Document o f The World Bank

FOR OFFICIAL USE ONLY Report No: 25561

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 6.70 MILLION (USS9.12 MILLION EQUIVALENT)

TO THE

PEOPLE'S REPUBLIC OF BANGLADESH

FOR THE

TELECOMMUNICATIONS TECHNICAL ASSISTANCE PROJECT

May 20,2003

Global Information and Communication Technologies Bangladesh Country Unit South Asia Region

This document has a restricted distribution and inay be used by recipients only in the performance of their official duties. I t s contents inay not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 1,2003)

Currency Unit = Bangladesh Taka (Tk.) Tk.1 = US$0.1219

U S S l = Tk.58.20

BTRC BTTB CAS ccTLD C I D A CPAR

DFID FMR GOB I A IC I C T IDA I IFC ISP JBIC M O F MOPT N Shopping N C B PIP PIS P M C P M T PPIAF PSC PSTN QCBS SA SMMS TAPP TRB U N D P VOIP W T O

CQ

FISCAL YEAR July 1 -- June30

ABBREVIATIONS AND ACRONYMS Bangladesh Telecommunication Regulatory Commission Bangladesh Telegraph and Telephone Board Country Assistance Strategy Country Code Top Level Domain Canadian International Development Agency Country Procurement Assessment Report Consultant Qualifications Department for Intemational Development Financial Management Report Govemment o f Bangladesh Implementing Agency Individual Consultant Information and Communications Technologies Intemational Development Association Infrastructure Investment Facilitation Center Intemet Service Provider Japan Bank for Intemational Cooperation Ministry o f Finance Ministry o f Post and Telecommunications National Shopping National Competitive Bidding Project Implementation Plan Project Implementation Specialist Project Management Consultants Project Management Team Public Private Infrastructure Advisory Facil ity Project Steering Committee Public Switched Telecommunications Network Quality and Cost Based Selection Special Account Spectrum Management and Monitoring System Technical Assistance Project Proforma Telecommunications Regulatory Board United Nations Development Program Voice-over Intemet Protocol Wor ld Trade Organization

Vice President: Mieko Nishimizu

Sector ManagedDirector: Pierre A. Guislain Rajesh B. Pradhan

Country ManagedDirector: Frederick Thomas Temple

Task Team LeadedTask Manager:

FOR OFTICLAL USE ONLY

BANGLADESH TELECOMMUNICATIONS TECHNICAL ASSISTANCE PROJECT

CONTENTS

A. Project Development Objective

1. Project development objective 2. Key performance indicators

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Ma in sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices

C. Project Description Summary

1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5 . Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5 . Environmental 6. Social 7. Safeguard Policies

F. Sustainability and Risks

1. Sustainability 2. Critical r i sks

Page

2 2

2 3 9

11 14 15 15

17 18 18 19 20

20 20 21 21 22 22 23

23 33

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.

3. Possible controversial aspects 25

G. Main Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Fiscal Impact o f Sector Reform Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance

25 25

26

26

27 31 35 36 38 39 50 56 57 58 60

BANGLADESH Telecommunications Technical Assistance Project

Project Appraisal Document South Asia Regional Office

CITPO

BORROWER

Date: M a y 20,2003 Sector ManagedDirector: Pierre A. Guislain Country ManagedDirector: Frederick Thomas Temple Project ID: PO8 1849 Lending Instrument: Technical Assistance Loan (TAL)

Team Leader: Rajesh B. Pradhan Sector(s): Telecommunications (100%) Theme(s): Regulation and competition policy (P), State enterpriseibank restructuring and privatization (P)

[ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ]Other:

For LoanslCreditslOthers: Amount (US$m): $9.12

Proposed Terms (IDA): Standard Credit

1.99 1 0.00 I 1.99

Grace period (years): 10 Commitment fee: 0.00-0.50%

Total:

Years to maturity: 40 Service charge: 0.75%

1.99 1 9.12 1 11.11 [DA I 0.00 I 9.12 I 9.12

A. Project Development Objective

1. Project development objective: (see Annex 1)

through strengthening elements o f the policy, institutional, and regulatory framework in order to promote the competitive provision o f telecommunications infrastructure and services. This w i l l be achieved by: (a) separating the policy and operational roles o f the government in the sector by restructuring the Bangladesh Telegraph and Telephone Board (BTTB) to operate on a commercial basis; (b) strengthening the policy function o f the Ministry o f Post and Telecommunications (MOPT); and (c) strengthening the regulatory capacity o f the Bangladesh Telecommunication Regulatory Commission (BTRC). At the end o f the project period, i t i s envisaged that there w i l l be a clear separation in the operational and policy roles o f the government and that BTRC's capacity to effectively regulate a competitive telecommunications sector would be improved.

The project objective i s to improve the performance o f Bangladesh's telecommunications sector

2. K e y performance indicators: (see Annex 1)

wi l l include the following: The key performance indicators to measure the achievement o f project development objectives

Increase overall telephone penetration from 0.83 percent in 2002 to 3.3 percent by end o f 2006. BTTB restructured by end o f 2004. BTTB or i t s successor company's l ines per employee increases from 29 in 2002 to 40 by end 2006. BTTB or i t s successor company awarded a pro-competitive license by BTRC by end o f 2004. Telecommunications Policy o f 1998 reviewed and new policy announced by end 2005. Universal access policy adopted by the Government o f Bangladesh (GOB) by end 2005. Transparent licensing and regulatory regime and clear ru les o f business by end 2004. New operators licensed to provide fixed-line local and domestic long distance services b y end o f 2005. Rebalancing o f sector tariffs by end o f 2006. Radio frequency assigned within 15 days o f application by end o f 2006, for 90 percent o f applications.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported b y the project: (see Annex 1) Document number: 21326-BD

The project i s consistent with the CAS objective o f accelerating and broadening private sector-led growth by supporting governmental efforts to remove structural impediments and establish a conducive environment for private investment. The project w i l l assist in enabling private sector-led growth through regulatory and structural reform in the telecommunications sector. I t w i l l promote competition and private participation in the provision o f telecommunications services by supporting the development o f a sound policy, legal, regulatory, and institutional sector framework. This w i l l facilitate private sector growth and more efficient delivery o f services resulting in a reduction in costs for other sectors; and also establish a level playing field for a l l operators. The project i s also in l ine with the CAS strategy o f being responsive to Government initiatives and opportunistic in supporting areas with good

Date of latest CAS discussion: 02/08/2001

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prospects for reforms.

The project also supports the Government's Interim Poverty Reduction Strategy Paper (I-PRSP) pillar o f accelerating pro-poor growth, through substantial expansion o f the capacity and quality o f infrastructure services, including telecommunications, which serve as an important backbone o f a growing economy.

The project i s consistent with the World Bank Group's Information and Communications Technologies (ICT) Sector Strategy (April 2002), which calls for:

0 Completing telecommunications sector reform in countries that have not undergone sector restructuring by (a) shifting the government's role from ownership and operations to policy making and regulation, (b) promoting efficiency and service quality, and (c) promoting effective competition and increasing private sector participation in the provision o f infrastructure and services.

0 Supporting the establishment o f clear, stable, and transparent regulatory regimes and building client country regulatory capacity through policy advice, training, and technical assistance.

0 Promoting private sector leadership in extending the reach o f Information and Communications Technologies (ICT) through development o f information infrastructure and providing technical and investment assistance to extend access beyond the market.

2. M a i n sector issues and Government strategy:

telecommunications sector management and structure in Bangladesh. Sector overview. The following section provides an overview o f and summarizes the

Bangladesh Telecommunications Regulatory Commission (BTRC)

Service Providers

Basic Fixed Services Local (limited competition)

Domestic Long Distance (monopoly) International Long Distance (monopoly)

Cellular Services Value Added Competition Services

Competition

VSAT service Telecom Authority providers and others

Telephone Board

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The MOPT i s the government ministry responsible for formulating the government's policy for the telecommunications sector. The National Telecommunications Policy o f 1998 i s currently being implemented. The telecommunications sector in Bangladesh i s governed b y the Bangladesh Telecommunication Act, 2001. The law provides an adequate framework for the development o f a workable regulatory regime. Through enactment o f this legislation, the Government created the BTRC, which resulted in the transfer o f regulatory functions from MOPT to BTRC, and the Government appointed the chairman and commissioners o f BTRC to start operation on January 3 1, 2002. BTRC i s responsible for regulating the sector in keeping with both the Act and telecommunications policy as determined by MOPT. I t i s responsible for licensing operators and ensuring compliance with license terms and conditions; managing the radio spectrum; ensuring technical compatibility and effective interconnection between service providers; monitoring carrier quality o f service; approving tariffs; and providing equipment type approval.

