Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 16824

IMPLEMENTATION COMPLETION REPORT

THE INDEPENDENT STATE OF PAPUA NEW GUINEA

THIRD TELECOMMUNICATIONS PROJECT(LOAN 3154-PNG)

June 30, 1997

Papua New Guinea & Pacific Islands DivisionEast Asia III DepartmentEast Asia & Pacific Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EOUIVALENTS

Currency Unit = Kina (K)Parity: K 1 = US$ 0.716 May 30,1997

Equivalency of I US$ in K since 1989(Annual Average)

1989 0.84 1993 0.991990 0.95 1994 1.00*1991 0.95 1995 1.281992 0.97 1996 1.32

* the Kina was devalued by 10% on September 30, 1994 and floated on October 10, 1994

WEIGHTS AND MEASURESMetric System

FISCAL YEAR OF BORROWERJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

DEL - Direct exchange linesDOF - Department of FinanceDFP - Department of Finance and PlanningGRA - Gazelle Restoration AuthorityIBRD - International Bank for Reconstruction and DevelopmentICB - International Competitive BiddingK - KinaMIS - Management Information SystemOAG - Office of the Auditor GeneralOR - Operating RatioPCR - Project Completion ReportPNG - Papua New GuineaPPAR - Project Performance Audit ReportPPF - Project Preparation FacilityPPO - Project Program OfficePTC - Post and Telecommunications CorporationROR - Rate of ReturnRWL - Revenue per Working LineSOE - Statement of Expenditures

Vice President: J. M. SeverinoDirector: Marianne HaugDivision Chief: Richard A. CalkinsStaff Member: R. Peter Wright

FOR OFFICIAL USE ONLY

Table of Contents

Page No.

Preface

Evaluation Summn ary .......................................................... i

Part I: Project Implementation Assessment .1

A. Background and Project Objectives .1B. Sector Reform, Regulation and Privatization. 3C. Achievement of Project Objectives. 3D. Major Factors Affecting the Project and Implementation Record 8E. Project Benefits and Sustainability. 9F. Bank's Performance .10G. Borrower Performance .10H. Assessment of Outcome .11I. Key Lessons Leared .11

Part II: Statistical Tables ........................................................ 13

Table 1: Summary of Assessments ..................................................... 14Table 2: Related Bank Loans/Credits ................................................. 16Table 3: Project Timetable ........................................................ 17Table 4: Loan Disbursements: Cumulative Estimated and Actual .... 18Table 5: Key Indicators for Project Implementation .......................... 19Table 6: Key Indicators for Project Operation ................................... 21Table 7: Studies Included in Project .................................................. 22Table 8A: Project Costs ....................................... 23Table 8B: Project Financing ......................................................... 24Table 9: Economic Costs and Benefits .............................................. 25Table 10: Status of Legal Covenants .................................................. 26Table 11: Compliance with Operational Manual Statements ............ 28Table 12: Bank Resources: Staff Inputs ........................................... 29Table 13: Bank Resources: Missions ............................................... 30

Appendices: ........................................................ 31

A. Map IBRD 21856

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

IMPLEMENTATION COMPLETION REPORTTHE INDEPENDENT STATE OF PAPUA NEW GUINEA

THIRD TELECOMMUNICATIONSPROJECT(LOAN N° 3154-PNG)

Preface

This is the Implementation Completion Report (ICR) for the ThirdTelecommunicationsProject in The Independent State of Papua New Guinea, forwhich Loan 31 54-PNG in the amount of US$ 17.2 million was approved on January 4,1990 and made effective on September 26, 1990.

The loan had a closing date of June 30, 1996. Final disbursementtook placeon November 6, 1996 at which time a balance of US$ 5,510,540.50 was canceled.Cofinancing for the Project was provided through suppliers' and export financing forthe procurement of telecommunications switching and transmission equipment.

The ICR was prepared by R. Peter Wright of the TelecommunicationsandInformatics Division (IENTI) and reviewed by Stuart Whitehead (EA3PI); PirouzHamidian-Rad (EA3PI); Richard A. Calkins, Chief, Papua New Guinea and PacificIslands Division (EA3PI); James Bond, Chief, Telecommunicationsand InformaticsDivision (IENTI); and Oscar de Bruyn Kops, Acting Operations Advisor (EA3DR).

Preparation of this ICR is based on material in the project file. The draftreport was reviewed with the Borrower, and despite the Bank's repeated requests for acontribution to the report, the borrower's participation was limited to the preparation offinancial tables to the ICR.

IMPLEMENTATION COMPLETION REPORT

THE INDEPENDENT STATE OF PAPUA NEW GUINEA

THIRD TELECOMMUNICATIONS PROJECT

LOAN No. 3154-PNG

Evaluation Summary

Background

1. The implementation of the Third Telecommunications Project in theIndependent State of Papua New Guinea, which was supported by IBRD Loan 3154-PNG in the amount of US$ 17.2 million, was under the supervision of theGovernment's Department of Finance (DOF)'. Provision was made to on-lend US$16.25 million to the Post and Telecommunications Corporation (PTC). PTC is a whollygovernment-owned corporation, established in 1982, with the exclusive right to provideall international and domestic telecommunications services in Papua New Guinea. PTCis also responsible for postal services, maritime radio facilities and radio frequencymanagement. The Loan was approved on January 4, 1990 and the Loan and ProjectAgreements were signed on June 29, 1990. The Loan became effective on September26, 1990, with the Closing Date for the Loan set for June 30, 1996.

Project Objectives and Description

2. The stated objectives of the project were to: (a) help the Government prepare andimplement appropriate sector policies, regulations and procedures; (b) improve PTC'sinstitutional efficiency through a training program; and (c) rehabilitate and expand existingtelecommunications facilities. The project was estimated to cost US$ 76 million equivalent(K 66.2 million), with a foreign cost of US$ 64.6 million at appraisal; including IBRDfinancing of US$ 17.2 million, suppliers' and export credits of US$ 16.4 million, and PTC'scontribution of US$ 42.4 million equivalent.

Effective September 1995, the Ministry of Finance and Planning was split - with a new Minister of Planningappointed and the former planning staff installed as the National Planning Office. This entity assumedresponsibility for relations with the World Bank through the Foreign Aid Management Division (formerly theOffice of International Development Assistance Division). Existing IBRD loans continued to be administeredthrough the Revenue, Aid and Debt Management Division of the Department of Finance.

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3. Project objectives were modified during implementation to provide funding forrehabilitation of telecommunications services in Rabaul following the volcanic eruptions ofSeptember 1994 in the Gazelle Peninsula on the Island of East New Britain. The Governmentof Papua New Guinea established the Gazelle Restoration Authority (GRA), and, with theconcurrence of the World Bank, reassigned funds, of US$ 25 million (K 30.0 million) fromfour existing IBRD loans - including an uncommitted US$ 4.0 million from the ThirdTelecommunications Project. An amendment to the Loan agreement to effect this change wassigned on March 23, 1995.

