationsare considerably shorter than the term of the Bank loan, PLDT shall amortizeits loans ahead of DBP's amortization of the IBRD loan. Consequently, DBPwill need to manage a float resulting from the excess of the principal repay-ments made by PLDT over the amounts that would be due to the IBRD. The Gov-ernment wishes to use this float for application to general macroeconomicpurposes, according to an arrangement for secondary lending that would func-tion as though the Government were the Borrower of the IBRD loan; thus thearrangements for secondary lending will need to be tailored so as to hold DBPfree of benefit or cost (Annex 2.4).

2.23 The documentation for the arrangements described above are unusualand complicated. For that reason, negotiations were held open until thedrafts were reviewed satisfactorily by the Bank. A condition of effectivenessof the proposed loan will be the execution of satisfactory documents for:

(a) onlending to the syndicate and syndicate operations (between DBPand the other participating banks);

(b) onlending to PLDT (between the syndicate members and PLDT);(c) guarantee of the Bank loan, coverage of the cross currency risk,

and secondary lending (between the Government and DBP).

G. Procurement

2.24 Procurement arrangements for the proposed project are summarized inTable 2.3. Details are provided in Annex 2.5. Contracts for about US$114million (including contingencies) for goods and services would be awardedaccording to International Competitive Bidding (ICB) procedures using theBank's standard procurement guidelines. The Bank has cleared PLDT's proposedwording for its model document, "Invitation to Bid and Conditions of Con-tract", which would be applied to all ICB procurement financed by the Bank.Items to be procured according to ICB include (a) new telephone exchange equi-

-is -pment; (b) transmission equipment; (c) outside plant items such as optic fibercable, copper cable, and miscellaneous jointing materials; and other items

Table-2.3: SUMMARY OF PROCUREKENT ARRANGEMENTS(US$ million)

Procurement MethodICB LCB OthertLa NBF& Total

Eguipment and Services:

Telephone Exchanges 38.5 16.6 22.5 77.5(38.5) (16.5) (55.0)

Transmission Equipment 28.0 0.5 13.5 42.0(28.0) (0.5) (28.5)

Outside Plant 34.5 38.0 72.5(34.5) (34.5)

Customer Premises Equipment 7.0 7.0

Operations and Training Equipment 10.0 1.0 4.0 15.0(10.0) (1.0) (11.0)

Power Equipment, Towers, 3.0 11.0 14.0Vehicles & Misc. (3.0) (3.0)

Civil Works:

Outside Piant works 13.0 13.0

Buildings and sites 27.0 27.0

C.onsultancy: 2.0 2.0(2.0) (2.0)

Total 1HA Z Z& 12(114.0) (20.0) (134.0)

NOTE: Figures in parentheses indicate financing from the Bank loan. Costs have been rounded to nearest $0.5million.

fa Direct purchase, international and local shopping, and Bank procedures for selection of consultants.

& NBF refers to nonBank-funded items and includes equipment, works and services and expenditures onengineering and administrative overheads and also duties and taxes, all of which are funded by PLDT. Thecost of duties and taxes is estimated at US$40 million.

including powerplant equipment, network transmission monitoring equipment andtraining aids. The equipment suppliers will be required to install outsideplant equipment and provide services for supervision of the installation ofmost equipment items. Equipment needed to extend PLDT's most up-to-date, ex-isting, digital telephone exchanges ($16.5 million, representing about 6X ofthe total project cost) and expand existing multiplex radio systems ($0.5 mil-lion) is of a proprietary nature and would therefore be procured directly fromthe suppliers. Use of other equipment for these applications would not be

I

Pj,j-

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economic. In order to ensure that negotiated prices for telephone exchangeequipment are reasonable, PLDT has agreed to engage an independent inspectingfirm (acceptable to the Bank) to confirm that the prices are comparable with,or less than, international prices for similar equipment recently provided bythe supplier. Most contracts for goods procured under ICB are expected to beawarded to foreign suppliers. PLDT proposes to procure telephone instrumentsand small-size copper cables from local suppliers using its own funds. Con-tracts for specialized training equipment costing less than $50,000 each witha total value not exceeding $0.8 million may be procured through internationalshopping; and smaller training support items such as personal computers cost-ing less than $50,000 each with a total value not exceeding $0.2 million maybe procured using local shopping procedures. Bank financed project managementconsultants (about $2 million) would be selected according to Bank guidelines.

2.25 All ICB contracts for goods estimated to cost more than $1.J mil-lion individually, and all contracts for consultants services, will be subjectto prior review by the Bank. This would involve about 85% of the total valueof contracts to be financed by the Bank. The remaining Bank-financed contractswould be subject to post-award review.

H. Disbursement

2.26 The proposed Bank loan would be disbursed over a 6-year period.Disbursements would be made as follows: (a) 100l foreign expenditures forequipment and material imported directly; 10OZ ex-factory costs of local ex-penditures for equipment and materials manufactured locally and 85X of expen-ditures for other items procured locally; (b) 100l of total expenditures forconsultant services. Disbursements for equipment contracts with a value ofless than $1 million equivalent may be made against Statements of Expenditures(SOEs). The supporting documents will-be retained by PLDT and will be avail-able for review by supervision missions upon request. All other requests fordisbursement would be fully documented. To the extent possible, DBP and PLDTwould consolidate withdrawal applications for direct payment and reimbursementprocedures into amounts of not less than US$1.00 million equivalent prior topresentation to the Bank. During appraisal, DBP and PLDT were assessed ashaving the capacity to manage the above arrangements properly.

2.27 To facilitate project disbursement, a Special Account in a fullyconvertible currency would be established by DBP. The authorized allocationto the Special Account would be US$3 million, representing an estimated aver-age of four months' disbursements. Replenishment of the Special Account wouldbe made quarterly or whenever the available balance in the account droppedbelow 501 of the initial deposit. The Special Account would be establishedwith terms and conditions acceptable to IBRD including that: (a) the deposi-tory bank for Special Account funds would be a commercial bank, and (b) DBPshould have direct and ready access to funds deposited. During negotiations,(i) DBP agreed to have its records in relation to the Special Account auditedfor each fiscal year and the results of the audit furnished to the Bank byJune 30 of the end of such year; and (ii) PLDT a3reed to have its records inrelation to Statement of Expenditures, being maintained for disbursement pur-

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poses, audited for each fiscal yenr and the results of the audit furnished tothe Bank by June 30 of the end of such year.

2.28 The project completion date for the proposed loan will be June 30,1998, and the closing date of the loan will be December 31, 1998. For IFCprojects, PLDT has generally met its implementation targets apart from delaysin completing the assembly of project financing plans, regulatory clearance,or equipment deliveries. Consequently, IFC has rated PLDT's project implemen-tation capability as very good. These past problems have been addressed underthis project (para. 1.14). Furthermore, consultants are to be engaged underthe project to review, and if necessary, strengthen PLDT's project managementcapabilities so as to avoid any delays that could occur as a result of theproposed project stretching PLDT's project management capacity (para. 2.30).The estimated disbursement schedule, given in Annex 2.6, is based upon theprofile for all Bank telecommunications projects during FYs 1978-90.

I. Project Implementation and Schedule

2.29 Responsibility for project implementation will be shared betweenPLDT and the various suppliers and contractors. Path design, specificationand installation of most transmission systems are well within PLDT's capabili-ties and will be undertaken by the Company. Switching systems and thosetransmission and other systems relying on technology unfamiliar to PLDT willbe installed by PLDT's technical staff; suppliers will be contracted to pro-vide adequate training to PLDT's staff and to supervise the installation. Ina manner similar to other PLDT projects, outside plant networks will be de-signed by PLDT with contractors' assistance as required, and constructed andtested by contractors under PLDT supervision; a combination of separate localcontractors and PLDT staff will wire customer premises and install new custom-er telephone facilities. PLDT has invited bidders to pre-qualify for the out-side plant supply and erect contracts, has prepared the bid documents forswitching equipment and generator sets, and is finalizing bid documents fortransmission equipment. A schedule of construction activities is given inAnnex 2.7.

2.30 PLDT will retain responsibility for managing its investment pro-gram. Project management is the responsibility of a single division in PLDTwhich already has two project management groups in operation. One of thegroups is responsible for managing the proposed project together with ongoingworks; the other group is responsible for managing the large X-5 and X-5C pro-jects. Consultants are to be engaged under the proposed project to strengthenPLDT's project management capabilities. The consultants are to review PLDT'sproject management structure, work practices, training, and support systemsand recommend appropriate improvements; and assist with project managementwhere necessary. In their review, the consultants would be required to payparticular attention to the adequacy of PLDT's preparations for managing theproposed project and a key responsibility will be to ensure proper coordina-tion between the two different project management groups. Draft terms ofreference for the consultants are given in Annex 2.8. During negotiations ofthe proposed loan, PLDT agreed to appoint the management consultants, a:cord-

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ing to terms of reference and a selection procedure acceptable to the Bank,not later than June 30, 1993.

J. Monitoring and Reporting

2.31 Satisfactory procedures for monitoring (i) the physical executionof the project; (ii) project expenditures; and (iii) PLDT's technical, commer-cial, and financial performance were developed at appraisal. PLDT will fur-nish progress reports to the Bank every six months.

K. Supervision Plan

2.32 Supervision of this project will focus upon the following key im-plementation aspects: (i) fast and effective procurement of goods and servicesin the early stages of the project. (ii) implementation progress and coordina-tion of the various project elements of civil works, switching, transmission,outside plant and connection of customers; (iii) proper coordination of theproject with related elements of PLDT's other expansion program components;(iv) compliance with financial covenants to assure the financial health ofPLDT while undertaking its large investment program; and (v) assurance thatadequate steps are taken to protect the environment. A substantial componentof supervision time would be spent reviewing and assisting the Government'sefforts toward strengthening sector management, mainly through the use of con-sultants to be engaged under the Japanese Grant Facility (para. 1.15(e)).Three missions annually for a period of five years are foreseen for adequatesupervision of this project. The total estimated staff inputs are: (a) atelecommunications engineer and financial analyst, with assistance from aneconomist being drawn as required -- 47 staff-weeks; and (b) a specialist ontelecommunications regulation and policy -- 15 staff-weeks.

L. Environment

2.33 The proposed project is not expected to cause any environmentalproblems. Construction would involve some minor site clearing, and accessroads may be needed to reach transmission tower sites. Where optic fiber isused, some plowing of cable trenches may be needed. However, these disrup-tions normally follow existing power, road and rail alignments. The disrup-tion of virgin land is expected to be minimal.

2.34 Because the project's impact on the environment is expected to beminor, no special environmental assessment is needed. However, as designs andcontracting for the proposed project become more advanced, the measures thatPLDT proposes for protecting the environment would be assessed during projectsupervision to ensure their conformity with both local guidelines and stan-dards acceptable to the Bank.

3. THE BORROWER AND THE BENEFICIARY

A. Introduction

3.1 The Borrower of the proposed loan will be the Development Bank ofthe Philippines (DBP). The Beneficiary will be the Philippine Long DistanceTelephone Company (PLDT), which will receive the proceeds of the proposed loanflom DBP according to acceptable onlending arrangements (para. 2.19), and willuse the funds to execute the project.

B. The Development Bank of the Philippines

Background

3.2 DBP was established in 1958 as a Government-owned development bank.Until 1986, DBP's financing operations reached into almost all segments of theeconomy, including large and small-scale enterprises. In addition to itsindustrial, agricultural, real estate and transportation lending, DBP madesubstantial loans to social sectors such as education and health care. Start-ing in the 1970s, under the guise of its development mission, DBP financedhigh risk and low return Government development programs ("directed" or "be-hest" lending), as well as takeovers of financially distressed firms when sodirected by the Government. This lack of financial discipline in its lending,compounded by serious weaknesses in its internal organization and procedures(notably credit appraisal and supervision), led to massive defaults in itsportfolio and, in turn, serious financial prcblems.

3.3 With its resource mobilization c..apacity thus undermined, DBP had torely mainly on Government deposits for funding its activities. Still, itsfinancial difficulties were so severe that 8) several capital increases be-tween 1972-80, (ii) substantial government deposits to shore up its liquidityposition, and (iii) various measures to strer *hen its organization and proce-dures, all failed to prevent DBP's further firin'cial deterioration in theearly 1980s. Serious portfolio arrears and poo- collection rates persisted;all the same, the Government continued pressing IBP to make high-risk and low-interest behest loans. Despite corrective action.; agreed with the Bank in thecontext of various Bank operations (the last on; being the Industrial FinanceProject, Loan 1984-PH; 1981), DBP's financial and operationa'l performancecontinued to deteriorate, culminating in a suspension of Bank lending to DBP.

DBP's Rehabilitation (1986-1989)

3.4 Following the change of Government in 1986, the severity of DBP'sproblems and its technical bankruptcy were addressed by a comprehensive reha-bilitation program that included a financial restructuring and reorganizationdeveloped in conjunction with the Bank financed Economic Recovery Loan (ERL).Those two provisions of the rehabilitation program, were implemented during1987-89 and are now completed. DBP's Policy Statement, which was issued in

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1989, provides for it to have: (a) a private sector orientation combined withdecision-making autonomy; (b) an interest rate and fees policy that (i) isconsistent with prevalent market rates and (ii) ensures full coverage of allits direct and indirect costs, including provisions as required, plus an ade-quate profit margin; (c) a prudent matching of interest rates and maturitiesbetween its assets and liabilities; and (d) a debt-equity ratio not exceeding5:1.

3.5 DBP now has a good management team. Its financial indicators (cap-ital adequacy, liquidity, return on equity, return on assets) are healthy andin line with the leading private financial institutions in the Philippines(Table 3.1). In 1989, the Bank agreed to finance the Industrial InvestmentCredit (IIC) Project (Loan 3123-PH), with DBP acting as the apex organizationchannelling investment funds to private industry through accredited partici-pating financial institutions (PFI). Implementation of that project has sofar been satisfactory. Under IIC, DBP agreed to implement an InstitutionalDevelopment Plan (IDP) that defines and makes operational DBP's wholesalebanking strategy. In connection with this proposed project, DBP will continueto implement the IDP, including (i) the market-oriented policies that form thebasis of its operations and (ii) the privatization of its retail operations.In January 1991, DBP reaffirmed these principles in connection with a new Bankloan for US$175 million (Loan 3287-PH) to finance the Industrial RestructuringProject (IRP).

Table 3.1: SUMMARY OF DBP'S FINANCIAL PERFORMANCE, 1989-1991(Peso billion)

Year 1989 1990 1991

Total Loans Outstanding 5.7 9.2 15.3Total Debt 5.3 10.0 20.2Total Equity 6.3 6.9 7.3Net Income 1.1 1.1 1.2

Ratios:Debt/Equity 0.9 1.4 2.8Net Worth/Risk Assets (X) 100.5 71.6 42.9Liquid Assets/Deposits (X) 165.3 113.6 103.5Provisions for Doubtful Accounts/ 24.0 11.9 8.4

Total Loans (X)Net Interest Margin/Total Assets (X) 8.4 8.4 8.5Return on Average Net Worth (X) 17.5 17.5 16.8Administrative Expenses/ 4.5 4.5 4.3

Average Total Assets (X)Personnel Costs/Total Assets 2.6 2.6 1.7

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DBP's New Role and Strategic Orientation

3.6 DBP's financial restrv.cturing and the major elements of its insti-tutional strengthening were completed in 1989. and left DBP solvent. As acondition of the Financial Sector Adjustment Loan of 1989, its role was rede-fined so that DBP is now becoming a wholesale bank, which would mobilize andchannel term funds to the private sector through retail financial institu-tions. Given the availability of domestic long-term funds from the SocialSecurity System, insurance companies and pension funds, DBP is expected toplay a major role in domestic resource mobilization and in developing domesticcapital markets. At the same time, DBP will be divesting itself of its retailoperations. A partial divestiture is expected in 1992. By separating DBPfrom some of its more risk activities, this divestiture is likely to improveDBP's financial prospects. Under the IIC and IRP, the Bank is monitoringclosely DBP's financial and operating performance, as well as its compliancewith the targets set out in its Policy Statement. Through conditionalityrelated to those two prcjects, the Bank will address on an ongoing basis anyactivities or difficulties that would reduce DBP's ability to fulfill itsresponsibilities under the proposed project,

3.7 In moving toward wholesale banking, DBP can only gradually increaseits reliance on domestic resource mobilization; in the short term, the lack ofa developed internal capital market and the Government's continuing needs totap domestic savings through high-yield Treasury bills would impede DBP's ef-forts to raise significant long term local currency funds. Given these con-straints, DBP will have to fund a significant proportion of its wholesalebanking activities from foreign sources in coming years. In this context, DBPhas been designated to serve as a conduit for official foreign borrowings,channeling the proceeds through retail financial institutions for use in fi-nancing private enterprises.

3.8 The onlending arrangements under the proposed loan are consistentwith DBP's reorientation into wholesale banking. DBP has performed due dili-gence in satisfying itself with regard to PLDT's credit. Having decided thatthe proposed transaction was attractive financially while also being consis-tent with the Government's development objectives, DBP has structured thearrangements in keeping with financial prudence principles. Not only is itthus providing PLDT with much needed investment finance, but it is also en-abling the participating banks to improve the return on their existing assets.

3.9 Under the Financial Sector Adjustment Loan (1989) DBP's Boardadopted a policy statement spelling our operational and financial practicesand targets that it intends to meet in the future years. Moreover, it agreednether to amend nor abridge that policy statement without the bank's priorconsent. That policy statement continues to be relevant and appropriate. Inaddition, during negotiations of the proposed loan, DBP agree to furnish tothe Bank by June 30 of each year, its annual financial statements for theprevious year certified by an auditor acceptable to the Bank.