The incumbent monopoly operator i s the government-owned BTTB, established by the 1979 BTTB Ordinance No. XII, to function under the MOPT. This ordinance was amended in 1995, to create the Telecommunications Regulatory Board (TRB) also functioning under the MOPT. TRB was the precursor to BTRC. BTTB has been operating as a GOB department. BTTB's management board consists o f a Chairman, four full time members and three part time members, all o f whom are appointed by the Government. The MOPT reviews BTTB's annual development plans, the Ministry o f Finance (MOF) approves the financing plan and allocates funds. The Planning Commission approves the Annual Development Plan and allocates capital development funds for BTTB.

BTTB has a de facto monopoly on domestic fixed-line public telephony and a de jure monopoly over international telephony. The telecommunications sector in Bangladesh has limited competition, with four licensed private sector mobile operators and a number o f value added service providers, including Internet Service Providers (ISPs). The mobile operators are directly responsible for 72 percent o f al l new l ines in service since 1996. Grameen Phone, the largest mobile operator leases capacity from Bangladesh Railways' fiber optic network and provides nationwide mobile services.

Main sector issues. The performance o f the Bangladesh telecommunications sector has fallen far short o f i t s potential and remains a significant constraint to economic growth. The main sector issues can be classified under two broad categories: (a) poor sector performance, and (b) weak competition and private investment environment. These issues are further discussed in the following sections.

Poor sector performance. Despite being the f i rs t country in the region to license private operators to provide services in 1989, Bangladesh lags behind all countries in the South Asia region, both in the coverage and quality o f telecommunications services as evidenced by the indicators in Table 2.

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Table 2: South Asia ICT Indicators (ITU, WDI 2001) I Population (in millions) GDP per capita (US$)

Main telephone l ines in operation (in million) Cellular mobile telephone subscribers (in million) Fixed teledensity * Mobile teledensity Total teledensity Rest-of-country teledensity ** Number o f internet hosts

0.50

Sangladesh 133.4

386

0.56

0.52 0.43 0.40 0.83 0.19

3

0.25 0.15

India 1,033.4

472

38.54

6.43 3.75 0.63 4.38 3.58

82,979

7.00

Nepal 23.6

250

0.30

0.02 1.31 0.08 1.39 0.22 1,513

0.06

Pakistan 141.5

52 1

S r i Lanka 19.6

869

0.81 2.33 0.56 2.89 1.74

11.319

0.67 4.43 3.56 7.99 3.51 2,286

* Teledensity means number o f lines per 100 people ** Rest o f country means excluding largest city, data for 2000

This poor performance can be evidenced by a number o f factors:

e Limited access to telecommunications services. The overall level o f teledensity in Bangladesh i s very low at approximately 0.83 l ines per hundred persons compared to an international low income group average o f 4.00 lines per hundred persons. This low level o f teledensity reflects the failure o f initiatives to attract the private investment needed for the sector as well as the poor performance o f the dominant operator BTTB to meet customers’ demand. BTTB’s capacity limitations constrain supply within the overall sector. Despite high fixed-line connection charges (only recently reduced to approximately USS150 from approximately US$350) BTTB cannot keep up with demand, and installation wait times average several years. Capacity constraints similarly affect interconnection for mobile operators, who in the absence o f adequate interconnection, offer mobile-to-mobile only services for a majority o f their customers and are unable to expand services in l ine wi th growth in demand. The results are (a) a significant unmet demand for basic telephone lines, estimated at about 3.5 mill ion immediately, growing to 10 mi l l ion within three years; and (b) inadequate fixed-line national and international services.

e Low rura l teledensity: Although approximately 80 percent o f Bangladesh’s population resides in rural areas, access to services in these areas i s limited. Non-Dhaka and rural teledensity i s estimated to be only about 0.19 l ines per hundred persons. A t present, the two private rural fixed-line operators provide only about 26,000 main lines in the rural areas. Telecommunication services provided by cellular companies are not accessible to most o f the rural population. Although some cellular operators l ike Grameen Phone have initiated a village phone program to bring connectivity to rural areas, less than one-third o f Bangladesh’s 68,000 villages have access to phones. Given the economic importance o f access to rural communities and the high cost o f rural provision, there i s a need for public policy and regulatory intervention to promote access in rural areas.

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e Poor performance of BTTB. The government-owned and controlled incumbent operator BTTB has not improved i t s performance despite substantial public investments in the organization. It continues to operate under a protective regime with l i t t le accountability to both i t s owners and customers. For example, as an indicator o f efficiency, the BTTB has approximately 29 l ines per employee (in 2002), compared to the international low income group average o f 69 l ines per employee. BTTB has found it difficult to improve efficiency in an environment where it has: (a) faced limited competition, (b) needed to follow civ i l service procedures for staffing and procurement, and (c) had inadequate access to capital. BTTB, in i t s current structure, lacks the resources--financial, technical, human resources--and the autonomy to achieve i t s target o f meeting demand. I t has very limited decision making authority and needs M O F and MOPT approval for most investments and general expenditures. This has led to limited service availability, lack o f new product rollout and generally poor service quality. Competition i s also growing in several forms: mobile telephony i s creating a viable substitute for BTTB’s services, voice-over Internet protocol (VOIP) (authorized or unauthorized) and falling international settlement rates have eroded BTTB’s highly profitable international monopoly. As BTTB lacks the autonomy and incentive to productively invest i t s profits back into building i t s network, national infrastructure and sector performance i s crippled and this reduces the value o f BTTB as a government asset.

Competition and private investment environment. Many factors can be attributed to the low level o f private investment in the sector. In general, there are inadequate incentives for high levels o f private investment to take place. Factors contributing to limited competition and poor private sector investment include:

Lack of separation between policy and operational roles of government. BTTB i s MOPT’s primary advisor on technical elements o f policy issues and MOPT i s responsible to government for BTTB’s revenue. This has not necessarily ensured transparent and accountable development o f policies in the sector. I t has instead created policy distortions in BTTB’s favor and an uneven playing field for private investors in a sector where the government i s responsible for both policy formulation and service provision. Further, MOPT’s capacity to formulate sector policies remains weak.

Limited competition. Important market segments such as international long distance remain closed to competition. While the National telecommunications Policy o f 1998 clearly indicates that the basic services and national long distance segments will be opened to private participation, no new operators have as yet been licensed. Further, despite the liberalization o f very small aperture terminals (VSAT) service, private VSAT operators are not permitted to resell excess capacity on their networks.

Provision of mobile services by the public sector. Progress i s being made for the provision o f mobile services by the public sector. Public sector provision o f mobile services w i l l have to take place in a pro-competitive manner. That is, BTTB has to ensure fair transfer pricing, provide the new public operator and other private operators the same conditions for interconnection and sharing o f facilities, and the government has to provide adequate safeguards that level the playing field. The public mobile operator should operate in a pro-competitive basis, without public subsidies or government guarantees.

Limited capacity of BTRC. BTRC i s a young organization and faces the challenge o f institution building while establishing the regulatory regime. BTRC has the authority to establish the

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regulatory regime relative to issues such as interconnection, licensing, tariffs, spectrum allocation, and other issues that w i l l affect competitiveness o f the sector. Using these tools to create the initial regime and communicate them to sector players w i l l be key to creating and maintaining a level playing field that provides certainty and adequate incentives for private investment in the sector. I t i s critical to build capacity in BTRC so that it can establish and maintain regulatory credibility, which w i l l partly be measured by i t s ability to render impartial, transparent and enforceable decisions and through the establishment o f transparent regulatory processes and procedures. While the Act generally provides for a significant degree o f independence for BTRC, it includes certain provisions which may compromise this independence, including: (a) BTRC Commissioners are appointed by government; (b) BTRC reports on i t s activities through the MOPT, not directly to parliament; (c) MOPT has the right to promulgate rules pertaining to the Act and to direct the BTRC to modify regulations; and (d) BTRC i s subject to c iv i l service ru les and salaries.