Sector Reform

4. The project was designed in 1989 when project objectives were consistent with thetraditional public utilities approach in practice at that time - infrastructure development withinstitutional development only as deemed necessary to remove identified organizational,management and operational constraints, and improve the Government institution responsiblefor overseeing telecommunications. The policy objectives did not foresee liberalization of thesector, including the introduction of competition. However, the Government and senior PTCmanagement began in 1995 a program to repeal existing telecommunications legislation andintroduce new legislation, which became effective January 1, 1997, creating Post PNG, TelikomPNG, and introducing a regulatory authority. The Bank had only a limited involvement in thisinitiative

5. An attempt to introduce competition in the telecommunications sector was made in May1994 by licensing a second operator for international and domestic telephony, including cellularwireless service. However, the process followed was subsequently deemed not to legal, nortransparent, and the second license was not issued. With the change in legislation in 1997, theintroduction of competition in the telecommunications sector to improve service availabilitywould now be possible.

Project Achievements and Results

6. Institutional Objectives. Within the framework of this project, the limitedinstitutional objectives for the Department of Finance and Planning (DFP), as envisagedat the time of appraisal, included: technical assistance, training of staff, and the purchaseof minicomputers to review tariffs and monitor PTC's performance and policyimprovements. During project implementation, only about 50% of technical assistanceand training for DFP was completed, with little impact on tariffs, improvement of anoversight program of PTC or sector policy. PTC institutional objectives included:training of national engineers and managers; increased commercial and customer-service orientation and responsiveness to subscribers by reorganizing operations;improvement of the management structure to address and eliminate weaknessesidentified in the Management Review; and the introduction of a computerizedManagement Information System. Of these, only the MIS and reorganization objectiveswere achieved, while the remaining objectives were only partly met. The unsatisfactoryoverall rating for the project reflects the importance of the institutional objectives and

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the very limited accomplishments in this area inspite of the major, increased share of theBank Loan which was targeted to it.

7. Staffproductivity. The telecommunications section of PTC improved itsproductivity during project implementation by reducing from 87 staff/i,000 workinglines in 1989 to 48 staff/1,000 working lines in 1995, achieving the target established atthe time of project approval (see Part II, Tables 5 and 6).

8. Operational targets for telecommunications activities. PTC increased itsswitching capacity from 43,518 lines in 1989 to 59,144 lines in 1995 (falling short of itsProject target of 74,500 lines), and the number of working lines increased from 30,993in 1989 to 43,398 by 1995 (achieving the target). The telephone density (working linesas percent of population) however, has only marginally improved from 0.9 in 1988 toabout 1.3 in 1995, which is still very low compared to other island countries in theregion. PTC facilities are concentrated in urban areas, with little service to rural areasother than those provided by private concerns (e.g. mining firms, missions) using high-frequency (HF) radio systems (more than 3000), with only a few of these connected toPTC's network. Consolidation of the HF and Coastal radio systems which wouldimprove the rural service was not achieved.

9. Implementation schedule. Actual procurement of all equipment, except the HFand coastal radio systems consolidation, occurred and was available for servicerelatively on schedule. The funding for the six sub-projects, which were to be financedunder the project, was mobilized by PTC through suppliers' credits because the PTCfound the Bank's ICB process inappropriate in this case (see Part 1, Paragraphs 24). Theobjectives of expansion and modernization of the network, on balance, were met (seePart II, Table 5). Two phases out of three of the GRA restoration program werecompleted.

10. Objectives of service quality. The expansion was accompanied by a renovationof the outside plant network in Port Moresby. As a result, the quality of serviceimproved, as faults/100 working lines per month declined from more than 15 in 1992 to7.5 in 1995. The project target to establish a program to measure and improve faultclearance to a period of two days was underway and showed improvement until 1994,then it was radically reduced following the Rabaul disaster.

Implementation Experience and Results

11. The objectives of the project were not fully achieved. The destruction caused bythe 1994 Rabaul volcanic eruptions in the Gazelle Peninsula necessitated a reallocationof the uncommitted loan funds. This resulted in the postponement (and ultimatecancellation) of a part of the institutional development activities, which had fallenbehind as a result of PTC's lack of interest in the reforms.

12. Government performance at the preparation stage is rated satisfactory, but itdeteriorated shortly after project implementation began. A deteriorating commitment to

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the project, mainly caused by the turn over of PTC management, and PTC's reluctanceto follow Bank's ICB procurement procedures, resulted in major delays inimplementing the project and the Project Program Office's (PPO) failing to monitorcompliance with project convenants. The institutional and physical development targetswere also missed. As a result, the project implementation and compliance withconvenants are rated as deficient.

13. Bank performance in the preparation and approval phase is rated satisfactory.Bank supervision was, however, fragmented and deficient due primarily to an unusuallyhigh turnover of task managers (five task managers in six years), leading to a lack ofcontinuous and consistent support to the Borrower.

Project Benefits and Sustainability

14. Benefits resulting from or associated with the project include: (a) an increase inthe quality and coverage of telecommunications services; and (b) implementation of anumber of the institutional development activities in PTC which improved commercialoperations and customer orientation in service provision. .

15. The organizational split between post and telecommunications activities and thecreation of the regulatory entity in 1996, while not an objective of the project as such,will provide the foundation for further commercialization and a climate for privatizationof the sector.

16. Although the project's physical achievements and the legislative change notedabove provide favorable conditions for project sustainability, overall service coverageremains low and major issues related to debt assumption and tariff reform remainoutstanding (see Part I, paragraph 33) leading to a rating of uncertain for sustainability.The project is, therefore judged unsatisfactory in achieving its development objectivesand in its implementation.

Key Findings and Lessons Learned

17. The key lessons learned are as follows:

(a) Project implementation and the achievement of its development objectives arecrucially dependent on continuity of staff on both the Borrower and Bank's sidesas well as the frequency of Bank supervision visits and consultations.

(b) The Borrower's commitment to attaining project objectives and meeting Loancovenants must be exercised through vesting a PPO with adequate authority andresources to oversee and take action as required with all project entities.

(c) The Bank must educate the Borrower on the requirements of the legal covenantsand the implication of non-compliance at the time of project preparation, and must

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play an active role in assisting the Borrower in resolving problems in meeting suchcovenants in a timely fashion.

(d) The Bank's procurement guidelines requiring ICB for the procurement oftelecommunications equipment may be inappropriate in certain situations -typifiedby a small telecommunications entity, which is concerned with multipletechnology compatibility, additional training for a new type of equipment, andongoing operation and maintenance costs, rather than solely minimizing initialcapital costs. The appropriate alternative may be to selectively structure thephysical objectives to permit more direct purchases.

(e) If the Bank wishes to play an active role in assisting the Borrower in evolvingnational policy relative to the telecommunications sector, it must provide in atimely manner relevant information on changes in sector structure and financingoccurring internationally and in the Bank's approach to development assistancefor the sector, and be prepared to commit the required resources for technicalassistance if so requested by the Borrower.