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C. The Philippine Long Distance Telephone Company

Background

3.10 Telephone service was introduced to the Philippines in 1905 withthe founding of the Philippine Islands Telephone and Telegraph Company. PLDT,itself, was founded on November 28, 1928 with the Philippine Legislature'spassage of Act No. 3436, which incorporated the Company and vested it with a50 year franchise to provide telephone service nationwide; that franchise wasextended by another 50 years in the late 1970s. Subsequently, PLDT acquiredthe assets, franchises and businesses of the then existing telephone systems.The Company's ownership passed to Filipino hands in 1967. While PLDT has sub-stantially expanded its capital structure since ther, the interests that ac-quired it in 1967 have continued to retain operating control over the Company.

Ownership

3.11 PLDT has nearly 500,000 holders of its common and preferred shares.About 14% of its paid-in capital was raised from common stock, about 36% fromissues of cumulative non-convertible preferred stock, and the remaining 50%from the Company's Subscriber Tnvestment Plant/. While the preferredshareholders have the right to vote on capital increases, only common share-holders may vote for directors, annual business, and auditors; as a result,the common shareholders control the company. These arrangements vest inordi-nately broad corporate powers in a narrow group of shareholders; still, thisis not expected to have any noticeable impact on the proposed project.

3.12 PLDT's common stock is traded not only on the Manila and MakatiStock Exchanges, but also on the American Stock Exchange. About 39% of thecommon stock is closely held by interests that have owned large blocks ofshares for many years. Another 30% is owned beneficially by U.S. based stockbrokerage firms on behalf of their investors; those holdings are generallylarge blocks. Another 17% of the common stock is owned by foreign investorsand held abroad. The remaining 14% is held by investors in the Philippines.While this includes some large blocks, it also includes many small holders.Virtually all the common stock that is traded in the Philippines comes fromthat last group of 14%.

!/ Under that plan, when subscribers receive their connections, they arerequired to purchase 180 shares of preferred stock bearing a P 10 parvalue and a coupon rate of 10%. Those shares are tradeable on the Ma-nila and Makati Stock Exchanges. After one year, those preferred sharesare convertible to common stock at a 10% discount from the average mar-ket price of the common stock on those Stock Exchanges. In practice,few of those preferred shares get converted to common stock. Their ownmarket value has tended to fluctuate with that of PLDT's common stock,and the 10% dividend rate provides a higher pay out. Moreover, manysubscribers are not financially sophisticated and therefore unaware ofwhatever may be the comparative advantages of converting these holdingsto common stock.

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Organization, Management and Staff

3.13 PLDT's corporate powers are exercised by its eleven-member Board ofDirectors. Each Board member is elected by the common shareholders to serveuntil the next Annual Meeting and may be reelected without limitation. Thepresent Board consists primarily of senior executives drawn from the businesscommunity and high level public servants. The Board meets once a month; theExecutive Committee may act as the Board between meetings. In addition, theBoard has a finance committee to consider financial matters; an Audit Commit-tee to consider issues of internal audit; an Executive Compensation Committeeto set the pay of the Company's senior officers; and an Advisory Committee ofnon-Board members to provide specialized advice to the Board members them-selves.

3.14 PLDT's management is vested in its President, who is himself a Di-rector and serves as the Company's Chief Executive Officer. He is appointedeach year at the first meeting of the reconstituted Board of Directors follow-ing the Annual Meeting. The Board has also designated the Senior ExecutiveVice President to serve as Chief Operating Officer.

3.15 PLDT's organization chart is presented in Annex 3.1. The structurepresented therein is appropriate. The three line functions - operations,finance and administration, and development and expansion - each report to anExecutive or Senior Vice President. Some of the staff functions - includingstrategic planning, public affairs, internal audit, electronic data process-ing, and management information systems - report directly to the President;others - including corporate affairs, legal services, collections, and opera-tions support - report to the Chief Operating Officer. All PLDT functions arecentralized except for operations, which is decentralized on a geographicbasis. PLDT's distribution of its manpower of 17,501 as of December 31, 1991,is given in Annex 3.2; its staffing patterns are summarized in Annex 3.3.

Operation and Maintenance

3.16 PLDT is the country's largest telephone operator. As of December1990, its operations included ibout 600,000 working telephone lines (over 90Xof the cotntry total), of which 82% are located in the Metro Manila area. Theremainder are spread throughout all Regions of the country, but centered most-ly in the major cities and towns. PLDT also (i) operates a nationwide trans-mission backbone network, through which it provides toll services for its ownconsumers as well as for most of the small telephone operato: Itara. 1.7);(ii) switches almost all of the international telephone traffi. o and fromthe country through its four international gateways (para. 1.7); (iii) oper-ates a mobile telephone service in Metro Manila and major towns throughoutLuzon; and (iv) provides leased line services to businesses (for data andvoice communications) and to record carriers for local loop connections forrecord services.

3.17 Operations in Metro Manila are combined under one major grouping,while operations in all other parts of the country are organized into a secondgrouping. The Metro Manila grouping is organized into four divisions, with

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each one having an exchange operations unit and a service center. Each ex-change operating unit is responsible for the needs of all subscribers servedby the particular exchange, while the technical activity related to the provi-sion of service is the responsibility of the centers. Similarly, the MetroManila divisions do not handle billings or collections. Outside Metro Manila,operations are organized into one division for Luzon and a second for theVisayas and Mindanao. Within those divisions, each exchange is responsiblefor operations as well as the provision of service. While billing is stillcentralized, the exchanges handle their own collections. The exchanges andservice centers are adequately staffed and equipped to handle operations andmaintenance requirements effectively.

3.18 PLDT's operational efficiency and service quality has been weakcompared with most other telephone operators in the ASEAN region. This weak-ness is generally related to pcor outside plant, obsolete exchanges, and theoverloading of existing services resulting from high unmet demand. In addi-tion, line and service staff are subject to heavy pressures from inadequatelyserved subscribers or unserved applicants. However, its expansion program isInter alla designed to bring about significant operational improvements.Apart from providing high quality extensions to its networks, the expansionprogram should significantly improve the technical performance of existingnetwoiks through specific upgrading measures and relief of congestion; this,in turn, would enable improvements in staff related performance.

3.19 PLDT contemplates a number of initiatives to address operationalweaknesses. PLDT's ratio of staff per 1000 lines is 31; this is relativelyhigh compared with Korea (6), Malaysia (27), and Thailand (20), but betterthan Indonesia (50). PLDT plans to reduce this ratio to 22 by 1996 largely asa result of operational economies of scale, which it believes can be realizedthrough expansion. PLDT plans also to reduce average faults per 100 lines permonth from 14 to 9 by 1996, largely through improved outside plant, rehabili-tation and rearrangements of aging equipment, and replacement of obsoleteexchange equipment. Such a major improvement would bring PLDT's average faultperformance to a level comparable with Indonesiat/ and would build a soundbase for yet further improvements. PLDT has also begun a program to increasethe speed of service restoration; by 1996, the Company hopes to increase theproportion of faulty services restored within 48 hours from the current 90Xlevel to 95X. This would be achieved largely through system improvements andtechnical training.

3.20 One of the Government's important objectives is to improve the op-erational performance of participants in the sector. To that extent, duringsupervision of the proposed project, the Bank will want to monitor the effec-tiveness of PLDT's performance improvement measures. During negotiations ofthe proposed loan, PLDT agreed that, for the next five years, it will prepareannually for joint review with the Bank, a comparative analysis of its actualperformance against a set of operational performance targets (Annex 3.4), andto implement mutually acceptable recommendations to remedy any shortfall inperformance.

t/ This is still well below the Part 1 country standard; as an example, theU.K.'s fault per 100 lines per month ratio is 2.0.

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Development and Expansion

3.21 PLDT has a strong development planning group that has shown excel-lent capabilities for formulating and implementing projects. The group hasdemonstrated a facility for handling the full range of telephone technology.The modesty of the Company's expansion in recent years (para. 1.10) has re-sulted from political constraints and financial conservatism, and not frominadequate facilities or staff.

Training

3.22 PLDT has a substantial and effective in-house training program.The program focuses on (a) orientation of new staff; (b) skills developmentfor working level and clerical staff; (cj technical development, particularlyadapting to changing technology, for engineers and technicians; (d) issuesrelated to quality of service for all professional staff; (e) managerialskills development for (i) existing managers, and (ii) staff identified ashaving potential for promotion to management; and (f) communications coursesand training the trainer programs for staff of specially targeted units. Inaddition, PLDT arranges for on-the-job or external training for deservingstaff to cover topics that are not available from the in-house program. Thesearrangements are appropriate. PLDT is seeking to modernize its trainingequipment to enable its staff to keep abreast of modern techniques and tech-nology. The proposed project will provide this new equipment.

Accounting Systan

3.23 PLDT uses an accrual accounting system. The system, which is basedon the practices followed by U.S. telephone companies, observes generallyaccepted international accounting principles. PLDT presents two separate setsof annual financial statements: (i) the first, which presents the Company'sfinancial condition to its shareholders, is based on valuing fixed assets athistorical cost, and (ii) the second, which is used for reporting to NTC, isbased on valuing assets at replacement cost. PLDT's accounting system, andthe practices it implies, are appropriate.

Jtnandail Planning and Budgeting

3.24 PLDT has well staffed units for financial planning and budgeting.The financial planning unit has developed extensive integrated computerizedfinancial planning models, which are used primarily to test the impact ofinvestments and financial decisions, and to provide information to externalfinanciers. PLDT prepares budgets annually. The budget is revised periodi-cally during the year, and comparisons of actual performance against budget isa regular managerial exercise.

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Commerial Systems

3.25 Most PLDT exchanges are equipped to generate a centralized automat-ic metering accounting tape for recording toll calls; those few that are notuse digital systems to record toll calls, and billing records of those callsare therefore generated manually. The records of toll calls are sent daily tothe electronic data processing department at headquarters, where the chargesare entered into the consumers' accounts. Bills are sent out monthly; toregularize its cash flow, PLDT distributes its consumer accounts among sixdifferent monthly billing cycles, each at five day intervals. Customers whogenerate tolls exceeding P 2,000 within the first fifteen days of their cyclereceive an interim bill. Bills are delivered by hand by messenger service.In the case of Government Offices and large industrial consumers, the messen-ger service delivering the bill is responsible for returning as needed tocollect the payment. Other consumers may remit payment by cash or check atany of PLDT's business offices, which are located near exchanges or spreadthroughout its larger areas of operations. All consumers must pay by the lastday of the billing cycle, or the amount is shown on the next bill to be over-due. About ten days after delivery of the next bill, PLDT sends a disconnectnotice to those accounts that are still outstanding. These notices are deliv-ered by hand and include a delivery receipt. A consumer may be disconnectedafter ten days following receipt of the notice. The Company is deliberateabout disconnecting consumers, so that this policy is effective.

Audit

3.26 PLDT has its annual financial statements audited for inclusion inits Annual Report and presentation to its Annual Meeting. The accounting firmof Sycip, Gorres, Velayo and Company (SGV), which enjoys a strong professionalreputation region-wide, has been reelected to serve as PLDT's external auditorsince the 1960s; SGV coordinates with Arthur Andersen and Co. for reporting tothe U.S. Securities and Exchange Commission. At negotiations, PLDT agreedthat, by June 30 of each year, it will furnish to the Bank audited financialstatements for the previous year, together with the certification and relatedreport prepared by an acceptable auditor.

3.27 PLDT has an extensive internal audit department. This unit hasbroad responsibilities, including: (i) safeguarding of assets; (ii) optimizingthe usage of assets; (iii) reviewing internal controls and ensuring that theyare followed; (iv) ensuring that Company policies are followed; (v) reviewingsystems and procedures for consistency with Company policy; (vi) ensuring theconsistency of all contracts and negotiated arrangements are consistent withCompany policy; and (vii) ensuring that all revenues are accounted for andcollected. Internal Audit verifies inputs to the Company's computerized ac-counting system; this activity is then reviewed by the external auditor.

Taxes

3.28 PLDT is liable for income tax, assessed at 35X of income after in-terest. The pre-tax income figure has been adjusted to recognize certain

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expenditures related to foreign exchange losses and interest during construc-tion that had been capitalized for reporting purposes as expenses during thecurrent year. The Company must also pay a franchise tax, assessed at 3X ofgross operating revenues, and real estate taxes. PLDT is liable for customsduties in the range of 15-30% on all imports.

Insurance

3.29 PLDT insures its assets through a combination of self insurance andcommercially purchased policies. Risk management analyses are performed regu-larly by the Company's security division. At appraisal, these practices werereviewed and found satisfactory.

Dividends

3.30 PLDT has paid dividends on its common stock continuously since1954. Since 1988, the amount paid has been P 3.20 per share, representing arate of about 4.5X on paid-in capital, and a yield of 3-5X on the recent mar-ket price. In addition, PLDT has been paying dividends regularly on its vari-ous series of cumulative preferred stock. Dividends on all common stock andthe 15X preferreds are declared quarterly; dividends on all other preferredshares are declared semi-annually. These dividend levels are not excessive.Moreover, as PLDT's shares are publicly listed in both the Philippines and theU.S., its declarations of dividends are given widespread coverage. In thecurrent political and economic climate, PLDT wants to avoid appearances ofpaying out large dividends at the expanse of service quality or expansion;therefore, the publicity attendant to its declarations of dividends effective-ly acts as a deterrent against possible excessive increases.

4. FINANCIAL ANALYSIS

A. Background

4.1 PLDT maintains its own accounts and manages its own financial af-fairs. As such, it has authority to set prices, formulate its own investmentprogram, enter into contract with suppliers of goods and services, and borrowfrom foreign, as well as domestic, lenders. However, its financial autonomyis limited. As a carrier of a regulated service, its prices as well as itsplanned investments are subject to NTC's approval. Despite its financialstrength (para. 4.2), PLDT's ability to raise needed capital from foreigncommercial sources is limited by lender concerns about country risk; thus, inrecent years, the Company has sought Government guarantees for officialforeign loans to supplement finance it is raising from commercial sources.

B. Past and Present Financial Performance

4.2 PLDT's financial performance for 1988-91 is presented in Annex 4.1and summarized in Tables 4.1 and 4.2:

Table 4.1: PLDT's Key Financial Indicators - 1988-91(Pesos Billion)

FINANCIAL YEAR ENDED DECEMBER 31 1988 189 1990 1991Actuals

OPERATING REVENUES 7.7 9.5 12.8 16.6OPERATING EXPENSES 4.4 5.6 7.4 9.0OPERATING INCOME 3.3 3.8 5.4 7.6NET INCOME 2.2 2.1 3.2 4.7CAPITAL EXPENDITURES 1.9 3.3 5.5 7.7REVALUED RATE BASE 24.0 24.2 35.8 42.3TOTAL ASSETS 22.9 26.6 36.2 44.0RETAINED EARNINGS 3.9 5.6 8.5 12.7

4.3 PLDT experienced severe cash flow constraints in the mid 1980s.However, during the last four years, the Company has recovered strongly and iscurrently one of the healthiest in the Philippines. During this period, reve-nues, expenditures and profitability all grew by about 29X per year. Much ofthis growth resulted from the expanded use of existing facilities. The Com-pany's rate base, after holding relatively static during 1987-89, grew byabout 0 17.6 billion (about 48X) in 1990 and P 6.5 billion (about 181) in1991; of that amount, about P 11 billion represented new plant or work inprogress, while financial transactions related to the valuation of assets ac-counted for the remainder. While these

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Table 4.2: PLDT's Key Financial Ratios - 1988-91

FINANCIAL YEAR ENDED DECEMBER 31 1988 1989 1990 1991Actuals

CURRENT RATIO 1.5 1.7 1.6 1.4QUICK RATIO 1.3 1.4 1.3 1.2OPERATING RATIO 57% 59% 58% 54%NET PROFIT MARGIN 29% 22% 25% 28%INTEREST COVERAGE 2.7 2.9 3.7 4.9DEBT SERVICE COVERAGE RATIO 1.9 1.8 2.3 2.4DEBT/TOTAL EQUITY - WITH REVAL. SURPLUS 36:64 34:66 35:65 36:64

- W/OUT REVAL. SURPLUS 57:43 55:45 56:44 52:48RETURN ON RATE BASE - HISTORICAL (X) 23% 20% 23% 22%

- REVALUED (%) 11% 10% 9% 11%SELF-FINANCING RATIO (%) 74% 33% 78% 13%ACCOUNTS RECEIVABLE - MONTHS 4.0 3.1 3.0 2.5ACCOUNTS PAYABLE - MONTHS 2.3 3.3 3.2 4.2

results have been recorded in pesos, that currency held relatively stable atP 22-US$1 from early 1987 through mid 1990; it then devalued to about P 28 -US$1 by late 1990 and held steady at that level during 1991. Thus, about 38%of the rate base increase in 1990 and about 20% of the increase in 1991 refl-ect the changes in the value of the peso and not additions to plant in serv-ice.