0 Inadequate interconnection arrangements. One o f the greatest bottlenecks to enhanced competition and private investment i s the lack o f interconnection capacity. Interconnection with BTTB i s consistently named as one o f the top issues to be resolved in the sector by private operators. The current interconnect environment i s based on “revenue sharing agreements” between BTTB and the mobile operators. These agreements are based on retail prices and asymmetric payments (Le., BTTB does not compensate mobile operators for call termination, but mobile operators pay BTTB for termination). An additional feature o f the interconnect environment i s inadequate supply and difficulty concluding negotiations. An interconnection regime, conducive to fair competition has not yet been established and has thwarted growth o f existing cellular service providers. BTRC i s mandated to issue interconnection guidelines and resolve interconnection disputes among operators. In this regard, BTRC has received a limited technical assistance grant from the Public Private Infrastructure Advisory Facility (PPIAF) to establish a fair, pro-competitive, interconnection regime. BTTB and the private cellular operators recently signed a’memorandum o f understanding whereby the private operators will invest approximately US$1.7 mi l l ion in order to increase BTTB’s network capacity to provide increased interconnection for cellular subscribers. This i s a positive development.

0 Distorted t a r v s . Bangladesh‘s current tariff regime cross-subsidizes local calls by revenues earned from the national long distance and international calls. Further the price structure does not reflect costs. This has led to an inefficient allocation o f resources and has inhibited fair competition and private investment in basic and cellular services.

0 Ineffective spectrum management. A rational and effective spectrum management system that optimizes the use o f a valuable national resource i s essential for an orderly and competitive telecommunications market. The BTRC has not yet been able to effectively manage the radio spectrum or reap fiscal benefits f rom the optimal use o f this national resource. Ineffective radio spectrum management has been identified as a significant problem by private sector investors. Problems encountered include slow processing o f spectrum licenses, excessive spectrum fees, inadequate and inefficient allocation o f bandwidth, and interference caused by unauthorized use o f spectrum. This has created bottlenecks for sector development and served as a deterrent for new investments in services using wireless technologies.

Government strategy. The Government has undertaken several initiatives over the past four years to reform the telecommunications sector, including introducing competition and sector regulation. Some o f the key policy initiatives and actions taken by the Government are discussed below.

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The GOB'S prevailing National Telecommunications Policy o f 1998 recognizes competition and private participation as a means o f promoting improved sector performance. Private investments and operations are expected to play an increasingly important role in the provision o f telecommunications services. The MOPT has an informal goal for the sector o f a teledensity o f 3.3 by 2005. Achievement o f this goal w i l l require a capacity increase o f 3.5 mi l l ion lines. MOPT also has an informal goal for telereach o f having service available in every village in Bangladesh. With assistance from the Infrastructure Investment Facilitation Center (IIFC), the Government has had public stakeholder consultations and reviewed the 1998 policy, with a view to revise the policy.

The Government announced its National Information and Communications Technology Policy in September 2002, as it aspires to use ICTs as a key engine o f economic growth. This policy envisions building a knowledge-based society by the year 2006, where access to information allows for citizen empowerment, enhanced democracy, and sustainable economic development. I t states that ICT infrastructure w i l l be developed for use in human resource development, governance, E-commerce, banking, public services and other ICT enabled services. The Government recognizes the need for reliable and competitively priced telecommunications infrastructure as a prerequisite for meaningful implementation o f i t s ICT policy. The policy calls for accelerated deregulation o f and private participation in the telecommunications sector. The prime minister heads a high level national ICT task force which i s spearheading the ICT development agenda.

Recognizing that BTTB's poor performance i s a key hurdle in implementing i t s ICT policy, the GOB has taken the decision to restructure BTTB in order to dramatically improve sector performance and meet i t s ICT policy objectives. I t has established a high level task force, led by the MOPT, to examine the various options available for restructuring BTTB. The committee w i l l provide i t s recommendation on BTTB restructuring to the Government by the end o f June 2003. Key elements o f justification o f such a restructuring are to: (a) create a level playing field within the sector by separating the Government's policy function from operations; (b) to empower BTTB to operate as a commercial enterprise with the necessary financial and administrative autonomy to compete wi th private operators in a dynamic multioperator environment; (c) remove preferential treatment given b y the Government to BTTB; (d) allow for the pro-competitive entry o f BTTB into the mobile market on a level playing field; and (e) to increase overall employment and government revenue in the sector by allowing for a more robust competitive environment.

The establishment o f BTRC in January 2002, as stipulated in the Telecommunications Act o f 2001, and appointment o f i t s chairman and commissioners, are steps in the right direction towards implementing telecommunications sector reforms. The Government has recognized the need to strengthen BTRC's regulatory capacity to ensure a level playing field in a multioperator environment and i s seeking multilateral and bilateral assistance for BTRC capacity building.

In addition, the Government has decided to introduce competition in local and long distance services by licensing private operators. The BTRC, assisted by the I IFC i s currently preparing the necessary documentation to license new operators.

The above initiatives and actions are a clear indication o f the Government's commitment to reforming the telecommunications sector. Moreover, the National ICT Task Force o f the GOB, headed by the prime minister, i s leading the reform process with the Principal Secretary to the Government as the reform champion.

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The Bank has pursued policy dialogue with the Government and in i t s assessment o f the telecommunications sector, has discussed that a priority issue for improving performance o f the sector i s to implement i t s 1998 policy, including BTTB's restructuring. Recognizing that policy implementation requires a long-term view and short-term actions, the GOB and Bank have agreed that the overall long-term sector vision and plan w i l l necessarily include actions on the priority issues in the associated time frames as depicted in Table 3 below:

TABLE 3. Time Frame

Policy Objectives

Priority Issues

Priority Action Items

SECTOE Short-Term

IN PLAN Long-Term

1. To support independence between policy, regulatory, and operational functions

field for telecom operators 2. To create a level playing

1. Separation o f policy making and operation roles for Government

2. Sector liberalization

1. BTTB restructuring and MOPT strengthening

2. Revise Bangladesh's WTO Commitments on telecommunications

3. BTRC strengthening 4. Award new licenses 5. Establish and implement a

fair interconnection regime

OBJECTIVES AND ACT Medium-Term

1. To ref ine business environment for telecom operators

2. To attract new investment to sector

3. To increase rural access to ICT services

1. Further restructuring o f BTTB's successor company

2.Universal Access Strategy

1. Develop options for private participation in BTTB

2. Legislative change to protect BTRC independence

Universal Access strategy

3. Adopt and implement

1. To continue to attract sufficient investment to serve the needs o f the nation

2. To promote innovation and investment

1. Greater private sector opportunities

2. Convergence

1. To Be Determined

3. Sector issues to be addressed by the project and strategic choices:

it i s to improve overall sector performance and reach the level o f growth that i s required to improve access and thereby socioeconomic development in the country. The Government has realized this and has begun implementing reforms to improve performance o f the sector. The Government has also requested a number o f donors, including the World Bank, Canadian International Development Agency (CIDA), United Nations Development Program (UNDP), the Government o f Japan and the Department for International Development (DFID) for assistance to implement reforms. As there i s strong government commitment and willingness to undertake reforms, i t i s very important that support be provided in a timely manner, especially as the Government has already made substantial progress on the issue o f restructuring BTTB.