IMPLEMENTATION COMPLETION REPORTTHE INDEPENDENT STATE OF PAPUA NEW GUINEA

THIRD TELECOMMUNICATIONS PROJECTLOAN No. 3154-PNG

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Background and Project Objectives

1. The implementation of the Third Telecommunications Project in the IndependentState of Papua New Guinea, which was supported by IBRD Loan 3154-PNG in the amountof US$ 17.2 million, was under the supervision of the Government's Department ofFinance (DOF)'. Provision was made to on-lend US$ 16.25 million to the Post andTelecommunications Corporation (PTC). PTC is a wholly government-owned corporation,established in 1982, with the exclusive right to provide all international and domestictelecommunications services in Papua New Guinea. PTC is also responsible for postalservices, maritime radio facilities and radio frequency management. The Loan and ProjectAgreements were signed on June 29, 1990, became effective September 26, 1990, and theClosing Date for the Loan was June 30, 1996.

2. Two previous telecommunications projects, IBRD Loan 546-PNG (1968-1972) andLoan 852-PNG (1973-1977) with a total value of US$ 17.0 million, were for theconstruction of telecommunications infrastructure, with limited or no institutionaldevelopment objectives. Project Completion Reports (PCR) and Project PerformanceAudit Reports (PPAR) considered that both projects had successfully achieved theirobjectives of building a telecommunications network in PNG, under difficult geographicalconditions. Changing sector priorities, following independence of Papua New Guinea in1975, led to the suspension of Bank involvement in the telecommunications sector. Theevident need to increase the telecommunication sector's efficiency through policy reformand institution building, persuaded the Government in 1988 that there was a need to renewsupport to the sector.

3. The 1978 PCR for the Second Telecommunications Project noted emerginginstitutional and development issues, such as the urgency to expand into rural areas andextend services to district and subdistrict centers, staff development needs resulting fromthe process of localization, and the necessity to reduce operating costs and enhancingefficiency. These concerns were, however, inadequately addressed. In 1987, in responseto a Government request, the Bank prepared a Telecommunications Policy Options paper,

Effective September 1995, the Ministry of Finance and Planning was split - with a new Minister of Planningappointed and the former planning staff installed as the National Planning Office. This entity assumedresponsibility for relations with the World Bank through the Foreign aid management division (formerly the Officeof International development division). Existing IBRD loans continued to be administered through the Revenue,aid and debt division of the Department of finance.

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and later funded, through a Project Preparation Facility (PPF), an independent assessmentof PTC, the 'Network Development and Management Review 1988-1993'. The reviewspecifically identified four major institutional constraints: (a) vertical integration of PTC'soperations (including motor vehicle, building and machine maintenance functions, andemployee housing that should be outsourced); (b) organizational problems (managingdiverse elements of Posts, Telecommunications and common support functions); (c) lackof skilled indigenous staff; and (d) the high turnover of expatriate staff.

4. During the 1989 appraisal for the Third Telecommunications Project, it was foundthat the telecommunications sector in Papua New Guinea was limited, with only 0.9telephone lines per 100 population. Telephone density was very low compared to otherisland countries in the region (e.g. Fiji 4.7 and Western Samoa 4.0) and was comparable tolevels of service in other countries with poorly developed telecommunicationsinfrastructure (Philippines 1.3 and Sri Lanka 0.6). Furthermore, existing facilities of31,000 lines were concentrated in urban areas - Port Moresby and Lae had about 8% of thecountry's population but about 50% of the total lines in service. In rural areas where notelephone service was available, many businesses (e.g. mining and forestry), governmentoffices and missions operated private high-frequency (HF) radio systems (over 3,000) ormicrowave networks, only a few of these, however, were connected to PTC's network.Most rural areas had no access to telecommunications of any kind.

5. The Project was developed to address the identified institutional constraints and toassist the Government's strategy for the telecommunications sector, with objectivesdefined in its 1985 Telecommunications Policy Paper, which was used as a basis tostrengthen DFP, to exercise oversight of PTC, expand access to service, improve thequality of service to subscribers, and reduce PTC's operating costs. Specific projectobjectives were to: (a) help the Government prepare and implement appropriate sectorpolicies, regulations and procedures; (b) improve PTC's institutional efficiency through atraining program; and (c) rehabilitate and expand existing telecommunications facilities.

6. Project objectives were modified during implementation to provide infrastructurefunding for rehabilitation of telecommunications services after a natural disaster. As aresult of damage to the District of Rabaul, in the region of the Gazelle Peninsula on theIsland of East New Britain, following the volcanic eruption of September 1994, theGovernment of Papua New Guinea established the Gazelle Restoration Authority (GRA)and, with the concurrence of and assistance from the World Bank, reassigned funds of US$25 million (K 30.0 million) from four existing IBRD loans - including an uncommittedUS$ 4.0 million from the Third Telecommunications Project to be reserved fortelecommunications restoration costs An amendment to the Loan agreement to effect thischange was signed on March 23, 1995.

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B. Sector Reform, Regulation and Privatization

7. The project was designed in 1989 in a monopolistic, public sector ownershipenvironment. The project objectives were consistent with the traditional public utilitiesapproach in practice at the time - primarily infrastructure development with only suchinstitutional development as deemed necessary to remove identified organizational,management and operational constraints, and to improve the Government institutionresponsible for overseeing telecommunications. The policy objectives, at the time ofappraisal, did not foresee liberalization of the sector, the introduction of competition, oractive participation of the private sector in development and operations. However,beginning in 1993, a constructive dialogue occurred between the Bank, the staff of theDepartment of Finance and Planning (DFP) and senior management of PTC that led theGovemment to reconsider its sector policy in line with the worldwide trend towardintroducing competition and privatization.

8. The telecommunications sector in Papua New Guinea has been regulated since1982 by the Post & Telecommunications Act, the Radio Communications Act, and the Post& Telecommunications Corporations Act. Although the sectoral policy reforms were notformally part of the project, starting in 1995, Government initiated such reforms whichincluded, the repeal of the existing legislation and replacing it with new legislationapproved December 24, 1996-the Post PNG Act, the Telikom PNG Act, the PNGTelecommunications Authority (PANGTEL) Act, and a new Radio Communications Act.Separation of Post and Telikom under the Companies Act, and the establishment of aregulatory authority. In an attempt to introduce competition in the telecommunicationssector, the Minister for Information and Communications issued a second license forinternational and domestic telephony, including cellular wireless service, to a cartel offoreign and local investors, but without due regards to legal procedures and transparency2 .This was, however, challenged in court, resulting in the licensee being declared void. Withthe recent change in legislation, the introduction of a second operator in the sector will bepossible and would help improve service availability.

C. Achievement of Project Objectives.

Institutional Development

9. DFP institutional objectives. Within the project framework, DFP was to receivetechnical assistance and logistical support to be able to review tariffs imposed by PTC andmonitor PTC's performance, including policy reforms. Consultants were to be engaged inthe initial years of the Project to assist DFP in developing organizational and performancegoals for the operating entity. Unfortunately this did not occur (see tariffs, paragraph 19).

2 The Minister, apparently realizing that his ministerial issuance of the license may not be legal, as Chairman of theBoard of PTC, suspended the senior management and convened a special meeting of the Board of Directors, withonly selected allied associates notified, the sole agenda item to retroactively ratify his issuance of the licensethrough PTC. The legality of the meeting was challenged by other absent Directors, suspended PTC managers, andthe PTC Workers' Union. The meeting was decreed to be illegally convened, so the action to issue the license wassuspended.