4.4 PLDT's key financial ratios for the 1988-91 period all portray apicture of financial strength. The current, quick, interest coverage, debtservice coverage and self financing ratios are all comfortably high and pointto outstanding liquidity for a Company that provides a capital intensive ser-vice. The drop in rate of return in 1990 and 1991 reflects the increase inPLDT's rate base and not a diminution in the Company's performance. The onearea that may reveal some weakness is the debt/equity ratio, which at an aver-age of 55:45 (net of revaluation reserve) is slightly higher than normal for atelephone utility in this region. When considering that about half of PLDT'spaid in capital was raised through preferred shares that the subscribers mustpurchase as a condition of obtaining their connections (para. 3.11), thisratio indicates that capital solicited from bona fide investors is very thin.Finally, the wide spread between the interest coverage and debt service cover-age ratios reflects the lack of available long-term debt instruments in thePhilippine markets. Because the longest available instruments have a term ofthree years, and because that maturity is frequently unavailable in periods ofexchange rate instability, PLDt must finance the local component of its in-vestments with short-term loans; and its financing strategy presumes that itwill roll these loans over as they mature. This strategy is appropriate inthe context of the Philippines.

Regulatory LUmits on Revenues

4.5 PLDT must seek NTC's approval for revisions to its tariff. NTC'sguidelines impose two important restrictions on the level of PLDT's revenues:

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(i) after covering operating costs, revenues may yield no more than 12% onPLDT's revalued rate base; and (ii) PLDT must remit a stipulated share of rev-enues for toll calls to the local operators handling those calls. During thelast four years, PLDT has been sensitive to the political implications of ex-cess profitability, and has adopted a tariff designed to yield 7-10% on itsrevalued rate base. While revenues have thus been lower than the maximum al-lowable, they have been sufficient to maintain the Company's financial health.PLDT expects to continue observing a policy of pricing restraint during thenext few years. While the revenue sharing guidelines are expected to improvethe financial prospects of the smaller independent local carriers, the impacton PLDT is not expected to be great. PLDT currently handles more than 90% oflocal service and is expected to continue doing so for the foreseeable future.

Tadffs

4.6 PLDT's tariff includes provisions whereby its charges for localservice and international calls, which are denominated in Pesos, can be linkedto and therefore maintain parity with the US dollar; in contrast, rates forinternal long distance calls are denominated in Pesos and include no mechanismto adjust for exchange rate fluctuations (a detailed discussion of PLDT'stariff is given in Section B of Chapter 5). These arrangements do provide theCompany with substantial protection against variations in the peso-US dollarexchange rate; however, they do not protect PLDT against variations betweenthe US dollar (or the peso) and other hard currencies.

4.7 Since the mid 1980s, PLDT has not sought changes to the U.S. dollarequivalence of its local service charges or to the peso-denominated level ofdomestic long distance tolls. However, in 1990 PLDT lowered its internationalrates by 20%. This action represents the first appreciable change in the U.S.dollar denominated value of thosef rates in more than five years. PLDT sharesrevenue on outgoing international calls with destination countries and re-ceives a share of revenues generated abroad for incoming international calls.The Company estimates that incoming international calls outnumber outgoingcalls by about 9:1. When combining international net revenues (incoming andoutgoing) with local service revenues, about 90% of PLDT's revenues are effec-tively indexed to the U.S. dollar. In recent years, these dollar-based reve-nues have substantially exceeded PLDT's annual foreign exchange outflows.

Foreign Exchange Exposure

4.8 PLDT's ample dollar-based revenues enabled the Company to raiseconsiderable foreign debt. The Company has followed very prudent policieswith regard to its foreign exchange exposure. Because its revenues are U.S.dollar related, the Company has limited itself, as far as practicable, toraising U.S. dollar denominated loans. As the peso-U.S. dollar exchange ratevaries, the Company's dollar-based revenues adjusts in direct relationshipwith the requirements for servicing this debt. This policy has enabled PLDTto maintain control over its debt service obligations as a percentage of reve-nues. As of December 31, 1990, PLDT had outstanding P 17 billion (aboutUS$607 million equivalent) in total lor.g-term debt. Some P 15 billion (about

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US$536 million) of these estimated borrowings were expected to be denominatedin U.S. dollars, with the remainder being split between other foreign loansand local currency debt. As such, PLDT's exposure to cross currency risk islimited and well within its capacity to carry prudently; moreover, because ithas managed its foreign exchange exposure so prudently, the Company will con-tinue to have ample capacity to borrow for the foreseeable future.

4.9 During the last four years, the Company has raised more thanP 10 billion in fresh loans to finance the X-5 Program and other ongoing in-vestment activities. While PLDT's balance sheet is strong enough to accommo-date the additional long term borrowings needed to finance the X-5C and otherplanned investments, its capacity to borrow from commercial sources has beentainted by issues related to counti.y risk. In particular, by participating inthe Government's debt rescheduling program in 1986, PLDT compromised somewhatits credit with existing lenders. Although the Company has been remitting itspayments in pesos to the Central Bank on schedule, the lenders will receivethe corresponding payments from the Central Bank much later than was agreedunder the original loan agreements. When so requested by specific lenders,PLDT has followed accepted practice by purchasing some of its obligations at adiscount; while this practice has provided financial advantages to both theCompany and the particular lenders, it has resulted in a linkage betweenPLDT's credit and the commercial banking community's perception of countryrisk.

Accounts Receivable

4.10 Despite effective billing and collection systems, PLDT's accountsreceivable still equal nearly three months' sales. This largely reflects thetime involved in settling accounts with other international carriers. Basedon the Company's experience with these transactions, PLDT would have difficul-ty reducing accounts receivable below current levels.

Asset Valuation

4.11 Asset revaluation is only conducted every several years at irregu-lar intervals, in connection with rate submissions to NTC. The revaluationusually follows an engineering appraisal of PLDT's plant and equipment by anindependent firm. The last appraisal was conducted by the Asian AppraisalCompany, a Philippine firm enjoying a good reputation within the region. Themethodology followed is acccptable. Plant in service is revalued, but work-in-progress is not. PLDT takes the results of asset revaluation into the ac-counts it maintains for regulatory purposes; however, assets are valued athistorical cost in the accounts maintained for reporting to shareholders.This practice is appropriate.

C. Financing Plan

4.12 PLDT's financing plan for 1992-96, the period of the proposed pro-ject, is summarized in Table 4.3. The proposed project represents only 13X of

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PLDT's investment program for tht 1992-96 period. The proposed Bank loanrepresents only 7X of PLDT's external financing for the same period.

4.13 On an historical cost basis, the investments that PLDT will be im-plementing during that period will more than double PLDT's rate base. PLDTaims to realize a healthy growth rate of about 10 (para. 1.13(a)), at leastthrough 1998. Whether the Company can indeed realize this growth will dependon its ability to raise the needed finance during a period when commercialsources of credit are wary of increasing their exposure to Philippine risks.Clearly, PLDT's investment program needs to be consistent with the Company'sfinancial and implementation capabilities. At negotiations of the proposedloan, PLDT agreed to (i) conduct jointly with the Bank an annual review of itsinvestment program for the next five years and its investment accomplishmentsfor the previous two years, and (ii) adopt any mucually acceptable adjustmen-ts.

Table 4.3: PLDT's Financing Plan - 1992-96

PesosMillion Percent

i. Internal Cash Generationnet of Working Capital Needs 30.803 55X

11. (Less): Debt ServiceA. Long-Term Loans

Foreign Borrowings (16,187) -27XLocal Currency Loans (6.182) -10%

Subtotal (22,369) -37%

B. Redemption of Preferred Shares (517) -1%

Total '22.8861 ;

III. Funds Available for Cash Dividends 7.917

IV. Cash Dividends (2.247) J1

V. Balance Available for Investment 5.670 au

VI. ConstructionProposed Project 8,087 131Other Capital Expenditures 52,217 871

Total 60.304

VII. Balance Required to be Financed 54.634

VIII. Sources of FinanceSubscriber Investment Plan 852 1ISubscriber Deposits 200 11Proposed Bank Loan 4,240 7%Conercial or Other Borrowings 49,342 82%

Total 54.634 9

4.14 PLDT plans to raise about 82% of its overall financing requirementsthrough commercial and other borrowings. International commercial banks are

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expected to provide a portion of these needs, and international agencies thatserve the private sector, such as IFC and the Asian Development Finance Corpo-ration (ADFC) are expected to provide still an additional portion of thesefunds. However, the major portion is expected to be raised from suppliercredits in connection with the X-5 and X-5C programs. The financing plan forthe X-5 is fully confirmed and assembling the financing package for the X-5Cis virtually completed; the Bank's participation in PLDT's overall financingplan appears to be having a catalytic effect on the process.

D. Future Finance

4.15 Financial projections for 1992-98 are presented in Annex 4.1. Asummary of projected key financial indicators is given in Table 4.4, and aprojection of key financial ratios is provided in Table 4.5. These projec-tions are based on the following:

(a) PLDT's local service charges and its international toll revenuesare expected to continued being related directly to the U.S. dol-lar. Similarly, its domestic long distance revenues are expectedto continue being denominated in pesos.

(b) The peso-U.S. dollar exchange rata is expected to decline each yearduring the projection period in relation to the difference betweenthe assumed local inflation rate (10%) and the assumed inter-national inflation rate (3.9%).

(c) The scope of PLDT's service is expected to grow substantially dur-ing the projection period. Average annual growth in (i) the numberof working stations is projected to be about 15%, and (ii) the vol-ume of overseas toll calls is projected to be about 12%. The bulkof this growth is expected to be realized during 1992-96, as PLDTcompletes various components of the X-5, X-5C, the proposed proj-ect, and other investments cu:rently under implementation.

(d) Through 1996, PLDT's investment program is dominated by prejectstv-it are well defined (the X-5, X-5C, and the proposed project), sothat the annual cash flow for investment may be projected withinreasonable levels of tolerance. Beginning in mid-1994, the invest-ment program is projected to be dominated by the X-6. While theframework for that project has been developed, some details haveyet to be defined in detail. Therefore, the projections assumeinvestment streams for the X-6 and notional investments for otherprojects yet to be identified starting at about P 3 billion in1994, moving to about P 14 billion in 1995, and stabilizing there-after at about P 10 billion.

(e) The Company has agreed, under existing loans, to meet financialperformance targets different from those that will be sought underthe proposed loan. These targets include interest coverage and avariety of operating and liquidity ratios. The projections were

Table 4.4: 1991-98 KEY FINANCIAL INDICATORS(Pesos Billion)

Operat Revenues 16.6 17.9 20.8 24.4 29.1 34.7 41.4 49.4Operating Expenses 9.0 10.6 12.7 15.0 17.5 19.8 22.9 25.9Operating Income 7.6 7.3 8.1 9.4 11.6 14.9 18.6 23.5Net Income 4.7 4.8 4.8 5.1 5.4 5.9 7.4 10.2Capit Expenditure 7.7 8.8 12.7 14.0 15.3 9.4 9.5 10.0Rate Base 42.3 58.5 75.1 96.7 121.6 147.6 170.8 196.5Total Assets 44.0 52.9 66.3 81.9 98.7 109.3 118.4 127.3Retaned Earnigs 1 2.7 17.1 21.5 26.1 31.0 36.4 43.3 53.1

Table 4.5: 1991-98 KEY FINANCIAL RATIOS

Current Ratio 1.4 1.4 1.1 1.4 1.1 1.3 1.1 1.3Quick Ratio 1.2 1.1 0.9 1.1 0.9 1.0 0.9 1.0Operating Ratio - 54% 59% 61% 61% 60% 57% 55% 529Net Profit Margin-(%) 28 27 23% 21 189 174 181 21Interest Coverage 4.9 4.7 2.7 2.3 2.0 2.0 2.3 2.8Debt Service Coverage 2.4 1.9 1.5 1.3 1.4 1.3 1.5 1.5DebtaTotl Equity - with Reval. Surplus 36:64 39:61 42:58 48:52 50:50 50:50 46:54 42:58

- WlOut Reval. Surplus 52:48 52:48 54:46 57:43 57:43 56:44 51:49 46:54Retum on Rate Base - Historical() 22 17 16% 15% 15% 15 17% 198

- Revalued(9) 11. 89 8% 89 8% 8% 8 9%Self Flnancng Ratio - (%) 13% 256 236 59 16 8 51% 421Accowunts Receivable - Monfts 2.5 2.5 2.9 2.9 2.9 2.9 2.9 2.9Acoounts Payable - Months 4.2 3.1 3.0 2.9 2.8 2.8 2.8 2.8

- 35 -

formulated to ensure that PLDT complies with all its agreed targets, not onlythe covenants that will be sought in conjunction with the proposed loan.

4.16 PLDT believes that its projected growth rates, combined with itscurrent rate levels, should enable it to realize an 8% rate of return on itsrevalued average net fixed assets in operation during 1992-98. Its financialperformance based on this assumption would be consistently satisfactory thr-oughout the period. At negotiations PLDT formalized this expectation by ag-reeing to take steps, including inter alia proposing increases to its tariffas needed, to cover all expenses including depreciation and taxes, and yieldat least an 8% return on its revalued net fixe.d assets in operation. To en-courage effective debt management, PLDT also agreed to incur additional debtonly if a reasonable forecast of its net revenues after expenditures for eachyear during the term of the debt to be incurred would be at least 1.1 timesits projected debt service requirement. This latter target is somewhat lowerthan what PLDT is projecting; however, it reflects the uncertainty shared byPLDT and the Bank about whether PLDT's local debt can consistently be rolledover for three years at a time. If the maturities of local borrowers would befor two years instead of three, the debt service coverage ratio would drop to1.1. This would affect PLDT's cash flow, but not its accrual performance.

4.17 The projections indicate that while PLDT is expected to remain fi-nancially strong, it is facing a period of high growth. Revenues and profit-ability are projected to grow by about 17X and 12% per year, respectively. Inthe same period, PLDT's rate base is expected to increase by nearly 370%, or24% per year; at the same time, total assets are expected to increase by about190%, or about 16% a year. The Company is projecting some cash flow stringen-cy throughout the period, but especially during the years of heaviest invest-ment expenditure, 1994-96. For the whole period PLDT is projecting an averageself-financing ratio (SFR) of about 20%, and a debt service coverage ratio ofabout 2.1. However, for 1994-96, this ratio is expected to average about 10%for the whole 1992-98 period; the debt service coverage ratio is expected toaverage about 1.6; however, this ratio will average about 1.3 for 1994-96.This is acceptable.

5. ECONOMIC ANALYSIS

A. Beneflts

5.1 The benefits of the project would accrue to all sectors of the com-munity through improved access to telephone facilities and improved networkquality. Because the project aims to partly correct the imbalance in servicesbetween major cities and provincial areas, the greatest benefits are likely toaccrue to businesses and the public in the 128 provincial municipalities wherenew and expanded facilities will markedly improve existing communication ser-vices. Mostly these are areas recognized by the Government as offering higheconomic returns from investment in infrastructure. Here, access to moderntelecommunications services will help stimulate growth and investments andincrease the efficiency of market systems between (i) adjacent provincial com-munities, and (ii) provincial areas and the major cities. In addition, spec-ial emphasis on providing new facilities for seven industrial estates willhelp attract the development of secondary industries which are crucial toPhilippine economic growth. Existing telephone services will benefit from theincrease in access to about 149,000 new working telephone lines; the intercon-nection if 6 isolated exchanges to the national telephone network; and the ex-pected improvements in network and operator performance quality resulting fromPLDT's overall development program of which the proposed project is a part.

5.2 In addition, the installation of rural PCOs in 97 municipalitieswithout telephone service will provide these communities with basil' access totelecommunication services and thereby improve their participation in thePhilippines economy. Benefits to these communities will include more effic-ient use of high cost transportation services, improved access to market in-formation, and extension of Government services. Apart from direct benefitsto businesses, the provision of modern telephone facilities will add to thequality of life by providing voice communication opportunities between sepa-rated family members and improving the performance of public oriented servic-es; especially medical and emergency relief.

5.3 The Government will also benefit, first as a user of telecommunica-tions services and second through increased transfers from the sector as a re-sult of increased revenue generation and more efficient use of sector resourc-es. During 1991-1997 PLDT is expected to provide an additional US$75 millionto the Government in the form of duties and taxes as a result of the project.

B. Tariffs

5.4 PLDT's telephone tariffs (summarized in Annex 5.1) consist of aninstallation charge, fixed monthly network access charges (monthly rental) andcall charges for domestic long distance and international (toll) calls. Themonthly network access charges also entitle the customer to unlimited localcalling as the tariff does not include separate charges for local calls. In

- 37 -

addition, a compulsory subscriber investment plan that requires subscribers tobuy PLDT shares when ordering new installations, generates equity for PLDT andhas a dampening effect on demand.

5.5 The key factors on which tariffs are determined are: (a) overalltariff revenues to PLDT may not yield more than a 12% return on a rate base ofrevalued assets plus an allowance for operating expenses; (b) monthly rentalcharges are linked to the US$ exchange rate; and (c) charges for internationalcalls are set in US$ and converted to pesos at the prevailing exchange rate.PLDT regularly seeks NTC review of rental charges pegged to foreign exchange.Appropriate adjustments are normally granted automatically.

5.6 The overall level of the tariff and the resulting revenues are ade-quate to support and justify the proposed network expansion under this projectas indicated by the financial rate of returr. (para. 5.9). Furthermore, thetariffs recover the long run incremental costs of the local network and longdistance project components respectively. Thus, revenues from local networkaccess resulting from PLDT's expansion program are estimated at P53,000 persubscriber vs. long run incremental costs of P52,000 per subscriber. Domesticlong distance plus international revenues resulting from the program are esti-mated at P137,000 per suvuu.Uber vs. long run incremental traffic sensitivecosts of P74000 per subscriber.