As the table above demonstrates, Bangladesh needs to undertake comprehensive sector reforms if

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Issues to be Addressed by the Project

Within the issues summarized above and keeping in mind the political realities in Bangladesh, including possible BTTB labor union resistance, the proposed project will support selected interventions that have the highest possibility o f improving performance o f the telecommunications sector, through increased competition and improved environment for private sector participation. The interventions are intentionally limited to focus IDA resources on addressing key bottlenecks that have affected sector performance. Bank support complements assistance being provided by other agencies such as CIDA, DFID, and PPIAF. IDA resources w i l l be used to address the short-term policy objectives as stated in Table 3. The project w i l l address (i) separation o f the government's operational and policy roles; and (ii) developing regulatory capacity in the BTRC to effectively regulate a competitive telecommunications sector. In particular, the following w i l l be addressed:

BTTB restructuring. This w i l l address issues related to both the performance o f the sector and in improving the environment for private investments and competition. Technical assistance w i l l be provided to MOPT to implement the restructuring o f BTTB from a Government department. Restructuring w i l l allow for: (a) a clear separation o f government's role as a policy maker and operator; (b) identification and removal o f a l l preferential treatment, including tax and procurement, that BTTB as a government board receives and i s a barrier to leveling the playing field; (c) BTTB to be subjected to regulation by BTRC on the same lines as other private sector operators, thereby allowing for all operators to operate in a level playing field; and (d) the government to better manage public expenditure accountability in the telecommunications sector.

Restructuring w i l l prepare BTTB for competition through (i) productivity and profitability improvements; (ii) change in orientation towards becoming market and commercially focused; (iii) internal culture change; and (iv) decision-making autonomy and flexibility. This w i l l facilitate funding o f development projects and also provide B T T B with access to private capital, and strategic and commercial alliances. Overall, a restructured BTTB will create long te rm shareholder value and generally improve sector performance.

Strengthening thepolicy function of MOPT. A restructured BTTB should not be able to influence MOPT's policy function. In addition, MOPT w i l l no longer have a direct oversight function over BTTB. This separation o f policy and operational roles in the government, necessitates strengthening the policy function within MOPT, so that i t can establish a policy and institutional framework that encourages improved sector performance and growth, with increased private participation and investments. MOPT will be strengthened by Bank support through technical assistance to build and develop capacity to formulate and oversee sound policy, including the design o f a universal access strategy in Bangladesh. Bangladesh has prepared a schedule o f specific World Trade Organization (WTO) commitments under the telecommunications service section o f the General Agreement on Trade in Services. This i s currently being reviewed by the Ministry o f Commerce. Support will be provided to review and revise this schedule o f commitments so that Bangladesh can consider additional commitments on regulatory disciplines, such as compliance with the W T O Regulatory Reference Paper.

Strengthening BTRC's capacity to regulate a multioperator environment and ensure a level playing for all operators. Recognizing that the establishment o f a credible regulatory regime in Bangladesh i s key to increasing competition and private investment in the telecom sector, Bank support wi l l be utilized to strengthen BTRC and assist in the development o f a regulatory

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framework that i s W T O compliant. Technical assistance w i l l be provided to: (a) establish credible regulations (e.g., interconnection, licensing and tariff regime) that lay the foundation for a competitive telecommunications sector; (b) implement further sector liberalization through the award o f new licenses to private investors and removal o f barriers to competitive provision o f services; (c) address a regulatory strategy to improve rural access; and (d) build capacity within BTRC to address regulatory issues and manage scarce resources l ike the radio spectrum. BTRC will be provided with assistance to procure and implement a spectrum management and monitoring system.

Strategic Choices

In selecting the above areas, the project supports the government’s efforts to strengthen the environment to promote private investment and competition. The project intentionally does not address:

Investments in interconnection infrastructure. The lack o f adequate interconnection facilities in BTTB‘s network has always been a key factor thwarting sector development in Bangladesh. The GOB has asked for Bank assistance to provide funds to procure equipment to facilitate interconnection. However, Bank policy in telecommunications excludes direct financing o f telecommunications infrastructure investments. Moreover, private cellular operators are going to finance key equipment in BTTB’s network to facilitate the interconnection o f their subscribers to BTTB’s network. Instead, the Bank will focus on the establishment o f an appropriate and credible interconnection regime that provides incentives for BTTB to establish proper interconnection arrangements. While this w i l l help resolve some o f the problems, much larger investments are required by BTTB to address this issue. The Japan Bank for International Cooperation (JBIC) has indicated the possibility o f funding the expansion o f interconnection capacity in BTTB’s network if BTTB: (a) adheres to the interconnection regime established by the BTRC; and (b) i s restructured to ensure a level playing field for al l operators especially since it i s entering the mobile market. Furthermore, a restructured BTTB wil l have the financial autonomy and incentives to reinvest i t s profits to develop interconnection infrastructure.

Investments in a rural accessprogram: Given the dismal state o f rural connectivity in Bangladesh, an output based aid (OBA) type program, targeted towards increasing access to telephony and ICTs was considered. However, experience demonstrates that such programs are more successful in countries where regulatory and administrative obstacles to market entry and competition are f i rs t removed. The proposed project therefore focuses on establishing a policy and regulatory framework to improve the environment for increased competition and private investment, and developing a rural access strategy for future implementation.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

The project includes two main components, the MOPT and BTRC components: IDA will finance local and international consultant services, studies and training as well as procurement o f necessary equipment. The project i s estimated at $1 1.1 1 mi l l ion with proposed IDA financing o f $9.12 million. The detailed project cost and IDA financing by components/activities are provided in the table below.

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1. MOPT Component (a) BTTB Restructuring (b) Strengthening MOPT's policy functions (c) Strengthening project management capacity

2. BTRC Component (a) Strengthening regulatory capacity o f BTRC (b) Spectrum Management and Monitoring System

Total Project Costs

2.08 1.49 0.43

1.86 5.25

11.11

% of Total

18.7 13.4 3.9 0.0 0.0

16.7 47.3

100.0

0.07 0.00

1.49 16.3 4.70 51.5 9.12 100.0

The description o f the activities under the two components are summarized below:

MOPT Component: The main objective o f this component i s to separate the policy and operational roles o f the Government. This w i l l be achieved through (i) restructuring BTTB; and (ii) strengthening the policy function in MOPT.

0 Restructuring o f BTTB. Technical assistance w i l l be provided to implement BTTB restructuring and convert it from the present Government board into a company, registered under the Company's Act. Support will be provided to carry out a number o f activities including:

Re-examining Ordinance XII of 1979 (amended in 1995) that established BTTB. The Government needs to approve the recommendation made by the high level committee on BTTB restructuring to guide the overall restructuring. Ordinance XI1 may have to be amended to enable the restructuring. The process o f drafting, presenting, and amending the ordinance w i l l be undertaken. Further, other legal documents necessary for the restructuring o f BTTB wil l also be prepared.

AssetAiability allocation. BTTB's assets and liabilities are currently reflected as government property. In order for BTTB to operate on a commercial basis, i t w i l l need title to i t s assets and to develop depreciation and capital expenditure programs to support them. In addition to developing an inventory and valuation o f fixed assets, this task w i l l also include negotiation o f land and building ownershiphse between BTTB and Government. Appropriate levels o f debt to fund the assets to be transferred from Government to BTTB w i l l also need to be determined.

Financial audit and creation of openingjnancial statements. A financial audit will both identify BTTB's operating position and create the initial financial statements that the corporatized BTTB wil l be required to maintain. The financial audit will also provide valuable information about financial information systems to be created for BTTB.

Cost-based tariffstudy. BTRC has a mandate to enforce a reasonable, cost-based tariff

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structure, which w i l l mean rate rebalancing for BTTB. In parallel wi th BTTB restructuring, BTTB and BTRC w i l l work together to establish cost-based rates and a plan to transition to those rates. The transition would require carrying out a benchmarking tariff study which w i l l provide: (a) a tariff proposal by comparing it to other operators in the region, that run their business efficiently; and (b) an action plan with a monthly change in tariffs to rebalance tariffs in a couple o f years. This w i l l also provide BTRC with the required analysis to support implementation o f cost-based pricing for unbundled network elements.

Examining options for rationalization of labor force. A restructured BTTB w i l l l ikely need to employ fewer than i t s current labor force o f 22,000 staff. As part o f the restructuring process, an investigation should be made into a proposed new organizational structure and reduction plan. This reduction plan w i l l need to be negotiated with the union, as well as any potential donors who might provide financing to implement it.

Public relations. Because o f the sensitivity o f the stakeholder community, it i s critical that MOPT manage public relations very closely throughout the restructuring planning period. BTTB union officials w i l l be exposed to the experience o f unions in telecommunications companies that were restructured in other countries.