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Training of staff over the seven-year project cycle was minimal, and the purchase ofcomputers never occurred, resulting in little or no implementation of the 1985Telecommunications Policy Paper recommendations. The DFP's oversight capability ofPTC operations also remained deficient.

10. PTC institutional objectives. The project's institutional objectives for PTCincluded: training of national engineers and managers; enhancing commercial andcustomer-service orientation and responsiveness to subscribers by reorganizing itsoperations to improve the management effectiveness by eliminating weaknesses identifiedin the Management Review; and the introduction of a computerized ManagementInformation system (MIS). This component of the loan amounted to US$ 5.4 million. Theresults, as discussed below, were, however, disappointing.

11. PTC reorganization. The Project objective to reorganize PTC's operationsoccurred initially in the Post reorganization in 1993 followed by the Telikomreorganization into regional districts in 1994. The latter introduced fiscal and operationalaccountability under four General Managers reporting to the Managing Director.

12. PTC management. Management improvements were to be achieved under theProject through hiring and training of indigenous staff. On-the-job training of PNGnationals through postings to more developed telephone administrations, and overseastraining of managers provided some growth in local resources and their competence.However, the impact of the training program was too limited and the majority of theplanning, engineering, and financial positions continued to be occupied by expatriate staff.

13. Management information systems. The Project objectives in introducing acomputerized management information system were to: (a) monitor key performanceindicators; (b) provide a new telecommunications data base (service orders, cable facilities,fault repairs etc.); (c) improve financial and accounting systems; (d) create a personnel database to control staff operations; and (e) train MIS users to control PTC operationssuccessfully. These objectives were only partially achieved. The introduction of afinancial and accounting system at the early stages of the project was successful. Thelarger computer system to provide a new telecommunications data base was delayed inprocurement, and not initially well designed, leading to a long delay in initializing systemturn-up and poor performance in providing reasonable on-line response to district inquiries,necessitating further enhancements and subsequent investment. The resulting cost overrunwas US$ 3.1 million (+125%) by 1994. The allocation for MIS equipment was adjusted inthe amendment to the Loan Agreement of March 1995. At the time of loan closing,computer operations for the financial and accounting systems, overlaid with personnel databases, was leading PTC to consider replacement of this MIS component in the next fewyears. Implementation of that component was therefore not satisfactory.

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PTC's operations

14. Staffproductivity. The telecommunications component of PTC improved itsproductivity during project implementation by reducing its staff ratio from 87 staff/1,000working lines in 1989 to 48 staff/1,000 working lines in 1995, thereby meeting theappraisal target.

15. Operational targets. PTC's target at the time of project preparation was to increasethe switching capacity from 43,518 lines in 1989 to 74,500 lines by 1995 (an increase of30,982 lines), and increase the working lines from 30,993 in 1989 to 38,500 by 1993. Thelargest increase in exchange capacity (25,236 lines or 81.6%) was to occur in 1991/1992.There was little increase in exchange capacity prior to 1993, and the total increase incapacity over the seven year (1989 to 1995) period was only 15,626 lines (50% of theprogram target). Lines in service increased to 38,807 by 1993, achieving the target.Further improvement in providing new services occurred between 1993 and 1995, with4,591 subscribers added, mainly in urban centers.

Financial Objectives

16. Financial situation. Project targets were met in most years. PTC's operating ratio(operating expenses to operating revenues) was not to exceed 85% in fiscal years 1990through 1992, and not to exceed 80% following 1992. These targets were achieved in theyears 1992 through 1994. The rate of return on net fixed assets target for the project was tobe at least 13%. This target was significantly exceeded in the period 1992 through 1994.Both indicators, however, fell below target levels in 1995, after expenditures to rehabilitatethe telecommunications network as well as the loss of revenues, following the Rabaulnatural disaster. Subsequently the rate of return rose again in 1996. The debt coverageratio remained consistently above target throughout the project period. PTC's financialsituation, judged by the indicators, is satisfactory, although revenue per working line(RWL) slightly declined from K 3,288 in 1991 to K 3,253 in 1995 - but remains very highby international standards. Total expenses per working line significantly exceeded the K2,800 target only in 1992, both as a result of high staff and operating and maintenancecosts, and returned later to normal.

17. Accounting system. The reliability and availability of financial and accountinginformation has improved through the introduction of a computerized system early in theproject. The capacity of the accounting system is limited, therefore restricting theavailability of financial information to senior management through direct computer access.This has inhibited fiscal accountability under the new organizational structure. The formalseparation of post and telecommunications financial and accounting records and systemshad not been completed by the closing date for the project. The reorganization of theaccounting department into two new units remains incomplete since the required additionalqualified staff and a new computer system have not been obtained.

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18. Annual audit requirements. The provision of PTC's audited financial statementswas in full compliance with the provisions of the Loan agreement. The provision ofaudited financial statements for the special account and SOE's was not in compliance withthe Loan agreement for the years 1991 through 1995, which led to the suspension ofdisbursement under SOEs, effective January 1995 (see audit and disbursements,paragraph 26).

19. Tariffs. Historically, tariff adjustments had been made on the basis of passing oncosts and on achieving the rate of return targets for PTC. An institutional objective for theproject included engaging a Telecommunications policy advisor to work with DFP, whoseprimary role would be to initiate two tariff reviews (in 1990 and 1993) and to introduce anew policy on tariff setting for the Government. No action had been taken by DFP on thisby 1993, so the Bank attempted to reinstitute the objective by having PTC assume thisresponsibility in 1994. The new Managing Director of PTC, however, engaged theTelecommunications policy advisor and utilized the resource to initiate legislative changesin order to split post and telecommunications, which was completed in January 1997.Furthermore, the GRA rehabilitation work in 1994/95 diverted DFP's attention from thisobjective. Consequently, engaging a consultant for tariff reform had not been realized bythe closing date of the loan.

Physical Objectives

20. Implementation schedule. The IBRD component of the project was to: (a)rehabilitate the existing local switch network and cable distribution network for about27,000 existing customers; (b) expand the local telephone service by the addition of 7,000lines and associate cable distribution network; (c) build new exchanges in Boroko and Lae;(d) replace and expand the long distance transmission facilities through the addition of 20new digital microwave transmission systems; (e) replace the existing satellite earth stationand expand the international telephone exchange; (f) replace the telex exchange and installa packet-switching data exchange; and (g) replace the existing high frequency (HF) andcoastal radio systems and consolidate them into two networks. The IBRD financing forthis component was appraised at US$ 11.8 million. Procurement was to occur in 1990-91,with installation ready-for-service progressively from 1992 to 1995. Actual procurementof equipment, except the HF and coastal radio systems consolidation, was available forservice almost on schedule. However the funding of the six sub-projects was financed byPTC from suppliers' credits, rather than from the Bank loan as had been envisaged (seeparagraph 24). The HF and coastal radio system consolidation had not been tendered bythe time the project closed.