5.7 Nevertheless, PLDT is aware that its tariffs are not optimized inthe following respects: (a) monthly rental charges barely cover their long-run incremental costs and should be reviewed; (b) local call charges (pres-ently free) should be introduced, at least during periods when local networkcongestion occurs; (c) national long-distance charges are believed to be belowcost and should be increased; (d) PLDT is too dependent on excessively highinternational charges; and (e) PLDT's tariff structure is much too complexwith 15 local service location classes, each with their own tariff, and 59domestic toll distance bands; simplification is warranted.

5.8 In the difficult area of obtaining government authorization forprivate monopoly or utility price changes, both PLDT and NTC deserve somecredit for instituting a system which involves a considerable amount of auto-maticity in tariff adjustments and which is related to costs on a company-widebasis. Nevertheless, over the medium term, the tariff structure should bereviewed and important improvements introduced. Accordingly, during negotia-tions, the Government provided the Bank with a letter through which it indi-cated its intention to develop a policy framework within which the structureof telephone tariffs could be reviewed jointly by NTC and the Bank (para.1.16).

C. Return on Investment

5.9 The internal rate of return of the project based on financial flows(FRR) is 15X which justifies the investment as it is considered to be wellabove the cost of capital for this type of project. A summary of the calcula-tion results is given in Annex 5.2. The economic rate of return (ERR) is cal-culated at 211. The ERR is greater than the FRR due to the elimination of tax

- 38 -

and duties, and the adjustment of unskilled labor rates using a conversionfactor of 0.8. The resultant ERR is considered conservative and does not takeinto account consumer surplus and the benefits that accrue to the economy as awhole as a result of improved telecommunications services. Because thesefactors are difficult to quantify they are not included. In testing the sen-sitivity of the ERR, the most likely worst case scenarios and their effect onthe ERR would be: (a) a delay of 18 months in connection of new customers re-sulting in a delayed revenue stream (ERR - 14%); (b) an increase of 10% inoperating costs (ERR - 20%); (c) a reduction in tariffs resulting in a fall inoperating revenue by 10% (ERR - 15%); and (d) a small increase of 5% in in-vestment costs, over and above the project contingency allowances (ERR - 19%).Combining the above would result in a fall in the estimated ERR to 11%. Whilesuch a combination of events is unlikely, after taking into account the un-quantifiable benefits resulting from the project, under this worst case sce-nario the project would still be acceptable.

D. Least Cost Solution

5.10 The proposed project represents the least cost solution for expand-ing and modernizing PLDT's existing network. Standard telecommunicationsplanning principles have been used in determining the most appropriate type ofequipment and locations for telephone and transmission systems. Detaileddesign of outside plant networks will be undertaken by consultants, who willbe required to tailor the local networks to serve demand locations using stan-dard minimum net present value dimensioning methods. The modernization pro-gram includes the replacement of obsolete exchanges that cannot be expandedfurther and those for which the high cost of operations and spare parts is toogreat to justify the exchange's retention.

L. Project Risks

5.11 There are no significant risks associated with the project. Howev-er, although PLDT's project management capabilities are assessed by IFC asbeing very good (para. 1.14), taking into account that the proposed projectneeds to be managed in conjunction with the ongoing X-5 and X-5C projects andwould extend PLDT's project management capacity beyond previous experience,project management consultants are to be engaged under the project. Theseconsultants would assess and, if necessary, strengther. PLDT's project manage-ment capabilities (para. 2.30).

6. AGREEMENTS AND RECOMMENDATIONS

A. Agreements Reached

6.1 The following agreements were reached during negotiations:

The Government agreed to:

(a) (i) furnish to the Bank a summary of the results of its annual re-view of the implementation of its telecommunications policies; and(ii) seek the Bank's comments if major changes in any of these pol-icy are expected (para. 1.16)

DBP agr6eed to:

(a) furnish to the Bank by June 30 of each year, a copy of its annualfinancial statements certified by an acceptable auditor (para. 3.9)

(b) have its records in relation to the Special Account audited foreach fiscal year, and the results of the audit furnished to theBank by June 30 of such year (para. 2.27)

PLDT agreed to:

(a) appoint management consultants, according to terms of reference anda selection procedure acceptable to the Bank, by not later thanJune 30, 1993. (para. 2.30)

(b) have its records in relation to Statement of Expenditures, beingmaintained for disbursement purposes, audited for each fiscal yearand the results of the audit furnished to the Bank by June 30 ofthe end of such year (para. 2.27)

(c) furnish to the Bank by June 30 of each year audited financialstatements for the previous year, together with the certificationand related report prepared by an acceptable auditor (para. 3.26)

(d) (i) for the next five years, prepare annually for joint review withthe Bank, a comparative analysis of its actual performance againsttargets for its construction program and its operations; and (ii)implement mutually acceptable recommendations to remedy any short-falls in performance (para. 3.20)

(e) (i) conduct jointly with the Bank an annual review of its invest-ment program for the next five years and its investment accom-plishments for the previous two years, and (ii) adopt any mutuallyacceptable adjustments (para. 4.13)

- 40 ^

(f) take all necessary steps, including Inter alla proposing increasesto its tariff as needed, to cover all expenses including deprecia-tion and taxes, and yield at least an 8% return on its revalued netfixed assets in operation (para. 4.16)

(g) incur additional debt only if a reasonable forecast of its net rev-enues after expenditures for each year during the term of the debtto be incurred would be at least 1.1 times its projected debt ser-vice requirement (para. 4.16)

6.2 Following negotiations the Government sent a letter (Annex 1.4) tothe Bank confirming that it would:

(a) conduct an annual review of progress with regard to implementingits policies and plans, including the provisions of DepartmentalCircular 90-252;

(b) by January 1, 1994, review its policy framework including thestructure of telephone tariffs; and

(c) share with the Bank the results of those reviews and, if feasible,implement the recommendations reached.

Moreover, the letter affirmed that the Government would share with the Bankthe results of these and other reviews that might result in major changes insector development policy, and solicit the Bank's views prior to deciding anysuch changes.

6.3 The conditions of effectiveness of the proposed loan (para. 2.23)would be the execution of satisfactory documents for:

(a) onlending to the syndicate and syndicate operations (between DBPand the other participating Banks);

(b) onlending to PLDT (between the syndicate members and PLDT); and

(c) guarantee of the Bank loan, coverage of the cross currency risk,and secondary lending (between the Government and DBP).

B. Recommendation

6.4 Under the agreements reached on the above items. the project con-stitutes a suitable basis for a Bank loan of US$134 million equivalent to belent to DBP. This loan would have a term of 20 years, including five years ofgrace on repayment of principal, and carry the standard variable interestrate.

o0o.

ANNEXES

n m Iw r>c4O >

jI iI~~IiI IIiI III I Ii ul1 1S- - - -- - - - - - - - -- - i

[bIll~~ -------- ----* §ii|f is|| £ #i -' sX3

1 1 1 -Bx - - - - - - - - - - - - - - --

T T X |Nl T_

3. II

e § X - - - - - - - - - - = - - -. -; -

t ~ ~ ~ ~ ~ ~ ____ _ __ Ii

VT ~____ XugtlNflI4 -; -

- 43 -

ANNEX 1.2Page 1 of 2

Republic of the PhilippinesDEPARTMENT OF TRANSPORTATION & COMMUNICATIONS

OFFICE OF THE SECRETA;RY10 Aupst 1990.

Department Circular No. 90 -252

8Ubject: Policies to Promote the Raapid Expansion ofTelecommunicitions in all Regions

The Government's primary goal for the telecommunications sectoris growth to the maximum extent within the shortest timepracticable, warranted. by demand and by resourceconstraints, ..pqticularly foreign exchange availability.

The earthquake disaster has demonstrated anew the immediate needfor the rapid provision of improved telecommunications servicesand facilities in all areas of the Philippines, over and abovethe initiatives that are already underway.

In support of this urgent need, it is hereby declared that:

1. The government will rely on the private sector to build and.operate telecommunications facilities in all regions, allsuch facilities to be interconnected to form part of asingle national network with appropriate revenue sharingarrangements as enunciated in Department Circular 90-248 andpromulgated in National Telecommunications CommissionMemorandum Circular 7-13-90.

2. As soon as suitably qualified private operators can befound, the government will privatize its existingtelecommunications operations, and will only enter into newventures when there is no private sector alternative and asa temporary arrangement.

3. The National Telecommunications Commission is directed toestablish abbreviated procedures to ensure rapid approval ofviable projects proposed by the private sector which can beimplemented on a timely.basis.

pIHILCOMCEN BLDG.. ORTIGAS AVE.. PASIG. METRO MANILA, PRILIPPINESTEL. NO. 721-3781 up to 92 Loc 221. 222,.233

01. 771.rnV7 ton n" P9 TLX NO. 4221 Io=C PM

- 44 -ANNE 1. 2Page 2 of 2

4. The government will establish arrangements whereby officialdevelopment assistance funding can be made available to theprivate sector to finance construction of new facilitieswhich further the government objectives.

Pursuant to the policies enunciated above, the Department of

Transportation, and Communications hereby invites qualifiedprivate sector entities to submit projects to the National

Telecommunications Commission for their prompt approval. TheCommission shall give priority consideration to initiatives which

result in immediate expansion of service to unserved andunderserved rural areas.

This circular takes effect immediately.

Sr. ORBOS8ecretary .

-45-

ANNEX 1.3Page 1 of 3

Republic of the PhilippinesOEPARTMENT OF TRANSPORTATION & COMMUNICATIONS

O9FICE OF THE SECRETARY

DEPAM ETORDER f 90-483 ^ FORMATION OF TELECOMMUNICATIONSPOLICY DIRECTORATE

1 . BACKGROVND

The govenment is committed at the highest levels to mobilizng the pdivate sector Inexpanding the country's telecom infhstruture, and privatzing those government-owned fcilities that can be operated more efficiently by the private sector, and thuslessen the burden on the public purse. In the case of telecommunications, DepartmentCircular No. 90-252, dated August 10, 1990, stated that the government will:

* rely on the private sector to build and operate telecommunicationsfacilities in all regions.

* privatize its existing telecommunications operations, and will onlyenter into new ventures when there Is no private sector alternative*ad only as a temporary amngement.

Iassist in on-lending ODA funds to the private sector.

Pursuant to these high-level policies, there is an effort underway to privatize thefai;lities instlled under RTDP Phase A, and eventually Phase B. rn addition, theSTPMO management is worlkng on a method for ensuring that the facilities of theNTP are transferred to private sector operators, and the World Bank has committedfunds to assist in the process. The MIPO has received submissions from aU majorprve sector firms who wish to participate in the municipal tephone program.

Only when these objectives can be met will the government be able to assume Itsrightful rolas a leader and facilitator, not a competitor ti the private sector, uponwhom the nation will depend for the upgrading of its telecommunicatonsInrsrctr

2 POIUCY D!PLEMENTATION

The MTPO Initiative, and the fast trac development theme championed by thedepartment have galvanized the thinking of private sector operators, who realize thatthis is the time when the teuitory of the Philippines may wel be allocated amongst

1

PNILCOMCEN BLDG, ORNI1AS AME PASIG, MERMO MANLA, PHlPINESEL NaO 86 up to 5 a m.m 23

- 46 - ANNEX 1.3_Page 2 of 3

them for the long term. Thus, they have all staked claims over regions of the countryaiming to ensure an effective preence in the nation's telecommunications future.

Now Is the time for the government to demonstrate that it is serious about harnessingthe energies of the private sector to get the job done. As regions are assigned toopaerators, they must take over govemment faciliies in their serving area, where theywill be the primary service provider, with the obligation to serve the oft region,not just the profitable parts.

It Is essental that Ai elements of the government's involvement in telecommunicadonsbe rationalized under this theme. Thus, it is necessary to develop a comprehensiveimplementation strategy and timetable for achieving the goal. The effort must be seenas hivlng support at the top, and the process conducted in as transparent a fashion aspossible, thus ensuring that there is public accountability for the results.

3 IMPLEMTATION STRATEGY

A special Telecommunications Policy Directorate is hereby appointed, reporting to theSecretary, to accomplish the following:

D to develop a comprehensive strategy for the privatizing of aUl governmenttelecom facilities, to be presented to the Secretary within 90 days of approval;

o to include in the strategy the facilities of:

5 the RTDP (Ph A and B);

MITPO projects;

- STPMO projects;

* TELOF; and

* DOMSAT.

O to address the folIowing Issues as part of the strategy:

* modes of transfer - lease, sale etc;

* use of and access to ODA funding;

* choice of operators;

fnancial aspect, including txation;

2

-47- ANNMC 1.3Page 3 of 3

menue shaig;

reg ulato,requimnients;

' policy Implications; and

* tariff concems.

It is noted a the aforementoned RTDP project is alrady underway. This mayserve as a modd for other proects aimed at pzvalzing etg cili In the caseof MTPO, It is urgent that the tak force develop a plan to ensure that A PCO'sunder Phase 1 of the project be allocated to pivate sector operators as soon aspossible, and that the CMDA fuding coveting the foreign exchange part of the projectbe made available under appropriate tem, to such private sector firms. This shouldserve as a model for the NTP projects, and fut phases of the MTPOprogram.

4 STUCTURE

The Telecommunications Policy Directorate will comprise Undersecretaries l.T.Lichauco. R.V. Sibal and R.L de Vera, with Assecs. C.L. Royeca and J.V. Pars ofthe MTPO. Assec. Royeca is appointed Director, Policy Inplemenrion, in whichcapaty he will oversee the work of specialized teams of DOTC and NTC staff,supported by cosng resources as required, to translate these broad policyobjectives into concmte actions )c 4es f; aS- c

5 ACTION PLAN

The work is to be completed in 90 days. The aim is to develop a concrt strategicplan for achieving the privatadon objecive, including any necssary policy changesneeded to support the plan.

6 RESOURCE REQUtEl}TS

Departmental, NTC and consultng resources wi be required to supprt the effort.Assec. Royeca wi identf the specific individuals to be recommended forassignment to the wnor teams.

* Dept. of Transportationand ComNovember2 19V90

3

- 48 A-*= 1.4

ReubUl of fth PNUWesDEPARTMENT OF TRANSPORTATION &.COMMUNICATIONS

OFFICE OF THE SECRETARY

05 MaY 1992

Mr. Callisto MaduvoDirectorThe World Bank1818 H Street. N.W.Washinoton, D.C. 20433United States of America

Dear Mr. Madavo:

Pursuant to its mandato to toste-r and develop aPproporiatetelcommunioations sYstems in the PhiliPPines, the oepdrtment ofTransPortation and Communications Intends to, inter alia:

(a) conduct an annual roview with regard to the implementg-tion of its telecommunmoutLons policies as enunciatedin ox3sting laws, circulars (e.9., DOTC Circular Number90-252) and olons (e.*., tho National Telecommunioa-tionr Devolopment Plan) ot the Republiv of the Philip-pines;

(b) update by January 1994, Its Policy framework withinwhich the structure of telecommunications taritffs,among others, will be reviewed; and

(a) adopt, if feasible, the recommendations roached bythose reviews.

The Department further int*nds to share the results of thesereviews with the World Bank, ard, if appropriate, seek its com-ments particularly if they affect or result in major changes inany existing telecommunications policies ** enunciated Previouslyin various laws, qiroulars, and plans of the Republic of thePhilippines.

CTE N EC0M1SDI$PZRADOSecretary

pHILCOMCEN LOG., OMTROM AM PA6 MEO MANILA. Pt PPTML NO. 634S. up to as La& 3= 23

DL U14741 up to i LK NO.3 1 OOTC PM

- 49 -

ANNEX 2.1PHfl~EP

Telephone System Expansion Project

Philippine Long DWstance Telephone Company

Details of X-5. X-SC and 'Other Works' Projects

X-5 Proiect

This project provides new telecommunications equipment throughout the Philippines. Local telephoneexchanges with a capacity of about 133,000 new lines including the replacement of 15 electromechanicalexchanges serving about 11,000 customers will be provided along with 2 trunk exchanges with a capacity of11,000 trunks. Major 140 Mbps radio transmission systems with a total of 84 hops and optical fiber systemswith 33 links of 140 Mbps or greater capacity will be installed to upgrade existing interexchange linksthroughout the Philippines. A total of about 3,600 fiber - km. of optic fiber cable and 381,000 pair km. ofcopper cable will installed along with about 145,000 telephone instruments and 684 PABX's. Associatedpower equipment, buildings, vehicles, etc. are to be provided

The X-5 - Comolementarv Proiect (X-5C)

This project will follow and complement the X-5 project. Exchanges with a capacity of about385,000 lines, including the replacement of 33 electromechanical exchanges serving about 150,000 workinglines will be provided throughout the Philippines. Toll facilities will be expanded through the provision of 4new, and expansion of 18 existing, SPC-D exchanges. To cater for the Increased traffic, a major expansion ofPLDT's transmission network will be made including a new undersea cable linking Manila, Cebu and Cagayan-de Oro. Major transmission equipment will include optic fiber systems with a total of 49 x 565 Mbps and 53 x140 Mbps lines and 140 Mbps microwave radio systems with a total of 10 hops. A total of about 13,600fiber km. of optic fiber cable and about 2 million pair-km of copper cable will be installed along with about371,000 telephone instruments and 829 PABx's. Associated power equipment, buildings, vehicles, etc. willbe provided.