Development of a business plan. The restructuring o f BTTB w i l l require that it develops a corporate business plan to guide i t s operations after restructuring.

Development of aperformance contract for BTTB. In order to ensure that the restructuring o f BTTB actually results in improved performance, support w i l l be provided to develop a performance contract for BTTB. Project funds wil l also be used to carry out annual performance audits. Such a contract would provide incentives to BTTB to improve performance. In the event that BTTB does not fulfill i t s performance commitments, BTTB could, for example, lose i t s exclusivity to provide certain services, earlier than planned.

Other support as may be needed.

I t i s expected that the restructuring o f BTTB will (a) limit BTTB's function only to operations, thereby removing the possibility o f the incumbent distorting policy decisions in i t s favor; (b) allow the GOB, through BTTB's corporate financial statements, to get transparent information on the financial performance o f B T T B and i t s contributions to the treasury; and (c) ensure that BTTB i s subject to regulatory oversight by BTRC on a level playing field with al l other operators in the sector. These important changes w i l l positively impact sector performance and encourage greater competition and private sector participation.

Strengthening MOPT's policy function. Technical assistance support for consultancy and training programs w i l l be provided in order to strengthen MOPT's capacity to carryout i t s policy functions. This w i l l include (i) policy review and formulation; establishment o f processes and procedures for policy monitoring and evaluation; and re-examination o f Bangladesh's W T O commitments and preparation o f a new telecommunications offer; (ii) development o f a universal access strategy; (iii) other studies on policy issues such as convergence, market structure, competition; (iv) capacity building and professional development through in-country, on the job and external training programs; and (v) procurement o f equipment and systems to facilitate information sharing and dissemination, within and outside o f MOPT.

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Strengthening project management. Limited support will be provided to procure services o f local project management consultants in order to strengthen MOPT’s capacity to manage and implement the project. In addition, the Government w i l l provide budgetary support towards project management.

BTRC Component

Strengthening BTRC’s regulatory capacity. Technical assistance support to BTRC would include: (i) developing and implementing credible regulations through consultancy programs in the areas of: tariff reform, spectrum management, licensing; fair competition, universal access; interconnection, carrier performance monitoring, dispute settlement, benchmarking and others; (ii) licensing new operators and drafting new pro-competitive licenses for B T T B and its subsidiaries; (iii) capacity building and professional development through in-country, on the job and external training programs; and (iv) establishing adequate tools and facilities for information gathering, dissemination and sharing, including a library, local area network, management information system and website development. In addition, support w i l l also be provided to BTRC to carry out important studies on issues such as country code top level domain (ccTLD) administration and convergence, that impact ICT development in a country.

Strengthening spectrum management: Support for strengthening BTRC’s spectrum management function w i l l be provided to (i) assist in reviewing and rationalizing spectrum use in Bangladesh including development o f a spectrum allocation plan and a database o f spectrum use; (ii) develop a spectrum pricing policy; and (iii) train BTRC staff in addressing spectrum management and monitoring issues. BTRC w i l l also be provided assistance to procure and implement a Spectrum Management and Monitoring System (SMMS) so that i t has the tools to effectively manage the radiospectrum. Consultants wi l l assist BTRC in the development o f technical specifications for the SMMS, preparation o f bidding documents, bid evaluation and contract administration o f the system. Support w i l l also be provided to design and implement an appropriate arrangement wi th private sector to operate and maintain the SMMS.

2. Key policy and institutional reforms supported by the project: 0

0

0

0

Separation o f policy and operational role o f the government. Strengthen the regulatory framework, to increase competition and private investment in the sector. Award licenses and authorizations to private operators and service providers in liberalized market segments. Restructure BTTB and limit i t s activities to telecommunications infrastructure and service provision.

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3. Benefits and target population:

affordability and quality o f traditional and modern telecommunication services. Improved BTTB performance, the introduction o f competition and a more effective regulatory framework w i l l lead to the provision o f more competitive services in terms o f price, quality and variety. I t w i l l also reduce information isolation for populations living in rural areas. The improvement and expansion o f telecommunication services wi l l contribute to sustainable economic growth. Also, the large non-resident Bangladeshi community w i l l benefit from improved efficiency and affordability o f communications services to Bangladesh.

The project w i l l benefit the Bangladeshi population as a whole by increasing the availability,

The IT industry and businesses, which increasingly depend upon communications services to be competitive, will especially benefit from lower costs and the availability o f a greater variety o f value added services. A modern telecommunications regulatory framework, ensuring market innovations and competition, w i l l make Bangladesh more attractive to foreign investors.

4. Institutional and implementation arrangements:

through December 3 1,2007. Implementation period. The project w i l l be implemented over four years, September 1,2003

Project implementation and coordination. The two organizations responsible for implementing the project are MOPT and BTRC. Each o f the implementing agencies w i l l be responsible for executing i t s respective component. Project Steering Committees (PSC) have been established at each o f the implementing agencies to provide overall guidance on the management o f the project components. The PSC in MOPT and BTRC, w i l l be headed by the Secretary MOPT and Chairman BTRC, respectively. Project Management Teams (PMT) have been established at MOPT and BTRC to manage in a timely manner the reforms supported by the project. The PMTs are headed by a Project Director and include staff from within the MOPT and BTRC who are knowledgeable in procurement and financial management. The Project Directors for the PMTs are senior officials from MOPT and BTRC. The PMTs in both MOPT and BTRC w i l l also be assisted by local Project Management Consultants (PMC) and Project Implementation Specialist (PIS), respectively, funded under the proposed credit. Their principal task i s to support P M T in the implementation o f the project components. The PMC w i l l assist wi th financial management and facilitate the procurement o f the main activities for each component and assist in the administration o f procurement planning and preparation o f related documents for MOPT, including BTRC.

Procurement: Procurement under the project w i l l involve consultants’ services including training and goods. The project supports the procurement o f the spectrum management and monitoring system which wil l be procured through ICB procedures. For all other goods, since the contracts‘ sizes are very small and shopping i s the preferred procedure, IDA will carry out prior review o f the f i rs t two contracts for shopping. All Goods financed under the Credit will follow procedures outlined in the Bank’s “Guidelines for Procurement under IBRD Loans and IDA Credits ”, published in January 1995, and revised in January 1999. For consultants’ services, IDA’S prior review wil l be required for consultants’ services contracts estimated to cost US$ 100,000 equivalent or more for f i r m s and US$50,000 equivalent or more for individuals. Consulting services and training will be hired in accordance with the Bank’s “Guidelines: Selection and Employment of Consultants by World Bank Borrowers ”, published in January 1997, and revised in September 1997, January 1999 and May 2002. Procurement o f goods and services will follow the Bank’s approvedhtandard documents. An assessment o f the procurement capacity o f the implementing agencies was carried out during pre-appraisal and actions to meet the adequate procurement management requirements were agreed upon. The assessment

- 1 5 -

and the action plan are provided in Annex 6, para 20.

Financial management. The beneficiary agencies financial management capacity assessment was conducted by a Bank financial management specialist. In order to mitigate potential financial management r isks and to strengthen financial management capacities, i t was agreed that MOPT and BTRC would employ project management consultants and project implementation specialist, respectively, prior to credit effectiveness. The detailed assessment and the action plan agreed to improve the financial management are provided in Annex 6(b).

Project reporting requirements, monitoring and evaluation arrangements. The MOPT and BTRC will be responsible for maintaining records and accounts o f the activities under their respective project components. MOPT and BTRC w i l l prepare quarterly Financial Management Reports (FMRs), which w i l l project implementation progress, including status o f procurement activities, sector reform initiatives, and financial aspects o f the project, in accordance with the agreed upon format. The project management consultants in MOPT w i l l assist in the preparation o f FMRs to be submitted to the Bank within 45 days o f the end o f each quarter. The project reporting, monitoring and evaluation arrangements w i l l include, inter alia: (a) quarterly FMRs; (b) three Bank supervision missions annually for the f i rs t two years and biannual, thereafter; (c) jo int MOPT/Bank and BTRC/Bank annual progress reviews and midterm review (about two years after date o f effectiveness o f the loan); and (d) completion report to be transmitted by the GOB to the Bank within six months o f the closing o f the project.