21. Gazelle Restoration Authority activity. The telecommunications restorationprogram for GRA encompassed three phases: phase 1 included activities required forrestoration of services in all areas except Rabaul and Toleap in a one-month period; phase2 was aimed at restoring services to Rabaul and other locations in the Gazelle Peninsulawhich had telecommunications services prior to the volcanic eruptions, to be completedwithin six months; and phase 3 included the development of a long-term network

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infrastructure for the New Guinea Islands Region to avoid blackout of services in the eventof future volcanic eruptions - a two-year activity. Phases I and 2 were completed on time,but phase 3 only started when the project closed-21 months after the eruptions.Therefore, only US$ 2.04 million (out of the US$ 4 million allocated for this component)was disbursed under the loan.

22. Objectives of service quality. The quality of service has improved during projectimplementation. Faults/100 working lines per month have declined from more than 15 in1992 to 7.5 faults in 1995. The major contributor was the physical renovation andexpansion of the outside plant network in Port Moresby. The project target to establish aprogram to measure and improve fault clearance to a period of two days, 90% of the timein urban centers, 50% in rural areas, was only partially realized in 1993. A combinedurban/rural result of 51 % was reported for 1993. In 1994, service quality measurement andreporting was revised radically, with faults cleared within 30 days being the only reportedcriteria, and this performance was achieved at only 80% of the time by the end of 1995.

Cost of Financing

23. The cost of the project was estimated at appraisal to be US$ 76 million (K 66.2million), with a foreign cost of US$ 64.6 million; IBRD financing was foreseen at US$17.2 million, suppliers' and export credits at US$ 16.4 million, and PTC's contribution atUS$ 42.4 million. The actual cost of the project is estimated to be US$ 74.6 million (K73.3 million)3, with US$ 11.69 million (68% of the approved loan) disbursed by IBRD -US$ 9.65 million for institutional development (a US$ 4.25 million increase from theappraised project, decided at the time of the Loan Amendment, in 1995, and allocated tothe implementation of the MIS, (see paragraph 31)) and US$ 2.04 million to meet physicalobjectives (a US$ 9.76 million decrease), with a substantial increase in suppliers' credit toreplace Bank financing for network investment components (see paragraph 20).

Procurement

24. The use of the Loan funds to meet physical investment objectives of the project wasmuch more limited than had been foreseen, due mainly to the reluctance of PTC's seniormanagement to follow World Bank's ICB procurement guidelines to purchasetelecommunications equipment. The objection was related to PTC's operations approach,which favors relying on a limited number of technology suppliers to avoid multipletechnology interface problems, minimize new equipment training requirements, andminimize ongoing operations and maintenance costs; rather than buying from new anddifferent equipment suppliers through ICB to optimizing capital costs. These reservationsagainst the Bank's ICB procurement guidelines were known and discussed at projectappraisal, and were considered in allocating procurement packages among the financingsources: PTC, suppliers' and export credit funding, and IBRD. However, when additionalsuppliers' credit became available to PTC during the project, IBRD financing was ignored

3 If the costs for the restoration of the Gazelle peninsula are included, the estimated cost would exceed K 76 million.

8

for the procurement of telecommunications equipment, except for the GRA restorationactivity. With hindsight, even though a Borrower may prefer competitive selectionthrough negotiated offers, the use of the ICB procurement method should be discussedmore at appraisal to resolve Borrower commitment to utilizing the Bank's financing.

25. Procurement of consultants and computer equipment followed World Bankprocurement guidelines. Training was sole source.

Audits and Disbursements

26. The SOE and special account audit report for 1991 was only received January19944, after much insistence from the Bank. Audited reports for 1992 and 1993 were notprovided on time despite repeated requests; the Bank, therefore, suspended disbursementby SOEs in January 1995 (see audits, paragraph 18). The issue was only resolved whenthe April 1996 Bank Mission addressed this failure to meet the terms and conditions of theLoan agreement: the documentation of invoices and payments to satisfy the Office of theAuditor General (OAG) had not been produced by PTC for many transactions in 1992,delaying audit of the 1992 accounts as well as the subsequent financial reports, submittedby PTC in April of the following years. Once the Bank identified the cause of theblockage, and with special effort by PTC accounting and OAG, the 1992, 1993 and 1994financial reports were audited and submitted to the Bank, and disbursement by SOEsreinstated in September 1996, permitting processing of two final withdrawal applicationsfor phase 1 and 2 Rabaul foreign restoration expenditures, by the end of October 1996.

D. Major Factors Affecting the Project and Implementation Record

27. Factors not generally subject to Government control. The 1994 Rabaul volcaniceruption and the subsequent destruction to the Gazelle Peninsula necessitated theredirection of existing IBRD loans, leading to a modified infrastructure expenditure for theThird Telecommunications Project.

28. Factors generally subject to Government control. Adequate oversight, control andresponsibility to exercise corrective action by the Project Program Office (PPO) ofGovernment departments and corporations utilizing IBRD loans funds was lacking.Adequate procedures to monitor adherence to the conditions of the Loan Agreement, inparticular to the financial reporting covenants, were not in place. These factorssignificantly weakened the case for extending the loan closing date5 (see paragraph 38).

29. Periodic evaluation of institutional development activities by PPO was inadequateto ensure timely and effective project implementation. Furthermore, several keyinstitutional development objectives were not achieved (see DFP institutional objectives,

4 By the terms of the Loan agreement, the audited reports are due nine months after close of the fiscal year.

5 For Loan 31 54-PNG other contributing factors in not granting the Government's request to extend the closing dateinclude: loan funds were not used to procure telecommunications equipment as stated in the Project agreement;and lack of a reasonable Action Plan for the period of extension.

9

paragraph 9), as a result an attempt to implement some aspects of the institutionaldevelopment program in the last four months of the project life did not bear fruit.

30. Factors generally subject to Implementing Agency control. Changes in Borrower'sphysical development targets and the sources of financing were to be included in theannual reviews with the Bank and clearly documented. This was not done properly.Furthermore, it was PTC's decision to reject ICB procurement guidelines for the purchaseof project telecommunications equipment and instead resort to other sources of financing.In 1995, PTC requested the Bank for a reallocation of US$3.1 million of the loan for theMIS component. The reallocation of US$ 4.0 million for GRA rehabilitation program in1995 reduce the urgency to cancel the unused Loan funds; however, adequate funding wasstill available for PTC to procure the HF and coastal radio system. Furthermore, with achange in PTC management on two occasions, the Borrower's commitment to the projectand the achievement of its objectives wavered.

E. Project Benefits and Sustainability

31. Project Benefits. The benefits of the project, considered irrespective of itsfinancing, are related to the improvement of services provided to the subscribers and theirimpact on the economic activity. Specifically, they are: (a) an increase in the quality andcoverage of telecommunications services, as explained above, primarily in urban centers;and (b) implementation of institutional development activities in PTC. The economic rateof return is calculated at 21 percent (see Part II, Table 9). Although it is less than the 24percent projected at appraisal, it is considered satisfactory, considering the economicimpact and postponement to achievement of the physical objectives incurred by the Rabauldisaster.