'Other Works' Proiect

This project includes the following:

1. Cable rehabilitation in Manila and the Provinces2. Buildings and civil works (various).3. Upgrading small radio systems.4 Upgrading and provision of new toll spur stations and interconnection of small operator

exchanges.5. Provision of new exchange supervisory systems. (Manila and Provinces).6. Upgrading exchange power systems.7. Expansion of some SPC-D exchanges.8. Provision of Public Call offices.9. Provision of Coin telephones.10. Provision of the Eastem Visayas backbone trunk network.11. Various TDMA radio systems for connecting customers to exchanges.12. PLDT's portion of the Brunei-Malaysia-Philippine undersea cable plus its extension from its

landing site in Southem Luzon to Manila.

AX21X5D5.8A

50

TEi.HN SYTE ExPANSIaOi NtCT

PHILIPPPIE LON DISTNE TS m

FACILITInS TO BE PRa0Di0

Mmguii ios Piblic DigftitToll Inter- ultan KUdea Cott Leae

A. SUITCHING FACILITIES1. Local Exihw

1.1 MNw 51,900 ltnf - 1,600 lfnes 23,000 tfnes 76,500 lines1.2 Epxwsion 26,100 tines - - - 7,100 lines 33,200 lins

2. Coabined Local/Toll 14,000 lins t - - 9,400 lines 2,400 linsExw

3. Coapltuntary Trunk 5 ckts. . - 90 ckts. 30 ckta. - 690 ekts.Terms

S. TRANSMISSION FACILITIES1. Point-to-Pofit Radfo/ISa

1.1 140 Mbps lays n - lsys1.2 34 Mbps 11ys Ss" l ys Tsys 24 ys1.3 8 Mbps 26sys 1 ys Iys - l ys 29 ays1.4 2 Mbps - - 0

2. Pofnt-to-Mutlpoiont RadfQiox - - 13 O.8 ; - 13 o.&.3. VSAT Te1minal t - 04. Optfeal Ternatl Eqpt.*dc

4.1 140 Mbps 4 sys - - - - 4 ys4.2 34 bs 12sYs - - sYs 2 ys

S. Cellular Radfo Teromnal - s tarm. - 588 tuez.6. P01 Systen 5 term. - 14 trm - 76 term. - 195 term.7. TDO 190 units 290 units8. OCE - - - 10t004 unts - 10.004 units9. Nultiplex Eqpt. 272 din. - m in.

C. CABLE1. Fiber Optic Cable 303 pr-b - - - 158 Pr pr-1 b2. Coper Cable

2.1 Tru*inw 110-pr-b - 320 pr-b - 430 pr-b2.2 Sub fcriber Plant 1°9,788 pr-b - 3,699 pr-b - 71,652 pr-i. 275,139 pr-bs

0. CUITW PREMISES EPT.1. Tetleone Instrumnt 95,315 unfts - 1600 wits 938 ifts - 39,939 unfts 137,78 units2. PABX 99 units - 26 unft 12 nits

E. INFRASTRUCTURE1. PoWer G tor 33,t lasts - * 9 "to 47eeOm2. DC Powr Ef puent 19 St 11 es IeMt - lt 32 be3. Uuildieg 61 soto - S sites - 20 aft. 86 sito4. Antem Tomer 31 site 6 sftes I alt. 111 sIfte 6 site 155 ofits5. M tole and Conuft dt-bn * - - - 0 dt-O b6. Lard 45 afto I sfte S ofte 7 sfte - 10 stes 68 site7. Acom Road 4 oftes I site 7 ft - 12 situ8. Vehicles 240 units 6 units 104 units 350 wi1ts

F. TRAINING FACILITIES 1.; -

6. TRANISSION MAINTENJNCE I op - ..SYSM

Y

-51 - AUNlEX 22Page 2 of 7

TELEPHCb 4CHARGE FACILITIES

PROVINCIAL TELEPHOCE EXPANSION

EiKdIaON Lines h&tlio erov1xw> MnwIcfoetltv1 HIGH GOVERNMENT PRIORITY AREAS

1.1 Industrfal EstatesCanLubaUn Sugar Est,-te- 2,000 RCarmel Ind'l Park

Peoples Technology Comptex 1,500 N

Lufsita Industrial Park 2,000 N

First Cavite Indstrial 1,500 NEstate

AyaLa Laguna Ind'l Park- 3,000 NUnilab Irnistrial Park

Light Indistry & Science 1,000 NPark

1.2 New SPC-D Rural Exchanges

Alttagtag a 400 N Batangas Altitatag *Sta. Teresita*

Laurel 300 N Batangas Laurel *

Talisay 300 N Batangss Talisay *

NutxusNo a 450 N Capf z NIutusao *Jamirdan *Sapi-an *Sifgu *

Panitan B 350 N Capiz Panitan *Pontevedra *

Senate S 350 N lloilo Senate *Anilao *8arotac Viejo*

fDingle 350 N llolto Ofileg*Duenas *San EnrfqL*'

Leon a 450 N tlotlo Leon *Atimodian *San Miguel *Tihwgan *

Sara S 400 N 1lofto Sara eAjuy *Concepcion *Son Dionisfo*

Lezo 9 400 N Aktan Lezo *Nakato'

asaw *Nuangia*Nwmncfa'Nalinro *

Esealante SOO N Negres Eswalante'Occ.

La Casteltam S 600 N Negros La CasteLeansaOcc. Noises Padillat

-52- ANNEXL2Page 3 o?

Exchansa L1nes IkSSLon ~~Provnce uNmficoal1tNanmpla 400 N Negro. mnapla *

0ec.

inifgaran 350 N Negros Hinigaran*0cc.

Uayaman a 1,000 N Negro. Bayexan Or. Sta. Catalina *

Laom 9a 350 N N. S_r Laong *Palapag *

Oras 350 N E. 8mr Oras *Dolores *San Policarpio*

1.3 Upgradifg wWor Dasmrnars 5,000 a Cavite ODm_rfnasexpaslon of existingprovincial xchanges

Indang 9 1.000 a Cavite IrmdnAlfonso *

Nafc a 1,200 R Cavite NaicTernate *Maraondon *

Silanr 3,000 R Cavite S1la,

Tagaytay a 2,000 R Cavite TagaytayAodso *MendZ-Niawz*

sta cruz a 6.000 R Law"u Sta. CruzPagsanJanLunta

Paete RSU a 1,500 a Laagu PastePakilPargilKlay *

Lips a 6.500 R 8atangas Lip.Nataas no Kahoy

Tanauan RSU a 4,500 a Satangas TanoumnSto. TomasNalvar

Tagoloan a 700 R Nif Occ. TagoloanVillafueva

Oinaskayn a5 5,500 a AM* maadtBacoorIsiA

Nolino RSU 1,000 E Cavit Nolino, Bacw

Rsoarfo a 2,000 a Cavto Rosl rfo(Poblcifon)Novelets

Cpo a 2,000 a Casvto Gen TriasTanzaRosa rio

Cawite t 000 E Cavite Cavito City

Sn Pabto a 3000 a Lagun San Pablo CityAlaminAs

-53- ANNEX 2.Page 4 of 7

EX m Line8 Acton Proviqe suilm

Liiw RSU J 1,300 E Laogn. LiliwNagcarlanRizalNagdalena *Majayjay *

Calaba 2,500 E Lagooa Colombo

Caniubwng RSU 1.500 E LagwL. Catbuyo

St.. Rosa RSU SOO E Lapars Sta. Rosa

Los Banoe 0 2,000 N Laguna Los Ssnossay

Satangas 3,000 E Batangas satenas Cf ty

sIC RSU S00 E Sataga Tabswnao,SatanW City

Sauan RSU 0 2,000 E Satangas BauanSan PascualNabini *

Tom RSU (Part of Sinakaymn 5500 E Cavite Imu (Poblacion)oxpmmi on)

Zapote RSU (Part of 4,000 3 Cavi to Zapote, BacoorSinakcyan expansion)

Pita RSU a (cable extension 700 N Lag"a Pitato New RSU) VWctoria

2. Telecomnunfeation Plan Sultan tudsrat 200 N Naguindmn Sultan Kudarat'for Naguindanao & Sultan 80Kudarat Provinces (NewSPC-DExchanoss)

olnaig 200 N Naguindsn Dinafg *

Parans 300 N Naguindmn Parang *so

Isulan 300 N Sultan Isutan *Kudarat

Tacurong 600 N Sultan Tacturang *Kudarat

3. Priority Areas inRegion III

satlang a 5.500 R Bataan SalangaPilarAbuh

Orion a 1.200 R Bataan OrionLisay

Bsaltfung 4,S00 R Bulacan Satfuaglustos

Son MNiuol S 1S00 R Sulacmn Son NlguelSan ltdefonso *

54 -A5NEX 2.2Page 5 of 7

fxchanoem U tn Province M!cfati p

amwoz RSU 600 R Numwa MuiozEcija

Ba3tan 600 R Tartac Bamban

Capas 500 R Tarlac Capas

Concepcion 900 R Tartac Concepcion

Camling a 800 R Tarlac CaniflingSan Cleo te *

Paniqui 1,900 R Tarlac PaniquiGeronaMArcadeRams *

Bepza 2,200 E Sataan Mariveles

NaLoles a 2,900 E Bulacan NatotosPaaoong

Plaridet RSU 700 E Bulacan Plaridel

Guiguinto RSU 1,100 E Bulacmn Guiguinto

Bulacan RSU 400 E Bulacan Cutlcan

Nogonoy RSU 2,650 E Bulacan Magoofyf

San Fernando 8,000 N PaTpanua San Fernando

Tarlac 1,000 E Tartac Tartac

Victoria 8 100 E Tarlac VictoriaPura

Sto. Tomns RSU (part of San 1,500 N Pampanga Sto. TomBsFernando P. xpansi on)

Mexico RSU (pet of San 1,000 N Penpange Mexico *Fernando P. expansion)

New SPC D 33,600 32 53ExpandJd by SPC-D 50,600 23 32Replaced by SPC-D 48U900 21 43

Total 133.100 18 128

* Naw Area (59 of total 128 u.nicipatites)a Exchange Serving more than (1) umicipatity (37 of total 76 exchanges).N New SPE Expansion of existing exdhae.R Raptaceant of existing exchn.

" _ ~~~~~~~~~~~~~~~~55 _MANEX 2.2Page 6 of 7

PUBLIC CALL OfFICES (PCO)

The followina 97unicirolitles are to be orovided with PCOs fn accordance with the Nunicinal Tetechone Act

Reclon I

1. Itg£o8 Norte Province 6

Bacerre Nueva Era BadocPasuquin Pinili Vintar

2. Ilocos Sur Province - 15

Altltm Baneyoyo San EstebanCervantes CGlimuyod SantiagoLidlidda Nagbukel Suoy

Salcedo San JuanSan lIdefonso SugponSigay Grgorio del Pilor

3. Benmut Province - 10

Atok Bakun BokodSuguias Itogon KabayanKopengon Kibtugan SablanT.btay

4. La Union Province - 10

Bacnotan Bagulin BaLaoanBangar Burgos LunePuco San Gab)riel SantolSudipen

S. Pangasinan Province * 17

AgWo Agut tar Andeent 3otinao surgo"Damo1 Infants LabradorLoac Nabint NapmndanMNtivided San Jacinto San NicolasSison Urbiztondo San Nicoles

6. Mum ESIfJ - 15

Aleage Licab Palayan CityLour Napicuan EliotLupao Queton ZaragoseSan Antonio TalugtogCobtao Gen. TinfoGn N. Mativided Lanera

7. Tarlac Prvifne - 5

Anao La Paz NoyantocPura Rom

Reaon IV

S. Cavit Provfnee - 7

Alfonso AMedeo Gen. E. AguinaldoGen. N. Alvarez Indwng NegaltlanesNondezLumeZ

- 56 - ANNEX 2.2. . ~~~~~~~~~~~~~~~~~~~~~~~Page 7 if 7

9. Lgfuna Province 10

Calauan Cavfnti FamiyKaLayaan Nabitse MagdaleneMajayjay Pile Santa MariaVictoria

10. Rizal Provj nce - 2

Jala-Jata Teresa

PHILIPPINESTelephone System Expansion Project

Philippine Long Distance Telephone CompanyEstimte Proet Costs

(Peso Million)

. ~ ~ ~ ~ ~ ~ -.19 .. . '94'" .99 .. . ..

Telephone Exchange. 0.0 0.0 0.0 11.3 372.1 383.5 3372 630.0 9672 167.1 315.3 482A 48.0 96.6 1446 563.7 1.414.0 1877.7

Transmission Equipmen 0.0 0.0 ,0.0 218.1 504.8 722.9 35.5 105.8 141.3 21.3 34.7 56.1 59.4 87.9 147.3 334.4 733.3 1.087.7

Outside Plst 0.0 0.0 0.0 35.2 163.6 108.8 448.7 370.1 819.8 194.3 157.5 351.8 203.3 140.3 343.6 882A 831. 1A13.8

Customer Preml_s 0.0 0.0 0.0 2U. 4.9 7.5 37.6 72.2 109.7 15.7 29.8 45.5 4.0 7.5 1.6 58.7 114.4 174.1

Operations and TraInn 0.0 0.0 0.0 102.0 243.6 345.6 0.0 27.2 27.2 0.0 0.0 0.0 0.0 0.0 0.0 102.0 270.8 3728FacIJes

tn

Powr Equtipmt Towe. 0.0 0.0 0.0 39.0 44.8 83.7 69.2 50.7 119.9 19.4 22.9 42.3 47.3 5s.9 103.1 174.8 174.3 3490Vehlee&MMI.

CNNWosOutide P"nt 0.0 0.0 0.0 1.5 OA 1.9 163.0 44.2 207.2 56.1 15.5 71.5 17.7 4. 22.8 238.3 64.9 38.2

idlne andd ste 22.3 0. 22.3 66.1 1.8 67.9 217.7 49.6 267.2 72.7 218 94.6 1470 32.1 178.1 525.9 105.2 M3A.1

conllanv0.0 0.0 0.0 0.0 14.0 14.0 0.0 14.0 14.0 0.0 14.0 14.0 0.0 14.0 14.0 0.0 56.O 66.0

TOWalsCt 2ts3 0.0 22.3 47s.8 aSOo 182I I.09.8 ts. 2.673 546.6 611.4 1.158.1 26.7 439.1 06.8 _sst12 3,78s2 ,.4

Physloal oCt',en 2.2 0.0 2.2 31S. 75.1 106.6 108.6 00.7 199.3 43.8 39.6 83.4k 46. 30.1 76e 232.6 236A 468.1Puls Condngency 25 0.0 2.5 50.7 55.6 106.S 141.8 56.7 108.6 60.0 25.4 A4.4 57.3 18 75.6 311A 15.O 467.4

TdOal PY tCon o o 27.0 so 10.0 2.0 58 l.os4 0 349 . .4 e 1511.1 3 071.4 64.42 s 4 . 5.5 I75 0 A 4jS8 *

- 58 -

ANNEA 2.4Page 1 of 2

PHILIPPINESTelephone System Expansion Project

Philippine Long Distance Telephone Company

Sconda Lending Anrangem

1. The financing arrangements for the proposed project envisionflowing the proceeds of the Bank loan to PLDT through two subsidiaryloans: (i) US$35 million will be onlent directly from DBP to PLDT fortwelve years, including four years of grace on repayment of principal; and(ii) the remaining US$99 million would be onlent to PLDT through a groupof Banks for ten years, also with a four year grace period on repayment ofprincipal. Because these maturities are considerably shorter than theterm of the Bank loan (twenty years), PLDT shall amortize its loans aheadof DBP's amortization of the IBRD loan. Consequently, DBP will need tomanage a float resulting in the excess of the principal repayments made byPLDT over the amounts that were due to the IBRD. The Government wishes touse this float for application to general macroeconomic purposes.

2. The device DBP would use to maintain the identity of and managethe float is a sinking fund. All of PLDT's principal repayments would beplaced in the sinking fund. The sinking fund would also be the channelfor DBP's repayments to IBRD, during the term of the subsidiary loans toPLDT as well as after those subsidiary loans have been fully repaid.

3. Secondary lending from the sinking fund would be designed asthough the Government were the Borrower of the IBRD loan; therefore, theprovisions would need to be tailored so as to hold DBP free of benefit orcost. Thus, the mechanism envisions DBP investing amounts placed in thesinking fund in special issues of government securities, preferably denom-inated in US Dollars, including treasury notes, treasury bills and relatedplacements as determined by the needed terms and due dates. These securi-ties would carry a variable interest rate provision, thereby enabling co-ordination of the rate payable on these securities and the rate that DBPshall pay to IBRD. The rate could also include a premium to offset what-ever taxes or other charges that DBP may incur with regard to (i) the in-terest income generated from said investments, and (ii) the handling ofthe repayments to IBRD. The variable interest rate provision on thesesecurities would be structured so as to enable the Government to realizethe benefits or costs of variations in the IBRD rate as of the very datewhen IBRD announces its change. DBP would be responsible for ensuringthat sufficient amounts of the government securities portfolio either ma-t-are or can otherwise be liquidated so that the sinking fund has enoughcash to meet every scheduled interest and amortization payment to IBRD.

4. PLDT's payments to DBP shall be denominated in US Dollars, whileDBP's interest and amortization payments to IBRD shall be determined inrelation to the Bank's basket of currencies. If, owing to a depreciation

- 59 -

ANEXK 2.4Page 2 of 2

of the US dollar against the Bank's basket of currencies, PLDT's paymentsto DBP are less than DBP's obligations to IBRD, the Government of thePhilippines shall remit to DBP the amount needed to bridge the difference.Similarly, if the US dollar appreciates relative to the IBRD basket, theGovernment would enjoy the benefits of that appreciation.