Midterm Review. The midterm review w i l l be conducted jointly between MOPT and the Bank and the BTRC and the Bank on the basis o f a report prepared by the PMTs with the assistance o f the PMC in such a manner as to: (a) assess progress in the implementation o f key actions and performance indicators; (b) verify the continued validity o f the design assumptions in light o f implementation experience and the evolving environment; and (c) identify remedial actions that might prove necessary to achieve the Project's objectives. In addition to the above, during mid term review a detailed sector assessment w i l l be carried out to evaluate sector evolution, vis-a-vis, sector and market structure; performance, issues and challenges. The Bank and GOB will also identify the need for possible future interventions, especially on issues related to deepening sector reform and accelerating rural access to ICT services. Further, a review w i l l also be carried out on the sector tariff rebalancing plans and agreement will be reached on establishing tariff rebalancing indicators and targets.

Audit. Project financial statements w i l l be audited annually in accordance with standards on auditing acceptable to the Bank by an independent auditor. The audit o f project accounts w i l l include an assessment o f the adequacy o f accounting and internal control systems, ability to maintain adequate documentation for transactions, eligibility o f expenditures for Bank financing and availability o f counterpart funds. The audited project financial statements together with the auditor's opinions on financial statements, Special Accounts (SA) and with respect to amounts claimed on the statement o f expenditures separately for MOPT and BTRC, will be submitted to the Bank not later than six months after the close o f each fiscal year. The auditors o f the Foreign Aided Projects Audit Directorate (FAPAD) o f the Comptroller and Auditor General (C&AG) are acceptable to the Bank as independent auditors for MOPT component. BTRC's statutory audit by a firm o f Chartered Accountant, which are acceptable to the Bank, wi l l also include an audit o f the project financial statements. Separate BTRC's audit report on the entity and the project w i l l be submitted to the Bank not later than six months after the close o f each fiscal year.

Disbursement. There w i l l be two separate Special Accounts in Convertible Taka (CONTASA)

- 16 -

under the project for each o f the implementing agencies, in accordance with M O F circular o f September 2, 1991, revised on May 4, 1992 and December 24, 1992. Both the implementing agencies w i l l be responsible for managing their respective Special Accounts including submission o f withdrawal applications to IDA. Transaction based or traditional disbursement procedures w i l l be followed for withdrawal o f IDA funds. The proposed Credit wi l l be made available to the Government at IDA standard terms and conditions. The Government w i l l provide the proceeds o f the Credit as grant to both MOPT and BTRC for technical assistance. The Government would ensure timely availability o f i t s share o f project funding. The counter-part fund for BTRC component would be made available from i t s revenue earnings for timely utilization o f IDA's fund. Counterpart fund o f the MOPT component w i l l be included in the Annual Development Program and would be released through the CAO (T&T) and would be paid directly to the beneficiaries on the basis o f approved billshnvoices, requiring no separate project bank account.

D. Project Rationale 1, Project alternatives considered and reasons for rejection:

Rationale

Although gaps exist in Bangladesh's policy and regulatory environment, there i s a strong government willingness to implement sector reforms in Bangladesh, especially with regard to restructuring BTTB. BTTB's behavior as a Government enterprise department has been a key constraint to sector development. Given the Government's commitment to reforms, including i t s support for and readiness to separate the policy and operational roles o f Government, the Bank can capture an opportunity to facilitate improvements in Bangladesh's telecommunications sector performance. The timing o f this proposed operation i s key to ensure that the Bank responds adequately and in a timely manner to the GOB'S request. Further the scope o f the project has deliberately been kept very limited to address the short term objectives o f the Government's reform agenda and focus on the key constraints that have hampered sector development. The basic policy framework, although not perfect, i s adequate to pursue this activity. Further, the establishment o f the regulator BTRC, which i s being provided limited support by both the PPIAF and CIDA, represents sufficient forward movement for IDA to support the government in implementing the remaining agenda on i t s sector reform program.

The project outputs are also consistent wi th telecom sector targets specified in the Bangladesh Development Support Credit currently under preparation.

Alternatives

The following project design alternatives were considered and rejected:

e Designing the project as a multisectoral (infrastructure including telecommunications) technical assistance facility. This approach was rejected for the following reasons: (a) a multisectoral approach would not allow for fast track processing o f a project that i s necessary to leverage upon the ongoing telecommunications reform momentum in the Bangladeshi telecommunications sector; (b) IDA i s already supporting IIFC and the Infrastructure Development Company Limited (IDCOL), which can provide consultancy services and financing for infrastructure projects; and (c) the experiences from other umbrella technical assistance projects in Bangladesh, to support focused technical assistance projects wi th a significant portion o f pre-identified components in the future.

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e Pursuing a broader Comprehensive reform project, rather than a focused, limited project. The telecommunications sector reform process in Bangladesh i s slow but ongoing. The Bank could pursue a more comprehensive reform program that would involve overhauling the existing legislative framework among others. However, given that important, necessary steps to accelerate the reform process have been taken (passage o f Telecommunications Act o f 2001 and establishment o f BTRC), and that there i s high-level government commitment to address the most critical impediments to sector development (BTTB restructuring), a focused project, limited in scope would address key issues that have the potential to make a positive impact on sector performance. The implementation o f these key reform initiatives would also demonstrate GOB'S seriousness to undertake more comprehensive reforms which could be addressed in a possible future IDA operation.

Sector issue

2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Project

Ban k-financed Regulatory reform component

Support o f the government's objectives for the telecommunications sector in the Second Five-Year Plan (1 98 1 to 1985)

Other development agencies

Sixth Technical Assistance Project (completed) Third Telecommunications Project (completed)

International Finance Corporation (IFC), private sector development Public Private Infrastructure Advisory Facility (PPIAF)

Infrastructure Investment Facilitation Centre (IIFC) with support from IDA (through the Private Sector Infrastructure Development Project) C IDA and DFID

Grameen Phone (ongoing)

Technical assistance for the Bangladesh Telecommunication Regulatory Commission (BTRC) (ongoing) Licensing o f Fixed Line Operators and VOIP service providers

I

P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HL

Latest Supervision (PSR) Ratings

(Bank-finance Implementation

Progress (IP)

S

S

Highly Unsatisfi

projects only) Development

Objective (DO)

S

S

ory)

3. Lessons learned and reflected in the project design:

international experience in the telecommunications sector and are reflected in the project design The following lessons were learned from other sector reform and restructuring projects and from

e Newly established regulatory agencies are frequently overwhelmed, but have l i t t le expertise and

- 1 8 -

resources to draw upon. Support from resident advisors, operational advice and hand holding during the initial years o f operation are invaluable.

Telecommunications sector policies should include a set o f incentives to promote access to services for remote rural communities and to improve the affordability and availability o f services to the poor in both rural and urban areas.

Competition i s key to increasing growth in the sector.

A clear, predictable regulatory framework i s a prerequisite to attracting investment in the sector. Furthermore, the momentum created by policy reform initiatives can lead to sustained sector growth, provided prompt implementation i s undertaken.

Government should not participate as a provider o f telecommunications services, which are more efficiently run as commercial entities.

Speed i s key to telecommunications reform. The design o f this operation i s intended to achieve a quick w i n in the separation o f the policy and operational roles o f government which i s a cornerstone o f sector reform.

A project that i s focused and simple to administer (e.g., focusing just on telecommunications rather than including other sectors) i s less likely to get bogged down by administrative or other procedural delays.

Strong government commitment i s necessary for successful implementation o f a technical assistance project.

4. Indications of borrower commitment and ownership:

establishing an effective regulatory framework and i t s ownership for this project i s demonstrated by the following actions and initiatives.

The extent o f the Government's commitment to opening the telecommunications markets and

A high-level national ICT task force, led by the Prime Minister, i s spearheading the ICT, including telecommunications reform agenda with the Secretary, Prime Minister's office as the reform champion.

The establishment o f a high-level committee to recommend options to the Government for BTTB restructuring. The committee has recommended that the Government restructure BTTB from a Government enterprise department into a limited liabil i ty company in the short term.