32. Although a number of the project's physical objectives for the rehabilitation andexpansion of telecommunications services were achieved, service coverage remains low,and overall, institutional achievements under the project have been modest. Thus theProject is considered unsatisfactory in achieving its development objectives.

33. Sustainability. The organizational split between post and telecommunicationsactivities, although not an objective of the project, can provide a basis for furthercommercialization and privatization. However, two issues remain that affect the viabilityof the telecommunications sector in PNG: (1) whether the Government or Telikom PNGshall assume the debt incurred for constructing the new headquarters building (TelikomRumana) for PTC in 1994, as the burden of loan repayment will adversely impact thefinancial performance of the restructured Telikom PNG; and (2) the need for tariff reform(see tariffs, paragraph 19). The latter issue has many implications, as it would: (a) satisfythe Government's stated strategy of reducing telecommunications costs; (b) assureadequate revenues from local services and, at the same time, provide a stimulus to reduceoperating costs for any telecommunications entity; and (c) establish a standard method forrate adjustment that would directly influence the issue of any future licenses. These issues

lo

require Government's and Telikom PNG's urgent attention Therefore, on balance, theabove uncertainties make the project sustainability uncertain.

F. Bank's Performance

34. Preparation and appraisal. The Government expressed concern to the Bank in1987 about institutional and developmental issues in the telecommunications sector thatneeded to be resolved. The Bank assisted the Government through a PPF to obtain anindependent assessment of PTC operations (see paragraph 3). The project wassubsequently initiated to include both physical and institutional development for the sector.Appraisal and negotiations took place in 1989, in a compressed interval, with Boardapproval early in 1990. The Bank's preparation and appraisal of the project are ratedsatisfactory.

35. Supervision. Regular supervision took place with two visits per year in 1992 and1993, one in 1994, no visit in 1995 and one in 1996. When the project closed, it was withits fifth task manager; the two task managers who had supervised the project during itscritical period of change-from 1992 through mid- 1995-had left the Bank. Contentiousissues, such as changes in and lack of action towards achieving the project targets andobjectives, were identified in mission reports, but follow up actions from Washington hadlittle impact in resolving the issues. PTC's reluctance to follow IBRD procurementprocedures resulted in a substantial portion of the Loan funds remaining unutilized. Thisled the Bank to consider recommending cancellation of a portion of the Loan in 1994. Areallocation of resources to the MIS component as well as to GRA rehabilitation programin November 1994, however, provided an alternative use of funds (see paragraph 30). TheBank's supervision of the project is rated deficient.

G. Borrower's Performance

36. DFP was the Borrower, with PTC being the principal implementing agency of thefunds (US$ 17.20 million allocated, US$ 11.69 million disbursed). Cooperation betweenDFP and the Bank's project team was cursory, and rarely led to resolution of institutionalobjective issues, and matters pertaining to PTC. Cooperation between PTC and the Bankwas not fully effective in the latter years of the project life, with PTC's senior managementgiving little attention to Bank missions. The advent of the Rabaul disaster in September1994 presented the PPO and PTC with a valid motive to postpone action on projectobjectives for over one year.

37. Compliance with Loan Covenants. The status of compliance with all Loancovenants is shown in Table 10. The Borrower's compliance, with Loan convenants wasdeficient: the majority of project covenants were complied with, but compliance with theLoan's financial covenants was most unsatisfactory. Provision of audited financialstatements by PTC was achieved (see annual audit requirements, paragraph 18), but

II

audited reports for expenditures were consistently delinquent6 (see audits anddisbursements, paragraph 26). PTC did introduce a program to improve operationalefficiencies and improve earnings that reached its peak in 1993 (see financial situation,paragraph 16). The unfortunate natural disaster in the Gazelle Peninsula disrupted thisprogramn and the results for 1994 and 1995 show a significant decline to pre-Project levels.In 1996, Telikom PNG management instituted a new program to improve financial results.

38. Based on the Borrower's unsatisfactory implementation performance ofinstitutional objectives, a protracted delay in submission of the audited project accounts,and the delay in procuring telecommunications equipment both for the HF and coastalradio system and the GRA phase 3 component, the Bank denied the Government's requestfor an extension of the Loan closing date by one year to June 30, 1997 (see paragraph 28).

H. Assessment of Outcome

39. PTC achieved many service improvement and operational efficiency targets,although it utilized little of the Bank's financing for procurement of telecommunicationsequipment. Legal covenants were partially complied with, to the degree that they were inline with the principal objectives of the loan. However, the introduction of tariff reform andPTC oversight procedures by the Government were not realized as envisioned duringproject appraisal. Measure to improve the environment for the sector have taken placeoutside of the project. Overall, the implementation and outcome of the project areconsidered as unsatisfactory.

I. Key Lessons Learned

40. The key lessons learned are as follows:

(a) Project implementation and the achievement of its development objectives arecrucially dependent on continuity of staff on both the Borrower and Bank's sides aswell as the frequency of Bank supervision visits and consultations.

(b) The Borrower's commitment to attaining project objectives and meeting Loancovenants must be exercised through vesting a PPO with adequate authority andresources to oversee and take action as required with all project entities.

(c) The Bank must educate the Borrower on the requirements of the legal covenants andthe implication of non-compliance at the time of proj ect preparation, and must play anactive role in assisting the Boirower in resolving problems in meeting such covenantsin a timely fashion.

6 The Government utilizes the Office of the Auditor General (OAG) to audit reports of Government departments andcorporations. Unfortunately, OAG is required to suspend audits on corporate financial statements and reports onexpenditures as required under Loan agreements for the period April through August annually in order to auditGovernment reports due before Parliament by September. It is not a practice to contract private sector auditors asthe principal Government department or corporation is expected to bare such cost. The result is often delayed auditreports for financial statements and accounts.

12

(d) The Bank's procurement guidelines requiring ICB for the procurement oftelecommunications equipment may be inappropriate in certain situations -typified bya small telecommunications entity, which is concerned with multiple technologycompatibility, additional training for a new type of equipment, and ongoingoperation and maintenance costs, rather than solely minimizing initial capital costs.The appropriate alternative may be to selectively structure the physical objectives topermit more direct purchases.

(e) If the Bank wishes to play an active role in assisting the Borrower in evolvingnational policy relative to the telecommunications sector, it must provide in atimely manner relevant information on changes in sector structure and financingoccurring internationally and in the Bank's approach to development assistance forthe sector, and be prepared to commit the required resources for technical assistanceif so requested by the Borrower.