5. The cycle of investments and payments described above shall con-tinue until DBP has repaid the IBRD loan in full. Under this arrangement,DBP would neither benefit from the mismatch in lending terms nor be ex-posed to any possible interest rate or cross currency risks.

- 60 -

ANN 2. 5Page 1 of 2

Tdephone System EKpasion Pro3ect

Philippine Log Distamn Telephone Company

PLOT Type of lit.WB Procuremnb t Packa Goods Seric Proce. US$No mat

1.1 Supply of new tWephone Swhing equipment, Power, Enering desgn, Superv. ICB 35.5exchanges DistDibution Fames, of ;W sn,

ntaUllon Mateil e Tchniol as ,Trining, Repir serice

1.2A Expansion of existing Swithing equpme Power, Bngin.o design, Superv. Direc 5.7Dig l Tlphon Dtribution Fam, of n i PuraeExchanges (WD) Instllion Matedal et Tochnical as_sc, Repair

servmce

1.2B Expansion of exioig As above As Above Dirct 8.3Digitlu Telphon PurchaseExchanges aupphunder X-SC.

1.2C Epansion of CEPZ and As Above As Above Dret 1.0BPZA Exhages Purchae(Systm 12)

1.3A Outside Pn Pibr Optic cable, Cepper Some taining and ebhil ICB 30.1cables, closures, terWas, asistaccabinet, connect, poleaccessories etc.

1.4 Trnmso

1.4A Point to point adio/- Digial Micwav systems Tiing IC 6.8mulp eqpuimt. (140, 34, 8 and 2 MW.)

Muk4*lx equipmnt

1.48 Point to Muldpoint rdio Muliacces o MUD 4mnt Tring IW 0.8syse inluin power, do.

1.4C Anten Sysms Anten, wavoguides, ed. - ICB 1.0

1.4ID officc Tranms Line teina equipme, dig. Tning ICa 2.2ogo muzs and PCK:

ii IF, g

a.. jll a.a.IiIX g { { U [ fFt t t t fW W 10ff@- 1 Ne~~~~~~~~.

|~~~~~~ 1 *-"49 W

- 62 -

ANNEX 2.6

PHUPPINESTelee Systd Expansion Project

Philippine Long Distance Telephone Company

Disbursement Schedule

(US$ Million)

IBRD TelecommunicationsFiscal Semester Disbursements 11 Sector ProfileYew No. Ending Semester Cumulative Cumulative %

1993 I Dec. 31, 92 - - -- --

II June 30, 93 8.0 8.0 8.0 6

1994 I Dec. 31, 93 11.0 19.0 18.8 1411 June 30, 94 11.0 30.0 29.5 22

1905 I Dec. 31, 94 16.0 46.0 45.6 3411 June 30, 95 16.0 62.0 61.6 46

1996 I Dec. 31,95 21.0 83.0 83.1' 6211 June 30, 96 11.0 94.0 93.8 70

1997 I Dec. 31, 96 16.0 110.0 109.9 8211 June 30, 97 10.0 120.0 119.3 89

1998 I Dec. 31, 97 6.0 126.0 126.0 9411 June 30, 98 6.0 132.0 131.3 98

1999 I Dec. 31, 98 2.0 134.0 134.0 100II

1/ Disbursement profile based on overall Bank profile fortelecommunIcation projects.

PHILIPPINESTelephone System Expansi Project

Philippine Long Distance Telephone Company (PLDT)Schedule of Constuction

Telephone Exchanges- New ....... ..>* -

Telephone Exchanges - Expansion

Tranlssion Equipment <......... ... > <- >

Tenmdnal Equlpment . ....... -

Outside Plant c.. ....... 111 _ P11 I_ >Digl Data Equipment < . ....... ><Transmission Mahnt. System <... .......... >-Other Equipment .... ....... .............. ....... ......

CMIviWorks >.

Provincial Telephone ExpansionIndustrial Estates. r _ '1 11 = = + High Government Priority Areas <c m m Zinmi =4 -+H 4+ 1 I+4 I I 4+>Sultan Kudarat and Maguindanao = _u = *+4+ 4 t>

Public CaO Ofices <= -_ , , '> + FToll Interc ion C = . 4>Manila Outside Plant -i-=u'= . -+ .ei *~i+ +*i i

Private Une Facilites : .A= +++ + >Transmission Maint. System <_

..> Bidding and evaluation <111 Delivery^-^ Contract negotiations <m> Construction and testing

<-> Manufacture <..> Ongoing construction and progressive commissioning U-J

- 64 -

ANNEX 2.8Page 1 of 5

PHILIPPINESTelephone System Expansion Project

Philippine Long Distance Telephone Company (PLDT)

Project Management Organization and Procedures

Review of Existing Arrangementsand Recon dations for Improvmet

DRAFT TERMS OF REFERENCE

1. During the next five years, PLDT will be undertaking several largeprojects for expansion of the local and long-distance telecommunicationsnetworks in the areas currently served by PLDT. These projects will includethe X-5C, X-6 and the World Bank-financed Telephone System Expansion Project.Efficient management of these projects by PLDT staff will be essential toensure satisfactory and timely execution by the contractors of the largenumber of different works comprising the projects, and bring these intoservice as revenue earning assets. Currently, PLDT has a Project ManagementOrganization; but in terms of size, tools and equipment, it needs review.PLDT recognizes the need for certain improvements to the technical expertise,support services and systems used by its Project Management Organization toenable it to manage efficiently and effectively the very large volume ofcomplex project work that will be undertaken in the future.

8¢opo of -rk

2. To achieve the above objective, it is proposed to appoint a firm ofmanagement consultants to strengthen the PLDT's present project managementorganization and structure, improve its procedures and practices, etc. andrecommend changes. The Program Management Division within PLDT is responsiblefor overseeing projects on its construction and expansion programs. The WorldBank project will be managed by this Division. It is PLDT's objective to haveconsultant(s) provide the necessary inputs for more effective projectmanagement. The consultants will be required to undertake the tasks listedbelow. Items of work - from design to commissioning - involved in propermanagement of a project that should be covered under each of these tasks arelisted in the Annex. The tasks and the items listed herein are onlyindicative and consultants, in their proposals, should recommend additionaltasks that, in their view, would need to be undertaken to ensure establishmentof a satisfactory project management organization in PLDT.

Task A 1. During the first six (6) months, the consultant shall reviewpractices within PLDT, with emphasis on its Project Management

- 65 -

AMiEX 2.8Page 2 of 5

Division and relevant relationships between functional unitsand contractors that impact on project management. Theconsultant will review separately the disciplines of outsideplant, inside plant, transmission and overall projectmanagement.

Task B 1. During the following six (6) months, the consultant willdevelop and supervise the execution of an improvement programfor better management of projects to ensure timely completionwith acceptable quality.

Task C 1. There will be a follow-up phase to coincide with the durationof the World Bank project, wherein the consultant will returnfor a shorter assignment from the 2nd to 5th year. The purposeof these follow-up assignments is to assess the effectivenessof improvements implemented by PLDT, especially the work of theProject Management Division in managing projects, and helpresolve any problems that may arise.

2. Assist PLDT introduce changes to the project managementorganization and procedures that may be required.

3. Provide training, where required, to PLDT staff in the newprocedures.

3. The consultants should be experience in project management with atechnical background and knowledge of and experience with telecommunicationentities. They should preferably be knowledgeable on the use of specialproject management software.

XNANWha

4. It is estimated that a total of 90 manmonths of consultant'sservices will be required for the above tasks broken down as follows:

Y A R18t 2d 3rd 4th

1 - consultant for Outside Plant 12 2 1 1 21 - consultant for Inside Plant 12 2 1 1 21 - consultant for Transmission 12 2 1 1 21 - consultant Project Management 12 12 4 4 2

Total Manmonths - 50 18 7 7 8

Consultants may however make thetir own assessment of the actual quantum ofservices needed. Consultants shall indicate their proposals the following foreach oZ the above tasks:

- 66 -

ANNEX 2.8Page 3 of 5

(a) total manmonths proposed to be employed;

(b) personnel proposed to be employed with their curriculum vitae andthe period for which each will be employed;

(c) detailed work program with bar chart indicating the proposed datesof commencement and completion of each task; and

(d) assistance expected from PLDT.

Langguage

5. English shall be the governing language for this assignment andcommunications, presentations and reports shall be in English. Accordingly,all consultants shall be expected to be fluent in English.

Consultant's Res2onsibilities

6. The consultants shall be responsible for providing in full all theservices described in the Scope of Work and any additional services that maybe mutually agreed upon between PLDT and the consultants.

7. The consultants shall appoint a Team Leader to assume overallresponsibility for all consultants personnel and their performance. The teamleader shall act as the liaison officer between PLDT and the consultants.

8. The consultants shall inform PLDT in time any changes, conditionsor factors which could affect or jeopardize the schedule for the budget forthe assignment and specifically any changes in personnel that consultants maybe proposing during the course of the assignment.

- 67 -

ANNEX( 2 +8

Page 4 of 5

TERMS OF REFERENCEItems to be Covered in the ScoRe of Work

An effective and efficient project management organization wouldcover the following items of work, from initial design to final commissioning,from preparation of budget to payment of contractor's bills. In undertakingeach of the Tasks A to K under the Scope of Work, the consultants shall giveattention to the current methods and procedures in PLDT for performance ofthese items.

A. Preparation of network and equipment designs, technical specificationsand schedule of requirements for:

1. local and long-distance switching equipment;2. outside plant network;3. long-distance transmission equipment4. subscriber terminal equipment; and5. other complementary equipment items

B. Arrangements for Procurement of Goods and Works including preparation oftender documents (including commercial conditions, technicalspecifications, etc.), organization of pre-bid conferences whenrequired, procedures for receipt and opening of bids, bid evaluation andselection and contracting of the successful bidder.

C. Arrangements for project management including the organizationstructure, reporting arrangements, numbers of staff and their skilllevels.

D. Procedures for planning and monitoring project construction includinguse of PERT and other computerized management programs.

E. Manpower planning procedures related to project implementation andmanagement.

F. Checking contractor's supply, delivery and where appropriate,installation and commissioning schedules, for different items to ensuretheir coordinated and sequential implementation. The efficient storageand transportation of equipment where applicable.

G. Procedures for commissioning and acceptance testing and the inspect'-'n,supervision and monitoring by PLDT staff on a continuous basis of allworks carried out by contractors to ensure that these are being executedas per contract.

H. Procedures for checking quantities of completed equipment, works andservices to ensure that these are in accordance with the contract.

68 -

ANS 2.8APage 5 of 5

T. Procedures for checking and paying contractor's bills for ensuring that:

1. the bills are for quantities of goods delivered and works andservice and services completed;

2. unit costs of goods and services used in the bills are as specifiedin the contract; and

3. bills are paid promptly and efficiently.

J. Schedules, formats and periodicity of preparation and submission reportsand executive summaries for PLDT management.

K. Arrangements for coordinating construction and accounting informationincluding work-in-progress and updating PLDT's asset register.

PHIUPPINESTELEPHONE SYSTEM EXPANSION PROJECT

Organizational Chart of PLDT

I -RECHIEF EXEC. OFFICER

EDP P ElPftE$ INTOI SEC :VP

I FIIP I II W

--~~~~~H OPEP 1_ 10M P.EPfE

OORPORAVTE RINH

EE [1 " I1z 1 zA- a

Ip8OIP MVEY SeCTORFVP FII#W FVP

EVP a Emsaa* VIMs _edsn_

LEA COPpAT i1 BUSINESSP

SERVICES AFFAIRS ECTIONouv MRET4Q swse SVP aSoftr MMc PreddWdW VP ~~~~~~~~VP '$D'f V'P FVP .RstVIa.PrdduW

Ill WI ID It Iii 0lIt Iilii illATON IIIWNALPf IIPIN8EH 'i | ENi&I |i

A8UGROOUP GURP81ROUP SB3OPI18C.SBP T U4OPEVP FVEW V | FPP V

10.161 t90t

SVP74EUWTWMIC~~~~~~~~~~~~~~QWS4

8Vff SYSTBASTECHL~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

- 70 - ANNEX 3.2

PHILIPPINES

Telephone System Expansion Project

Philippine Long Distance Telephone Company

Staffing DistribU1in(Total = 17,501 as of Dec. 31, 1991)

1.3,320 (76%')Operations

988 (6%)

1,405 (8%')Offices of CEO and COO

1,788 (10%)Development and Expansion

- 71 - 3.3

PHILIPPINES

Telephone System Expandon Poect

Philippine Long Distance Telephone Company

As of December 31, 1991

MetroTotal Manila Provincial

A. Personnel ByEmi,lovment Status

Regular 16700 13028 3672

Probationary 179 140 39Temporary 622 582 40

Total 17501 13750 3751

B. Personnel ByOrganizational Gros

Ofc of the Pres-CED 631 610 21OSEVP-Ofc of the Chief

Operating Officer 774 774 0Development & Expansion 1788 1783 5Operations 13320 9595 3725Finance & Administration 988 988 0

Total 17501 13750 3751

C. Personnel by JobClassification

Executives (Mgrs & Up) 324 292 32Confidential/Technical 130 125 5Mgmt below Managerial

Level (Supvrs & Staff) 2712 2173 539Non-Supervisory Employees 14335 11160 3175

Total 17501 13750 3751

D. Personnel by Sexmales 10633 8719 1914Females 6868 5031 1837

Total 17501 13750 3751

Teleq*m Sysem Expansion ProjecPhilippines Long Distance Telephone Company

OPERAIONAL PERORMANC1 TARGBTS

~~ruiatr mrg.t1. Installed Exchange Capacity 616,862 621,439 721,911 888,145 892,924 1,230,115 1,546,350 1,649,520 1,661,580

(Equipped Unes)2. Working Unes 503,558 538,666 572,699 713,365 805,343 1,050,359 1,P79,671 1,442,558 1,505,4423. Stations-In-Service (SIS) 986,072 1,046,461 1,097,287 1,188,408 1.290,408 1,392,408 1,494,408 1,596,408 1.698,4084. StaPJl1000 Working Unes 31.9 30.9 29.4 28.0 26.5 25.0 23.5 22.0 21.05. Average FautsIlO00 SIS 13.8 13.5 13.0 12.0 11.2 10.4 9.7 9.0 8.86. % Faulty Serices Restored 87.7 91.0 91.5 94.0 94.3 94.5 94.8 95.0 95.2

Within 48 hours N7. Gross Revenues (Pesos Bi) 9.7 13.0 16.8 18.1 21.1 24.8 29.6 35.3 428. Current Rato 1.7 1.3 1.4 1.4 1.1 1.4 1.1 1.3 1.19. Operating Ratio (%) 59% 56% 54% 59% 61% 61% 60% 57% 55%10. Dabt Servce Coverage Ratio 1.8 2.6 2.5 1.9 1.5 1.3 1.4 1.3 1.511. Debt(Tota Equity Net of 55% 60% 52% 52% 54% 57% 57% 56% 51%

Reval. Surplus12. Rate of Ratum on 10% 8% 11% 8% 8% 8% 8% 8% R3

Revalued Assets (%) _1. Stations-In-Service (SIS) includes:

(a) PLDT-Owned * Number of subscriber lines Induding business, PABX trunks and extensions,paystations. mobile phones

(b) Subscriber-Owned - Subscriber PABX extensions2. Woddng Unes * Excne lines In service3. Number of Subscribrs Total working lines to al seris Incuding single and party lines, payphones,

private lines, mobile, etc.4. Year end: December 31.