The Government has approved the National I C T Policy o f September 2002, which places significant importance on the establishment o f a reliable telecommunications infrastructure in Bangladesh, through deregulation and increased private sector participation in the sector.

The establishment o f the BTRC in January 2002.

Government's repeated request for Bank support to implement reforms through a technical assistance program

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5. Value added of Bank support in this project:

including India, Afghanistan, Nepal, Pakistan, and Sr i Lanka in the region. The Government recognizes the value added o f Bank support in terms o f i t s extensive international experience in addressing telecommunications sector reform, designing effective policies and establishing regulatory frameworks. This experience coupled with the Bank's neutrality i s attractive for the Government. In addition, the Bank has developed significant experience in supporting the international best practice approach to spectrum management and monitoring. The Bank i s involved in supporting spectrum management and monitoring in several countries, such as India, Nigeria, Pakistan, Nepal, and Sri Lanka.

The Bank i s involved in dialogue on telecommunication sector reform in over 60 countries,

E. Summary Project Analysis (Detailed assessments are in the project fi le, see Annex 8) 1. Economic (see Annex 4): t - ' Cost benefit - Cost effectiveness 0 Other (specify)

required. The project focuses on institutional, policy and regulatory reforms which, if successfully implemented, will enable supply and demand o f telecommunications to evolve favorably for consumers. The economic benefits o f the project, resulting from improved sector performance and therefore increased penetration and access, are likely to include:

NPV=US$ million; ERR = % (see Annex 4) -

Given the small size and technical assistance nature o f the project, an economic analysis i s not

improved range and quality o f service provision; reduced prices for advanced services that w i l l allow businesses and the Government to reduce business costs and expand their use o f information technology; advanced information services also have wide-ranging applications in health care and education, and these will become more affordable as prices fall; improved investment climate; significant increases in off-farm employment and income generation across a number o f countries, including Bangladesh; improvements in the quality o f service delivery by the government; faster response to emergencies, as proximity to a telephone allow customers to easily receive unsolicited information not requested due to information asymmetries (for example, customers can receive information about imminent major hurricanes that they would not know in advance to request); and equalizing access to information infrastructure has a significant impact on reducing inequality within countries.

While, i t i s diff icult to provide a quantitative estimate o f the response o f private investors to the regulatory and policy environment, greater competition in the sector w i l l lead to improved services, thereby stimulating economic growth, resulting in a broader source o f revenues to GOB from tax receipts. Such indirect benefits, although difficult to quantify, are certain.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4)

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Fiscal Impact:

The fiscal impact analysis to estimate BTTB’s annual contribution to the national treasury before and after the restructuring i s summarized in Annex 4. Historically, BTTB has produced a significant revenue surplus (cash revenues less cash expenditures) that i s transferred to the treasury, which in tum funds BTTB’s annual investment requirements. The restructuring o f BTTB and the on-going sector reforms (regulation, tariffs, interconnection, competition, licensing, etc.) wi l l greatly influence the size, shape and direction o f the sector in the next few years. Because o f a l l the changes that are taking place simultaneously in the sector, an estimate o f the fiscal impact o f BTTB’s restructuring factors in all o f these other elements. The government w i l l experience an immediate cash f low impact as a result o f the restructure process, but the overall magnitude o f the contribution may not be as severely impacted. The treasury can potentially gain more (net cash), year-over-year from BTTB as a limited company. The net amount that i s actually transferred to the treasury depends to a great extent on the level o f investment made by BTTB. I t i s also important to note that beginning in 2003 the mobile operators begin to provide more to the national treasury than BTTB, even though it i s assumed the mobile operators have been granted a tax holiday through 2006. In a high growth scenario, BTTB catches up to the mobile operators, in terms o f contributions to the treasury, in the year 2010.

3. Technical:

help attract and sustain investment in the telecommunications sector. Under this framework, technology choices in the sector will be market-driven. Private investment in the telecom sector w i l l lead to the import o f new technology and management know-how.

The project will assist in establishing an enabling institutional and regulatory environment to

4. Institutional:

4.1 Executing agencies:

Regulatory Commission are the two implementing agencies.

4.2 Project management:

The Ministry o f Post and Telecommunications and the Bangladesh Telecommunication

Each o f the implementing agencies will be responsible for executing i t s respective component. As both MOPT and BTRC have limited experience in managing and implementing World Bank projects, Project Steering Committees (PSC) have been established at each o f the implementing agencies to provide overall guidance on the management o f the project components. Project Management Teams (PMT) have been established at MOPT and BTRC to ensure timely project implementation. The PMTs are headed by a Project Director and includes staff responsible for procurement and financial management aspects o f the project. The PMTs in both MOPT and BTRC wil l also be assisted b y local Project Management Consultants (PMC) funded under the credit and housed in MOPT. The Project Implementation Plan includes detailed arrangements for project and financial management, procurement and accounting procedures.

4.3 Procurement issues:

During pre-appraisal, the procurement capacity o f MOPT and BTRC was assessed as high risk and an action plan was agreed upon with the implementing agencies to mitigate this risk. See Annex 6 for details.

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4.4 Financial management issues:

agencies was completed and actions to meet the financial management fiduciary requirements were agreed. The detailed findings o f the financial management review and the action plan to mitigate these weaknesses are provided in Annex 6 (b). The implementation o f the action plan during the project period will improve the quality o f the financial management. Given the weak financial management capacity, MOPT will appoint before credit effectiveness, a Project Management Consultant (PMC) with a financial management expert in i t s team to look after the project accounting needs o f both MOPT and BTRC and to strengthen the financial management capacity o f BTRC. The PMC w i l l define the financial management needs o f BTRC and assist in the design and implementation o f a computerized accounting system. The P M C will also provide adequate training to all financial management staff to transfer sk i l ls and knowledge to sustain an adequate system in BTRC beyond the project period. In addition, MOPT and BTRC w i l l hire a project accountant and an assistant Director (Finance and Revenue), respectively, by January 1,2004.

During appraisal, the assessment o f the financial management system in the implementing

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

N o issues.

5.2 What are the main features o f the EMP and are they adequate?

NA

5.3 For Category A and B projects, timeline and status o f EA:

NA 5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

NA

5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

NA

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

BTTB and private operators to expand into rural areas, thus enabling delivery o f better social and other services. The restructuring o f BTTB may require labor retrenchment.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Environmental Category: C (Not Required)

Date o f receipt o f final draft:

There are no resettlement issues in the implementation o f this project. The project w i l l facilitate

NA

6.3 H o w does the project involve consultations or collaboration wi th NGOs or other c iv i l society organizations?

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NA

6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

NA

6.5 H o w w i l l the project monitor performance in terms o f social development outcomes?

NA

Risk From Outputs to Objective Government's commitment for the restructuring o f BTTB wanes and timely approval to restructure BTTB i s not received

Government's efforts to restructure - - -_l.l I__.._

7. Safeguard Policies:

Risk Rating

M

----I----

S

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

Risk Mitigation Measure

Despite slow progress in implementing reforms, the government has shown commitment to introducing competition and increasing private investment, including establishment o f a high-level committee for BTTB restructuring.

BTTB management and unions wil l be fully I__ _I--__II - ~

NA

F. Sustainability and Risks 1. Sustainability:

By developing an adequate institutional and regulatory framework for market-based telecommunications service provision, the project will help accelerate investment and improve sector performance. Incentives to sustain project objectives include strengthening the regulatory framework so that the rights and obligations o f the incumbent and private operators are codified both in the legislation and licenses. Improved service coverage and quality at more competitive prices w i l l be sustained as private investment grows in telecommunications infrastructure and services.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

- 2 3 -

BTTB meets opposition from BTTB management and unions

M

S

Government seeks to intervene in BTRC's actions, or BTRC could take actions (possibly politically motivated) which would reduce investor and consumer confidence.

involved in the dialogue on restructuring. Project support will also be provided for carrying out public relations campaigns and conducting workshops to allow union leaders from other telecom operators in the region such as Malaysia and Sri Lanka, share their experiences on restructuring wi th BTTB.

BTRC i s required to hold public consultations before making decisions. This process w i l l minimize both undue government influence and non transparent decisions.