13

IMPLEMENTATION COMPLETION REPORTINDEPENDENT STATE OF PAPUA NEW GUINEA

TELECOMMUNICATIONS PROJECT(LOAN NO. 3154-PNG)

Part II: Statistical Tables

Table 1: Summary of AssessmentTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 1 1: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

Appendices

Appendix A -IBRD Map No. IBRD 21856

14

Table 1: Summary of Assessments

A. Achievement of objectives Substantial Partial Negligible Not applicable

Macro policies [1 [1-

Sector policies E EFinancial objectives LI [E] FI 0

Institutional development U [2i3 II lPhysical objectives 0 53 O

Poverty reduction D [

Gender issues I Li L EOther social objectives D L a Environmental objectives =N ] LI [

Public sector management [] [x] QPrivate sector development I II 0I IOther (specify) LI FE2

B. Project sustainability Likely Unlikely Uncertain

(1') ($) (1)

15

HighlyC. Bank performance satisfactory Satisfactory Deficient

(V) (v') (/)

Identification ax=C

Preparation assistance I xEa

Appraisal [ xEa

Supervision ni a

HighlyD. Borrower performance satisfactory Satisfactory Deficient

(1') (/) (/)

Preparation E Ela

Implementation j E]

Covenant compliance El El [x

Operation (if applicable) L [

Highly HighlyE. Assessment of outcome satisfactory Satisfactory Unsatisfactory unsatisfactory

(/) El) El l

16

Table 2: Related Bank Loans/Credits

Loan title Purpose Year of Status

approval

Telecommunications Project To assist in: 1968 CompletedIB3RD Loan 546-PNG (a) development of local and long- 1972

distance telecommunicationsfacilities;

(b) provision of subscriber directdialing; and

(c) introduction of commercialaccounting standards.

Second T elecommunications To assist in development of local 1973 CompletedProject IBRD Loan 852-PNG telecommunicationsfacilities. 1977

Third telecommuinications To assist in: 1990 CompletedProject IBRD l,oan 3154-PNG

(a) expanding access to service; 1996

(b) improving the quality of serviceto subscribers; and

(c) reducing PTC's operating costs.

17

Table 3: Project Timetable

Steps in project cycle | Date planned Actual Date

Identification (Executive Project June 1989 June 20, 1989Summary)

Preparation - -

Appraisal June/July 1989 July/August 1989

Negotiations November 15, 1989 November 20-22. 1989

Letter of development policy (if lapplicable) l

Board presentation December 5, 1989 January 4, 1990

Signing June 29, 1990

Effectiveness September 26. 1990

Project completion June 30, 1996 June 30, 1996

Credit closing/final disbursement October 31. 1996 November 6, 1996

18

Table 4: Loan Disbursements: Cumulative Estimated and Actual

(US$ million)

Calendar years19/ 90 91 92 93 94 95 96

Appraisal estimate 1.9 10.8 15.6 16.6 17.0 17.2 17.2

Actual 1.54 2.47 3.16 6.38 9.26 11.26 11.69

Actual as % ofestimate 81 23 20 38 54 65 68 a/

a/ An amount of US$ 5.51 of the loan was cancelled in November 1996.

19

Table 5: Key Indicators for Project Implementation

1991 1992 1993 1994 1995 1996Annual targets or values at SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual

December 31 target target target target ta target

A. TELEPHONE

1. Exchange Capacity (000's) 43176 44930 52268 54992 74500 59144 62246

2. Lines in Operation (000's) * 34500 34654 36500 36406 38500 38807 42460 43398 46796

3. International CircuitsSatellite 74 95 213 223 232 379Submarine 167 217 226 226 221 246

4. National Trunk Exchanges 8 8 8 8 6 5

5. Exchange Fill (%) 80.2 84.3 74.2 77.2 73.4 74.9

B. OUALITY OF SERVICE

6. Average lines faulty % NA 15.3 10.0 15.4 7.5 1.9

7. Faults cleared %within 24 hours 27 NA 30 NA NA NAwithin 48 hours* 60 48 80 NA 90 51 NA NA NAwithin 7 days 82 NA 79 NA NA 75within 30 days 89 84 89.5 88 80 90

8. Call completion % *international outgoing 56 NA 59 58 62 60 55 NA 52international incoming NA 45 45 53 45 49

C. PRODUCTIVITY

8 Telecom Staff 1435 1626 1751 1809 1934 2111

9. StaiV1,000WrkngLines* 72 41 62 47 50 46 44 48 46

20

1991 1992 1993 1994 1995 1996

Annual targets or values at SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR ActualDecember 31 target target target target target target

D. FINANCIAL

10. Operating Ratio (%) * 83 87 82 85 81 77 80 78 78 87 84

11. Current Ratio 1.2 1.1 1.5 0.8 1.8 0.9 1.6 0.9 1.7 0.9 1.1

12. Rate of Return on average 13 12.4 13 16.2 15 22.2 16 17.2 18 9.8 17.4net fixed assets *

13. Debt Service Coverage 4.1 31.3 4.2 4.9 4.6 5.9 5.1 5.1 5.7 3.0 4.6

E. OPERATING INDICATORS

14. Revenue /DEL (K) 2866 3288 2950 3554 3037 3678 3127 3490 3221 3253 3435

15. Expense /DEL (K) 2811 2873 2826 3014 2828 2837 2827 2751 2833 2823 2880

Indicators contained in SAR

21

Table 6: Key Indicators for Project Operation

Annual values at December 31 1996 1997 1998 1999 2000

(actual)

A. FINANCIAL INDICATORS

1. Operating ratio (%) 84 89 85 82 79

2. Current ratio 1.1 NA NA NA NA

3. Rate of Return on average 17.4 7 8 10 13net fixed assets

4. Debt Service Coverage 4.6 2.0 2.5 3.2 4.4

5. Revenue per Working Line * 3435 2940 3000 3000 3000

6. Expense per Working Line * 2880 2609 2570 2460 2370

B. FINANCIAL RESULTS Kms

7. Capital Expenditure 21 73 49 37 31

8. Total Telecom Revenues 155 141 154 167 181

9. Total Telecom Expenses 130 126 132 137 143

10. Net Profit 37 15 22 29 38

* Working line average in service for the year

22

Table 7: Studies included in Project

Study Purpose as defined at appraisal Status Impact of study

I .Tariffs A tariffeconomic advisor would review Studywas prepared GRA rehabilitationeffortdivertedPTC tariff proposals in 1990 and 1993 and in 1990, but no attention from this objectivewould analyze its structure at three-year action taken norintervals follow-up study.

2. Managementinformation Planned MIS would include a customer Study completed Introductionof a financial,system (MIS) records data base, cable/plant records, an and implementation accounting and personnel records

order processing system, a billing system, a completed. system was successful, but will needfinancial system, personnel records systems, to be replaced with larger capacitypostal operation systems, inventory system. Records data based and ordermanagement systems and support service processing system introduced, butsystems with significant cost overrun.

brouwerA:\TABLE7.DOCJune 13,1997 12:07 PM

23

Table 8A: Project costs

Item Appraisal estimate Latest estimate

(US$M) (US$M)

Physical development

1. Exchanges 16.1 16

2. Cable plant 7.2 4

3. Subscriber terminal equipment 7.5 about5

4. Long distance transmission equipment 8.2 15

5. Internationaltelephone exchange and 13.9 19satellite earth station

6. Air conditioning, power supply and test 5.3 about 3equipment

7. Data and telex exchanges 6.6 3.7

8. Radio-telephoneand maritime service 4.3 0

Subtotal 69.1 65.7 (IBRD 2)

Policy and Institutional ImRrovement

1. Technical assistance 1.7 2.1

2. Training 1.8 2.0

3. Management information system 3.4 6.9

Subtotal 6.9 11 (IBRD.9.7)