ANNEX 4.1Page 1 of 12

PHILIPPIES

Telephone System Expasion Project

Philippine Long Distance Telephone Company

Annual Financial Statements and Projections 198- 98

Table of Contents

Key Financial Indicators ........... . . 2

Income Statements.... 3

Balance Sheets ... 4

Cash Flow Statements.. 5

Notes to and Assumptions Used in the Financial Projections . . . . 8

Page 2 of 12

4|IgH .SES^|l

III a|;g; +Sfagg|lIIIII ;;.: ;a; t50l$ f

t ~I3 > ; *SI I0 slitoE# I 111 1 1as:2g t{fi:i {! ; II

PHUJPPINETQELHONE YSTM EXPANSION PROJECT

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

1_6-1908 ANNUAL INOOME STATEMNTFIGURES IN P MILLIONS

FINANCIAL YEiAR ENDED DECSEBER31 10 199 l1 1092 103 109a 1006 16 199? 100

OPERATING REVENUESLOCAL SERVICE 230 8.088 3*B1S 4,182 4.8, SAM .27 7.085 7.0 8.0,TOLL SERVCE. S7 9,77 12.7M3 13.757 16,011 1872 22.097 27.882 23,739 40*70MISCELL 8NEOUS 172 180 218 227 233 266 282 310 341 375LESS PROVISION FOr JOUTFULACCOUNTS (216) (216) (216 (240) (317) (37 (414) (2 (3t) (73)

TOTAL 0.450 12,830 18.600 17.005 20.700 24,306 20.116 34.720 41.416 49.415OPERATING EXPENSES

MAINENAN8 TRAFFIC. COMERCIAL. ETC. 4.366 6,851 7.001 8.2 90.76 11.064 12.613 13.0 15.618 17.745DEPRECIATN 972 1.222 602 1.77 2.482 8176 400 4.87 6.7 667FRANCHISETAX 289 374 6tS 339 833 743 87 1.0511 1.61 1.805TOTAL .62 7.447 0.010 10s5 12.80 142 1706 t9080 . 26"W U

NETOPERATWINGINCME SAm 6892 7.8 7.316 6.100 9.423 11.00 1462 1sm 2.404

AXWCS4AR NTU 1.048 1.111 1.101 1." 2,6 4.092 5684 79 8.125 .29

INOOMWOEIWETAX 2.787 411 0.428 6910 6.164 68 5.726 7.406 10.434 11.102PROISO FOR TAX 72 1.4 too 1 332 289 372 1.613 024 4.6NET INCOME 2.061 8.187 4.722 4.801 4.82 6.062 64 5.86 7.410 to"24

005ii

76 - ANNEX 4.1Page 4 of 12

I I $ :!ka f , I $ }Xlf I I

v I 1 1~~~ U t-aI

§ } R sszu w "4 25^ 11!R l

|~~ l . Sk -go

0~ ~ | f |o ! w -* aig ;f

g~~~ Z gl I Z

l | gl§§l0|2fl5 5 i} ~~~I|l:

TlEPHONEW 801W EMON PAWPHUPPIELODWSANCETELEPHONEOOMPANM

t_' -ImANNUALCAH FLOWSATWENTFIJRESI PMIONS

DIT AL MENERATLIOFROM 2.742 $AU 2A" 4X4 5.731 AN6 7.= 10.AM t

IllEa t 6MIOIF-fMA. LOMW-TEl LOAN

DOLURDENOUATED

PimAVME6TOFLOAMU In 0 0 0 0~ 0 0 a0 0AWAAAORTIOATI- RES_UAL LOANS 704 46 Su o S a561 410 444 470 46- US$2M REUNDING PFLJt O 0 0 321 on m 1.064 1.116 1.12 t .252 a-CB-APEWMLOANS 22 17 20 is 20 Is le 1S 22 le-HAW40I OWST CABLE PROT FINANC 0 0 818 842 176 428 420 m76 m 802-VARIOUSCAMBEPRWN FINANCI 0 0 8 47 so 0o as 6o 70 e s *-OTHERS so 17 0 17 9 13 14 a 11 119-XSPfROGRAM DPJ_S 0 0 0 us 644 780 m 7 as as- 0 PROGRAm FNANNo (1o00 LOLU.FAUTRACK PRDWJET 0 0 sO 282 2 306 324 843 853 64 -BASEP JCTFIWANCG-EBWAlK-Uft 6.IN 0 0 0 0 t5 33 34 30 as 20

RORL MANKPNIANO -U8st84s00mIRANCEI -UsUs.oio 0 0 0 0 0 0 0 0 615 onTRANCHEU -USSIOSOM 0 0 0 0 0 0 0 0 16a 178

BINONOO&DAV^YOENHANGEFPIANCiN-UW#47.01 0 0 0 20 120 148 18 1 175 l86)2 COIANCOIN1ALANOE -U88201SO 0 0 0 0 0 0 0 1.076 1.140

XODPROAMPIFIAICM -WU8.OUU 0 0 0 0 0 0 0 0 1.067 2.302

SUSIOTALOFDOUARDENOMINATEDLOAS 1.02 624 1.243 2.366 2.t87 8S.SI 3.300 4.070 6.5 7.4a0

USO 0* 'a'.

PWr.wu PLDTsus1sCsR.8A1s-Pga

1Wo9 au tn tlow lSw 1r tno tno 19i M

Uo -

-LONGbMISOAJMMOSAP3

URIa S

a3 13 a4 6

-mmyumsu suupmw

0 s 0 z n 0 73 lI 2 0

-P1A1BL*AUThAITDW V-ALANCEPS1AM

0la

3 0 6 15 16

-&OWIS- OOMUMLPAPR

SAN 0900

.0 0 Rim0

-AOMMI"taLWAI

o 0 0 0 - 0 1. t.l43

-U3TOTOLOLOWSTOLOA t

IAM urn &s S.ou 4.4 o tw o Si

3.RWSPT10MOPPRHRWSMAREO

4 40 48 400 II 3 0 0 0 0

TOTAL

No I ° too0 3 0 4,074 7 °3 ° ° ° °

&B3EMMAIM LAU12 1.430 s0o e L2 t408 3 t.1 743 k0 tO7

W.gmRmgm

0 4 U 4 420 443 461 4S3 4? 475 483

VOtMANCE76

2.2t8 476 1.401 2.023 m 71 1.sa m27t 2.213 2.7

n) PHOJT01 OTHER THA Xs

*.OR30AEPRQJEOO

307 164 a78 ST I O 0 0 0 0

- SUPPORT AND OTHE PRJEC

021 1,408 2.149 4,712 3S61 0 0 0 0 a

2a)s1pNP

134 11t so se 0 0 0 a 0 o

3) RUER FflCABLE PAOJECTWMNTEATOtLPROJECT

263 07 73 60 64 0 0 0 0 0

4) XS PORAM

t62 28 2.136 107 lift a 0 0 0 O

6I)XCOMMUDENTARY PRORAMPOX-C)

- 100,00LU FASTTRAC1K PPJECTS

0 62 2.111 V7 0 0 0 0 0 0

-BALANCEOFXS-C

0 38 03 8.40 7,082 0 0 0 0 v

a)POTSP6OPOSW TOBORWANW BY RW9AK

0 0 0 27 2.100 37 1.452 16 0 0 A

7) XPROWGRAM

0 0 0 O 0 t8t1 t3,8B3 8.18? 2,630 0 0 l

6) OTER CAf"MA OWEX OM S (PR1NCIALY RO AO_ON 0 0 0 0 0

0 ?.00 10.000

TOTAL 3.2T 6so0 7.668 8,700 t702 14.050 1ia33s 0.43 0.13 tO1

V,. CASH EOUIRAEMES FOR AR ( ) 01 71 . 0.6 (3.2 13. (,16 ,

FIlW*t19W-INCS OALOWSTAVEkW=-PpS3

FINANGIALVEARENDEDON 0=1 Wm6 11100 169 1"a 9 1904 166 1"a low 19

4sussofoommsonournm ~~104 10 70 16n 173 173 73 1in 173 173BSUBUCR1ERSOEFC0 go U 1" 3y 41 41 41 41 41 41wYrES STocEPU so 5 0 a 13S t to a 0 0 00) SHORT-TM CREWf LINE 0 * m3 (ian 0 05)HAW4fF-41P0&WIKFNWMI 64 74 0 0 5 0 0 0 0 0p)WA$EOpnWWMSHARES 0 469 0 0 0 0 0 0 0 0s)uX PrmomA~ Fuwbou

-IFCUS87AMiLOAM . 156 0 0 0 0 0 0 0 0-W40USSUAM LION 0 870 167 0 0 0 0 0 0 0-ADS UfI4.U LOAN 178 m 61 4 0 0 9 0 0 0-cCOOUPsOaMLoA 0 33 so U9 IS 0 0 0 6 S-1KFWU8W7M LOAN 0 694 414 33 1l? 0 0 0 0 S-IFCUBMOOSiLOAN 0 66 235 112 0 0 0 0 -DeQ Utoo ALOA 0 124 34 6 85 0 0 0 0 0

*EASTE93 vIINPROJWDT INANGS6- U561. 0 0 Is u 0 0 0 a 43-U- CABLE PRWWBTTRFANOSS-U-P(WU1 -USPIUm 0 0 107 68 U 0 0 0 0mITsw -US$451 0 0 0349 0 0 0 0 0 0SVUMa -o U AM 0 0 0o 0 0 0 0 0 aOITMAN -US8.7M 0 0 713 0 0 0 0 0 .0t19350PROQRMFW=NANCING(10,9L.U. FASTPACK PR0JWT569,06 LU.- mft -1886 Um 0 10 36 23 0 0 0 0 0 0-IVUSC -US.14m 0 0 as 14 0 0 0 0 0 0-SAKOFTS IT-U$ 1AMM 0 RI 0 0 0 0 0 0 0 0

1000LU.a -aPw -ussSi.UI0 0 1.404 u7s 000S0S-Xo -UsSMIm 0 0 ea 813 0 0 0 0

I)SASEPRQJW1 FINANOlN6kWANI9-UW Si 0 0 0 189 0 0 0 S kosvIusOPw usm 0 0 0 0 0 0N)DESETUREISSUE-P1Wm70 0 0 0 0 0 0 a 0 0O)PIABLOAN AUINO9TY 0 70 540 on2 0 0 0 0 0F) LOG-1 COWMME AL PAPER 0 0 2000 4,00 0 0 0 0 0cPoinWf FLDAI NKPROJ ff I A*~NCm..fWS4ISM 0 0 0 0- 1.519 1,03 64 715 0 0IQPFO6WiNO ANDAVAOSKAJGFIANS -US$47. 0 0 0 t 1.012 0 0 0 0 05)pOpAo6wFNamCN ALANCE0X1'XI -UD1M* 0 0 0 0 20t1 362 0 0 0 0* PRPOWXSPROft4MAWOn -USSNA 0 0 0 0 0 1*5 7.104 3,6 1'2 0I) PROPOSS ADO ND FNANIN 0 0 0 0 4,0 0 6500 4.0 50 7.O O

@0WTOL. 83.02 5,1 7. 13 O3 O 4 0 MS .14

FOWLU.~~~~~~~~~~~~~~~~~~~~~~

-UNNIh_ 1."@t"03 0S 130 IN 70 ON 70 51 O 7OEN-N 1.9f TO.30 hO 70 O6 70 O1 OW 76 574

- 80 -Page 8 of 12

NOTES TO AND ASSUMPTONS USED INTHE FINANCIAL PROJECnONS

GENERAL

1. Infaton, Dovaluatlon

These inancial proJecUons were prepared usIno the followingehang rates:

192 - January to February actualMarch to April P26.00: US$1.00MaytoDecember P28.00:US$1.00

1993 - onwards Assumed annual forexescalation of 5.9%

The folowing Interest rates wer also assumed:

On edsixng loans - UBOR at 9%- 91-day PhIl. T-8111 at 20%

On proposed loansWB ProjectFinaning- WB Rate of 7% plus 1-1/4% margin

OthemForeIgn - UBOR plus 1-1/8Local - 91-day PhIL T-BIll plus 1-1/2 to 1-718% maroin

2 Captal Ex0enditure Program

Projects Other Complementary Projecsthan XS Fiber ------------------- Proposed

-=_____- ___ Optic 100,000 to beService Cablaf LU. Financed Oer

Bridge Improvement Int'l XS Fast Track Balance by World XB CapitalProgram ProJects Projects Program Program of tX-C Bank Program Expenditures ToWt

- -- - -- - -- -- -- -- -- ------ - - - - -- -- -- - -- -- -- - -- - -- -- - -- - - - -- - -- -- -- - - -.-- -

----- -------- -------- --------- Pesos In MlUlonse--- -------- -------- ----

1992 87.1 4 58.2 598.5 1,507.3 836.9 952.8 27.0 0,779.61993 7.2 3,510.3 54.3 1,57.9 5,450.4 2,100.3 12,7&4194 7,981.6 3,6.9 2,811.1 14,049.61996 1,452.0 13,883.2 15,335.21996 1,250.8 81868 0.0 9,437.61997 2,O 7,000.0 94,50

11,000.0 10,000.0

94.3 8 58.2 652 3,087.2 8389 14,384.8 8,087.0 27,411.0 17,000.0 79,04.3__m MMMin mmnm mm mmmmm __w m nmin ===am= S_ _

Does not ti up with project cost submitted by DePlan of P7.68 which was computed at P28:US.1. This cost reflecs fuhr"al depreciaton of the peso by .9% annually on oralgn ecchange rquiremnts of the project s1ta 1993

AN 4.1-81- Pago 9 of 12

3. DraIngs against Loans and Issues of Proferred Stock

1992 13 1994 1995 19 1997 198 Total

---------------------------- P esos In Millions -- ------Existng LaneX-5 Program FinancingADO Loan - US$24.OM 3.9 3.9CDC - US$18OM 289 153.9 1828KFW - US$567M 238.1 118.9 365.0IFC - USM70.OM 112.4 598.4 710.8DEG - USS10.OM 16.1 85.5 101.6

Easern ViIMln Projoct FinancingUS.12.5M Loan 259.3 259.3

B-M-P Cable Project FinancingS-M-P (WE!) - US$9.8M 5&0 59.0MITSUI - US$4.2M 487 48.7SVENSKA - US$1.OM 28.1 261CMIBANK - USS .7M 13.0 19.0

X-SC Program Financing (100,000 LU.Fast Track Projects)29,000 LU.- MITSUI - USS 5.5S7M 22.8 22.8- SVENSKA - US$ 2.614M 1&5 13.5

70,000 LU.-KFW - US$ 61.226M 261 2781- KFW - USS 22.945M 513.2 513.2

Sm Project Financing(dmbank) - US$5.2M Loan 137.5 137.5

P1.556 Loan AuthorIty 931.5 931.5Lon-Term CommercW Paper 4,000.0 4,000.0St-term Credit Une (239.1) (239.1)

Proposed IoansWodd Bank Fnanping

US$134.0M Loan 1,518.5 1,283.3 640.1 7985 4,240.4EUnondo and Davao Exchange

Financing - US$47.OM 360.5 1,012.3 1,372.8Balanc of X5-C Program Fnancinog

US$201.98M Loan 2,5122 3,682o. 6,194.3X Program Financino -

U5$4060OM Loan 1,452.3 7,103.8 3,967.1 1,324.7 13,847.8Additional Fnancing 4,500.0 7,000.0 5,500.0 4,X50O 5,000.0 7,000.0 33,500.0

Sttbcriber lnvestment Pan,Subscribs Deposit andEnployees Stock Plan 330.7 335.3 299.7 214.2 214.2 214.2 214.2 1,822.6

7,1462 10,833.1 13,717.4 13,458.0 9,479.8 6,569 7,216.2 68387.5mmisioNmmm _Ns_ _ _mm

- 82 -

X4. 1Page 10 of 12

INCOME STATEMENT

Operating Revenues

Local Service. Local service revenues are billed in pesos, but are adjusted for foreign exchangefluctuations using the formula allowed by I -e National Telecommunications Commission (NTC) under thecurrency adjustment clause whereby for every 10 centavo change in the peso/dollar exchange rate, there isa corresponding change of 1% in the local service rates (against the base of August 12,1983 rates).

In addition, NTC may upon application by PLDT review the rate structure and increase local servicerates if it believes the existing rates do not adequately compensate PLOT for capital costs. PLOT wasauthorized to increase its local service and national toll rates by 35% effective August 12, 1983. A 10%reduction on residential main station local service rates was also provisionally approved by NTC effectiveNovember 1, 1986, and made permanent on November 1, 1986.

The tariff rates per telephone prevailing at the beginning of 1992 are used in the projection.

Toll Seryice. The tariff rates for national and international toll calls prevailing at the beginning of 1992are used in the projection.

a. The Company projects national toll based on estimated number of average working stations,demand forecast, local service facility profile and estimated average paid minutes per main station ofa given year. Using these parameters, the resulting growth rates in national traffic are as follows:

1992 15%1993 21%1994 19%1995 18%1996 17%1997 16%1998 16%

b. The Company intemational toll revenue based on estimated number of working circuits on a givenyear; circuit forecast based on agreed figures from the Intelsat Global Traffic Meeting and estimatedaverage paid minutes per circuit of a given year. On the other hand, the expansion of the Company'snational network has resulted in increased international toll traffic. Using these parameters, theresulting growth rate in international toll are as follows:

1992 3%1993 8%1994 12%1995 15%1996 15%1997 15%1998 15%

Mbcelbne Principally revenue from directory advertisements.PLDT projects this minor componentof operating revenues to grow at 10% per year.

- 83 -

ANNEX 4.1Page 11 of 12

Provision for Doubtful Accounts. Based on experience, assumed at about 1.5% of gross operatingrevenues.

Operating Expenses

Rent. Rental expense for leased circuits is determined by the rates charged by Philcomsat for use ofits satellite circuits. Cost per circuit was assumed at US$2,300 per circuit per month for US Mainland,Hawaii, Canada, Europe, Middle East, Africa, and North America and US$1,920 for Asia Pacific counirveseffective September 16, 1987. Other rental expenses are for rental of local circuits, electric poles an dbusiness offices.

Depreciation. Principally 5% per year for telephone plant, 20% for motor vehicles, and 10% forcomputer equipment.

Taxes. Consist ot franchise tax (3% of gross operating revenues) and real estate tax (about .1 % ofgross property, plant and equipment) based on experience.

Insurance. Based on experience, about .3% of gross property, plant and equipment.

Other Ooeratinn Exoenses. These include all other operating expenses (administrative, traffic,maintenance, etc.) and consist principally of payroll expense in accordance with the Collective Bargain. igAgreement in place up to 1991 and as projected and other expense items which were assumed to increaseusing annual inflation rate of 10%. (Current inflation rate is 12%.)

Non-operating Income and Expenses

Interest Income. Principally income from short-term placements, assumed at 18% of the averagetemporary cash investments.

Income Tax. Assumed at 35% of taxable net income.

Deductions from Net Income

Preferred Stock Cash Dividends. Based on outstanding preferred stock plus projected issue inaccordance with Subscriber Investment Plan. Cash dividend on nonconvertible preferred stock is based on theoutstanding nonconvertible preferred stock on a semiannual period ranging from 12% to 15% per year up toMarch 1992 and 12% per year up to September 1994.