Govemment has decided to issue license to the private sector for provision o f local service. BTRC, wi th C IDA assistance, i s already preparing PSTN licenses. The project w i l l support BTRC in the licensing process.

Lack o f progress on sector liberalization1 award o f licenses to new operators

M

M

N

N

M

From Components to Outputs Government unwilling to follow the agreed upon strategy for BTTB restructuring.

Support for the planned implementation phase o f restructuring w i l l not be provided under the project.

MOPT i s being provided with training support under the project and MOPT has recruited new staff. Bank oversight o f terms o f reference, selection, and work o f technical experts.

BTRC i s receiving PPIAF and CIDA support to establish a consultation process and develop a track record in developing and issuing consultation papers.

BTRC through i t s precursor TRB has experience in Bank procurement. Bank oversight o f terms o f reference, selection, and work o f technical experts.

BTRC has the mandate to levy fees on regulated companies to meet i t s operating costs. Project funds w i l l be used to develop a medium t e r m business plan for BTRC and support wi l l be provided to fund priority tasks. Bank w i l l continue dialogue with GOB to address BTRC's budget issues.

MOPT's ability to carry out i t s mandate i; undermined by lack o f staff resources

BTRC management i s not effective in sarrying out public consultations.

BTRC i s resource constrained and ?rocurement i s not implemented in a :imely and effective manner

BTRC's ability to carry out i t s mandate i s indermined by i t s lack o f financial mtonomy

Dverall Risk Rating

Risk Rating - H (High Risk), S (Substantial Ris M I

M (Modest Risk), N(Negligib1e or Low Risk)

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3. Possible Controversial Aspects:

None.

G. Main Loan Conditions 1. Effectiveness Condition

0 MOPT to select and recruit Project Management Consultants (PMC) which shall include a financial management expert.

BTRC to select and recruit Project Implementation Specialist.

Subsidiary Grant agreement between Ministry o f Finance and BTRC to be executed

0

0

2. Other [classify according to covenant types used in the Legal Agreements.]

0

0

0

0

0

0

0

0

0

0

Ministry o f Finance to make available to MOPT and BTRC the proceeds o f the credit on a grant basis.

MOPT to appoint a Project Accountant by January 1,2004.

BTRC to appoint an Assistant Director (Finance and Revenue) by January 1,2004.

BTRC shall announce by end 2003 an interconnection regime, which includes interconnection regulations; model interconnection agreement; guidelines and methodologies for determining interconnection costs and charges; reference interconnection offer; and dispute resolution mechanism. BTRC shall ensure that the regime i s implemented by end 2004.

BTRC to have secured land for i t s spectrum monitoring stations, prior to issuance o f bidding documents for the spectrum management and monitoring system.

BTRC to develop and implement by end 2004, a National Frequency Allocation Plan and spectrum pricing policy.

BTRC to submit to IDA, a Human Resources Development Plan for i t s spectrum management and monitoring unit by end 2004.

BTRC's procedure for selecting and appointing the auditor should be specified and be acceptable to IDA.

MOPT and BTRC to prepare Financial Monitoring Reports (FMRs) at the end o f each quarter, and submit them to IDA within 45 days o f the end o f each quarter.

The PMTs in MOPT and BTRC shall submit audit o f the project's financial statements within six months after the end o f each fiscal year.

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0 MOPT and BTRC shall establish and maintain a PSC and a PMT in each o f the implementing agencies throughout the project period.

The PMTs in MOPT and BTRC shall submit a midterm review report by September 1,2005; and review said report with IDA by December 1,2005.

H. Readiness for Implementation 3 1. a) The engineering design documents for the f i rs t year's activities are complete and ready for the - start o f project implementation. I 1. b) Not applicable.

L! 2. The procurement documents for the f i rs t year's activities are complete and ready for the start o f - project implementation. ,A 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

quality. 4. The following items are lacking and are discussed under loan conditions (Section G):

I. Compliance with Bank Policies -~ ._J 1. This project complies with all applicable Bank policies. - 2. The following exceptions to Bank policies are recommended for approval. The project complies

-

with all other applicable Bank policies.

//&&Ad Rajesh B. Pradhan Team Leader

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Annex 1: Project Design Summary BANGLADESH: Telecommunications Technical Assistance Project

Sector-related CAS Goal: Accelerating and broadening private sector-led growth by supporting governmental :fforts to remove structural impediments and establish I conducive environment For private investment

aroject Development 3bjective: [mprove the performance of :he telecommunications sector through :stablishment o f an .nstitutional and regulatory Framework favorable to the :ompetitive provision o f :elecommunications nfrastructure and services

Sector Indicators: Increased private investment, as well as the number (and market share) o f private operators in various segments o f the telecommunications sector

Outcome / Impact Indicators: Increase overall telephone penetration from 0.83 percent in 2002 to 3.3 percent by end o f 2006

BTTB restructured by end o f 2004

Lines per employee increased from 29 in 2002 to 40 by end 2006

New operators to be licensed to provide fixed l ine local services by end 2005

New operators to be licensed to provide domestic long distance services by end o f 2005

Transparent licensing and regulatory regime and clear rules o f business :stablished by end 2004

Rebalancing o f sector - _ _ - . - " _ ~ -l--l.- ,,

ntinued commitment b

Private sector willingness to increase investments

Stable macroeconomic and political environment

project reports:

lnnual reports o f BTRC ind operators

(from Objective to Goal)

Continued government commitment to develop private sector participation and a competitive market structure

2onsultant reports, BTTB innual reports

TU statistics and ndividual consultant 'eports

h n u a l report o f BTRC

3TTB's published tariffs

BTTB labor union approves o f restructuring plans

Sufficient supply response to new regulatory and institutional framework

- 27 -

Iutput from each :omponent: MOPT Component

3TTB restructured

vlOPT's policy function itrengthened

3TRC Component

3TRC's capacity to ,egulate the sector itrengthened

ariffs by end o f 2006

+equency assignments nade within 15 days o f ipplication for 90 percent )f applications by end o f !006. Iutput Indicators:

Restructuring option selected by mid 2003

0 Amendments to BTTB Ordinance XI1 adopted by end 2004

0 Universal access policy adopted by end o f 2005

Policy o f 1998 reviewed and new policy announced by end 2005

0 Tari f f regime announced by end o f 2005

0 Licenses awarded to fixed line operators by mid 2005

Transparent consultative process institutionalized by mid 2004

0 Interconnection regime announcedbyend2003

'roject reports:

celevant consultant reports celevant legislation

ielevant policy documents

4nnual reports o f BTRC

ielevant published -egulations

Zonsultant reports

from Outputs to Objective)

zontinued commitment in he govemment for the estructuring o f BTTB and imely parliamentary ipproval for BTTB estructuring.

3TTB management and inion buy-in to BTTB ,estructuring

rimely govemment tpprovals o f policies

3overnment does not ntervene in BTRC actions ind BTRC does not take ictions that could reduce nvestor and consumer :onfidence

- 28 -

'reject Components I Sub-components: MOPT Component

Pestructuring of BTTB

TA for implementation o f BTTB restructuring

0 TA for other related support

TA to strengthen MOPT'S mlicy function

0 Policy review and formulation; establishment o f procedures and processes for policy monitoring and implementation; and preparation o f WTO offer

0 Other studies

0 Policy advisor

0 Professional Development

Computer hardware and software

0 Website development

0 Office Equipment

"A to strengthen MOPT'S v-oject implementation

".

Radio frequency assigned within 15 days o f application by end 2006, for 90% o f applications.

nputs: (budget for each Project reports: :omponent)

;2.08 mill ion

; 1.495 mi l l ion

Periodic progress report from project unit

Report on options and recommendations

Legislation for incorporation o f B T T B

Periodic progress report f rom project unit Draft policies Training plan for MOPT

i 0.425 mi l l ion Consultant's reports

from Components to Iutputs)

3overnment follows the igreed upon strategy for 3TTB restructuring,

idequate staff resources nade available

- 29 -

apacity.

Timely provision o f local counterpart funds

BTRC has adequate staff and financial resources

BTRC can effectively institute a public consultation process

Procurement o f SMMS i s not delayed

lTRC Component

Periodic progress report from project unit

Draft License for BTTB

Draft regulations

Annual repo