TOTAL 76.0 estimated over 76

24

Table 8B: Project financing

Item Appraisal estimate Actual financing

(US$M) (US$M)

1. IBRD 17.2 11.69

2. Suppliers and Export Credit 16.4 about 37

3. PTC 42.4 over 27

TOTAL 76.0 estimated over 76

25

Table 9: Economic costs and benefits

Million Program Revenues Operating Benefit Total costs1991 K cost from new cost of new from new and benefits

lines lines and lines of themaintenance project

1990 5.7 -5.71991 24.7 6.9 4.0 2.9 -21.81992 30.4 12.8 7.5 5.4 -25.01993 5.7 20.7 12.1 8.6 2.91994 5.7 32.6 19.0 13.6 7.91995 35.8 20.9 15.0 15.01996 47.0 27.4 19.6 19.61997 47.0 31.0 16.0 16.01998 47.0 31.0 16.0 16.01999 47.0 31.0 16.0 16.02000 47.0 31.0 16.0 16.02001 47.0 31.0 16.0 16.02002 47.0 31.0 16.0 16.02003 47.0 31.0 16.0 16.02004 47.0 31.0 16.0 16.02005 47.0 31.0 16.0 16.02006 47.0 31.0 16.0 16.02007 47.0 31.0 16.0 16.02008 47.0 31.0 16.0 16.02009 47.0 31.0 16.0 16.02010 47.0 31.0 16.0 16.02011 47.0 31.0 16.0 16.02012 47.0 31.0 16.0 16.02013 47.0 31.0 16.0 16.0

Internal Economic Rate of Return (IRR): 21 percent

Revenues and operating costs only come from the 14,300 new lines, connected from1991 to 1996. Maintenance costs is added, as 5% of the total investment cost, from 1997 on.Prices are 1991 constant. The calculation excludes an estimate of the consumer surplus.

26

Table 10: Status of legal covenants

Project development objectives rating: U

Original RevisedCovenant Present fulfillment fulfillment Description of

Agreement Section Type status date date covenant Comments

Loan 3.01 A Utilization of CP Borrower to carry out part In partial compliance.project funds A of the project.

3.01 Implementation CP Borrower to cause PTC to In partial compliance.BCD perform in accordance with

provisions of Projectagreement, with relevantfunds.

3.02 Management CP Procurement of goods, Project agreementworks and consultants amended in Marchservices to be governed by 1995. In compliance.provisions of schedule ofProject agreement.

3.03 Utilization of C Obligations of General In compliance.project funds conditions in respect to

parts B and C of theproject.

3.04 Implementation C August Borrower to employ In compliance.31, 1990 consultants to assist in

carrying out part A of theproject

4.01 Accounts/audit C Borrower to keep accounts In compliance.for part A of the projectand furnish auditedaccounts within ninemonths after end of fiscalyear.

4.02 A Accounts/audit CP Borrower to keep accounts In partial compliance.for parts B and C of theproject and retain recordsfor at least one year aftersubmitting last auditedreport, and enable Bank'srepresentatives to examinesuch records.

4.02 B Accounts/audit NC Borrower to keep accounts Accounts for 1992,for parts B and C of the 1993 and 1994 wereproject and Special audited with muchaccount, and furnish delay, and submittedaudited accounts within in 1996, only afternine months after end of WB mission learntfiscal year. Should furnish what blocked theinformation on such procedure. The 1995accounts as required. accounts were never

provided..

27

Project 3.01 A Management C PTC to carry out its In compliance.operations in accordancewith sound professionalpractices.

3.01 B Monitoring CP PTC to out its operations In partial compliance.in accordance withindicators acceptable to theBank.

3.02 Management C PTC to maintain its plant In compliance.and equipment inaccordance withprofessional practices

3.03 Management C PTC to be insured against In compliance.risks, in accordance withappropriate practices.

4.01 Accoounts/audit C PTC to maintain financial In compliance.s records and fumishes

audited statements ninemonths after end of eachyear.

4.02 Financial CP PTC to achieve an annual Return was higherperformance rate of return on net fixed than target in 1992-

assets of not less than 13%. 94, lower in 1995 andhigher again in 1996.

4.03 Financial CP PTC to achieve an In compliance fromperformance operating ratio not more 1992 to 1994, but not

than 85% until 1992 and in 1995.than 80% in later years.

4.04 Financial C PTC not to incur any debt, The ratio was over 2performance if its debt coverage ratio is from 1991 through

less than 2. 1996.

Present status:

C = covenant complied withCD = complied with after delayCP = complied with partiallyNC = not complied with

28

Table 11: Compliance with operational manual statements

No significant lack of compliance with applicable Bank Operational ManualStatements (OD or OP/BP) was observed under the project.

29

Table 12: Bank resources: Staff inputs

Stage of project cycle Planned Actual

Weeks US$ a/ Weeks US$ bJ

Through appraisal 12 24,000 15 30,000

Appraisal to Board 10 20,000 10 20,000

Board to effectiveness 10 20,000 10 20,000

Supervision 39 78,000 38 95,000

Completion 10 20,000 10 27,000

TOTAL 81 162,000 80 192,000

a/ In FY89, at estimated average cost of US$ 2,000 per staff week.

b/ In FY95, at estimated average cost of US$ 2,700 per staff week.

30

Table 13: Bank resources: Missions

Performancerating /b

Stage of projectcycle Month/ Number Days in field Specializedstaff Implemen- Develop- Types ofyear of persons skills tation status ment problems

represented/a objectives

Before appraisal

Identification 6/89(Executive ProjectSummary)

Appraisal throughBoard approval

Appraisal mission 8/89 4 13 Eng., Econ.,FinA, Cons.

Board approval 12/89

Supervisionmission 1 5/90 2 7 Eng.,Econ.

Effectiveness 9/90

Other Supervision

Supervisionmission2 11/90 2 9 Eng., Econ. 2 2

Supervisionmission3 6/91 2 10 Eng., Econ. 2 2

Supervisionmission4 3/92 2 4 Eng., Econ 2 2

Supervisionmission5 9/92 1 3 Eng. 2 2

Supervisionmission6 5/93 1 5 Econ. 2 2

Supervisionmission 7 10/93 2 5 Econ., FinA S S

Supervisionmission8 11/94 3 5 Eng., Econ., S SFinA

Supervisionmission9 4/96 2 4 Eng., FinA S S No audit ofSpecialacccounts hadbeen submittedsince 1992

Closure mission 9/96 1 3 Eng. S S

/a Abbreviations: Cons: Consultant; Econ: Ecomomist; Eng.: Engineer; FinA.: Financial Analyst./b Keys to overall performance rating (before FY 94) = I - problem free; 2 - moderate; 3 -major problems;

(from FY 94 on) = HS -highly satisfactory; S - satisfactory; U -unsatisfactory; HU - highly unsatisfactory.

I88R 21856

50 jSRP A P A U N E W G U I N e A

.M A N U 5! POST AND TELECOMMUNICATIONS CORPORATION (PTC)- Wf Sf sER/< i 1 THIRD TELECOMMUNICATION PROJECT

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Report No.: 16824Type: ICR