Prooertv. Plant and Eguigment. Based on December 31, 1991, balances plus charges principallyprojected capital expenditure program (see raragraph 2), net of retirements.

Cash and Temporarv Cash Investments. Funds placed in temporary investments would earn 18% peryear.

BALANCE SHEET

Accounts Receivable. Based on experience, assumed at approximately three (3) months revenue.The long period of collection is principally attributed from settlements of foreign administration which taketime.

Materials and Supolies. Based on experience, about 3% of gross property, plant and equipment.

- 84 -

ANNEX 4. 1Page 12 of 12

Deposits on Letters of Credit. About .1 % of gross property, plant and equipment.

Prepaid Items. Principally prepaid insurance assumed at .5% of gross property, plant and equipment.

Other Assets. Consist of deferred charges and investments in shares of stocks. Deferred chargesrepresent principally costs of employees' material accountabilities assumed at about .1% of gross property,plant and equipment.

Inyestments in Shares of Stocks. Based on December 31, 1991, book balances are as follows:(Pesos in millions)

a. Pilipino Telephone Corp. (PILTEL) 65.4b. Filphone Management Corp. - at cost 2.4c. Manila Electric Company (WMBALCO) 5.6

73.4

Preferred Stock. Based on December 31, 1991, outstanding preferred stock, projected issue inaccordance with Subscriber Investment Plan, and projected conversions to common stock, and scheduledredemptions on nonconvertible preferred stock.

Common Stock. Based on December 31, 1991, outstanding commonstock plus projectedconversions from preferred stock and 15% stock dividend payable on July 15, 1992.

Capital in Excess of Par Value. Based on outstanding balance as of December 31, 1991, plus thedifference between the par value and the assumed conversion price of preferred stock to com non stock.

Lynn-Term Debt. Based on existing long-term debt as of December 31, 1991, projected drawings andscheduled amortizations.

Accounts Payable and Accrued Fx ernses. Consist principally of expenses accrued during the period,mainly interest and taxes, plus other accou.,ts piyable projected at 35% of other operating expenses based onexperience.

Dividends Payable. Computed at P6.40 per year on outstanding common stock and 10% to 15% peryear on outstanding preferred stock up to 1992 and 10% to 12% per year up to 1994.

ISSUED: APRIL 8, 1992

- 85 -

ANNEX_5.1LPage 1 of 4

PHILEPPINES

Telephone System Expansion Project

Philippine Long Distance Telephone Company

Tarf

STRUCTURE AND ADJUSTMENT MECHANISMS

Tariff Regulatlon: Tariffs are regulated by the National TelecommunicationsCommission (NTC). Adjustment to tariffs or the introduction of tariffs fornew services must be carried out through application to the NTC.

Tariffs are regulated to provide PLDT with adequate revenue to cover operatingexpenses, taxes, depreciation and a fixed rate of return on assets. Theapproved rate of return has been set at 121 since 1932. The value of assetsis established through an appraisal process, undertaken by an authorizedappraiser and revitwed by NTC. Cross subsidy between services is allowedrecognizing certain services may provide higher rates of return so long as theoverall return is kept to 12X.

Local Service: Rates for local service vaqry by location and type of service.There are 15 location categories. There are 5 service categories to coverresidential, business and party line users. Nonrecurring charges are imposedprior to service being provided. These include a service connection charge,deposit, inspection fee and the Subscriber Investment Plan (SIP). The SIPrequireis the purchese of PLDT shares each time a service is subscribed for.The required investment varies from P 900 for residential party line serviceto P 5000 for a PABX trunk. The shares are nonvoting, preferred stock with a101 cumulative dividend. They are convertible to PLDT common stock.Recurring charges are imposed monthly. There are no usage charges for localcalls.

Monthly rates for local service have an automatic adjustment mechanism,approved by NTC. It provides for an adjustment of 1X for each P.O.10 chzzigein the foreign exchange rate of the Peso relative to the US dollar. BetweenJanuary 5 and October 21, 1990, there were 8 adjustments resulting in anincrease of 202.

Domstic Toll: Domestic song distance tariffs are scheduled in 59 bands,based on distance. There are two categories -- operator assisted and directdial. Discounts are provided for two off peak periods (evenings and Sundays).Domestic toll tariffs have not changed since April, 1985.

- 86 -

ANNEX 5.1Page 2 of 4

International Toll: Rates are established in US dollars but billed in Pesosat the exchange rate prevailing at the time of the call. As for domestic longdistance there are two categories and discounts for off-peak periods. Inkeeping with worldwide trends, PLDT has recently applied for reductions ininternational tariffs. International tariffs which had been unchanged sinceApril, 1985 were reduced February 1, 1990, by an average 20X.

Cellular Telephone: Cellular charges are split into nonrecurring andrecurring charges. Nonrecurring charges are structured the same as localservice. Recurring charges are structured the same as domestic long distanceexctpt there are only 5 distance bands.

Leased Lines: Leased line charges are assembled from a schedule of chargeswhich covers the local loop, intraexchange or interexchange circuits, and theterminal equipment (if provided). The schedule provides bands of charges(based on distance) and categories of services based on data rate.

Domestic Settlements: Settlements for national and international toll arepart of the interconnect agreements PLDT has with its other operators in thePhilippines. For national toll calls carried by PLDT, the originating companyis returned 301 of the toll, although this can rise to 441 depending onproximity to Manila, volume of traffic and promptness of settlement.

For intern tional toll, the originating operator is returned either 9% of thegross charges or 181 of net (after international settlement). The former isthe most common arrangement. There is no settlement on incoming calls as theinternational correspondents do not provide call data which shows thedestination operator. Some operators in the Philippines haie approached AT&T(the major international correspondent) to provide su^t.h data but thus far noarrangements have been made.

Inteznational Settlements: PLDT has settlement agreements with allinternational correspondents. The main correspondent is the U.S. As withmost developing countries there is a large imbalance in traffic resulting in afavorable settlement to the Philippines. In 1989, the U.S. originated 130.3million minutes of traffic while the Philippines originated 12.9 millionminutes. The Philippines received a settlement of $127.5 million while U.S.carrier revenues for this traffic totalled $12.7 million.

AT&T and PLDT have restructured their settlement agreement to address theimbalance. A base traffic flow was established using 1988 values. Trafficimbalances above the base amount are settled at half the normal accountingrate.

COMPARISON WITH OTHER COUNTRIES

The following table shows typical tariffs for the Philippines and three othercountries. Most of the data is extracted from the Siemens study on nationaltariffs as at January 1, 1988. This was the most recent available. IN U.S.$terms, Philippines charges for installation and domestic toll will have

- 87 -

ANNEX S.1Page 3 of 4

declined significantly (approximately 40X) due to devaluation of the Peso.Local service charges have increased (also about 40X) due to the automaticescalation which is keyed to exchange rates. International toll charges arecurrent.

Ph1 ~Canada Japan Indonesi&

Installation Fee 108.00 30.00 639.60 302.40(Incl. Investment)

Local Service 105.00) 169.80 147.00 25.20(Annual Charges)

Domestic Toll 0.28 1.01 1.11 1.36(3 min/100 KM)

Annual Summation 156.60 342.00 460.80 312.00(Local plus toll)

International 7.20 5.39(3 min/IDD)

Notes:

1. All values in US$. Figures (except international) have been extractedfrom the Siemens survey of national tariffs, 1988.

2. Local service charges for Canada and Philippines include unlimitedcalling. For Japan and Indonesia, local metering is ayplied in additionto rental charges. The charges for 700 direct dialed calls with no off-peak discount have been applied.

3. Annual summation includes installation fee (distributed over 10 years),700 local calls, fixed monthly charges and 200 national toll calls of 3minutes up to 100 KM.

4. International calls are between Vancouver and Manila (country designatesorigination of call). Rates are for November, 1990.

- 88 -

Ae S.tPage 4 of 4

PF IPPJES

Representative Rates for PLDT Telephone Services

LOCAL JEVtCI RATESSINGLO PARTY SAVICE

4-i.-mofneocuftne (p).-*-.* R.cu.r.rSIP serv other Totat (p/month)

Nil WENTIAL: Nanl ts lc00 1O 30J 2288 236.9Low Rote 1300 180 320 1800 6.2ll*1an 1300 180 320 1800 200.0

ItUEtSS:Mantle 3500 215 408 4123 340.2Low Rats 2000 a11 420 2635 182.3MedIan 3000 215 420 2635 265.6

Mantla 5000 215 5 5223 693.7Low Rats 3000 215 20 3233 297.9MledIn 3000 215 20 3235 634.4

CELLULAR: 30 300 7000 10800 214.0

ANI.G LEAMsE20 im 5o000 430 0 5430 1303.1500 Km Soo0 40 0 5430 23719.1

OCtL LEASED:2a KM s5oo 430 6571 12001 8".9500 Km 5co0 430 6571 12001 13639.1

ot.es i other fnetudo fnspection and desit.2. Lea"d c efrCmt auei 3 Kr toca loqp

NW interexchenOE of ecult for distanceahown. Dats *4U3e 9600 fPs. Inctudztwmifnat equIpmnt.

3. Celtutar sswas vehicle mobUt.

TOLL SRVICE RATESSTNMStM S MtN CALL

*.leekcday.*- *..Swday... -- Ive4nin-rpr 000 oper cO0 opt? Do0. . ... a........... ... ._ . ..

NAtt'lAL (p)20 Km 4.? 3.2 44.7 2.2 *.7 2.2SOO 1m 29.0 28.1 20.5 19.9 20.5 19.91500 KIm $0.8 49.3 35.0 34.0 35.0 34.0

ZNTtRNATIONAL CS)Asia 6.86 r.72 n .84 7.73 8.44 6.88AlWries maJ io.4$ a." * r.n s.44 ?.nsuWv 11.94 IO." 11.64 10.48 9.84 8,60

Up to 100 Km 20.0 16.5 20.0 16.3 20.0 t6.251 to 600 lbm 45.0 32.0 43.0 32.0 4U.0 33.0Over 1000 K 75.0 52.0 n.0 52.0 7n.0 52.0

Weekdays Mon to Set 7t00 to 19:00 (matonal). 6s00to 2tOO (intrnoatIonal).

Evening: son to Su, 19:00 to 7:00 (nattonl), 24*00to 6:00 Cinternatfonal).

Surnys Sum, 7:00 to 19:00 (nstIonal), 6tOOto 24:00 (internationa).

- 89 -

ANNEX 5.2Page 1 of 3

PHELIPPINES

Telephone System Expansion Project

Philippine Long Distance Telephone Company

Return on Investment

Incremental benefits of the proposed project are provided by anestimated 108,000 new working lines, 97 PCO's, and revenues from leased linesbeing provided under the proposed project. The net benefits were calculatedas incremental to a base consisting of the existing network plus other partsof PLDT's expansion program the X-5, X-5C, X-6 (and "other works" projects)over the period 1992 to 1997. The benefit period of the project extends from1992 to 2007 when, on average, all the equipment provided under the projectwould have completed its useful life. Benefits attributed to new teleph-Nnesubscribers are estimated, on the date of connection, to be 85Z of the perworking line revenues of existing customers because of expected initial lowerutilization. Gradual increases in these revenues are forecast over the studyperiod to bring them in to line with average company rates; it is expectedthat the higher utilization of provincial services will compensate forslightly lower rental tariffs. In addition, progressively higher usage ratesare forecast, climbing to 15X more than current, as a result of increase inthe size of the network, trends toward higher usage of telephenes, and ahigher ratio of single line to party line services. Tariffs are forecast toremain constant over the study period and this results in a rather modestincrease in the average annual revenue per main station from US$559 in 1992 toTuS$662 in 2007. This is a conservative estimate because a large proportion oftelephones provided until now, and expected to be provided under the programsincluded in the study, will be for high calling rate subscribers (businessesand shared telephones). The above factors were applied to PLDT's revenueprojections both with and without the proposed project in order to determinetbv4 incremental effect. Operating costs attributed to the project were valuedat average operating cost per subscriber, less an allowance for operating costsavings realized on existing lines due to scale economies and modernization ofthe network.

In calculating the project's rate of return, the costs and benefitsassociated with the investment program are assumed to remain constant in realterms. All incremental costs and revenues have been deflated to bring them totheir comparable 1990 price levels. No residual value of assets has beentaken into account as the present value of these in real terms would beminimal. The estimated resultant internal financial rate of return is 15Xwhich is satisfactory.

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AhNMEX 5. 2Page 2 of 3

Economic Rate of Return

The economic internal rate of return (ERR) is calculated at 21X, It isgreater than the financial rate of return due to the elimination of taxes andduties, and an adjustment to the unskilled labor rates using a conversionfactor of 0.8. The resultant ERR understates the benefits to be derived fromthe project as it does not take into account consumer surplus and the benefitsthat would accrue to the economy as a whole as a result of improvedtelecommunications services. Because these factors are difficult to quantifythey are not included.

The results of a sensitivity analysis made of the project's internalrate of return are as follows:

Sensitivity Axialysis Conditions ERR (X)

(a) Base values 20.7(b) 18 month delay in connection of working lines 13.6(c) 10 increase in operating costs 19.9(d) 10 reduction in operating revenues 14.7(e) 5% increase in investment costs 19.4(f) Combination of (b), (c), (d) and (e) 11.2

A summary of the project's economic rate of return calculationsfollows.

PHILIPPINESTelephone System Expansion Project

Philippine Long Distance Telephone CompanySumrnmary - Economic Rate of Return Calculadons

(Peso Thousand)

ITEM. 1992 1993 1994 1995 1996. 1997 1 9 .199S 2000 21 202 2003 2004 2005 2006 200Cost Benefits of PLOT's Complete Exnanslon Program (Note 1.)

Total Net Benefits 18589 21354 22926 24464 26037 27788 29456 30792 31230 31594 31885 32103 32224 32248 32273 32299Net Op Costs 6822 7370 8886 9325 99O6 10516 11171 11688 11791 11895 12002 12111 12222 12336 12451 12569Net Inv (ongoing) 1624 1624 0 0 0 0 0 0 0 0 0 0 0 0 0 0Net Inv (S&X6) 1386 0 2467 7795 8939 4853 0 0 0 0 0 0 0 0 0 0Net Inv (X5C) 1445 4401 6445 0 0 0 0 0 0 0 0 0 0 0 0 0Net Inv (WB) 22 1685 2614 1165 1004 0 0 0 0 0 0 0 0 0 0 0Total Net Costs 11299 15081 20192 18286 19899 15369 11171 11688 11791 11896 12002 12111 12222 12336 12451 12569Benefits Less Costs 7269 6273 2735 6178 6t38 12420 18284 19104 19439 196 19883 19992 20001 19912 19821 19730

Cost Benefits of PLDrs Expansion Proaram without World Bank Proiect (Note 1.1Total Net Benefits 18569 21202 22203 23292 24689 26371 28045 29273 29641 29974 30261 30476 30594 30618 30642 30688Net Op Costs 6822 7368 8448 9023 9751 10482 11062 11572 11672 11775 11879 11986 12094 12205 12319 12434Net Inv (ongoing) 1624 1624 0 0 0 0 0 0 0 0 0 0 0 0 0 0Net Inv (X5&X6) 1386 0 2467 7795 8939 4853 0 0 0 0 0 0 0 0 0 0Net Inv (X5C) 1445 4401 6445 0 0 0 0 0 0 0 0 0 0 0 0 0Net Inv (WB) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Total Net Costs 11278 13394 17360 16818 18890 15335 11062 11572 11672 11775 11879 11986 12094 12205 12318 12434Benefts Less Costs 7291 7808 4842 6474 5999 11037 16983 17701 17969 18199 18382 18490 18s 18413 18324 18235

Incremental CosVBenefits of PLDT's World Bank Proiect

toComplete Expansion 7269 6273 2735 6178 6138 12420 18284 19104 19439 19699 19883 19992 20001 19912 19821 19730 IVWithout WB Project 7291 7808 4842 6474 5999 11037 16383 17701 17969 18199 18382 18490 18500 18413 18324 18235 *Difference -22 -1538 -2108 -295 139 1383 1301 1403 1470 1499 1501 1502 1501 1499 1497 1495 *EIRR (1992-207): 20.7%

0C'h ', '8;.fits ,ro .

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ANNEX 5.3

PHILIPPINESTelephone System Expansion Project

Philippine Long Distance Telephone Company

Selected Documents and Data Available in the Project File

A.1 The Philippines: National Telecommunicat.ons Development Plan 1991 to2010; Department of Transportation and Communication; October 1990.

A.2 The Philippines: National Telecommunications Commission (NTC) MemoCircular 7-13-90 establishing rules and regulations for interconnectionof exchanges; July 1990.

A.3 The Philippines: NTC Order establishing revenue sharing arrangements --Case No. 88-145, April 1990.

B.1 PLDT -- Franchise, Charter, By-laws, and Articles of Incorporation; asamended through 1983.

B.2 PLDT -- Annual Reports; 1986-89.

B.3 PLDT -- X-5 Program; September 1987.

B.4 PLDT -- X-5 Complementary Progiam (X-5C) March 1988.

B.5 PLDT -- Computerized Financial Projections; 1990-97 -- Lotus 123 fileFIN1.WK1.

B.6 PLDT -- Greater Metro Manila Market Survey (Summary); 1990.

B.7 PLDT -- Summary of Human Resource Development Program; July 1990.

B.8 PLDT -- Telephone Expansion Project support data.

B.9 PLDT -- Economic Analysis and Tariff Review of PLDT's Expansion Program,Teleconsult, Ltd. (Canada); March 1991.

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